Title page 1

Contents 4

ACKNOWLEDGEMENTS 8

ABBREVIATIONS 9

EXECUTIVE SUMMARY 10

CHAPTER 1. THE SERVICES SECTOR AND STRUCTURAL TRANSFORMATION 16

THE CONTRIBUTION OF THE SERVICES SECTOR TO GROWTH AND JOBS 17

INSIDE THE BLACK BOX OF THE SERVICES SECTOR 21

CHAPTER 2. A POLICY AGENDA FOR SERVICES: CONTESTABILITY, CONNECTIVITY, AND CAPABILITIES 30

CONTESTABILITY: TRADE RESTRICTIONS AND DOMESTIC MARKET COMPETITIVENESS 33

CONNECTIVITY: ENABLING DIGITAL AND PHYSICAL CONNECTIONS 40

CAPABILITIES: ENHANCING WORKER SKILLS AND MANAGEMENT PRACTICES IN FIRMS 43

CHAPTER 3. STRENGTHENING THE LINKAGES BETWEEN SERVICES AND OTHER SECTORS 47

WEAK LINKAGES BETWEEN SERVICES AND OTHER SECTORS 48

TELECOMMUNICATIONS: THE BACKBONE FOR DIGITALIZING THE ECONOMY 53

TRANSPORTATION AND LOGISTICS: FACILITATING TRADE IN GOODS AND MOVEMENT OF PEOPLE 56

CHAPTER 4. EXPANDING GLOBAL INNOVATOR SERVICES 63

THE NASCENCY OF EXPORT-LED GROWTH IN GLOBAL INNOVATOR SERVICES 64

RAISING THE POTENTIAL TO COMPETE IN INTERNATIONAL MARKETS 67

CHAPTER 5. IMPROVING THE GROWTH PROSPECTS OF LOW-SKILLED SERVICES 71

THE POTENTIAL TO IMPROVE THE PRODUCTIVITY OF JOBS 72

EXPORT-LED GROWTH IN TOURISM-RELATED SERVICES 73

THE USE OF TECHNOLOGIES IN LOW-SKILLED (NON-TRADABLE) CONSUMER SERVICES 76

CHAPTER 6. KEY RECOMMENDATIONS 80

REFERENCES 83

ANNEX FOR CHAPTER 1: DECOMPOSITION METHODOLOGY 85

Tables 7

TABLE ES.1. Policy recommendations along the dimensions of capabilities, connectivity, and contestability 15

TABLE 2.1. Policy priorities for the three growth pathways 46

TABLE 6.1. Policy recommendation along the dimensions of capabilities, connectivity, and contestability 82

Figures 5

FIGURE 1.1. Uzbekistan has sustained high rates of economic growth since 2017 17

FIGURE 1.2. The services sector has been central to growth in overall employment and value added 18

FIGURE 1.3. The services sector is an important source of jobs for women in Uzbekistan 19

FIGURE 1.4. The services sector has been a source of productivity growth, but a large gap remains with the global frontier 20

FIGURE 1.5. Uzbekistan's services trade growth has been slower than goods trade, which is at odds with global trends 20

FIGURE 1.6. FDI inflows have been lower than in some comparator countries, but the services sector in Uzbekistan is increasingly a destination of FDI 21

FIGURE 1.7. Services subsectors differ by the degree to which they rely on skills, provide inputs to other sectors, and are traded internationally, and they can be grouped... 22

FIGURE 1.8. Commercial presence (FDI) is the main mode through which services are imported, while cross-border supply is the main mode through... 24

FIGURE 1.9. Uzbekistan's services sector is dominated by low-skilled services as well as social services - with little prominence of global innovator services... 26

FIGURE 1.10. Within the services sector, female employment is mostly in social services and lower skilled services 27

FIGURE 1.11. Global innovator services are both the most productive services as well as the biggest drivers of productivity growth 28

FIGURE 2.1. Compared to global comparator countries, Uzbekistan underperforms on the policy dimensions of connectivity, capabilities, and contestability 32

FIGURE 2.2. Trade in services is characterized by major restrictions in most sectors, with some sectors virtually closed to competition 33

FIGURE 2.3. There are many businesses with state ownership in the services sector, including in subsectors where private provision can be effective 35

FIGURE 2.4. Services restrictions correspond to tariff equivalents of more than 25 percent for mode 1 trade and more than 15 percent for mode 3 trade 35

FIGURE 2.5. Liberalizing barriers to services trade in Uzbekistan is expected to increase GDP, trade and investment 36

FIGURE 2.6. There are large impacts of services liberalization across all sectors, also outside of services 37

FIGURE 2.7. Liberalizing services is expected to increase incomes of both unskilled and skilled workers 38

FIGURE 2.8. There are large gains in output and wages of liberalizing barriers to services trade in Uzbekistan 38

FIGURE 2.9. Uzbekistan has the highest trade costs compared to its regional peers and these have increased over the past two decades 40

FIGURE 2.10. Uzbekistan has experienced a decline in its logistics performance since 2018 with regard to infrastructure, tracking, tracing, and timeliness 41

FIGURE 2.11. Uzbekistan's overall logistics performance score lags regional comparators 41

FIGURE 2.12. The quality of Uzbekistan's broadband connectivity continues to lag comparator countries 42

FIGURE 2.13. Prices of mobile broadband are lower than before, but affordability remains low compared to some peer countries and advanced economies 43

FIGURE 2.14. Uzbekistan's emphasis on advanced, technical education is developing a relevant skill base but this needs to be expanded 44

FIGURE 2.15. There is a positive relationship between the adoption of structured management practices and labor productivity in the services sectors, but adoption is low 45

FIGURE 3.1. Most services are produced for domestic consumption 49

FIGURE 3.2. Manufacturing sectors rely very little on services as inputs for the production process 49

FIGURE 3.3. Many services jobs support exports through other sectors rather than direct exports 49

FIGURE 3.4. Exports by most sectors depend on services jobs through linkages 50

FIGURE 3.5. The most prominent manufacturing sectors are less dependent on services 51

FIGURE 3.6. Trade in mobile and fixed-line telecommunications is characterized by major restrictions 53

FIGURE 3.7. Regulatory quality in the ICT sector is low compared to other countries, including in the region 54

FIGURE 3.8. Uzbekistan has been lagging with respect to the adoption of mobile technologies 55

FIGURE 3.9. The uptake of mobile services and fixed-line services such as broadband remains low 56

FIGURE 3.10. Road transportation is the most important mode of transport by weight, while pipeline and rail transportation are important modes... 57

FIGURE 3.11. Postal services underperform compared to comparator peer countries 58

FIGURE 3.12. The transportation sector faces major restrictions when it comes to trade in services 59

FIGURE 3.13. Air connectivity has grown in terms of frequency, cargo capacity, number of carriers, and the amount of city pairs covered 61

FIGURE 4.1. Uzbekistan's exports of global innovator services have accelerated in the past decade, but they account for a tiny fraction of total services exports 64

FIGURE 4.2. Average wages in global innovator services exceed those in manufacturing and this gap has widened in recent years 65

FIGURE 4.3. Wage costs among global innovator services in Uzbekistan are comparable to India and the Philippines 66

FIGURE 4.4. Inadequate worker skills are not a major constraint for businesses in Uzbekistan 67

FIGURE 4.5. Global innovator services are characterized by higher levels of digital intensity 68

FIGURE 4.6. Global innovator services are highly restricted on cross-border delivery 69

FIGURE 5.1. The gap in labor productivity between Uzbekistan and Russia was the highest among low-skilled consumer services, including hospitality and retail 72

FIGURE 5.2. Tourism-related transportation and hospitality services are central to Uzbekistan's services exports 73

FIGURE 5.3. Slow growth in exports of travel-related services tracks the slow growth in the arrival of tourists from abroad 74

FIGURE 5.4. The number of passengers carried by air transportation services relative to the size of the economy declined in Uzbekistan unlike in other developing... 74

FIGURE 5.5. Among hospitality services, there are few trade restrictions on accommodation services, but the opposite is true for the services of tour operators,... 75

FIGURE 5.6. Restrictions on foreign direct investment in retail services in Uzbekistan are low even compared with high-income countries in the region 76

FIGURE 5.7. Uzbekistan's secondary school enrolment rates are near universal but digital literacy is far from complete 77

FIGURE 5.8. The use of basic digital technologies is more widespread in certain business functions 78

FIGURE 5.9. Access to mobile internet is relatively low, especially in rural areas 79

Boxes 5

BOX 1.1. Methodology for classifying services 22

BOX 1.2. Modes of services trade 23

BOX 1.3. Migration and trade in services 24

BOX 2.1. Measuring restrictions to services trade 34

BOX 2.2. Economic gains from reducing restrictions on services trade 36

BOX 2.3. Leveraging Uzbekistan's WTO accession process to reduce services trade restrictions 39

BOX 3.1. Financial services in Uzbekistan 51

BOX 4.1. Case studies of reforms driving growth in services 65

Box Figures 5

FIGURE B1.3.1. Emigration rates for high-skilled individuals are higher than for low-skilled individuals, especially among women 25

FIGURE B1.3.2. Emigration rates are higher for high-skilled women than men 25

FIGURE B1.3.3. Emigration rates are higher for low-skilled men than women 25

FIGURE B3.1.1. Financial services only provide 0.5 percent of employment, but contribute to 2.8 percent of GDP 52

FIGURE B3.1.3. Restrictions to trade in financial services remain high, especially for cross-border supply of services 52

FIGURE B3.1.2. Roughly 16 percent of firms report that they are fully credit constrained, higher than the average for Europe and Central Asia 52

FIGURE B3.1.4. The use of digital technologies for making payments is low in Uzbekistan compared to comparator countries 52