How Tight Is Too Tight? A Look at Welfare Implications of Distortionary Policies in Uzbekistan

IMF Working Papers, December 1, 2005

Source details

Canonical URL: How Tight Is Too Tight? A Look at Welfare Implications of Distortionary Policies in Uzbekistan

Since independence in 1991, Uzbekistan pursued a gradual approach to the transition from planned to market economy.
This approach relied heavily on trade controls, directed credit, and large public investments.
A number of financial sector measures were instituted that distorted resource allocation and increased transaction costs.
Those policies may have prevented the contraction of output in the early 1990s but led to disappointing economic outcomes and social conditions.

The paper reviews the underlying distortions in Uzbekistan’s policies and financial sector.
Survey-based evidence is presented to support:
- the existence of the observed distortions, and
- their detrimental impact on economic activity.
The paper concludes that the distortions reduced welfare and constrained investment and capital accumulation.

The analysis uses a representative agent framework to model existing financial sector distortions.
The model offers guidance regarding the likely implications of eliminating the observed distortions on key aggregate variables.
The paper suggests that elimination of these distortions will:
- enhance welfare, and
- lead to increased investment and capital stock.

Remove or reduce distortionary financial sector measures that impede resource allocation.
Phase out trade controls and reduce directed credit practices to improve market signals.
Rebalance public investment policies to avoid crowding out private investment and to foster capital accumulation.
Improve incentives and reduce transaction costs to stimulate investment and raise welfare.