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  • Finance development, inequality and poverty reduction (evidence from Uzbekistan)

Finance development, inequality and poverty reduction (evidence from Uzbekistan)

Donor: CAREC

Research areas: Economic Transformation

Duration: November 2009 - November 2010

Finance development, inequality and poverty reduction (evidence from Uzbekistan)

The goal of this study is to assess the links between economic growth rates, development of financial sector and the main indicators used to measure qualitative changes in poverty dynamics, namely poverty rates and changes in income distribution.

This work is envisaged under the third component of CAREC Research Institute Program 2009-2011 “Macroeconomic Policy Issues in the CAREC countries”.

The controversial nature of the well-known statement that financial development accelerates economic growth, which, in turn, leads to poverty reduction, is clearly illustrated by the case of Uzbekistan.

Firstly, while the average annual rate of GDP growth was 6.3% in 2000-2008, and significantly exceeded the average annual demographic growth rate of 1.3%, the poverty rate decreased by less than 2% (from 27.5% in 2001 to 25.8% in 2005).

Secondly, high economic growth rates occurred in the context of a relatively underdeveloped financial sector. In 2000-2008 the ratio of the bank assets1 to GDP fell from 64.9% to 32.7%. Similarly the capitalization rate decreased from 10.2% to 5.7%, signaling the low and decreasing capacity of the banking sector to keep up with the dynamics of economic growth. In the last three years the government has undertaken measures focused on greater capitalization of the banking sector, but these measures are slow to have effect, and have not yet had any significant impact in creating a strong financial underpinning for economic growth.

High growth rates also occurred in the context of a relatively large government presence in bank capital, as well as a weak and inconsistent privatization process. In contrast, in the literature it is commonly argued that privatization of the banking sector is a key component of the structural reform process, and that financial liberalization is the most important contribution to faster economic growth. The banking sector in the CAREC countries is in different stages of the privatization process: more than 98% of the banking capital is state-owned in China, but less than 5% in Kazakhstan and Tajikistan.

Thirdly, the long-term perspectives of welfare improvement are to be viewed primarily through the prism of stimulating savings and investment, which determine the prospects of long-term economic growth and are closely interrelated with the priorities of structural and investment policy.

Thus, high economic growth rates in Uzbekistan are due to a number of general economic factors, but the development of the banking sector is not one of the main factors. Only microcredit organizations, which are designed to work with economically active but poor groups of the population, are really active as financial intermediaries.

Overall, state support provided through a number of programs and financed by public expenditure have a much greater effect on poverty reduction in the country, especially those which are focused on education, healthcare, and social protection. Free access to the basic health and educational services influences the poverty trends, and the funds made available for public social protection transfers influence the trends of income redistribution The objective of the study is to verify the accuracy of the following hypotheses:

  1. There is no direct link between financial development and per capita GDP indicators;
  2. Targeted state social protection programs have the greatest effect in alleviating poverty;
  3. Development of the financial sector reduces inequalities in income distribution;
  4. Microcredit organizations are the financial bodies which are the most effective in reducing poverty.