Uzbekistan Quality Job Creation as a Cornerstone for Sustainable Economic Growth

 Macroeconomic Performance, Opportunities, and Challenges
9
Box 1.1: Countercyclical Fiscal Policy 
Resource-rich developing countries (RRDCs) such as Uzbekistan are typically 
subjected to volatile commodity prices, which to a large extent drive the business 
cycle in such countries. Empirical studies suggest that fiscal policy in developing 
countries, and particularly RRDCs, typically is pro-cyclical (Kaminsky et al. 2005, 
Kraay and Serven 2013). This means that spending expands in times of resource 
booms and contracts during busts. Such a spending pattern both prolongs and 
amplifies economic expansions and recessions, which can lead to macroeconomic 
instability. By contrast, counter-cyclical fiscal policy would be beneficial. Indeed, 
empirical evidence suggests that counter-cyclical fiscal spending dampens 
business cycles and reduces the probability of a prolonged economic crisis (Ostry 
et al. 2010).
Moreover, pro-cyclical fiscal policy may indirectly have an adverse impact on long-
run economic growth. Countries with high output volatility tend to experience 
lower economic growth (Ramey and Ramey 1995). Another possible channel is 
through the so-called Dutch Disease: excessive growth in fiscal spending during 
booms leads to further erosion of the manufacturing sector’s competitiveness. 
The development literature often argues that manufacturing is special due to 
the positive externalities that are not present in other areas of economic activity 
(Rodrik 2008). While whether such externalities exist in practice remains unclear 
(Eichengreen 2008; Schroder 2017), there is evidence that small states benefit 
from export diversification through lower output volatility (McIntyre et al. 2018). 
Uzbekistan’s fiscal policy compares favorably with that of other RRDCs and 
countries in the region. For example, Kazakhstan and the Kyrgyz Republic, two 
neighboring countries, have among the most pro-cyclical fiscal policies in the world 
(Aizenman et al. 2018). In these economies, estimated cyclicality is above 1, i.e., 
for every 1% increase in gross domestic product, government spending grows by 
more than 1%. Indonesia and Papua New Guinea, two peer RRDCs, also display an 
estimated cyclicality of greater than 1. The Uzbek authorities, by contrast, increase 
fiscal spending by only 0.5% for every 1% increase in the annual gross domestic 
product growth rate, which, when compared internationally, is moderate. 
Nevertheless, moving toward a more counter-cyclical spending would be 
beneficial. Other Asian countries, some of them also rich in natural resources 
(such as Brunei Darussalam, Bhutan, Cambodia, and Sri Lanka) on average, 
decrease fiscal spending when output increases. Uzbekistan should gradually 
follow suit to reap the benefits. 
Sources: Aizenman et al. 2018, Eichengreen 2008, Kaminsky et al. 2005, Kraay and Serven 2013, McIntyre 
et al. 2018, Ostry et al. 2010, Ramey and Ramey 1995, Rodrik 2008, Schroder 2017.

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