Regional perspectives: 1996

The World Bank

Throughout Central and Eastern Europe and the Baltic countries, output continued to grow during 1995, and in several other countries of the former Soviet Union (FSU) - Armenia, Kyrgyzstan and Moldova - growth resumed in 1995. There is evidence that such growth has been sustained during 1996. In the other countries of the FSU, output continued to decline, although at a slower rate (about six per cent in 1995, as against 15 per cent the year before). There is some evidence, particularly if the new emerging private sector is fully included, that 1996 will have witnessed the bottoming out of output decline.

Private sector growth and improvements in the external sector are largely responsible for recovery of output in those countries where output grew. For the region overall, exports grew at 22 per cent in 1995; Estonia, Hungary and Kazakstan saw export growth in excess of 40 per cent in current dollar terms. Foreign direct investment nearly doubled between 1994 and 1995.

Throughout the region, inflation has fallen, notably in the countries of the FSU. Despite progress on inflation, however, countries in the region continue to struggle on the fiscal front as they deal with legacies from the past while, at the same time, they work to create the scaled-down, yet effective, public sector structures needed in a market economy. In many countries - in particular, in Central and Eastern Europe - government spending, and revenues to finance it, continues in the range of 50 per cent of GDP.

In some countries, however, progress has been made in reducing fiscal aggregates. For example, the share of public expenditure of GDP in Hungary was cut by some seven per cent to about 55 per cent in 1995, helping to restore macroeconomic equilibrium. By contrast, in some FSU countries, the decline in public expenditure reflects a failure to collect broad-based revenues.

Generally in line with growth trends, the fall in real earnings has been stemmed. Real wages increased during 1995 throughout most of Central and Eastern Europe and the Baltics. The unemployment rate declined in almost all countries of Central Europe, but it is levelling out at rates comparable with those of Western Europe, with evidence of structural unemployment and little turnover in the pool of unemployed.

By contrast, there was an upward drift in unemployment, from far lower levels, in the countries of the FSU; by the end of 1995, three per cent of the labour force in Russia was registered as being unemployed, and eight per cent was unemployed as measured by labour force surveys. The initial collapse of output and increase in inequality to market economy levels reduced real incomes for large portions of the population, within both lower and middle income households. Many households have been able to adjust to the new opportunities, however, in particular those headed by younger and well-educated workers living in areas with a diversified resource base or employed in jobs linked to exports and the service sector.

At the same time, poverty has increased, and many households remain vulnerable, even in countries where significant resources have been directed towards social protection. Those headed by the very elderly have seen their pensions eroded or, in some cases, have seen their pension eligibility vanish. Other vulnerable households include those that depend on earnings of less well-educated workers, in line with greater dispersion of wages in a market economy and their predominance in the ranks of the structurally unemployed. Growth is critical to improving household income and reducing poverty. Early evidence from Poland and Estonia, for example, indicates that growth has resulted in a decline in the number of poor in 1995. However, an important challenge of the transition is to ensure that vulnerable groups are not left behind.

The activities of the Bank

Twenty-seven countries are now active borrowers in the Europe and Central Asia (ECA) region. The volume of lending was US$4.4 billion, roughly comparable to the peak of US$4.5 billion in fiscal year 1995. Disbursements increased sharply to more than US$3.7 billion.

Over the past four years, the project portfolio for the most recent member countries has more than doubled. The entire portfolio now exceeds US$20 billion, of which US$12 billion represents undisbursed commitments. The portfolio spans a range of sectors:

  • support for infrastructure and energy continues to be significant;
  • lending in support of the financial sector and on-lending to the private sector is also robust, as is that for agriculture and natural resources;
  • the share directed to the social sectors is increasing.
Adjustment lending remains an important vehicle, representing 34 per cent of the portfolio.

Enhancing results on the ground

As a result of the rapid increase in the portfolio and in undisbursed commitments, and in response to signs of portfolio problems, the Bank is placing more emphasis on enhancing the development effectiveness of previously approved projects. Increased resources are being devoted to strengthening borrower implementation capacity so as to assist the absorptive capacity of the borrowers.

During the past year, resources devoted to project supervision increased by 12 per cent (to close to 90 staff years). The proportion of operations with unsatisfactory progress on implementation continued to decline in fiscal 1996, and six problem projects, largely in the mature borrowing countries, were restructured.

Many of the projects in newer member countries are at the early stage of implementation where, typically, projects have a slower rate of disbursement. At the same time, legal and administrative requirements within countries frequently have delayed effectiveness. The Bank has become increasingly alert to internal procedures for processing approvals in borrowing countries and in integrating them into the sequence of actions so as to avoid delays in disbursements.

Clients are also becoming more familiar with Bank procedures. The translation of standard bidding documents and assistance in strengthening national procurement procedures, for example, have facilitated procurement. As a result, during fiscal 1996, the ratio of disbursements to opening balances for projects increased from 12 per cent to 18 per cent, compared with a Bank-wide average of 19 per cent.

To assist project implementation, several investment projects now include components that strengthen what often limits project impact, namely institutional incapacity to effect systemic change. For example, considerable institutional strengthening in Russia's banking sector has been achieved under the Financial Institutions Development Project approved in May 1994. Among the criteria for participation in the project (and follow-up credit lines) are annual audits by international accounting firms and adherence to banking norms that are much stricter than central bank regulations. There has been keen interest among the leading Russian commercial banks to be accredited under the project: some 40 banks have been screened, and 13 banks have been accredited. While disbursements have been limited, the project has achieved a good part of its institution-building objectives through the introduction of international banking standards and more extensive disclosure.

Again in Russia, the auctioning-off of municipal land to the private sector, a component of fiscal 1995's Housing Project, has had the effect of introducing the concept of land as an asset, establishing a transparent system of land allocation and transfer of ownership from local governments to the private sector, and introducing new market-oriented planning processes at the city and oblast levels.

The portfolio also includes an increasing number of innovative projects that are testing community approaches on ways to reduce the social cost of restructuring. In the Ukraine, for example, the Bank is supporting a pilot project designed to mitigate the social and environmental impact of the Government's decision to close coal mines. Ways to close mines safely will be tested, and out-of-work miners seeking employment elsewhere will be able to choose assistance from a menu of options. The lessons from the pilot project will be built into future support for coal-sector restructuring.

With implementation of the portfolio moving to centre stage, high-level Country Portfolio Performance Reviews (CPPRs) with member countries are now a central vehicle for ensuring effectiveness of Bank assistance, particularly in those countries experiencing implementation difficulties. Eight CPPRs were held during the fiscal year. During the CPPR for Russia, for example, important bottlenecks were resolved, quantitative performance indicators and key targets were established, and corrective actions were identified for both the Government and the Bank so as to improve the pace of implementation of the project portfolio. By the end of the fiscal year, performance ratings for individual projects met or exceeded the expectations for improvements established during the CPPR, and signed contracts and project disbursements accelerated and appear likely to meet agreed targets, with a delay of between one and two months.

In Poland considerable progress was made during 1996 on implementing decisions from the previous year's country-strategy implementation review (CSIR), in particular reallocating resources under lines of credit. The fourth annual CSIR exercise resulted in agreement on action plans to address cross-cutting issues in the portfolio, including amendments and clarifications of Polish procurement regulations and extension of sovereign guarantees. The meeting also was used to advance preparations for the next country-assistance strategy, which is being prepared in a participatory programme with Polish authorities.

Supporting market institutions

The Bank is devoting increasing resources to supporting institutions essential to the functioning of private markets and to consolidating progress in privatisation and liberalisation. Through a combination of new private start-ups, formal privatisation, and sales of enterprise assets to the private sector, the private sector share of economic activity continues to rise. Private sector shares in GDP and employment have reached over 50 per cent in all but a handful of countries in the region. Large increases in the private sector share of GDP have taken place in countries that recently implemented comprehensive privatisation programmes, such as Georgia and Moldova.

While progress in privatisation of large-scale enterprises remains slower than that of small- and medium-scale enterprises, there were several notable large-scale privatisations in 1995, including a large part of the energy sector in Russia, energy-sector utilities in Hungary, telecommunications in Hungary and the Czech Republic, and several large banks in Hungary and Poland through sales to private investors. In Romania, the Financial and Enterprise Sector Adjustment Loan supports the accelerated programme of mass privatisation, with the design of the cash auctions resulting in broad local private sector participation. To support the implementation of the mass privatisation programme in Poland, the Bank financed the fees of the national investment funds.

Banking system reforms, combined with a sound regulatory and legal environment for secured lending, are essential to ensure adequate access to credit for emerging private and privatised enterprises. These twin goals were the focus of adjustment operations in Kazakstan and Kyrgyzstan. In the face of a banking crisis in late 1995, the Bank provided timely advice to the Government of Latvia on how to address the underlying structural problems of the sector.

The Bank is also assisting newly privatised enterprises to adjust to the opportunities of the market economy. In Moldova, for example, where by end-June 1995, 741 medium and large-scale enterprises and 563 small-scale enterprises had been privatised, a Bank-assisted project is focusing on measures to restructure private enterprises and build indigenous business-management skills. The project is also providing medium-term finance for private sector enterprises in the context of a strengthened regulatory and supervisory environment for banks. The Bank continues to facilitate the sharing of experiences throughout the region. It co-sponsors and supports financially the Central and Eastern European Privatisation Network, that brings together privatisation officials from 18 countries in the region to share experiences.

This experience-sharing has as its goal the transfer of the lessons learned by the more advanced transition economies to other countries. The Network's newly created Financial Forum brings together officials from finance ministries and central banks, as well as securities regulators and market participants, to share their experiences. In Budapest, the Bank organised a Pension Reform Conference in co-operation with the East-West Institute and the US Agency for International Development, attended by officials from seven countries of Central and Eastern Europe. The purpose was to learn from the experiences of countries in implementing multipillar pension systems.

Facilitating social consensus and reducing social costs

Social consensus is critical to the sustainability of the economic transition in the region. As understanding of its newer member countries and rapport with its clients have grown, the Bank is increasingly listening to, and seeking advice from, non-governmental organisations (NGOs), community groups, local governments, public service providers, trade unions, the academic community, and the growing private sector.

The Armenia Social Investment Fund Project, for example, aims to promote self-help and community solidarity. The project was based on the lessons learned from a pilot implemented by an NGO. With financial support from the project, the communities identify eligible microprojects based on their priorities, manage the implementation of their microproject, select contractors and supervisors, and devise a plan for maintaining the facility after microproject completion.

A project to support the divestiture of housing from Russian enterprises incorporated the views and concerns of tenants into both project design and the implementation process through surveys of tenant preferences and the establishment of condominium associations as the most effective way to encourage voluntary resident participation in decisions.

Through the Economic Development Institute (EDI), the Bank is supporting seminars to inform parliamentarians and a broad range of civil society, in Kyrgyzstan and Ukraine, for example, on transition issues.

The EDI, with financial support from Switzerland, also organised the Former Yugoslav Republic (FYR) of Macedonia's Forum for Senior Policymakers ('Vision of the Future'), which brought together the country's President, Parliamentarians, private sector representatives, academics, journalists, and out-of-country policymakers with relevant experiences to share for a wide-ranging dicussion of the future of the country.

A critical element of the Bank's assistance programme is to support the social agenda surrounding the restructuring of the enterprise sector, including facilitating the movement of workers to higher productivity jobs. In addition to the pilot project in the coal sector in the Ukraine, reported on earlier, the US$500 million Russia Coal Sector Adjustment Loan and a companion implementation assistance project will provide assistance to those affected by that country's coal sector restructuring programme. Community support and diversification programmes are being supported in five coal basins (Eastern Donbass, Kisel, Kuzbass, Moscow and Pechora). To ensure that affected communities receive adequate information, a country-wide network of major coal cities was established, and public information and social impact monitoring activities are being supported.

Elsewhere, Bank-assisted adjustment lending continues to facilitate budgetary outlays to assist workers dismissed from large, distressed enterprises. During the past fiscal year incentives and financial support were provided to more than 50,000 workers leaving troubled enterprises in Romania, as well as to workers in Kazakstan, Kyrgyzstan and FYR Macedonia. Projects currently under implementation that support employment services - from countries as diverse as Hungary and Kazakstan - are enabling workers not only to collect unemployment compensation but also to receive counselling to facilitate their search for other jobs. Such counselling has proved to be very cost-effective.

Given that the incidence of poverty remains high in the region, the Bank accelerated its work in this area, completing an additional five poverty assessments during the year. Eight such assessments, designed to provide the basis for a collaborative approach to poverty reduction by country officials and the Bank, have so far been completed, with several others under preparation.

Restoration of growth is essential to reverse poverty trends. At the same time, given that fiscal constraints are tight, the Bank's adjustment lending is supporting improved targeting of social safety net assistance to the poor. In Georgia, for example, the Government is developing a backup programme of social assistance, focusing on the most vulnerable groups, in particular, children, the elderly and invalids, to assist destitute families who are not protected by other programmes. In Armenia, child allowances, focused in particular on younger children, are being increased with assistance from the Bank. Armenia's attempt to target better its humanitarian assistance centres around a pioneering attempt to track and quantify the numbers of needy in a 'social passport', and it is being reviewed as a possible vehicle for targeting general cash transfers.

Again in Armenia, as well as in Albania, projects are providing employment opportunities through microprojects managed by local communities for marginalised and vulnerable groups.

Rationalising the public sector

The Bank is also helping to facilitate the process by which the state adapts its role and priorities in the transition to a market economy, and during the past year, it expanded its non-lending support in this area. Public expenditure reviews were carried out in nine countries of the FSU, and measures were identified to improve fiscal management and reorient expenditures. In several countries of the region, underlying budgetary systems require revamping.

About a third of the Bank's portfolio in the region is supporting efforts to increase the effectiveness of governments' role in critical infrastructure and energy networks. Road improvement projects currently under way in Albania and Russia have introduced competitive bidding by private contractors for awarding contracts. In Bulgaria, reforms, aimed at ensuring that the railways operate independently in a commercial manner according to market principles, are being supported by the Bank and European and North American co-financiers.

Capacity rehabilitation for both energy production and distribution needs public and private sector collaboration. Through its sector work and programme of donor co-ordination, the Bank is assisting the Ukraine to develop a competitive electricity subsector that will be an attractive target for private investment in the future.

In Kazakstan, the Bank is working on the rehabilitation of the Uzen oil field in a way that facilitates foreign investment.

This article first appeared in the World Bank's Annual Report 1996. A new article will be available, providing the 1997 perspective, early in 1998

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