i"n Y,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~K uotrr~~~~~~~~~~~~~~~~~I o t : I I The Evolving Role of the World Bank The Transition in Central and Eastern Europe and the Former Soviet Union Kemal Dervis, Marcelo Selowsky, and Christine Wallich The World Bank Washington, DC The World Bank Group The World Bank Group is a family of multilateral development institutions owned by and accountable to member goverunents. These govemrnments exercise their ownership function through Boards of Governors on which each member country is represented individually. All the powers vested in the Board of Governors, with a few exceptions, have been delegated to Boards of Executive Directors, who are appointed or elected by member govemrnments. The President of the Bank Group is appointed by the Executive Directors. The World Bank Group today includes five international organizations: The International Bank for Reconstruction and Development (IBRO), the original institution in the group, opened its doors for business in 1946. Today, it is the largest source of market-based loans to developing coun- tries and is a maior catalyst of similar financing from other sources. It lends to govemments or to publi or pri- vate entities with goverment guarantees. It is funded mainly through borrowings on the international capital niarkets. The Intemational Finance Corporation (IFC) was established in 1956 to support private enterprise in the developing world through the provision and mobilization of loan and equity financng and through its advi- sory activities relating to, among other things, capital market development and pnvatization- IFC is also a major catalyst of both local and foreign private investment Its lending and equity investment activities are based on the prindple of taking market risk along with private investor Ur 1er the terms of its Articles of Agreement, it cannot acept govemment guarantees. The International Development Association (IDA) was created in 1960 to provide finance on concessional terms to low-income countnes that lack creditworthiess for IBRD borrowing. IDA is primarily funded from grants it receives from donors in periodic replenishments. The International Centre for Settlement of Investment Disputes (ICSID) was added to the World Bank family in 1966 to provide conciliation and arbitration services for disputes between foxeign investors and host gov- ernments that arise directly out of an investment The Multilateral Investment Guarantee Agency (MICA) was created in 1988 to provide noncommercial invest- ment risk insurance and technical services that help promote investment flows. It also disseminates inforna- tion on investkent opportunities. As is now common practice, the "World Bank" or simply the "Bank" are used interchangeably to mean both IBRD and IDA. The "World Bark Group- refers to IBRD, IDA, IFC, ICSID, and MICAG Contents Foreword v Introduction 1 Stabilization and Transition 2 Institution-Building and the New Role of Govenment 4 Labor Markets, Social Sectors, and Safety Nets 8 Infastructure 13 Private Sector Dcvelopmcnt 21 Building the New Financial Sector 26 * Aid Coordination 32 The Bank's Research and Tlaining Support 33 Conclusion 35 Box 1. World Bank Group Assistance to Privatizauion in Russia and Kazakhsan 22 Box 2. Enterprise and Financial Sector Adjustment Loan (EFSAL) in Poland 30 Mwcelo Selowsky is Cbief Economist sn the Europe and Central Asia Regional Office of the Wodd Bank Kem- l Drvis is Diector and Christine Wallich is Lead Economist in the Central Europe Deparment of that office. The autbors am gnateful to their colleagues in the World Bank who provided contributions for the paper. The fmdizs, interpretaions and conclusions expressed in this paper am entirely those of the aubors and should not be attributed in any manner to the World Bank, to its afflti oreanizarions. or to members of its Board of Exective Directors or the countries they rpresent. Foreword The world has changed dramatically over rhe last five decades and so has the World Bank. The Fiftieth Anniversary of the World Bank has provided us with an opportunity to reflect on and learn from the Bank's experience and to apply the lessons to the Bank's future agenda. This series of essays is devoted to improving understanding of the evolving role of the World Bank. Each essay analyzes the Bank's approach to the major development challenges its borrowing countries have faced, startng with the reconstruction and development needs of Europe and Japan in the 1940s and 1950s and ending with the transition of Central and Eastern Europe and the former Soviet Union. One essay examines the evolution of the Bank's relations with the world's capital markets as it mobilizes private savings for develop- menL An overview paper provides a picture of the fifty-year period as a whole. The story th2t emerges is one of an evolving and learning institution that has built on its successes and its mistakes. The Bank has rcsponded with vigor and energy to the challenges confronting its borrowers. In this process, it has made a significant contribution to the impressive developmental gains recorded in these past fifty years. In responding to those challenges, the Bank itself has changed, learning from its experiences, deepening its under- standing of the development process, and recasting its analytical and financial support to help its borrowers better. The Bank will continue to nurture its tradition of self-evaluation and learning. These essavs will, I hope, contribute to a better-informed debate on the Bank's future role. They comple- ment the recently issued paper, The World Bank Grozp-Learning from the Past, Embracing the Future, which sets out the future directions for the Bank Group. Anneane M. Choksi Vi-ce President, Human Resources Development and Operations Policy, and Chairma of the Bank Group Committce on the 50th Anniversary The Transition in Central and Eastern Europe and the Former Soviet Union Kemal Dervis, Marcelo Selowsk, and Christine Wallich From Eatern Europe to Central Asia, countries have embarked on a path of systemic transformation, the extent of which has few parallels in history. The Bank, too, is now engaged in one of the greatest efforts in its history. In fiscal years 1990-94, twenty-two states in this region became new members, while the Bank com- mitted US$11S billion and opened seven new resident missions. These countries face the task of creating wealth and improving living standards. Both the opportunities and the challenges are Both the oppormtuntes immense. Many countries are rich in technology, agriculture, and . the challenges are natural resources. Huge resources, historically devoted to military ..nme.zs.Hug:e output and unnecessarily high levels of investment, can now be resources, historically used to improve the quality of life. devoted to military out- put and unnecessarily In some countries, much progress has taken place on both the high lvels of investment, insitutional and policy front, especially as regards privatization. can now be used to In many, however, there is still a need to reduce the dominance of improve the quality of life state monopolies and to limit heavy political and administrative interference. All countries share the need to restructure and priva- tize heavy industry. All also need continued fiscal retrenchment. 1 ThJe Evolving Role of the World Bank Successful transformation will prices and exchange rate require macroeconomic adjustments. Thus, transition stability, free prices, the build- economies were faced with a ing of modern institutions, hard choice. Much-needed including a modem state, and stabilization programs had to be the development of financial adopted at the same time as markets with a legal frame- these structural causes were work that supports the opera- leading to output decline. But, tion of markets. Infrastructure failure to pursue stabilization needs to be revamped to avoid would risk hyperinflation, since hindering restructuring and monetary financing of the recovery. Finally, in most deficit would take place at a countries, a readaptation of time when the demand for skills and an improved social money was collapsing. safety net will be particularly important. When they joined the Bretton Woods institutions, these Stabilization and Transition countries engaged in discassions with the IM on stabilization In all transition economies, efforts, and many negotiated systemic transformation has formal IMF approval for been made more difficult by financial programs. The Bank the serious macroeconomic played a supportive role with a imbalances in place when the series of fast disbursing opera- old order collapsed. Price tions, financing either general controls, along with under- imports (structural adjustment lying budgetary imbalances, and economic recovery loans) had repressed inflation and or agreed on lists of priority In all transition created a large monetary over- imports (critical import and economies, systemic trans- hang. The severing of supply rehabilitation loans). These formation has been made links among enterprises vithin operations provide non- more difficult by the seri- countries, as well as the dis- inflationary finance tO the ous macroeconomic ruption of COMECON trade, budget;, since Bank-financed imbalances led to economic contraction imports generate counterpart and large output losses. fund revenues (Iable 1). Bank Movement to a market loans were, of course, only part economy required freeing of larger financial packages, 2 The Transition in Central and Eastern Europe and the Former Soviet Union including IMF, G-24, and other funds committed. This is due contributions. partly to the fact that many of these loans were "tranched," While committed loans were with tranche release dependent substantial, the actual flow of on agreed policy actions, and disbursements in the first partly to the Bank's procure- twelve months after approval ment rules. IBRD shareholders was only a fraction of total insist that Bank funds be spent Table 1. EBRD and IDA Import Financing Loans and Credits Percentage of Month Dollars Percentge funds disbursed Loan Amount of per of I year Country tye (S million) approval capita GDP after aproval Albania Critical imports 43 June 1992 12 6.2 22.0 Bulgaria SAL 250 Augst 1991 28 3A S6.8 Czechoslovakda SAL 450 June 1991 29 1.4 44.4 Hungary SAL 200 June 1990 19 0.6 100.0 SAL II 250 June 1991 24 0.8 70.0 Poland SAL 300 July 1990 8 OS 33.3 Romania Critical imports 150 June 1991 6 0.5 8.1 SAL 400 June 1992 17 2.1 57.7 Russia Rehabilitation 600 August 1992 4 0.7 51.1 Belarus Rehabilitation 120 November 1993 12 1.9 14.7 a Moldova Rehabilitation 60 October 1993 14 2.6 40.4 a Estonia Rehabilitaton 30 October 1992 19 15 60.9 Latvia Rehabilitation 45 October 1992 17 3.2 35.6 Lithuania Rehabilitation 60 October 1992 16 1.9 47.3 Kazakhstan Rehablitation 180 September 1993 11 1.8 413 b Kyrgyzstan Rehabilitaton 60 May 1993 14 3.3 60.3 Slovalia Recovery 80 November 1993 16 0.1 20.0 FYR Macedonia Rccovery 80 February 1994 36 3.7 c 100.0 Note: Underlying data on GDP and population correspond to the calendar year of loan approvaL a. 7months. b. 9 months. c. Percentage of GM. 3 The Evolving Role of the World Bank to finance imports procured in more harm than good, ways that allow competition increasing indebtedness among suppliers. Specific rules without paving the way to the must be followed and docu- sustained growth needed to mentation must be available. avoid a debt trap. Moreover, if Both requirements are difficult the Bretton Woods institutions for new member countries for provided large amounts of whom these procedures are nonconcessional financing to new. Although disbursements unsuccessful adjustment often speed up with experi- programs, they would not only ence, slow disbursement of undermine their credibility but import-financing loans has would build a porffolio of often been criticized. Until problem loans that could lead now, there has been little scope to serious financial problems for greater flexibility in the for them in the medium-term procurement rules. future. Clcarly, both flexibility and caution are needed to Debate continues about the prevent a waste of resources role of balance-of-payments where the real e:ononic loans from the Bretton Woods returns on external financing institutions to support are likely to be nil. stabilization efforts. Substantial up-front external finance can Institution-Building and the If there is insufficient make a huge difference by New Roleof Govemment domesi policy effort, helping to stabilize the suchJ finzancing flows &, .exchange rate, finance the Lack of appropriate institutions mote hanm than g -. budget deficit in a non- has been an impediment to inflationary way; and create implementing stabilization inmsiGng indebtedm positive expectations. But to policies and a major botdeneck without paving the way to have such a decisive impact, to modernization and the sustainedgrowtI need- the external assistance package restructuring. To meet the ed to avoid a debt trap must be of a substantial magni- needs of a market economy, tude and disbursed rapidly. the state apparatus for civil service, the organization of On the other hand, if there is public finances, and the insufficient domestic policy regulatory frameworks all need effort, such financing flows do reform. There are limits, 4 The Transition in Central and Eastern Europe and the Former Soviet Union however, in trying to administration and a broader accelerate institution building, tax base would permit, in turn, especially in some countries of lower tax rates that are less of I the former Soviet Union that a disincentive to private sector lack the prewar institutions development. and memory of markets shared by most countries in Eastern Also required are predictable Europe. incentives and the rule of law-reforms in the financial To move a public To move a public administra- and payments systems, . administration from a tion from a system based on accounting systems, the system based on direct direct control of the economy introduction of new legal control of the economy toward one based on incentives frameworks, and courts able to . Ow. o b involves a reorientation of the enforce contracts. To provide tives involvs a state's role-indeed, a reinven- headroom for the private rnentaoo thesta don of public institutions. The sector also requires a Central Bank, for example, reorientation of the state's role-rndeed4 a needs to be strengthened in fiscal role, induding a reinvention of public new functions of indirect mon- reallocation of public expendi- institutions etary control, domestic debt tures and better public invest- and interest rate management, ment programming so that the and bank supervision. Many infrastructure needed to countries inherited centralized support private sector activity state structures that no longer develops. Without such serve them well and are now changes, the supply response strengthening local expected from economic governments that can mobilize liberalization will be damp- resources and deliver public ened, making macroeconomic services more efficiently. The stabilization more difficult to introduction of a market sustain. economy also brings with it a need to strengthen tax admninis- Retooling the state involves tration to ensure that the sensitive issues that are difficult - budget will be able to tap to resolve. Initial Bank newly emerging tax bases- intervention in some member consumption and private- countries was through sector incomes. Better tax assistance in strengthening the S The Evolving Role of the World Bank institutional capacity to parent are perhaps the most implement reforms in areas important aspects of retooling While it is important to key to transition. Such Bank the state. While it is important support, however, is recent to reduce deficits, reducing the reduce deficits, reducing , and experience is still being share of public expenditures is the share of public . gained. The strengthening of also key to creating the expenditures is also key tO core state functions has been economic headroom needed creating the economic supported through free-stand- for the private sector to headroom needed for the ing technical assistance loans, flourish. Economic studies private sector to flourish investment lending, and quick- undertaken early in the I 'disbursing opezations-each dialogue with each country focusing on different aspects identified the sustainability and of institution building. rationale of many government Throughout the former Soviet transfers and subsidies. These Union, institution-building were typically provided in loans were designed to nontransparent forms though strengthen economic subsidized credits, uncollected management capacity, debts, tax and social security including aid coordination, arrears, and controlled prices. and to establish modem Moreover, the proliferation of treasuries to improve public extra-budgetary accounts and expenditure and debt manage- parallel budgets make ment. Targeted technical controlling both the level and assistance projects for tax composition of public expendi- administration (in Albania and tures difficult. The Bank has Hungary, for example) have tried to encourage maldng such sought to bolster resource subsidies explicit and to analyze mobilization-as well as tax their justification-both in policy and its implementa- terms of equity and efficiency. tion--by strengthening tax and customs offices, training tax Important studies of this type officials, and computerizing were undertaken for Russia, tax records. Ukraine, and Uzbekistan, where credit and energy subsidies had Streamlining the state budget, major macroeconomic implica- rechannelling its focus, and tions. In Hungar, work has making its impact more trans- focused on the consolidation of 6 The Transition in Central and Eastern Europe and the Former Soviet Union budgetary, extra-budgetary, * Bank loans under way in I and other institutional funds, Poland, Albania, and Slovakia whose continued proliferation provide technical assistance to puts fiscal stabilization at risk. improve central banking skills, Work on the sustainability and bank supervision, financial and reform of fiscally costly capital market regulation, and I pension systems is also auditing and accounting. continuing. Projects in this area have helped to improve * In Armenia, Belarus, I administration and computeri- Kazakhstan, and Ukraine, zation of social benefit systems instiudtion-building loans in Hungary and Albania, for focused on strengthening example. banking and financial-sector accounting as well as develop- Finally, development of the ing a modern payments system. financial and economic Even so, major challenges infrastructure needed by a remain. These institutional market economy-including reforms must be followed by payment systems, banking concrete restructuring of legislation, accounting and financial institutions still securities regulatory systems- burdened by bad loans and old is also being supported: habits. A financial institutions Today neither the level nor development project of $200 composition of public. invest- Current public investment million was recently approved ment is compatible with the .eels-sometimes as low for Russia-one of the larger growing needs of the private as 2 percent of GDP- technical assistance projects economy. Current public mortgage the /uture. To approved by the Bank. It investment levels-sometimes Iensure that scarce supports the modemization of as low as 2 percent of GDP- budgetary resources go both commercial banks and mortgage the future. To ensure where returns are highest, Russia's payments and clearing that scarce budgetary resources wfero pu blic system, the strengthening of the go where returns are highest, supervisory capabilities of the reform of public investment ?iflit programming Central Bank, and an overhaul programming is crucial. The is cncial of accounting and auditing Bank har supported the design standards. of public investment programs 7 The Evolving Role of the World Bank in Albania and Poland and has * In some former Soviet undertaken in-depth public republics, the Bank has also expenditure reviews in the provided direct support for Baltic countries. legal reforms in the areas of privatization, energy legislation, Legal reforms are also key to and banking through grants and the transition but are long-term loans for legal advisers, legal in nature, involving funda- information systems, training, mental changes in institutions, and judicial reform. The redeign of social sec- .processes, and procedures. In the former Eastern Bloc, major Labor Markets, Social Sectors, tar spending is also key to gaps exist in the legislation and Safety Nets fiscal adjustment. Socil .needed to support economic sector spending now reforms, induding the Strengthening social policies absorbs as much as 30 per- defiition of property rights, (employment, education, cent of GDP z some cowt- commercial and financial laws, health, and the social safety net) tries and without poliy banking legislation, and rega- is another cornerstone of r OF IRANU AUGUMST19 BORROWING MEMBER COUNTRIES OF ____ ~THE FORMER SOVIET_ UNION 16 The Transition in Central and Eastern Europe and the Former Soviet Union IUD 26192 D' SWEDEN'-t r WV ~~~~ 4 LAlVIA *-~~~ilsLA Di_.4-.. FED. Bazh f4 t( 8e!tic i IHUANIA lb Sea J - .- FED wjmk [f~~~~~ s" *i- SeeJ J a. Lr .,,, * = t _1 ., \BELARLUS , * l - < . j -. , POLAND 4%i. GERMANY , CZECHi;-, >, UKRAINE z rA I i *1 -777- - ;- VA -'C'~~~~~~~~~A }k', h~~AUML , \ '1ta, e Ssxtiello # RD. REP, I... ~s O Black k- ) Tyrrhenian 1% \ coldenapi . WME j. A on Aegean TURKEY qw'dn. am of AUGusr 1994 BORROWING MEMBER COUNTRIES OF EASTERN AND CENTRAL EUROPE 17 The Evolving Role of the World Bank Europe, for instance) are heavy successfully slow price importers and, for the time adjustments, reductions in being, reliant on a sole pollution will also be slower, supplier. In producing regions, since lower energy prices mean the aim is to increase the continucd high energy efficiency of production and consumption, lower energy exploitation, attract foreign sector profitabiliy, and fewer It is necessary to find investment, and improve funds available for reinvestment ways to move aheazd Wisth s incentives for energy in pollution-abating tech- prieform while . conservation through pricing nologics. It is necessary to find cfl0V prics the most . and other policies. In ways to move ahead with o s consummg countries, the aim energy price reform while vulnerable groups is to diversify supply, develop compensating tie most regional networks for major vulnerable groups. energy carriers, promote energy saving investments, While some environmental reduce waste, and address the problems will be helped by safety aspects of nuclear power price changes, others will need generauon. targeted investments. Bank- supported environmental Adjusting energy prices both in investment projects are current- relative terms (between ly under way in some countries: households and industry) and absolute terms is key in all In Slovenia, an environmen- countries. Change, however, tal project seeks to help will be neither quick nor easy. households and industry shift Private households-which from polluting fuels (such as benefitted for years from coal) to gas or district heating subsidized energy-are likely to by financing gas-connection resist So, too, will industrial works and purchases of gas- users, where demand elasticities fired appliances. in the short run are low. Organized labor has also * In the Czech Republic, resisted, fearing what industrial another project is working to power price increases may do improve power system to enterprise profitability and efficiency and reduce air employment If such objections pollution in northern Bohemia. 18 The Transition in Central and Eastern Europe and the Former Soviet Union The same project also aims to impact of closing polluting reduce lignite consumption by enterprises be on workers and making power plants more nearby towns? efficient, to curtail power plant sulphur dioxide emissions with Foreign investors and those flue-gas desulfurization, and interested in privatization are to increase the reliability particularly concerned with and efficiency of power liability for cleaning up past transmission systems. pollution. Ensuring that environmental policies are In Russia, the Bank helped to "market friendly" is also key. establish an environmental Generally, the Bank has framework program under emphasized the importance of which some $200 million in reducing ongoing pollution pledged funds will strengthen before addressing the clean-up Rnssia's environmental of already polluted areas, which management and finance must be done over time and resource recovery and pollution when resources become projecs--'win-win" projects available. Past environmental meant to generate foreign damage is generally deemed the exchange to pay off investment responsibility of the costs. government, while stricter pollution standards typically The Bank's involvement in this apply to future operations of a area has also included private enterprise or joint environment strategy studies, venture. now completed for most countres. These studies rankc Research on envirommental The Ba has emphasized environmental priorities on the taxes and other instruments the importance of basis of health impact and cost continues. Vehicle taxes, fuel .ducing ongoing effectiveness and can help taxes, and improved traffic pollution before address- clarify a country's policy management, for instance, can ing the clean-up of already regime. The key issues are: contribute substantially to polluted areas, whrch How strict should environ- environmental improvement must be done over time mental standards be? How Such economic policies can and when resources quicldy should they be often make a difference, but at , , . .................. . , . .bscome available enforced? How serious will the lower cost than direct 19 The Evolving Role of the World Bank investments. These measures substantially increased in real can go a long way toward terms. reducing the demands on the environment that, over time, Other key aspects of energy economic growth would policy reform-particularly in otherwise bring. sector restructuring, commercialization, and Energy Projects privatization-have made less progress. Major energy With varying degrees of enterprises have yet to be success, the Bank's energy privatized, and private projects have sought to support investrnent, particularly in the policy reform, institution oil and gas sector, has not been building, improved investment substantial relative to needs. efficiency, environmental This reflects political and benefits, and regional economic instability, as well as integration. In addressing the inadequate and uncertain severe underprcing of all regulatory, legislative, and fiscal energy, the Bank has had some frameworks. influence in most countries. Forsome early ref'1 2ers This has been achieved through One project that highligts the in Central Europe (for its economic and sector work, importance of policy reform is example, Hungary and the through conditionality in some a $610 million loan (for a $1 Czech Republic) most adjustment and investment billion project) supporting the forms of energy to lending operations, and first major effort to rehabilitate industrial consumers are through ongoing dialogue. For Russia's oil sector. The project now close to or = some early reformers in Central supports major pricing, economic costs, and the Europe (for example, Hungary taxation, legislative, and and the Czech Republic) most institutional reforms to financial positions of forms of energy to industnal encourage new investment, energy enterprises have .consumers are now close to or both foreign and domestic. The also improved . at economic costs, and the benefits and economic returns financial positions of energy are high and will begin to be enterprises have also improved. realized when the first round of Further east, progress is slower, equipment arrives at Russian oil although even in Russia, fields. A second project will petroleum and gas prices have build on the first. 20 The Transition in Central and Eastern Europe and the Forner Soviet Union Achieving greater efficiency and replacing them with conservationi in energy use is internationally certified plants crucial. For the Baltics, a or with power plants based on district heating rehabilitation alternative fuels. For some project in Estonia and a power countries in the region, this rehabilitation project for transformation is not easy. The E Lithuania have just been Baltics, for example, which The challenge of moving approved. Greater efficiency is nowv rely on a sole supplier of an economy where also an objective of the Bank's gas, might become more 90 to 95 percent of planned power-transmission vulnerable with conversion to productive assets are projects in Slovakia and Poland, gas. The Bank lias not to date owned by the state or which will link these countries been involved in financing u orkers' collectives to one with the kest of the European nuclear projects; that financing where private ownership is grid. is generally led by the private i , . . ! ~dominant (60 percent or sector or other international m Eivestment projects havc financial institutions. dominated the Bank's energy precedent lending, but among adjustment Private Sector Development loans, an energy sector adjustment loan to Poland is The challenge of moving an noteworthy. Tnis loan supports economy where 90 to 95 government efforts to dcvelop percent of productive assets are an energy sector regulatory and owned by the state or workers pricing framewoLk and to collectives to one where private restructure and commercialize ownership is dominant (60 public utilities. Such steps are percent or more) has no historic needed to attract the precedent The Bank has used approximately $3 billion in three means to directly support energy investment required by ownership change and private the gas and power sectors over sector development: the next years. Adjustment loans that In the nuclear energy sector, support specific policies to the Bank has participated in a speed up privatization. G-7 study of environmental clean-up possibilities for * Technical assistance loans to phasing out unsafe plants and finance expertise. 21 The Evolving Role of the World Bank Box 1. World Bank Group Assistance for Privatization in Kazakhstan and Russia Kazakhstan. Following independence in late 1991, Kazakhstan initiated a privatization program. Enterprises were transfcrred through a slow, case-by-case process and went primarily to worker collectives at highly favorable prices and with restrictions on business practices. By mid-1992, the drawbacks were obvious and the government invited the World Bank to assist in the development of a new strategy In the fall of 1992, the Bank, together with EBRD and USAID, worked with the Kazakh State Property Conmnittee (SPC) and other agencies to define a comprehensive, action-oriented privatization strategy with policy recommenda- tions on competition polic, capital market devehpmenr, and private sector development By March 1993, it was signed by the President. Parliament pssed relevant legslation shortly thereafter. The progam's four componenrs provide for (a) local auctions of almost all small-scale enterpises by the end of 1994; (b) mass privatization of the roughy 3,500 medium and large, nonagricultural firms between 1994-96 (with most shales sold to investment funds using coupons invested in them by individuals); (c) case-by-case privatization of some very large or special enterprises, mainly through international tender; and (d) privatization in the agrcultural sector, with the allocation to individual farmers of long-term use rights for state famland. This sound program enjoys broad consensus. Execution began by mid-1993 and has proceeded quickly. Pilot pro- grams for small-scale privatization in six large cities and for truck and warehouse auctions have beguL The first international tender for a very large enterprisc was also launched, and SPC has started share auctions for mass privatization. Implementation support has been provided by the World Bank, the European Union, and USAID. The World Bank will provide additional technical assistance under two sequential loans, and furier Bank projects may help restruc- ture enterprises after their privaiizadon and seek to improve the economic enviromnent in which they operate. Hussia A major turning point in Russia's transition to the market occurred in late November 1991 with the imple- mentation of the Law on Privatization. In March 1992, a Bank ream of technical advisors-management consultants, lawyers, public relations specialists, economsts, and accountants-helped to construct the detailed mechanics of the program. Thjis derailed exercise provided crucial assitance to the concepmally sound but poorly implemented program. Since that time, the Russian Privatization Fund (GKI) has: * Elaborated an economically defensible and politically palatable privatization program. * Begun the sale of vouchers permitting 146 million Russian citizens to participate direcdy in the privauzation process- * Changed finms to joint stock company sratus, distributed shares to insider workers and managers, and sold, by March of 1994, much of the remaining stock for vouchers in more than 9,000 medium and largesized firms-an outcomne remarkable in its scopc and scale. Between late 1991 and carly 1992, before Russia joined the World Bank Group, when GlI was formulating its key privatization policies, JFC maintained a permanent advisor in Moscow who participated in GKI's policy meetngs and helped elabcrate a conceptual framework of the progran-that has stood up remarkably well over the ensuing three years. In conjunction with the EBRD, the Bank prepared a $130 million privatizaton loan which was approved by the Executive Directors in December 1993. The Bank and IFC continue to work closely with the Russian privatization program and have assisted firms after they have been privatized. 22 The Transition in Central and Eastern Europe and the Former Soviet Union * Credit lines to augment the terms of 'share of value-added resources of banks and to privatized by a certain date," encourage them to lend to the using public offerings or direct new private sector. sales. In the Czech Republic, Slovakia, and Poland, very Through the IFC, the Bank different methods of mass Group has also taken an equity privatizaton were supported position in private enterprises, by Bank adjustment loans. and MIGA provides insurance Countries of the former Soviet services to foreign investors. Union, too, are pursuing a As discussed earlier in relation variety of approaches accepted to infrastructure financing, the by the Bank and incorporated use of various forms of into Bank-supported guarantees (including liquidity- operations. The Bank also enhancing guarantees for supports privatization of capital markets) could become agricultural land and state an important instrument to farms-just as important as support private sector privatization in the industrial development and service sectors. Bank Support for Private Sector In addition to its early support Deuelopment for Central Europe (particular- ly Poland), the Bank has been Bank has ndtngsto T~he Bank has no-t used policy- active in the Russian based lending to promote a Federation, Kazakhstanpromote a particul particular model of privatiza- Box 1) and the Kyrgyz model of privatiwion. tion. Rather, adjustment loans Republic-with both economic Rather, adjustment loans were generally used to speed work and technical assistance. were generally used to up privatization following Early support to Russia includ- speed up privatization whatever method or mix of ed technical assistance for the following whatever methods (privatization tracks) mass privatization program, a nzethod or mix of meho the particular country wanted public information campaign, .. . . . -.~~~~~~~~~ (privatrwon tracks) the to pursue. Hungary and and policy advice on such Bulgaria, for example, did not issues as corporate want to use voucher schemes governance, interenterprise to pursue for mass privatization. Bank liabilities, competition policy, adjustment loans set targets in environmental issues 23 The Evolving Role of the World Bank associated with privatization, before privatization. Lines of and divestiture of enterprises' credit were prepared for social assets- Hungary and Poland in the late 1980s and early 1990s to pro- The Bank's message has Drawing on early cxpericnces vidc long-term resources to been that it is more in Poland, the Czech Republic, new commercial banks and to important to move toward and Slovakia, the Bank has encourage them to lend in private ownership than to been active in disseminating support of the transformation. try to perfect any lessons, making transparent A recent loan for restructuing particular privatization . the costs and benefits of private enterprise in Russia will method. Expenenceis different types of mass rest the demand for credit by pritgatiztion, as well as com- the emerging private sector. teahing botb the Bank paring mass privarization (via The project is innovative. It is and member countries vouchers) to case-by-case meth- accompanied by equity funds what works and what ods based on auctions and spe- and technical assistance centers doesn't cal management or labor buy- (financed by the EBRD, iFC, outS The Banlks message has and bilateral donors). The been that it is more important credit will be intermediated by to move toward private a selected group of commercial ownership than to try tO banks required to comply with perfect any particular internationally accepted bank- privatization method. mg standards and practices. Experience is teaching both the Bank and member countries Strong demand for investment what worlks and what doesn't credit, however, is unlikely to But much depends on the emerge before an economic circum=staces of individual uptur, as evidenced by the countries, induding the poor initial disbursement of the political rapport between Polish and Hungarian credit insiders and outsiders in the lines. And wholesale credit that enterprise sector. is supposed to reach new entrepreneurs through the From the beginning, there was intermediation of a banldng concern about the availability system itself in crisis may be of credit both to newly priva- puttng the cart before the tized enterprises and to enter- horse. A stronger banling prises attempting to restructure sector may be a prerequisite for 24 The Transition in Central and Eastern Europe and the Former Soviet Union rapid private sector develop- induded agribusiness projects ment in transition economies. in Hungary and Poland, a hotel and an office building in THE RoLE OF IFC IFC has Warsaw, coal-bed methane gas supported the private sector by recovery in Poland, and gold investment in private enter- mining in Uzbekistan prises and technical assiace with privaization, capital Capital market projects have markets, and promotion of included the privatization of foreign investment The banks, the creation of new number of approved IFC banks in Hungary and investments in the region rose Kazakhstan, credit from two in FY90 to twenty- lines-including one to the nine in FY94. Beneficiaries Moscow International Bank, mclude Bulgaria, the Czech the creation of leasing and Republic, Estonia, Hungary, factoring companies, and the Kazakhstan, Poland, Romania, participation in venture capital Russia, Slovakia, Slovenia, and investment funds both at Ukraine, and Uzbekistan- IFC's the national level-the Ukraine investments have concentrated Fund, for instance-and on a on manufacturing and capital multi-country leveL Technical market projects. Examples of assistance m capital market the former include a cement development is also available The member of approved plant in Estonia, float-glass and consists of advice on t7C in the and special steel plants in securities legislation, the -m rose from two in Poland, and glass container, creation of stock, bond and, FY90 to twenty-nine in wheel manufacturing, carbon commodity markets, the FY94 black, and newspaper framework needed for banking investments in the Czech and leasing, and the registration Republic In addition, IFC has and custody of shares in newly made telecommunications privatized companies. investments in Hungary (including a joint venture to Technical assistance to small- operate Hungary's national scale privatization is now telecommunications system) under way in Ukraine and and has two oil projects in Belarus. Meanwhile, IFC has Russia. Other ventures have provided advisory services and 25 The Evolving Role of the World Bank assistance to the privatization established. The new regionally of major enterprises, often or functionally specialized (but finding them suitable foreign still publicly owned) banks joint-venture partners. FHAS continued to take deposits and has provided advice on how to make loans. And while much improve the foreign investmnent was expected of them in legislation and climate. umproved credit allocation, directed credit continued and Building the New Financial little in the incentive Sector framework changed. Too rapidly, some thought, the door Systemic trasforMation from opened to many small private centrally planned economies to banks, even though the market economies requires not regulatory and supervisory only a new baning system but framework was far from also the regulatory and adequat All this took place payments systems, and other simultaneously with economic infrastructure within restructuring, downsizing, and which true financial intermedi- privatization in the enterprise aiies can function responsibly. sector, leading to the continued accamulation of nonperforming The problem is time. Ideally, the loans and deterioration of the Systemic transformation it step should be to build the balance sheets at new banks, from centrally planned supervisory and regulatory public and private. economies to market environment and create or economies requires not import financial intermediaries While there are important only a new baking . with the appropriate staf Only differences among countnes in system but also the then, should these new actors their financial sectors, there are r lato and payments make the credit allocation enough similarities to suggest regulatory and ~tiyt1WiltS decisions that influence the common issues that need to be systems, and other path of the economy. In reality, addressed strategicaUly. These economic infrastrucure governments have not had this include: improvements in legal within which true luxury and have had litde and regulatory systems, financial intermediaries choice but to use the shell of especially in the areas of bank- can function responsibly the old system- Monobanks ing regulation and supervision; were hastily split, and a modernization of payments two-tier banking system systems; restructuring and 26 The Transition in Central and Eastern Europe and the Former Sov'iet Un.on privatizing the former state payments system and to update banks, support for moving banldng technology. The commercial banks more rapidly Poland financial institutions toward international standards; development loan has aimed at provision of extensive training twinning arrangements in banking services, credit between Polish and inter- operations, accounting and national banks to strengthen auditing and the like; and credit policies and internal moving to market-based credit management practices. allocation by phasing out directed credit and non- In Russia, one of the Bank's The Poland financial insti- budgeted interest rate subsidies. lIarger technical assistance loans j_AA ,,. , ., * tutions development loan (a $200 million finanal insti- Tecbnima Assistance and tutions development project) has aimedattwinning Istitution Building aims to build the capacity of a arrangemnts between core thirty to forty private Polish and international World Bank support for commercial banks, which will banks to strengthen credit financial sector development operate to higher banking policies and internal has tended to have two distinct standards. it also provides the mangement practices phases. In phase one, there is basis for a private (federal) intense focus on technical dearing system. The project assistance both to the future consists of three components: regulators and supervisors and commercial banking, consisting to bank staf This involves of institutional strengthening developing banking infra- and a systems modernization structure through basic program; bank supervision, legislation, introducing consisting of the development improved accounting and of on-site supervisory capabili- auditing, encouraging pruden- ties and legal assistance for the tial regulation, modernizing the Central Bank of Russia; and payments system, and training bank accounting, which will staff and managers in project focus on the modernization of evaluation, corporate finance, accoundng and auditing stan- and risk assessment techniques. dards and practices. A similar In Hungary, for example, an operation is under way in early modernization loan Kazakhstan. attempted to strengthen the 27 The Evolving Role of the World Bank In Albania, Lithuania, and created to handle insolvency, Moldova, the strategic focus is induding the bad debt of state- more fundamental. The World owned banks. Basic issues such Bank is emphasizing the need as supervision, auditing and to estabLish a proper legal accounting standards, and framework for commercial payments system moderniza- banking, to restructure state- tion are also being addressed. owned banks, and to overhaul In addition, diagnostic studies the payments system. In of the four state banks are Ulraine, where credit policy being financed. has made financial sector reform especially difficult, the In Estonia, where reforms are institution-building loan is more advanced and the macro- financing a twinning arrange- economy has stabilized, it is ment for the state savings possible to be more ambitious. banks, and an institutional Parallel support from the development fund (IDF) grant World Bank and the Swedish is financing technical assistance government aims at expanding in accounting for commercial both commercial bank capital banks. Similarly, in Belarus, and improving banking skills. where reform is just beginning, In Latvia, the World Bank an instituon-building loan is supports efforts to restructure providing financing for and privatize state-owned Only when there has b7een -. . twinning arrangements for the savings and commercial banks some technical a~ssitanc4, * savings banks and the largest and to modernize the payments training, and institutional private banlk and an IDF grant system. development can more is financing accounting reforms. ambitious adjustment Financial SectorAdjusmnent operations be launcbed In the less developed Kyrgyz Republic and in Uzbekistan, the Only when there has been strategy is different again. technical assistance, training, World Bank technical assistance and institutional development is provided for auditing two can more ambitious adjustment key banks with problem operations be launched. In portfolios and for training some countries, shell state bankers and bank accountants. banks are being allowed to Under a proiect now being shrink while newly-licensed prepared, an agency would be private banks expand. In 28 The Transition in Central and Eastern Europe and the Former Soviet Union others, the need to address agent of change for all but a problems in both the banking certain subset of troubled, system and enterprises joindy is indebted enterprises (Box 2). paramount. Dealing with the banks alone would risk that Phase two of the World Bankis future lending would again be financial sector support focuses Pot some of the more channeled to their traditional on strategies for the recapial- advanced countries in client base-including weak ization of banks and financial Eastern and Central and debt-burdened or loss- restructuring of enterprises that Europe, the enterprise and making entrprises. Solving the should allow the newly .fi?l sector adjust- enterprise problem is a sine reformed, retrained banks to _ * *so r * e * mewz~~~~~t loaną (EFSAL) bas qua non for lastng viability of functoon as competitive entities the banking system (as distinct with positive net worth. Kqry choice restore bk from a one-time overhaul). questions relate to the most desirable form and timing of .vlbilily and strengthen Bank asistance recognizes the the inevitable recapitalization, financial intermediation. need to address nonperforming the degree of its linkage to These loans support gov- loans of commercial banks-a bank privatization and to enter- einment policy reforms legacy that has undermined the prise restructuring, liquidation, designed to resolve the dual objectives of restructuring and pnvatizatioa. debt overhang of ste- enterprises and providing - . . . ~~~~~~~~~~~oumed enterprises and the adequate credit to emerging For some of the more advanced enterprises. In some cases, the countries in Eastern and poro problems of limited capacity of the banks Central Europe, the enterprise e bks has necessitated more central- and financial sector adjustment ized approaches in the short- loan (EFSAL) has become the term, with the most problem- vehide of choice to restore atic enterprises isolated from banldng viability and the rest of the banling system. strengthen financial inter- Increasingly, as banks have the mediation. These loans support technical capacity to government policy reforms participate in enterprise designed to resolve the debt restructunmg, a lasting solution overhang of state-owned can focus on the active enterprises and the portfolio involvement of banks that had problems of state-owned banks. lent to problem enterprises in Both are needed to unfreeze the first placc. In Poland, banks bank lending (much of which is were thought to be the only now tied up in rolling over 29 The Evolving Role of the World Bank Box 2. Enterprise and Financial Sector Adjustment Loan (EFSAL) in Poland In 1993, Poland embarked on a far-reaching enterprise and bank restructuring program (EBRP) supported by a $450 million adjmment loan from the World Banlc The program asumed that banking and enterprise problems must be jointly resolved, and that banks-not the government, a centralized agency, or a "hospital" for sick enterprises- were the only effecCve agent of change for troubled, indebted enterprises. Banks know their clients best and can dis- tinguish better than a government agency or an outsider between borrowing enterprises that are loss-makers under any scenario (and should therefore be pushed into bankruptcy or liquidation) and those that could be restored to profitability if properly down-sized or restructured and their decb overhang reduced. For this scheme to work: * Banks must face a hard-budget constraint. Practically speaking, this means that they must be privatized, and thar they must believe that no further resources are forthcoming to support them. (In Poland, bank privaization is part of the loan cond&ionality, and the agent-of-change role is already being played by nonprivatized banks governed by a steadfast and determined Ministry of Finance). - The accounting and bank regulatory and supervisy framework must 1 right, with market valuation of loans in bank portfolios and provisioning required for nonperforming loans. In Poland, a comprehensive progmm to strengthen bank supervision was suppored by the EFSAL * Banks must be recapitalized to give them a suffidcnt capital cushion to provision and write off loans to problem or nonviable debtors folowing restructuring or liquidation. - The privatization program and governance framework for enterprises must ensure prudent management and a hard-budget constraint. The Poland EFSAL supports the mass privatization program and sets specific targets for more traditional privatization tracks * Bankrupty procedures must function smoothly. Given the cxpected worldoad and inexperience of cours, the Polish EFSAL supports a temporary out-of-court conciliation procedure led by banks that would facilitate creditor- led workouts. Banks were given a one-year window to conlude conciltation proceedings. Creditor banks account- ing for 50 percent of loans were also permirted to impose a soluton on minority creditors. * For cnterprises unable to agree on conciiation or banlkuptcy in one year, a government-managed intervntion fund was set up with a limited budgetary envelope. Banks will have to write off a large portion of loans handled by this fund. With these incentives, a profit-minded bank will do its utmost to recover value from its nonperforming loans, either by pushing the borrower into bankruptcy or liquidation to recover whatever value remains, or by rsructuring the borrower's debt (jointly with other creditors) such that the enterprise once again becomes profit-generating. So far, two banks have been priva:tized and another is in the process. The mass privatization program and privatiza- tion through other routes are generally on tracck By the end of the one-year window, banks had dealtwith 80 percent of their bad loans in value terms and were expected to complete the job in a mamttr of weeks Bank-ed conciliations were used to work out 60 percent of bad loans in value terms The balnce was handled through triggering bankrupt- cy or by auctioning off assets. Somc of the remaining loans arc being -sold" to the intervention fund. It remains to bc seen whether these sales wil be at prices that reflect tie intended punitive nature of state intervention. One might not choose this creditor-led approach, however, where banks are not yet tuly banks-as in AlbAnia or Moldova, where banking and credit skldls are still rudimenary. This approach is also not indicated where bank pri- vatization is not on the agenda and where government policies for governing public sector banks are not credible. 30 The Transition in Central and Eastern Europe and the Former Soviet Union nonperforming loans) so that technical assistance and credit can be redirected toward institution building. Using performing stare-owned twinning arrangements between enterprises and the private Polish and European commer- Of the eleven fnancial sector. EFSALs support govem- cial banks, it has produced seotor operations in fiscal ment policies aimed at strength- positive results. 1990-94 (totaing $2.1 ening bank management and billion in commitments), governance and reforming bank Of the eleven financial sector one quarter were adjust- supervision, accounting, operations in fiscal 1990h94 ment loans to help cover licensing, and regulation. (totaling $2.1 billion in com- the budgetar costs of Increasingly, EFSAls mitnents), one quarter were ,. , ~~~~~~bank recapitalization or incorporate incentives for adjustment loans to help cover bank-led conciliation and the the budgetary costs of bank . 7nerrs restructuring restructuring of enterprise debt recapitalization or enterprise reduction. Such loans have restructuring (Table 2). Other already been made in Albania, operations have aimed to Poland, and Slovenia and are strengthen the banking system now under consideration in in two complementary ways- FYR1 Macedonia, Bulgaria, directly, tbrough the finance of Romania, and Slovakia. equipment needs or technical assistance to the bank them- Within these loans supporting selves, and indirectly, by financial sector development providing long-term resources and deepening financial that banks intermediate. intermediation, the Bank has also provided technical Aid Coordination assistance for capital market development and the strength- Additional support for country ening of bank regulation and programs can be leveraged by supervision. One such project the Bank's economic work and in Poland supported an action cofinancing. Other donors (the program to strengthen European Union, bilateral financial institutions, the sources, and other multilateral regulatory and supervisory banls) often find the World capacity of the central bank, Banlks analyses useful as a and the policy and institutional framework for aid coordination environment. It included and as a compass for the policy 31 The Evolving Role of the World Bank measures that donor-supported financing. Given constraints on programs finance. A Bank- the absorptive capacity of many Aid coordination is time- assisted public investment countries, aid coordination is consuming but key to review of Albania, for example, also needed to ensure that ensuring concerted policy led to greater donor and gov- donor support will fit govern- advice, technical assis- emnment agreement on a public ment priorities. The centerpiece tance, and in:vestzent ~Ivestment program, and many of aid coordination is the con- donors have now chosen to sultative group process. In provide finncnial support Such Eastern Europe and the former aid coordination is time-con- Soviet Union, the Bank has summing but key to ensuring either organized or participated concerted policy advice, techni- in many EU-led coordination cal assistance, and investment efforts designed to help reduce Tlble 2. Financi Stor Operations (July1989 toJune 1994) Monti of Amot Cotrhy Name of loan approvD ([ millos) Hungary Fmancial sstems modernizadon Sept 1989 66 EPoland Agroindusnial exports developmenra Fe 1990 100 Poland indusi export development Feb. 1990 260 Poland Fmancial institutions development June 1991 200 Poland Enaterprse restructrng and prvaunuion June 1991 280 Bulgaria Prvate invesment and exporsb Junc 1993 55 Romania Industrial developmentb May 1994 175 Russia Fmancial instutions development May 1994 200 - xssia Enterprise restructuring Jmc 1994 200 Poland Enrpse and FinmanCl Sector .-Adjtment May 1993 450 Sloven,: Enterprise and Financal Sector - Adjustment July 1993 80 Total 2,066 a. 'Wih a component for deeloping the coopee banking system. b. Includes funds for technical asistance to strengthen the banking system. 32 The Transition in Central and Eastern Europe and the Former Soviet Union constraints on external financ- able to provide guidelines and ing and to coordinate the over- general lessons for all transition all provision of foreign economies faced with resources. Sector-specific meet- fundamental changes in their ings bave also been held, as, for structures of taxation and example, conferences on the assignment of revenue (includ- agriculture sector in Poland and ing the thorny issue of natural Albania. resource rents) and expenditures among different The Banlks Research and levels of government. Ikaining Support Other Bank-sponsored studies As a knowledge-based institu- have examined how state tion, the Bank offers more than enterprises in Poland and just a financial product, and its elsewhere have responded to research has addressed issues various reforms: ranging from macroeconomic stabilization to enterprise * Comparative studies of behavior. Bank macroeconomic pnvate manufi niring m s h sough t studies have sought to under- Poland, Hungary, the Czech stand the reasons for the out- Republic, Slovakia, and Russia wudetd the reasons for put collapse in Eastern Europe and a survey of the private the output collapse in and the former Soviet Union sector in St. Petersburg have Easter Europe and the and have drawn lessons from identified factors encouraging faormer Soviet Union and the experience of early reform- and constaining prvate sector have drawn lessons from ers. For example, how have the growth. the exerience of early successes and failures of macroeconomic stabilization Comparative analyses of the programs in Latin America emerging legal framework for compared with those in private sector development in Eastern Europe? Another focus Easter Europe have provided a has been fiscal federalism, baseline to assess the progress where a study compared the of reform. Russian experience to that of among others, China, Brazil, * Extensive research has been Canada, and India. From these done on agriculture's transi- comparisons, the study was tion, including the collection 33 The Evolving Role of the World Bank . and analysis of data on farm- To deal with the problematic Ilevel restructuring. area of data and national accounting, the Bank has Since transition implies major produced two editions of its changes for households, an Guide to Historically Planned important focus of Bank Economies. A Bank newsletter, research has been labor markets Transition, represents a specific and poverty. Labor market effort to communicate the studies bave identified a grow- results of Bank analyses and ing pool of potentially long- studies to a wider audience. term unemployed and a widen- Circulation is now more than ing of skill premia in earnings 6,000, and demand in the distributions, and have assessed transition economies is strong the implications of these find- ings for poverty. Transition One of the greatest challenges countries inherited a compre- of transition has been the wide- hensive if inefficient and fiscally spread need for the retraining unsustainable social welfare sys- of mid-level civil servants tem. Estimating the distribu- steeped in the ways of a tional impact of social spending planned economy. They have was therefore a necessary pre- had little exposure to market- One of the greatest chal- lude to effective targeting of based systems, and this lenges of transition has social support amd to the pover- mismatch in skills has been the widespread need ty assessments now beginning constrained economnic policy- for the retraining of mid- in the region. making. The task is to raise skill levels while seeking lel cl eResearch activities have also greater consensus on economic in the wayvs of a planned . embodied institution building policy among policymakers economy and extensive collaboration and throughout the with leading analytical population. institutes and statistical offices. Scholars from the region have Since 1990, the World Bank's been brought to the Bank, and Economic Development many joint conferences have Institute's (EDI) efforts have been organized with included direct training, the institutions in Eastern Europe sharing of experience both and the former Soviet Union. within and across regions, 34 The Transition in Central and Eastern Europe and the Former Soviet Union and-increasingly-the training Conclusion of local teachers to train mid- level officials in local instit- The Bank's key challenge in tions and agencies. In Russia, dealing with transitional where demand for retraining is economies has been to enormous, EDI retrained a calibrate the volume and group of teachers recruited composition of assistance so mostly from Russian universi- that it complements domestic Assistance that is too litle ties and research institutions. In reform, making it less socially or too late makes reform late 1992, a training center at and economically costly and Moscow State University was more sustainable. Assistance established that organizes a that is too little or too late . myedenger its progress. wide range of courses, targeted makes reform unnecessarily Financial assistance that iS primarily at officials and taught costly and may endanger its premature may delay primarily by local staff This progress. Financial assistance reform and lead to capital model is being replicated in the that is premature may delay flight, adding to debt Ukraine and in Uzbelistan, reform and lead to capital rather than to economic with plans for Kazakhstan, flight, adding to debt rather growtb and public welfare Belarus, and Moldova. Similar than to economic growth and programs have begun at the public welfare. When a Center for Economic Research country's need is exceptionally and Graduate Education in large, it may threaten the Prague, and at Warsaw portfolio of the Bank and University. Teachers are being increase the cost of borrowing trained in the former Soviet for other members. Union, at EDI in Washington, DC, and at a recendy estab- In identifying the future direc- lished (1993) program with the don of Bank lending, it is Joint Vienna Istitute. Most important to recognize that recently, EDI has begun to restructuring and growth in reach out to journalists, parlia- transition countries will depend mentarians, and the general on addressing two major public to disseminate more constraints: demand-side widely and effectively informa- constraints that impair the tion on the objectives and likely business environment and the results from reforms, both desire to invest (such as lack of macroeconomic and structural. macroeconomic stability, 35 The Evolvitg Role of the World Bank insufficient liberalization, and a The key challenge is to ensure weak legal framework) and that adequate progress has been supply-side constraints in the achieved toward an availability of resources such as environment conducive to credit to enterprises and key restructuring and private sector public infrastucture needed to growth before transferring complement the growth of the significant resources through private sector. The key is to infrastructure and credit: achieve a balance between interventions addressing both * Much legislation and price types of constraints, policy is in the hands of sub- national governments and the Historically, lending operations division of responsibilifies The key challenge is to - have been well-geared for between these governments ensure that adequate investment operations and and the center is still unclear, togmss has been schieved- credit lines. But lack of partcularly in Rnssia and towardl -r envnen progress today in improving the Ukraine. In some countries, it t re.tructu.in environment for restructuring is necessary to await the Conducivoe to rest7rucaig and investment may result in: redefinition of political and and private sector growth economic authority between before transferring * Undisbursed credit lines, as local governments and central significant resources occurred in countres where authorities. through infrastucture Bank loans were approved and aeit before investmnent demand and * Privatization alone does not I prvatization progress required assure improvement in gover- them. - nance and depolitization of flrms, given the significant role * Balance of payments financ- played by insiders. Thus ing that ends in capital flight in privatization loans and credit response to an unstable macro- lines to newly privadized firms economic situation. still :.volve significant risks. * Investments that end in * In some countries, law and under- used inastructure order has deteriorated as - because the productive sectors 'governments have not have not yet been restructured. refocused their roles in these areas. This may have a major 36 The Transition in Central and Eastern Europe and the Former Soviet Union effect on the climate for new Russia. In terms of both the investment and private-sector political difficulties in Tbroghout the legion, growth. generating consensus and social support, and ~ momentous changes have social support, and the The Bank will also have to technical difficulties in trying alreadyen place ad recognize that legal and to implement the most perhaps the hope is institutional development appropriate policy measures, ustifid that tbrougb the crucial for economic reforms the task is daunting. systemic transfornation of will take time to yield resultsh Centrad and Eastern These reforms cannot be In 1994, however, encouraging E and the forner accelerated with large amounts signs are appearing. Central of financial support. Technical EurODe has started to grow, . assistance faces absorptive- with Poland leading the. new capacity limits that must be expansion. Albania, having geconomy is eerging recognized. experienced a disastrous collapse in 1990-92, has seen The first four years of the GDP grow at close to 10 transformation from commu- percent for almost two years. nism toward markets and The Baltics seem ready for a democracy have included rebound. And in Russia, the massive output declines, a first six months of 1994 show surge in unemployment, and in better results than anyone some areas, ethnic and expected a year ago. religious conflict. After an Throughout the region, initially cautious attitude by its momentous changes have major shareholders-at least already taken place, and regarding the Soviet perhaps the hope is justified Union-the World Bank that through the systemic Group has taken on the new transformation of Central and challenge of supporting and Eastern Europe and the former financing the systemic Soviet Union, a stronger and transition in more than two more integrated world dozen countries, including economy is emerging. 37 Distributors of World Bank Publications ARGENMINA EGCW, ARAB REFUPUC OF KENYA SAUDI ARABIA. QATAR Carla Hcli.SRL M AAram AJica book Serkice EA.) Lt. ladir Book Stoat GdaeriaGueo AIGiba Stret QuwaaHnaaMfapnSbeS P.O. BS3SIG Flaidas 65.4dtFioovG4S3I465 airo P.O. Box45245 Riypdh 1471 =BauenAo sa Nimbi The blddle Ent COrnrr SINGAPORE. TAIWAN. Ofidnadet Lie lnledanmc 4I.SrifSweet KOREA. REPUBLC OF MYANMAR.BRUNEI Aberli40 Cairo PanKe B.kCwpomtion Gwr Asia Pac Pte LkL 106 BasiA P.O. 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