ECA regional brief 2006 Updated October 2007
Europe and Central Asia (ECA) has largely succeeded in overcoming the early challenges of transition. In 2006, most countries experienced solid economic growth, with the region as a whole growing by a robust 7.3 percent. Oil revenues were a major driver of growth in Azerbaijan (34.5 percent) and Kazakhstan (10.6 percent), while Armenia grew 13.4 percent, thanks to the implementation of an ambitious reform agenda.
Structural reforms in most countries have driven ECA’s ongoing success. According to the 2008 Doing Business survey, ECA countries are reforming the most rapidly, surpassing even East Asia on the ease of doing business, and four of its countries (Croatia, FYR Macedonia, Georgia, and Bulgaria) were among the top 10 performers worldwide. Integration with the European Union (EU) has been key to the reform process in many ECA countries. Bulgaria and Romania joined the EU in January 2007, bringing the number of member countries to 27. Slovenia joined the Euro currency area as the bloc’s 13th member state, and reforms motivated by integration led Estonia, Latvia, Lithuania, and Hungary to graduate from IBRD in Fiscal Year 2007.
Despite strong growth, ECA countries still face significant challenges, including large subnational disparities, rapidly aging and declining populations, persistent youth unemployment, lack of scientific and technical innovation, and, especially in the low-income countries, weak public and corporate governance. Rapid growth is increasing vulnerability to macroeconomic imbalances. Driven to different degrees by soaring private demand and credit expansion, higher oil prices, and buoyant capital flows, current account deficits in a number of ECA countries have increased their vulnerability to sudden reversals in market sentiment. Several regional currencies have appreciated as a result of the large influx of external funds (including remittances) and banking system borrowing, which, if not accompanied by productivity growth, will reduce competitiveness. Countries must also work to mitigate the threats posed by HIV/AIDS, drug addiction, and human trafficking; natural disasters; and environmental degradation.
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World Bank Assistance
The World Bank (IBRD/IDA) delivered US$3.8 billion in lending in Fiscal Year 2007, which ended on June 30, 2007. IDA commitments in ECA were US$422 million, and IBRD commitments totaled US$3.34 billion. IDA/IBRD lending was down slightly from fiscal 2006 levels due to political uncertainty in a number of countries. 59 projects were delivered, along with 100 economic and sector policy reports and notes, and a further 84 technical assistance activities. Lending was provided across all sectors, with the largest areas of assistance in law, justice, and public administration (22 percent); water, sanitation, and flood protection (22 percent); and transportation (19 percent). The top borrowers in FY07 by volume were Turkey (US$1,158 million), Croatia (US$522 million), Romania (US$349 million), and Bulgaria (US$345 million).
Transition trend: evolution of GDP 1990-2006. See chart
A significant amount of World Bank assistance is channeled through policy-based lending, technical assistance (TA), and sector programs on regional core issues—migration and remittances, demography, labor mobility, governance, and innovation and technology absorption. The World Bank is also engaged in supporting the transition of countries such as Russia and the new EU members from recipients of World Bank assistance to donors.
Increasingly limited resources mean that the region needs to become ever more innovative and responsive to deal with the rapidly changing economic landscape. The Bank is responding to the continuing strong demand for both traditional and innovative product lines, across a very diverse set of countries.
In IDA countries, the Bank continues to be a vital development partner. The $840 million it has provided to Armenia since 1991 was crucial in propelling the country out of severe economic paralysis after Soviet rule. Extraordinarily rapid growth—of about 10 percent a year over the past decade—has helped Armenia reduce the number of poor people from more than 55 percent at the beginning of the transition to about 30 percent today. In Bosnia and Herzegovina, IDA worked with the European Commission and other donors to mobilize unprecedented levels of assistance for the war-torn country. IDA supported the country’s reconstruction with about $1 billion in investments. It also acted as a catalyst and facilitator, bringing together different local parties for joint projects and endeavors. In this way, IDA has contributed not only to the implementation of specific projects but more generally to social reconciliation within the country.
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In middle-income countries, the Bank Group is providing integrated product lines based on client demand, as many of these countries are increasingly moving from borrower to donor status and from knowledge receiver to knowledge provider. A Joint Economic Research Program with Kazakhstan, for example, has been expanded to include project preparation support on a cost-sharing basis. In the Russian Federation, the Bank provided technical assistance on a fee-for-service basis for a public-private partnership tolled motorway project in St. Petersburg. Meanwhile, the Bank's engagement in subsovereign lending in the country has drawn strong support from federal and regional authorities for its role in strengthening the capacity of regional and municipal actors to manage their financial affairs and promote private sector development.
Tackling Core Issues
The Bank's analytical work is increasing knowledge and sparking debate on high-priority development topics through in-depth studies and advisory activities on such crucial issues as employment, trade, regional labor migration, and corruption. A recent flagship report, Migration and Remittances: Eastern Europe and the Former Soviet Union, shows that migration within and from the transition economies of Europe and Central Asia has been significant and will likely continue to increase. The report also looks at migration policies in the region and makes recommendations for improving them, focusing on circular migration patterns.
Governance and corruption continue to be top concerns in the region. To help policymakers address these problems, Bank experts conduct enterprise surveys to gauge perceptions of corruption. What they find is encouraging. Anti-Corruption in Transition 3: Who is Succeeding…and Why reveals that extensive reforms are reducing the opportunities for corruption and showing real results on the ground in many countries, with firms reporting a reduction in both the size of bribes and their frequency. Still, corruption is not receding in all countries or across all sectors, and even the most successful reformers tend to have higher levels of corruption than in Western Europe. The Bank supports regional governments in reinforcing and accelerating the reform process within the framework of its Governance and Anti-Corruption Strategy.
The Bank's annual Knowledge Economy Forum (KEF) is supporting countries in ECA in their transition to becoming increasingly knowledge-based. Improving knowledge, innovation, and technology absorption in ECA is vital if the region is to reduce the competitive gap with Western Europe, the United States, and South and East Asia.
The Way Forward
Looking ahead, countries in the ECA region still face challenging development agendas and the World Bank will provide assistance in a number of areas. The Bank’s support to new and candidate EU countries is expected to focus on the convergence agenda against the backdrop of demographic changes (aging, youth employment, and migration) as well as issues associated with productivity growth and financial sustainability. In the rest of the region, the Bank will focus broadly on helping move the poorer countries to middle-income status, supporting countries that are no longer eligible for IDA financing but lack creditworthiness to borrow at non-concessional terms (gap countries), as well as helping resource-rich countries face the Dutch Disease dilemma, where resource exploitation can slow manufacturing growth. At the global and regional level, the Bank will focus on financial systems, climate change, communicable diseases, and helping societies take advantage of an inclusive and sustainable globalization.Back to Top
Active Portfolio by Sector as of June 2006
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