© World Bank

The Europe and Central Asia region is progressing steadily beyond the transition phase, which began in 1989 with the fall of the Berlin Wall. Markets in most of the region’s 28 countries have responded favorably to reforms, and political change in some of the Commonwealth of Independent States (CIS) has improved performance. Regional economic growth eased to 5.7 percent in 2005, down from 8 percent in 2004. Sustained expansion of the financial sector is boosting demand, but it is also increasing risks.

Political developments continued apace during the fiscal year. The European Union opened accession negotiations with Turkey and Croatia; it also signed a pre-membership agreement with Albania. Following a referendum in May 2006, Montenegro declared its independence from the union of Serbia and Montenegro.

While membership in the European Union has spurred many countries to move ahead with complex reforms that are owned by countries themselves, challenges remain across the region. Long-term unemployment and an inability to shift jobs to the formal sector remain nagging problems. Bulgaria, the Russian Federation, and other countries are faced with a range of problems including rural poverty, weak local institutions, decaying infrastructure, depressed one-company towns, state-owned enterprises in need of reform, and environmental degradation (see Reviving the Northern Aral Sea). Legacies of central planning, these problems are compounded in some countries by shrinking populations.

WORLD BANK ASSISTANCE

Assistance during fiscal 2006 reached $4 billion, including $3.5 billion in IBRD loans and guarantees and $500 million in IDA commitments. The Bank delivered 98 pieces of economic and sector work and completed 59 technical assistance activities.

Increasingly, Bank partnerships that involve representatives from various levels of government are the preferred mode of business with low- and middle-income countries in the region. This new approach responds to increased decentralization and recognition by governments that results at the local level often spur broader reforms. Examples include the Georgia Country Partnership Strategy for 2006 to 2009 and a new Albania Country Assistance Strategy, both discussed by the Board in fiscal 2006. Because governance and corruption are top concerns, the region is focusing on projects to reform public finances and modernize courts. Bank experts continue to use enterprise surveys to gauge perceptions about corruption.

The Bank responded quickly to requests for support in preempting an avian flu health crisis. Assistance was approved for Albania, Armenia, Azerbaijan (loan reallocation), Georgia, Moldova, the Kyrgyz Republic, and Turkey, and similar operations are under development for other countries. These operations deal primarily with animal and human health, public awareness and information, monitoring and evaluation, and emergency imports.

Several innovative projects were launched during fiscal 2006 in line with the particular technology needs of countries poised to join the European Union. They included the Romania Knowledge Economy Project and the Croatia Science and Technology Project. The Romania project will help remote and poorly connected communities participate more actively in the country’s knowledge-based society, raise digital literacy, develop e-government services, and support small business innovation. The Croatia initiative aims to improve the ability of research and development institutions to promote applied research and arm businesses with the skills they need to effectively apply technology for commercial uses.

Through in-depth studies and advisory activities focused on such crucial issues as employment, trade, poverty and inequality, and the economic cost of HIV/AIDS, the Bank was able to increase knowledge and spark debate on high-priority development topics. At the regional level, three flagship reports were produced in fiscal 2006: Growth, Poverty, and Inequality: Eastern Europe and the Former Soviet Union; Enhancing Job Opportunities: Eastern Europe and the Former Soviet Union; and From Disintegration to Reintegration: Eastern Europe and the Former Soviet Union in International Trade. Other major studies—on regional labor migration, demographic trends, and productivity growth—are under way. The periodic Russian Economic Report and the EU-8 Quarterly Economic Report allow journalists, economists, and policy makers to track macroeconomic trends in key countries.

BUILDING THE CLIMATE FOR INVESTMENT

Eastern European and Baltic countries are aggressively courting entrepreneurs with far-reaching reforms that streamline business regulations and taxes. According to the Bank Group’s annual Doing Business report, every country in Eastern Europe improved at least one aspect of its business environment in 2005—the highest rate of reform of any region. Serbia and Montenegro, the Slovak Republic, Romania, and Latvia topped the global rankings for most reforms enacted.

To boost the investment climate, the Bank is helping governments enhance enterprise competitiveness and improve the judicial system and other institutions that bring discipline to key economic sectors. Examples include the Moldova Competitiveness Enhancement Project and the Serbia and Montenegro Programmatic Private and Financial Development Policy Credit. On the policy side, a 2006 Country Economic Memorandum for Turkey focused on promoting sustained growth and convergence with the European Union. And because businesses need recourse to well-run courts, the Bank is also supporting judicial reform in Armenia by upgrading courthouses and making the judicial process more efficient and transparent.

In Russia, the development of real estate markets is being supported through a Bank-assisted Cadastre Project. Along with other Bank activities supporting access to land and real estate reforms, the project aims to improve Russia’s investment climate as well as provide a predictable source of income from land taxes for local authorities.

FOSTERING PARTICIPATION IN DEVELOPMENT

To ensure benefits to a broad section of society and to encourage participatory development, Bank operations emphasize improvement of public services and inclusion of vulnerable groups in innovative projects and research initiatives. A Poland Post-Accession Rural Support Project is targeting underdeveloped villages by helping local governments implement social protection strategies, supporting a farm insurance fund, and executing a social inclusion strategy that will help small-scale farmers and their communities. In Albania, people overlooked by the existing health system will become eligible for basic health services. Health care improvements being rolled out across the country, as part of the Health System Modernization Project, will also enable poor people to choose their own primary-care doctor.

The Bank is supporting nonlending initiatives in the region. Development Marketplace programs encourage civil society organizations to compete for microgrants. A multidonor Roma Education Fund is boosting school opportunities for Europe’s largest minority. A study of Russian youth in North Caucasus is shedding light on a segment of the population that faces high unemployment, social insecurity, and marginalization. And the report Dying Too Young brought the attention of policy makers to Russia’s crisis in mortality and morbidity relative to other countries at similar income levels. (See www.worldbank.org/eca.)

EUROPE AND CENTRAL ASIA FAST FACTS

EUROPE AND CENTRAL ASIA: COUNTRIES ELIGIBLE FOR WORLD BANK BORROWING

REVIVING THE NORTHERN ARAL SEA

WORLD BANK LENDING TO BORROWERS IN EUROPE AND CENTRAL ASIA BY THEME AND SECTOR