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Overview

Updated April 2012

EUROPE AND CENTRAL ASIA

ECA GDP ProjectionsMost countries in Eastern Europe and Central Asia (ECA) have recovered the output losses suffered during the 2008-9 global economic crisis, yet growth is slower than before the crisis in most countries of the region. In 2011, the region had a real growth rate of 5.5 percent, and is projected to grow at 3.4 percent in 2012.

The sovereign debt problems in Western Europe pose challenges to the sustainability of this already relatively tepid recovery. The Eurozone crisis harms the ECA region through three channels – finance, trade, and workers’ remittances – and the importance of each channel depends on the individual characteristics of the countries.

To respond to the crisis, the World Bank Group made available $27 billion in funding over the next two years for countries of the region impacted by the crisis.

Meanwhile, to deliver specific assistance to middle-income countries requiring services that cannot be fully funded by the Bank’s regular lending, ECA is increasingly using fee-based services (FBS). Under FBS programs, the Bank works with countries at their request, providing technical advice and guidance, and is then reimbursed for the costs. Since 2005, ECA has been engaged in over 80 FBS programs; over 20 FBS agreements were signed in FY2011 alone. Countries that have signed FBS agreements include: Albania, Bulgaria, Cyprus, Czech Republic, Estonia, Georgia, Kazakhstan, Latvia, Slovakia, Slovenia, Poland, and Russia.

According to the 2012 regional flagship report “Golden Growth: Restoring the Lustre of the European Economic Model”, the European growth model has been an engine for economic convergence during the past few decades and has delivered prosperity to hundreds of millions of people on the continent. The report says Europe has to make adjustments to its economic model without abandoning it. Many attractive attributes of the model that have led to a shared prosperity not seen before or elsewhere need to be nourished.

World Bank Strategic Directions in ECA

As ECA countries continue to look for ways to solidify and accelerate their recoveries amid increasing global volatility and set themselves up for sustainable growth in the long-term, World Bank programs in the region are focusing on three strategic directions:

I. Increasing Competitiveness

Countries in the region need to increase competitiveness, improve productivity, and strengthen regional integration. Relative to the pre-2008 period, there is less global liquidity and more risk aversion. Governments throughout the region are challenged to create the necessary environment for more diversified and competitive economies.

The World Bank Business Environment and Enterprise Performance Survey, which covers more than 10,000 firms in 29 countries in the region, highlighted that infrastructure and skills have emerged as the key bottlenecks to growth. Key areas for improvements are the investment climate and governance, relevant skills, stable and efficient financial intermediation, energy and transport infrastructure, composition and efficiency of public spending, and revenue mobilization. The Bank continues to work with client countries to identify their policy priorities, develop plans for recovery, improve the investment climate, and diversify exports.

In the area of competitiveness, the World Bank is supporting:

  • Private Sector Development and Export Diversification: The Bank is providing policy advice for improvement of the business environment in Poland, Kazakhstan, Kyrgyz Republic, and Tajikistan, helps improve the business environment in Russia through conducting sub-national Doing Business assessments, and is helping Serbia in its transition to a new growth model. Analytical studies of savings and growth, and gender equity in the private sector in Turkey, as well as growth and competitiveness in Moldova provide guidance to countries on policy steps that can be taken to achieve these goals. The Second High-Level Economic Policy Forum in Azerbaijan, facilitated by the Bank, provided a platform for discussing non-oil growth through export promotion, human capital development, agriculture, and institutional reform.
  • Financial Sector Development: Through operations in the region this year, the Bank has helped stabilize the financial sector in Serbia and FYR Macedonia with innovative Policy Based Guarantees which helped provide access to international capital markets; helped increase access to finance for small- and medium-enterprises in Armenia, Bosnia and Herzegovina, Moldova, and Turkey; and provided policy advice on banking sector regulation in Poland.
  • Public Sector Reform and Fiscal Management: The Bank is supporting regulatory reforms and the strengthening of public financial management in Croatia, Poland, and Romania. In Romania, the Bank is also supporting a large program to modernize the public administration.
  • Energy and Transport: The Bank has been involved in improvements in infrastructure through investment lending for roads in Ukraine, Kazakhstan, Kyrgyz Republic, and the South Caucasus, and improving infrastructure services delivery through public sector reforms to improve governance and delivery of transport and energy, such as with the Functional Reviews of these sectors in Romania. Turkey has partnered with the Bank in improving its energy security and addressing comprehensive energy sector reforms.
  • Innovation: The Bank is helping enhance competitiveness by supporting economic diversification and innovation in Russia’s regions, and by conducting a review on enterprise innovation in Poland

 II.Supporting Social Sector Reforms and Fiscal Adjustments

During the crisis, social safety nets – cash transfers, social pensions, and targeted anti-poverty programs – risked being cut as government revenues fell, even though it was precisely these programs that needed the most support in order to protect the poor and most vulnerable. Fortunately, most countries did protect, and even increase, their social safety nets. Those that responded to the crisis most effectively were those that had been developed and improved during stable times. Beyond the immediate crisis, increasing employment and access to quality public services in health and education also remained key areas to support inclusive growth. However, much social spending in certain Europe and Central Asia region countries remains inefficient and poorly targeted.

Governments need to do more to protect the poor by improving cash transfers, social pensions, and targeted anti-poverty programs. The lingering effects of the crisis, as well as of longer-term demographic, economic, and political forces, calls for policies that deliver equitable access to services and inclusive growth. There are three main challenges: first, to improve social safety nets before they are called upon again to protect people in a crisis; second, to acknowledge the demographic shift, which will force some elderly people to rely more on private savings or general revenue to supplement their pensions; third, to ensure that social safety nets are designed to help beneficiaries participate in the labor market and avoid reliance on social transfers.

In the area of social sector reforms, the World Bank is supporting:

  • Social Service Delivery: Improvements in government finances in more than a dozen countries in the region are supported through loans and analytical services. The Bank helped protect spending on social assistance programs in Albania, Armenia, Latvia, and Romania, as well as vital public services, such as education attainments in FYR Macedonia and education quality in Kazakhstan and Russia, and healthcare in Armenia, Bosnia and Herzegovina, Tajikistan, and the Kyrgyz Republic.
  • Social Protection and Job Creation: Improving social safety nets and insurance through results-based investment loans to Moldova, and a Rapid Social Response and IDA grants to Tajikistan, additional financing for health and social protection in Kyrgyz Republic, a health system improvement project in Uzbekistan, and pension reforms in several countries across the region. The Bank also prepared several regional reports including a study of the performance of pension systems and a study of household and government responses to the recession. It also released reports on social assistance programs in the Western Balkans, and female labor participation in Turkey.

III. Mitigating and Adapting to Climate Change

Energy use per US dollar of GDPThe lingering legacy of environmental mismanagement and energy-intensive production in Europe and Central Asia has left the region ill prepared to adapt to the negative impact of climate change. The region has the highest energy intensity of production in the world, though this has been falling. According to Adapting to Climate Change in Europe and Central Asia, a report issued by the World Bank in 2009, the impact of climate change will be more significant than expected. This is due to a lingering legacy of environmental mismanagement, the poor state of much of the region’s infrastructure, and inadequate institutional capacity, leaving the countries ill-prepared to adapt.

Many countries are suffering from unusually severe floods and droughts, and the number of extreme events—droughts, floods, heat waves, windstorms, and forest fires—is likely to increase in the coming decades. The energy intensity and carbon footprint of GDP are high. In addition to economically sound adaptation and mitigation measures, there are huge opportunities in the region for increasing energy efficiency, which reduces the carbon footprint and is good for growth.

In the area of climate change, the World Bank is supporting:

  • Mitigation: Efforts to mitigate carbon emissions, build countries’ climate change knowledge base. The Bank is financing energy efficiency and renewable energy projects in Poland, Turkey, Ukraine, and Uzbekistan, disaster mitigation and climate risk management in Moldova, and development policy lending in Poland. Further, the Bank has been working with countries in the region on developing their national energy efficiency strategies, for example in Poland and FYR Macedonia. In Turkey, the Bank is supporting implementation of the Climate Change Action Plan and adoption of the mechanism for market-based greenhouse gas emissions, as well as the green growth potential of reducing carbon emissions intensity. In addition to support for Energy Efficiency & Renewable Energy, the Bank is proving support to number of carbon finance operations in Poland, Czech Republic, Bulgaria, Moldova, Romania, and Albania.
  • Adaptation: The Bank is strengthening the climate resilience of its investment portfolio. It continued its pilot projects on the vulnerability of energy systems, agriculture, and water. It also initiated projects on sustainable cities and social development, and expanded its knowledge and learning programs for a wider group of Bank staff and selected clients in the region, like supporting the Western Balkans participation in a natural disaster risk mitigation facility to help prepare for climate related and other natural events. In addition, significant resources are being invested in: (i) improving the capacity of weather forecast and climate change and ensuring information availability to users (agriculture, municipalities, emergency management authorities, aviation--through Hydromet projects in Russia, Central Asia, Moldova); (ii) flood management ( Odra River project in Poland); and (iii) urban development and services (water supply and sanitation projects) across the region. Finally, these activities are complemented by work on the key social aspects of adaptation, including in Tajikistan, Armenia, Azerbaijan and Moldova.

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World Bank Assistance to Date

It is planned that World Bank support in the ECA region will reach more than $6.5 billion in 2012 fiscal year, including $6.2 billion from the International Bank for Reconstruction and Development (IBRD) and $363 million from the International Development Association (IDA). Romania ($1.9 billion), Kazakhstan ($ 1.1 billion), Poland ($ 1 billion), and Turkey ($600 million) will be the largest borrowers in FY12. The sectors receiving the most funding are public sector ($ 2.8 billion), transport sector ($ 1 billion) and energy ($0.6 billion).

Working with Partners

The Bank continues strengthening its partnership with the European Union (EU), co-financing international reform packages, providing advisory services to member states on EU issues and to potential candidate countries on accession issues, and expanding its work on regional energy issues. To enhance its engagement, the Bank produced a strategy for the region’s partnership with the European Union and other key Europe-based institutions (STEP-EU).

The Bank partnered with the European Bank for Reconstruction and Development and the European Investment Bank for the Joint International Financial Institution Action Plan to support banking systems and economies of Central and Eastern Europe in response to the economic crisis. It worked with Russia as an emerging donor, providing advice and technical assistance to Russia in its new role as an IDA donor, and administering Russia-funded Trust Funds supporting education, public finance management, and global public goods in the region and beyond. The Bank also partnered with the EurAsEc Anti-Crisis fund to provide parallel financing for low-income ECA countries.

The Bank also became an associate member of the Western Balkans Investment Framework (WBIF), a financing mechanism designed to pool grants, loans, and expertise from the countries of the Western Balkans, the European Commission, International Financial Institutions, and bilateral donors to prepare financing for a common pipeline of priority investment projects.

Regional Integration and Cooperation

Given the relatively small size of some of the countries and the high level of economic integration in the region, greater cooperation—on water and energy, transport, trade, corporate finance, and social inclusion—is essential. The Bank supported the Southeastern Europe Energy Community in establishing a common regulatory framework for energy markets and helped craft regional transport solutions to meet EU transport requirements.

The Bank initiated a comprehensive Central Asia Energy-Water Development Program to support Central Asian countries in managing their water and energy resources, strengthening regional institutions, and stimulating investments. A multi-donor trust fund was established with support from the government of Switzerland and the British government’s Department for International Development, and discussions with other donors are under way. The Bank also worked with the European Commission on Roma inclusion and provided support through the Roma Education Fund and the Decade of Roma Inclusion.

Analytical Work to Inform Financial Support

Country and regional analytical work informs the Bank’s financial support in the region, including Regular Economic Reports for the EU10, South Eastern Europe, Russia, Ukraine, Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyz Republic, Tajikistan, and Uzbekistan.

Contact Information

For general inquiries on the World Bank in Europe and Central Asia (ECA), please contact:

Elena Karaban,
ekaraban@worldbank.org




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