Towards a Better Development

Avaliable also in: Montenegrin

Author: Ivana Knežević

Interview with Jan-Peter Olters, World Bank Representative in Montenegro

Published in Biznis Montenegro, “U još bolji napredak (Towards a Better Development)”, Vol. 7., No. 12 (October 1, 2008), pages 20–25.

What is the World Bank?

A catalyst for policy dialogue, a source of knowledge, a pool of recognized experts in energy or financial markets, in health or pensions, for sanitary landfills or higher-education reform… Any bank can provide financial resources, but it is the breadth and depth of assembled expertise, a global outlook, and an insistence on carefully monitoring the success (or failure) of the projects we support, which adds value to the financial funds provided to governments. As a truly international institution, comprising 185 member countries (including Montenegro), the World Bank employs experts from any part of the world who work on projects around the globe and therefore have access to developments and experiences in their respective sectors that ultimately flow into the policy dialogue with Government and the joint design of projects.

In which way does the World Bank function?

Generally in a way governments want us to. I am not saying this in a condescending way, but more as a reflection of the fact that the World Bank is—what we would call—a “demand-driven” institution. This means that all our support—that is, all projects, programs, and any technical policy advice—follow an initial request made by Government. Whether in Montenegro or elsewhere, we are not active in areas where our support is not sought or welcome. Typically, discussions on the type and degree of World Bank support reflects an in-depth dialogue with Government and other interested parties and stakeholders on the broad policy objectives. The outcome of this exchange you will find reflected in the Country Partnership Strategy, presented to and approved by the World Bank’s Board of Directors, the members of which council represent our member countries’ governments. In Montenegro’s case, Government and the Bank share the view that our support can be most effectively provided in those areas that support sustainable economic growth. This implies that every project design has to spell out explicitly how it will contribute to achieving this goal, how this will manifest itself and how this can be monitored during and after project implementation. The bank teams follow and report this to senior management and the Board of Directors—as, ultimately, a project is only as good as the policy objectives that it is able to achieve.

What is the World Bank doing in Montenegro?

As indicated earlier, our main role consists of supporting Government in its efforts to foster high and sustainable rates of economic growth—a precondition for higher levels of employment and increased household income. Instruments to achieve this goal are often indirect and related to immediate challenges of strengthening public institutions, increasing capacity, and improving the overall institutional environment. Through these efforts, the Bank seeks to support Montenegro in achieving its overarching European integration objectives. If you take, for example, the tourism sector, a crucial engine of economic growth, our projects are multipronged. They aim at strengthening necessary public infrastructure, such as the regional water network, securing the supply with drinking water during peak demand. At the same time, the projects seek to address critical issues of managing both solid and liquid waste, essential tasks if you want to be able to present tourists with a clean and attractive “tourism product”. Clearly, vistors’ experience of driving by burning wild dumps will not necessarily help to convince them to recommend Montenegro as a tourist destination to their friends and family or to return in following years. A similar argument can be made for urban planning and construction activities. These topics are even more important as Montenegro is in the process—thus far, very successfully—to brand itself internationally as “Wild Beauty”, in itself a promise that the tourism experience contains impressions of unspoilt nature akin to those presented in the tourist brochures. With this in mind, some key elements in our projects are designed to help to protect the most valuable environmental treasures in Montenegro, to help municipalities to improve the management and administration of land, including urban planning and cadastre, and to help to contribute to a more holistic approach, with the aim of balancing environmental protection with economic development. Experiences elsewhere have shown that, otherwise, it can become very difficult very quickly to preserve the attraction of a given tourist destination. This balance and the interaction between protecting the sources of what makes Montenegro attractive and investing in the necessary private and public infrastructure that allows demand to be met encapsulates “sustainable” development. The consequences of taking away one of these two ingredients of Montenegro’s tourism development strategy are evident.

The World Bank is responsible for providing finances and giving advice to the countries in order to secure economic development and reduce poverty as well as to protect international investments. What has been achieved so far? What has been the strategy for providing help to the country? What has been the strategy for reducing poverty?

If you look at developments in 2007 and early 2008, achievements have been very impressive indeed. Montenegro has been one of the fastest-growing non-oil economies, has had one of the highest foreign direct investments, if measured in per capita terms, and has made significant inroads into increasing income, lowering unemployment, and providing an economic perspective for people living here. On a more political level, these developments are reflected in Montenegro’s progress made with its European integration agenda. Today, challenges of economic policy-making are unrecognizably different from those faced just a few years ago. Looking forward, it is critical to focus efforts now on strengthening the competitiveness of Montenegro’s economy. Recent international rankings on competitiveness and the ease of doing business have clearly identified areas that need political attention. In some areas, such as those surrounding permits, licenses, and registrations, are those, in which Government has sought World Bank support to overcome these obstacles as quickly as possible. Investments, growth, and job creation—paired with strong public institutions—represent the most promising strategy towards sustainable development and a standard of living more in line with other countries in Europe.

Is the level of cooperation between Montenegro and the World Bank satisfactory and is there, maybe, the possibility for improvement?

The World Bank’s support to Montenegro is increasing, both in terms of projects and funds that the institution has committed. This is a clear sign of a good and improving cooperation between both sides. Could it be better? Nothing in life is perfect, and there are always areas in which things could be improved. But that’s normal, and the appropriate steps are being taken to ensure that the collaboration will improve even further. The joint portfolio performance review in July, attended by all relevant ministers and senior World Bank management and followed up with discussions with the Prime Minister, underline the strong commitment by both sides to make our collaboration as effective as is possible. Altogether, I am very pleased with, and grateful for, the level of cooperation, including the willingness to act preemptively in situations where stumbling blocks appear and threaten to intervene with the successful implementation of our programs and projects.

How do you judge level of development in Montenegro’s banking sector?

Montenegro has now a modern banking sector, with considerable competition among its banks, a high degree of confidence by the market in the banks, rapidly increasing rates of financial intermediation (which generally are a leading indicator of future growth), and a central bank that is willing to carefully supervise developments and take actions when needed and where necessary. So, all the necessary ingredients are present for a continued strengthening of the banking sector in Montenegro and its support to economic development in this country. You have followed developments and now that a healthy dose of vigilance is warranted. The global financial crisis currently unfolding—rooted in the insufficient supervision of the mortgage sector in the US and banks’ recklessness in extending credits to clients with insufficient income streams—highlights the particular role that central banks have to play and consequences that an excessive laissez-faire attitude can have on the entire economy. Montenegro’s economy, with a maturing economic boom, declining foreign direct investments, and an increasing degree of foreign indebtedness by domestic banks, has to increasingly rely on a sound banking sector and households’ and firms’ confidence in it, and all indications point towards the banking sector’s ability to do so successfully. The—not universally popular—measures that were taken by the CBCG in late 2007 have proven very timely and adequate as preemptive strike against potential consequences of the type we are currently seeing elsewhere. Should the central bank have been given a few additional instruments of banking supervision foreseen in the original draft of the Banking Law? Personally, I think that this would have helped the central bank to perform its tasks even more effectively, but—as things stand right now—the CBCG is using all the very positive elements inherent in the current law to do this very professionally and with considerable success.

What do you think about dynamics of economic growth in Montenegro?

The immediate post-independence period has been spectacular. The unexpectedly high rates of economic growth that we have seen rest—to a considerable degree—on factors that are very difficult, if not impossible to maintain for the medium to long term. Especially in light of the current international situation, it is unlikely that banks will be able to borrow from abroad at the same level that we have seen last year or during the first half of this year. The role that foreign direct investments have played in the economic development of Montenegro’s post-independence economy, especially the sale of real estate to non-residents, will change. This means that the stimuli for growth will, more and more, have to come from internal sources. Therefore, a political focus on implementing policies that help to increase the productivity of capital invested and labor employed is crucial to maintain and foster high and “sustainable” rates of growth. 

Could you comment on the concept of development based on small and medium-sized business?

Small and medium-sized enterprises—in both developed and emerging economies—tend to represent the backbone of strong and healthy economies, not least because they tend to be the first to detect and develop niche markets and introduce innovations that help to increase an economy’s overall productivity. But for small and medium-sized enterprises to flourish, the economic environment has to be sufficiently favorable. The particular challenge faced by small businesses lies in the fact that they do not have the same clout vis-à-vis banks and/or the government to gain special advantages. They have to rely more heavily than large enterprises on a level playing field—that is, the proper functioning of the market, the underlying price mechanism, and public institutions that provide for the “rules of the game.” In a recent report, the World Bank has sought to identify the sources behind the success of countries that, for a period of more than 25 years, have managed to grow at more that 7 percent per year. Not surprisingly, the five elements that the authors found were common among all 13 “economic miracles”—namely, the proper functioning of markets, the provision of business-enabling public infrastructure, macroeconomic stability, good governance and a capable administration, and openness to trade—are those that are of particular concern for small and medium-sized enterprises and crucial for their success in the marketplace.

Montenegro is in 90th place of 181 countries in the “Doing Business” survey done by the World Bank and the IFC. Your comment? How can one remove actual barriers in administration which are degrading possibilities for investment? Can you tell us something about financial risks and risk control in the world and here?

It is very, very difficult to precisely quantify all aspects appropriately when comparing and ranking countries internationally. In general, Montenegro’s median position implies that much has been achieved, but further progress needs to be made. I think what is particularly revealing in studies of this type is the identification of areas that need particular attention. The “Doing Business” study, for instance, identifies “dealing with construction permits” (167th rank) as being particularly difficult. If you look at the amount of illegal construction, this is probably a fair assessment, giving Government an impetus to define priorities in its reform agenda. Already, by criminalizing illegal construction, Government has taken an important step in this direction. If, as a result of the “Doing Business” study, you will see considerable improvements in these critical areas, this will help investors as well as governments and the municipal and central levels, supporting the objective of sustainable development. That, in turn, will help to attract investments, foster growth, and stimulate job creation—outcomes that are much more important than Montenegro’s relative ranking as 80th, 90th, or 100th country. To some degree, the “Doing Business” results echo a recent survey on tourism and travel competitiveness, done by the World Economic Forum, that had environmental sustainability as one of two areas of particular concern—an area that is intractably linked with the challenge of urban plans and illegal construction. I might be stressing these points with a certain degree of self-interest, because this way I can share with you my pleasure and satisfaction that the World Bank—with its land administration project—will be supporting Government in strengthening public institutions in this area so that, in future surveys of this type, you will find Montenegro higher up the international ranking.

What do you think about decline of American banks and mixing of administration?

As far as I can see this right now, the current financial crisis seems to hold two lessons. First, effective banking supervision is a crucial public good and indispensable to guarantee a sound banking sector and uninterrupted periods of growth and socio-economic development. Second, universal banks—combining retail and investment banking—seem to have proven considerably stronger in the face of the current crisis than those financial institutions standing on only one pillar.

Which was the project that you are particularly proud of?

There are two or three projects that would come to mind, but I would like to see them implemented and the results being known before I will make any announcement of this type. This is the time to look forward rather than backward.

What are the challenges of your work for now?

Given that Montenegro joined the World Bank only in early 2007, with this office having opened six month later, the Montenegro program is still being shaped. Montenegro finds itself at a very critical stage, given its ambitious European integration objective, the maturing of the economic cycle, and public institutions that are being adjusted to meet current challenges. A lot can be achieved with the support we are providing—provided we do things right. That last part defines most of my current challenges.

What makes you happy in work you are doing?

Seeing things work out the way they were expected, seeing their objectives materialize. In a few years’ time, we will be able to see whether we will have been successful in contributing to areas crucial to achieving “sustainable development”, but I am very pleased that, in our modest role, we can be part of this challenge.

Can you tell us something about publishing, considering that you have worked in several magazines?

At least on some of the core issues surrounding sustainable economic growth, there needs to be an open, public dialogue on what constitutes overall development priorities. Media play in a central role in facilitating this dialogue, asking the right questions, demanding appropriate answers. If you look around, successful economies tend to have a very lively and inquisitive media, journalists who assess policies carefully, allow for different arguments to be made, accompany implementation, criticize where needed and provide the framework for debate where necessary. I have always enjoyed a critical debate, and I am pleased to have had the opportunity at several points during my career to be part of this public debate, as journalist, editor, or contributor.

What is your message for the readers of BM?

It was Keynes who said, “it would not be foolish to contemplate the possibility of a far greater progress still.”