Monday, December 3, 2007

The Role of the World Bank in Romania

Remarks by Mr. Benoit Blarel, Country Manager, at the "Chambre Francaise de Commerce, d'Industrie et d'Agriculture en Roumanie"

First of all, thank you for the invitation to join you for this lunch debate. The theme of the debate is challenging, but topical. It is a theme I am glad to respond to and show that the Bank has a role to play, definitely other than in the past and one which will largely depend on Bank capacity to adjust to a basically different environment.

My remarks are organized into two parts, each of which provides responses to the theme of this debate in the light of two different, but complementary, considerations. My first remarks are made in the light of the World Bank guidelines and strategic roles and implications thereof for a country like Romania; these new guidelines were recently elaborated on by our President, Bob Zoellick, at the annual meetings of the Bretton Woods institutions last month. The second part will be more specific and focus on the concrete role of the Bank here, in Romania, a middle-income country and EU member.

The Role of the World Bank in Middle-Income Countries

The world has plunged into one of its greatest economic revolutions ever. Since the fall of the Berlin wall, the market economy has extended across the world, globalization has intensified, and the economic growth and share of the emerging countries like China, India but Romania, too, have accelerated. The economic map of the world is being redefined, of Europe and the EU included. Emerging countries account for 30% of the world economy, 50% of world growth and 45% of world exports; this year their economies have grown 4 times as fast as those of rich countries. Globalization leads to a productivity shock and significant transfer of wealth across the world, which are supported by a mix of 4 factors: (1) the information technology revolution; (2) unprecedented private capital transfers to emerging countries (US$ 650 billion/year, as compared to US$ 140 billion international sovereign loans); (3) a very significant pool of labor that such countries have; and (4) for most emerging economies, their better health, which shows in their better management, but also greater stability, as a result of fast-rising foreign exchange reserves more particularly: 75% of the world foreign exchange reserves are currently held by these emerging countries.

Under the circumstances, it would be tempting to declare victory and that the World Bank as international bank for development has accomplished its mission, having to reduce its role and bow out. However, globalization raises new challenges. Such new challenges call for coordinated actions worldwide. For some of these actions, the World Bank has a role to play in their implementation in member countries.

Our President, Bob Zoellick, has defined 6 challenges or themes for the World Bank. Several such challenges apply to Romania. I will name 3 of them.

  1. Poverty. Notwithstanding the fast growth and poverty reduction across the world, more than one billion people worldwide are still below the absolute poverty line (less than US$2/day) and do not share the benefits of growth. 70% of these poor people live in middle-income countries. Poverty in such countries is concentrated in certain areas, and certain social (women) or ethnic groups. This is also the case in Romania where the poverty risk (13.8% in 2006), while falling fast, remains stubborn in rural areas, subsistence farming in particular, and certain vulnerable ethnic groups.
  2. Public Goods of a global or regional nature. Climate changes galvanize public opinion all over the world and Romania has experienced their effects (flash floods, droughts). In an increasingly interdependent world, other public goods become important: public health with communicable diseases such as avian influenza, but also international migration, water management. Some of these issues are not unfamiliar to Romania, as the events of the past few weeks have recalled. Another, often underestimated, public good is the knowledge, expertise and experience associated with the issue of shared and sustainable development across the world. The World Bank is uniquely positioned to provide and share with its member countries the knowledge it had acquired in more than 60 years of experience and practice throughout the world, and to help implement solutions adjusted to the member countries.
  3. Shared and sustainable development in middle-income countries. Middle-income countries such as Romania need solutions adjusted to their specific needs and conditions. In the case of Romania, some of these needs are associated with the above-mentioned themes. A few examples.
    1. On poverty, the World Bank has worked closely with INS and the Ministry of Labor to strengthen the poverty follow-up and policy impact assessment capacity, but also to identify, develop and implement social programs targeting the poor or the disadvantaged.
    2. On bird flu, the World Bank responded to Government request by developing a project which aims to strengthen the avian flu preparedness and response capacity of the Veterinary Agency and the Ministry of Health.
    3. Climate changes are addressed by several interventions. A « Risk Management » project invests in infrastructure to mitigate the flood and landslide risk, while also developing the administrative and financial (disaster insurance) management capacity and emergency preparedness. The energy efficiency pilot project and the ongoing study help expand Romania’s capacity to contribute to the climate change mitigation effort across the world.
    4. On knowledge, several of our products provide useful information to Government. Moreover, the advice provided for implementation of projects jointly financed by the Bank, our annual « Doing Business » report help Romania compare its business environment with the rest of the world, and best practices in order to identify the areas where progress can be made. Thus, Romania ranks 48th in 2007, as compared to 78th in 2005, and to 28th the average for EU-15. Our quarterly « EU8+2 » regional report compares macroeconomic developments across the new member countries, and also deals with sector files across new member countries (labor market, credit market, agricultural policies, shortly energy).

The needs of middle-income countries like Romania include further elements. I will refer to some of them.

  1. Infrastructure needs – transport, energy, the environment — are still large. If financing is available, responding to such needs also calls for often complex reforms, such as the launching of PPPs, better public expenditure management, privatization, decentralizing and strengthening local and regional governments.
  2. Strengthening the human resource and social service (education, health, pension system, etc.) policies, where further significant improvements can be made, and international experience and best practices can be adjusted.
  3. As the world financial market turmoil in the past few months has reminded, the middle-income countries do want to have further access to World Bank finance in order to mitigate their risks, should access to private capital be constrained or become too costly. For the time being, access to finance is not a problem in a number of countries, given their foreign exchange reserve level and favorable fiscal position. However, the risks are always there, and their impact in case of crisis can be neither ignored, nor underestimated.

Responding to these challenges, the evolution of its clients and demand for its products in middle-income countries, the World Bank is adjusting along three main lines:

  • A Flexible Engagement Strategy (Country Partnership Strategies - CPS) to respond quickly and in a differentiated manner to the specific needs of middle-income countries, by providing a range of services matched by advisory services to projects, or support to public expenditures at central or local government level, such as financial risk management instruments (disaster-type bonds, warranties, credit enhancements) or public debt management (contingent facilities).
  • Advisory Services: Such services are the outcome of our applied research center, but also of our 60-year experience worldwide. Such advisory services include economic surveys and studies by sector, economic or sector policy advice, technical assistance to enhance the Government institutional capacity, as well as our global and regional reports. Generally, such services are provided free of charge, as a complement to loans extended to a member country.
  • Financial Services: The World Bank has lowered and simplified its lending price and can now provide long-term loans at flat LIBOR. Furthermore, the Bank has developed several financial products: loans to local governments without sovereign guarantee, financial risk management instruments such as warranties, contingent loans, disaster bonds as security against natural risks (earthquakes).

The Role of the World Bank in Romania

First of all, I would like to make two points. While based in Washington, DC, the World Bank is not a US institution. The most important shareholder of this cooperative bank of countries which is the World Bank is actually the European Union, if the capital shares of all its member countries are added up. On the other hand, a EU member like Romania may further use the services of the World Bank.

Within the general framework outlined above, the World Bank offers the Government a number of solutions adjusted to its needs and demands. Active in Romania for over 16 years and involved in most of the reform programs and a good number of economic sectors, the World Bank has extensive and in-depth knowledge of Romania to offer.

Our services are provided within the framework of a Country Partnership Strategy, which is subject to regular review. Before 2007, CPS was focused on facilitation of Romania’s EU accession. Since 2007, CPS aims to facilitate integration of Romania’s economy with the EU and convergence of its revenue and well-being with those of the EU. Clearly, Romania’s EU accession radically changes the role and place of the World Bank. Access to financial markets and European structural funds more particularly has significant financial implications. There is no question for the Bank to substitute loans for what can be financed by transfers from Brussels. So, our financing and consultancy are currently focused on two main points:

  1. The areas which are not financed by EU but have a significant role to play in the integration and convergence process;
  2. Strengthening the EU structural fund absorption capacity.

On both points, the reform and investment program is still large. As I said before, in some specific areas, such as the business environment, Romania is not there yet. Moreover, there are other areas where there is still room for reform or further improvement: the judiciary, civil service, public expenditure management, decentralization, transport and energy, health, education, agriculture, administrative capacity of European structural fund absorption.

Our operations program includes 22 projects for a total amount of some US$ 1.8 billion, US$ 26 million worth of grants (Global Environment Facility, the governments of Japan and the Netherlands, the World Bank), and a dozen of advisory operations.

In the areas not financed by EU but having an important role to play in the process of integration and convergence, World Bank projects include:

  1. A judicial reform project. Its aim includes enhanced court effectiveness and the accountability of the judicial system, and it is being carried out in close cooperation with the Ministry of Justice, the Court of Cassation and the Higher Council of Magistracy
  2. In the education sector, one project aims to improve the education system in rural areas; plus advisory services on financing methods and access to higher education.
  3. In the social sector, the Bank assists the Government to implement the pension reform and strengthen the pension system and social programs, including programs targeting the disadvantaged, such as the Roma and persons with disabilities;
  4. In the energy sector, the Bank has not only supported privatization, but also invested in the rehabilitation and expansion of transmission and generation systems, supported creation of the first electricity market (OPCOM), and preparation of future public investments along with consultancy thereon.
  5. In the knowledge economy sector, the Bank finances development of electronic networks in 250 disadvantaged rural communities (schools, library, point of public access, mayor’s office), and delivery of administrative services by internet.

The Bank is active also in strengthening the EU structural fund absorption capacity:

  1. The Municipal Services project which, through a comparatively low investment in 12 counties. would help develop a pipeline of regional and municipal water and waste water projects estimated at some € 900 million.
  2. In Agriculture, there are several projects and advisory services aimed at facilitating EU funds absorption (land registration, advisory and extension services in rural areas, irrigation systems, forest management, etc.)
  3. In the Environment area, with putting in place the Nitrates Directive-related national program by the relevant ministry.

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