Annual IPA Conference December 6, 2010

Transcription

1 12/5/2010 4PM Annual IPA Conference December 6, 2010 Keynote Message Regional Vice President Philippe Le Houérou World Bank, Europe and Central Asia Achieving smart, inclusive and sustainable growth through strengthened partnerships and innovative instruments Ladies and Gentlemen, it is a privilege for me to address you this morning. Before starting, I would like to personally thank Commissioner Füle and Director General Michael Leigh for our close and constructive partnership and for their invitation to co-organize this very important event. Today I want to discuss three points: First, the current state of the global economy and the shape of the recovery; Second, the fundamental importance of the EU for the Western Balkans and Turkey and the remaining structural reform agenda in a post-crisis world; Third, the opportunities for partnership and instruments for achieving sustainable results in the Western Balkans and Turkey. 1

2 I. Global and Regional Prospects Among the developing regions, Emerging Europe and Central Asia has been the most heavily impacted by the 2008 economic and financial crisis. GDP, which grew by more than 4% in 2008, declined more than 5% in Looking ahead, we project that global economic growth in 2010 will come in at about 3.3 percent and less than 4 percent in 2011 and The pace of job creation will be slower; we don t believe that the jobs lost during the recession will be restored until after And the recovery will be uneven, with some economies doing better than others. Among the high income regions in the world, according to the latest ECFIN data, the Euro Area is expected to grow the slowest in 2010 and 2011, at around 1.5 percent per year. Among the emerging economies, we project growth in Emerging Europe and Central Asia of about 4 percent in 2010 and The number for East Asia is about 9 percent per year and for all developing countries, about 6 percent. Furthermore, the durability of whatever recovery the region can achieve will be tentative. The external credit that drove much of the growth in Emerging Europe and in the Western Balkans in particular is no longer so readily available. Capital inflows have increased a bit since the height of the crisis, but not nearly to the levels we were seeing in If you take away official flows, they are not even half of the levels in FDI in 2010 has changed little from what we thought was a trough in And while the 2

3 terms for bond finance are much better than last year, sovereign borrowing spreads are still twice what they were before the crisis. There is also the shadow of debt both public and private in the Eurozone. The problem is that this shadow falls on Central and Eastern Europe, even though public debt levels are lower there. This debt is stifling growth in parts of Western Europe. If not addressed effectively, it will dim the prospects of emerging Europe as well. II. Impact on the Western Balkans and Turkey and challenges ahead The future of the region from Ankara to Zagreb depends fundamentally on the EU and the efforts of those countries seeking membership to undertake reforms. The candidate and potential candidate countries established connections with Western Europe and the EU in the high growth years before the crisis. The EU is now the destination of nearly 60 percent of exports of the Western Balkans. And it is the source for a similar percentage of migrants remittances. Turkey s export base is more diversified, but still about half of its exports are also EU bound. While this poses a significant challenge in the short term due to the low growth projections for the EU, we should not forget that these countries benefited greatly from the proximity to the EU in the pre-crisis years. Partially due to trade, capital and remittances with the EU, growth averaged about 5 percent per year from 2002 to 2008 in the Western Balkans and 3

4 almost 6 percent during the same period for Turkey. This is what I call the good neighborhood effect. Substantial progress was also made along multiple other dimensions, including: Business Environment: According to our most recent report, the environment for doing business has been improving in the Western Balkans. FYR Macedonia improved its doing business rank from 75 in 2007 to 38 out of 183 countries in 2010 moving closer to the OECD average of 30. Turkey is ranked 65 followed by Montenegro that has improved its ease of doing business rank from 81 in 2007 to 66 in Albania s doing business rank has moved up from 136 in 2007 to 82 in Governance: Governance is, gradually, becoming more effective and more transparent. World Bank measures of government effectiveness, while still low, have been rising in nearly every country; Public Financial Management has improved this is significantly because of efforts to access IPA resources. And the incidence of bribery fell more sharply in the Western Balkans than any other part of Europe, with particularly marked drops in Albania and Serbia. Poverty Reduction: Most important, fewer people are living in poverty. Poverty in Turkey fell from 19 percent in 2002 to 16 percent in 2008; in the Western Balkans the drop was more pronounced, from around 38 percent to below 30 percent. 4

5 Integration with Western Europe and a determined reform agenda have clearly had numerous benefits for our countries. Looking forward, and despite the current difficult context in the Eurozone, I am confident that continued integration will yield further gains. But more hard work remains. A Shared Vision for Growth As a group, GDP per capita of the Western Balkans and Turkey is around 40 percent that of Western Europe. Closing this gap will, in part, be linked to meeting challenges in fostering competitiveness, enhancing social inclusion within a viable medium term fiscal framework, and addressing the increasing challenges of climate change. Here I note that the EU s Europe 2020 agenda and our own strategy identify precisely the same three priorities. And I ensure you that we did develop them independently. This alignment demonstrates that we share the same analysis and conclusions. Obviously, this overall strategy has to be adapted to each and every country. My colleagues, Jane and Ulrich, will go into greater deals on what the strategy means for the Western Balkans and Turkey. But allow me to say a few words on these three priorities. First, Competitiveness. It is is during an economic downturn that you can see the structural challenges most clearly. What is clear is that countries can no longer rely on a growth model based on a demand pull financed by credit. The focus has shifted to the supply side, and this means improving competitiveness, particularly in expanding exports. 5

6 Competitiveness is, of course, a multi-dimensional concept linked to macroeconomic policies, including exchange rate management but also structural issues such as productivity, governance, investment climate, infrastructure, education as well as long-term issues of demographics. I would like also to stress the obvious: competition today is a global game. Beating your next door neighbor isn t enough anymore. Brazil, China, India, Russia and South Africa are playing on the same field. Second Social Inclusion. At the same time, it is critical to protect the most vulnerable and prevent the erosion of human capital. Given the post-crisis fiscal pressures, a delicate balance needs to be struck between fiscal consolidation, increasing the effectiveness and targeting of social protection measures and maintaining a level of investment that will not stifle growth. Third Sustainability. As emphasized by the third pillar of Europe 2020, growth needs to be sustainable. South East Europe is on the front-lines of climate change. Of the ten countries in the Europe and Central Asia region most likely to experience the greatest increase in climate extremes, five are from the sub-region, with Albania and Turkey numbers 2 and 3 respectively. We need an adaptation agenda to protect agriculture, water management and hydropower. The agenda for mitigation as well as for economic savings is straightforward, beginning with measures to reduce huge inefficiencies in carbon intensive consumption. Energy intensity is more than double the EU 6

7 average; the network losses of energy are four times higher than the OECD average. We estimate the countries of the Western Balkans could save some US$3.5 billion annually by taking straightforward steps to improve efficiency. Turkey is the fourth largest carbon emitter in all of Europe and Central Asia accounting for 7.6 percent of emissions and will need to take similar measures to improve efficiency. This is necessary both to move toward EU standards and simply for the health and welfare of its own citizens. III. Partnership and Instruments for Achieving Results in the Western Balkans and Turkey Ladies and Gentlemen, I think that we can all agree that achieving smart, inclusive and sustainable growth is a formidable challenge. Especially in a tougher financial environment with hard budget constraints. Mastering this transition will require solid analysis of policy changes combined with key investments. This must be a concerted effort of determined governments, but we can provide assistance. This brings me to my third and last point on partnerships and instruments for external assistance. We are proud to have been close partners to the region for the last two decades. In terms of financial support, since 1995 the World Bank has provided assistance in the order of US$7.3 billion to the Western Balkans. Since the onset of the crisis in late 2008, we have shifted much of our support from investment lending to policy-based budget support. In the last two years, we have provided over US$400 million in budget assistance, with another US$470 million planned in These operations are helping 7

8 countries to meet their financing gaps. They are also supporting reforms aimed at strengthening the financial sector, improving the business climate, reducing fiscal deficits, improving management of public expenditure, and strengthening safety nets. Turkey has long been the largest partner of the World Bank in our Europe and Central Asia region and among the very largest worldwide. Since 1995, the World Bank has committed new financing just above US$20 billion for Turkey. Our current 4-year partnership strategy with Turkey for includes around 50 percent project financing and 50 percent budget support, for US$8 billion in total. Now that Turkey has a strong foundation of sound macroeconomic policy and stability, the focus of the World Bank funded program is on competitiveness and jobs; energy and the environment; and on education, health and social security reform. Our investments in these countries are big numbers for us, big numbers for some of our client countries, but they are small compared to other financiers like the EC, the EIB and EBRD, and in Turkey they are also small compared to Government s access to capital markets and relative to GDP. Therefore I want to emphasize that what our clients globally seek most from us is financing combined with sound analytical work such as Public Expenditure Reviews, Fiduciary Assessments, and Sector Reviews. On average, we spend US$4 million annually of our own budget resources on such analytical work for the Western Balkans alone. 8

9 We also have an extensive program of economic and sector analytic work in Turkey, across a broad spectrum of policy priorities, such as the investment climate, informality, jobs, female labor force participation, and policies to promote equal opportunities, the quality of education, and so on. We also put great emphasis on hands-on, implementation support through our country offices which are staffed with international expertise and local knowledge. That said, on the financing side we have to realize that the investment needs are very significant. Take the water and waste water sectors. One study found that for the countries of the Western Balkans alone to meet the requirements of the EU water and waste water acquis will require investments of nearly Euro 15 billion. Turkey would require Euro 47 billion or 11% of GDP. Currently under implementation are projects worth a fraction of that, with domestic and IFI financing combined. In energy the situation is similar. Our team estimates that the Western Balkans require investments of about Euro 25 billion in the next 10 years alone. Add to that transport, environment, education, health facilities etc. and you realize that the investment needs by far exceed the available resources of all partners combined. One of the challenges that candidate countries face with EU grants is that EU funding levels jump to much higher levels the moment they become member states. One way to smooth out this financing profile could be to leverage IPA grants with IFI loans in the pre-accession phase. Or we could 9

10 go even further by using guarantees to leverage even more funds from the markets. For example, the World Bank is working in Serbia on a Policy Based Guarantee which continues our support for Private Sector Development and Financial Sector Reform. But rather than directly lending Serbia US$100 million, we provide a guarantee which would allow the government to raise US$400 million from capital markets while reducing its overall cost of borrowing. The other challenge that we see in member states is public sector capacity to actually utilize structural funds. We are now engaged in building capacity in Bulgaria and Romania at the request of these countries and DG Regio to enhance absorption capacity. In order to avoid this problem later on it is very important to build sufficient public sector capacity right now in preaccession countries. I cannot overemphasize the importance of this point. The price of not doing this now will be high, and will be paid once they reach member state status. Ladies and Gentlemen, these challenges would suggest three final conclusions, the need for strategic partnerships, innovative instruments and more regional solutions. Firstly, the need for a strategic partnership between the countries, the European Commission, IFIs and all other partners to achieve greater efficiency and maximize the results achieved through external assistance. As I have stressed before, the World Bank is but a small player financially 10

11 speaking in the region and we will continue to play a complementary niche role. We see our main strengths in three areas: (i) to deliver analysis, based on our global reach, combined with experience in the region and local knowledge, (ii) a track record of strengthening public institutions, (iii) and in-country presence with international and local expertise combined. I feel strongly that going forward this capacity of ours can and should be better leveraged. Secondly, new innovative financing instruments are required to leverage EU grants with IFI loans and to maximize value for money. The Western Balkans Investment Framework, as the single entry point for project financing, is one good opportunity to leverage scarce EU grants with loan finance from IFIs. Blending, guarantee schemes, sub-national lending, public private partnerships and other innovative financing mechanisms could be rolled out in order to make a big enough dent into the significant investment requirements of the region. Sector wide approaches including sector budget support can usefully be explored with strong emphasis on capacity building to measure progress and results with sound M&E systems. And thirdly, given the small average size of the economies in the sub-region (with the exception of Turkey), we will need to much more aggressively look for regional solutions. Energy, transport and disaster risk management are examples where this is already working well. We should be jointly identifying and supporting many more to reap greater synergies and economies of scale. Here we have to start looking beyond infrastructure and 11

12 be more creative in areas such as higher education, tertiary health care, innovation, the environment etc. Allow me one more word on the results agenda before closing. Here all of us who are spending taxpayers money for external assistance programs are in the same boat. In my last job I was responsible for the replenishment of our concessional lending window (IDA). The ongoing discussion about the next financial envelope of the EU reminds me very much of that time. It is of course legitimate for governments to demand measurable results and a bigger bang for their Euro. I am convinced that if we deepen our partnership we stand a better chance of succeeding and look forward to further strengthening our partnership. 12