The World Bank Assistance

1. The World Bank Assistance Ingrid Brocková Country Manager The World Bank, Slovakia

2. International Development Experience • Poverty Reduction Strategies (PRS) • Country ownership • Long-term nature • Results focus • Comprehensive/multi-sector • Partnerships • MDGs rather prominent • MICs may focus less on MDGs but above integrated approach still holds: • Social inclusion (Roma population) • Institutional capacity of social institutions

3. Need for a coherent sectoral framework and systematic approach • Achieving sustainable and sustained outcomes requires a systemic approach • specific sector policies, institutional development, prioritized investments, sustainable financing, good governance together => form a coherent sectoral framework • Such framework prepares the ground and creates a conducive environment for sectoral investment and institutional accountability

4. Monitoring and evaluation systems are required at the country level • The Bank is committed to social development, achieving the MDGs. • need to balance advocacy for global public goods with country demands and needs • Successful implementation ofstrategy will rely on data collected at the country level (statistical capacity) • To achieve results, countries need to benchmark, conduct surveillance, and evaluate data for priority setting and allocation of funding among sectors • Monitoring and evaluation systems need to fully involve other sectors

5. Vertical programs in the context of the Bank’s perceived comparative advantage • Comparatively simple to conceptualize, implement, and report on • Often uncontroversial and targeted towards defined, vulnerable groups • Not contradictory to the Bank’s values or focus, but may not in all cases be in line with our comparative advantage: • At country level, WB comparative advantages are convening power, cross-sectoral technical capacity, analytic work, and ability to link sector policies to countries’ macroeconomic framework

6. WB approach and reality check: managing inevitable trade-offs at country level among competing priorities • Support country development in a systemic manner • focus on long-term results • country ownership • Capacity-building and institutional development • Balance a country’s needs and demands and (sectoral) supply and advocacy • Manage constant trade-offs within and between sectors / operations as competing priorities vie for attention and funding • Increasing attention paid to the concept of “binding constraints” • Country Teams must focus on solving binding constraints and Bank’s comparative advantage • Country Directors are fund holders and ultimate arbiters • must strike a balance among competing sectoral priorities against background of financial constraints • Challenges: • strengthen results framework • effective multi-sector work • live up to claim of our comparative advantage

7. Finance is not the only way for the Bank to provide support • Bank instruments, both lending and non-lending, contribute to multi- and cross-sectoral work: • Diagnostic tools: public expenditure and institutional reviews (PEIRs); specific sector studies to underpin policy dialogue (e.g. hospital administration reform); • lending instruments: sector investment loans; SWAps (sector-wide); development policy loans (DPLs) – multi-sectoral; • Advisory services and technical assistance, capacity building, and strategic intergration services. • ECA experience: Bank’s technical advice, advisory services, and policy analysis valued by non-borrowing countries, including the EU • But need for ECA to develop sustainable business model for such non lending, analytical work • Role of WB is also to foster partnerships with private sector: • Focus on mainstreaming (performance-based) contracting modalities

8. Why do institutions matter?Where are institutional bottlenecks and binding constraints? • Burden of disease may not be just a function of lack of funding that can be solved simply with additional financing • Institutional capacity is often real constraint, together with country absorptive capacity • must be addressed across sectors

9. The need for good governance • Good governance defined as “the traditions and institutions by which authority in a country is exercised (Kaufman, Kraay) • Capacity of government to formulate and implement sound policies, manage resources, and set an overall framework for efficient and effective health systems. • Corruption: “use of public office for private gains”. • Indicators of poor governance: • mismanagement • staff absenteeism and low productivity; • leakage of funds, and supplies • poor procurement and oversight practices; • informal payments; • corrupt practices: theft, kickbacks, selling of public positions.

10. Corruption • Management and performance • Anticorruption • National anticorruption initiatives • clear rules for and audits by enforcement agencies • community oversight (local level) • Affordability improvements • charging formal fees with exemptions • reorganizing staffing and performance with rewards systems • seeking alternative financing options • Accountability tightening • embedding accountability at every level of the system • contracting out services and overseeing performance • calibrating performance through clients satisfaction surveys • Ensuring good governance-accountability to ministries, local governments, • Check and balances – voice of the users/civil society

11. The EU8, One Year After • Very good performance across the spectrum – countries and sectors • Improved perception of benefits from accession • But diverse countries with different outstanding agenda and different approaches to reform

12. Pre-Accession Policy Highlights • Macro – created room for monetary tightening to stem “accession price spikes” • Business climate – liberalized to encourage supply response by local enterprises and FDI inflows to take advantage of accession opportunities • Public administration and management – increased credibility vis-à-vis Brussels and improved absorption of EU funds • Structural policy – undertook reforms that had short-term fiscal costs but increased fiscal space for medium term (pension reform, subsidy policy, banking sector reform, SOE restructuring)

13. The World Bank in the EU8 • The view of the Shareholders • Strong encouragement by the European Commission and the EU15 to remain actively engaged • Some skepticism on our Board from some non-European Part I countries • The view of the EU8 • Senior policy makers in all EU8 countries welcome engagement with the World Bank • All EU8 countries have reduced their borrowing from the World Bank • The view of the World Bank • Engagement in the EU8 is core part of our mandate, provides important lessons, and also stimulus for improving our instruments

14. Main Areas of World Bank Activity • Pre-Accession – lending, institutional development and policy advice, focused on modernization of public institutions and management to get ready for accession, and sector reforms to make the most from accession • Current – three main approaches: • Lending in support of complex operations • Lending for outstanding sector reforms and institution building • Policy advice on EU as well as non-EU areas • Prospective – continued decline in lending while engaged in policy advice

15. I. Lending in support of complex operations • On-going examples include coal sector restructuring, Odra flood protection, both in Poland – Key aspects include: • Complexity especially in social and environmental areas • Support provided from identification to technical design, to implementation, to monitoring and evaluation of impacts • Co-financing with EU structural funds and/or European Institutions (EIB, CoEDB)

16. II. Lending for Sector Reform and Institution Building • ‘Umbrella Facility’ created to respond quickly and flexibly to support institution building • Examples include TA loans in support of education and social protection, and rural development in Slovakia • Stand-alone operations in support of capacity building for implementation of sector reform cum investment building • Examples include Sector & TA loans for the health sector in Slovakia, SWAp for road maintenance in Poland

17. III. Policy advice on EU as well as non-EU areas • In very high demand by EU8, including by countries that have already graduated with focus on shared learning • Four areas are most in demand: • Health policy– all countries from Estonia to Slovenia • Corporate governance and consumer protection in financial services – Czech Republic, Slovakia and Slovenia, other countries in the pipeline • Utilization of EU Structural Funds, especially in agriculture and rural development – Latvia, Poland, Slovakia • PPPs especially in transport – Baltics, Poland, Hungary

18. Key challenges for prospective engagement • Main constraint to continued engagement in policy advice with limited lending is the Bank budget – our resources are limited and priority must be given to poorer countries • Cost-sharing with EU8 partners is a key factor – and innovative approaches to cost-sharing with European Institutions will also be needed • Our ability to provide timely and high quality advice based on global experience will continue to be the essential pre-condition to support effectively rapidly growing countries such as the EU8

19. Next Stage – Graduation • Graduation is the process of moving away from being a recipient of World Bank support towards becoming a provider of development assistance • Criteria for graduation include: per capita income, access to capital markets, persistence of poverty despite high per capita income, pending structural reform agenda, institutional capacity, client’s own demand for World Bank assistance • Only a limited number of countries have graduated in recent years: Singapore, Korea, Cyprus, Greece

20. Graduation for EU8 is different The EU8 benefit from special advantages: • The positive legacy of transition (human capital, infrastructure) • EU anchor – institutional, financial, political But also face special challenges: • External and internal convergence • Regional disparities, ethnic minorities • Incomplete or weak market institutions • Innovation gap

21. Prospects for Graduation of the EU8 • Slovenia and the Czech Republic have graduated – they are no longer borrowers but continue to receive limited support in the form of policy advice for a three-year period • Estonia, Hungary, Latvia and Lithuania have not borrowed in recent years but remain interested in financing for global public goods (GEF, PCF, GIS) and institution building (PPIAF, IDF), as well as policy advice • In addition to being interested in the above, Poland and Slovakia are also borrowing in selected areas and engaging in policy dialogue

22. Prospects for Graduation of the EU8 cont’d • We expect that each country will decide to graduate when ready to make the transition from recipient to donor, and will initiate the process with the Bank • We expect that all countries will decide to graduate by the time they are ready to adopt the euro • We look forward to each country becoming an increasingly important donor partner after having worked closely as a borrower with the World Bank

23. Assistance of the World Bank in Slovakia • Advocacy Role and Bank as a Facilitator of Changes (Knowledge Economy Strategy; Roma Issues) • “Knowledge and Experience” Bank (Government successfully implemented a wide-ranging reform program, although the desired pace of reform exceeded capacity) – not only financial assistance, but well-targeted Bank technical assistance to overcome capacity constraints • Reform Process Internalized, Looking Beyond the EU Policies (experience from the OECD and non-EU countries was required) – OECD and the World Bank engagement • Communication with all stakeholders, interest groups and non-governmental sector

24. 2001 Unsustainable growth Few structural reforms Fiscal policy risked high deficits Current account deficit high Indebtedness high Monetary policy good Inflation 12% in 2000 Exchange rate depreciation Interest rates high FDI low High unemployment 2005 Sustainable growth path Structural reform agenda well advanced Reforms now sharply reducing fiscal deficit Current account manageable Debt substantially reduced Monetary policy good Ex. rate appreciation Interest rates low FDI very high Unemployment still high Economic Development

25. Economic Changes (1998-2006) • Sustained robust growth in spite of the weak external environment. The highest growth in Central Europe (6.3 percent in 2005) • Structural Reforms (government policy planning capacity and implementation team; strong ownership) • Business Environment WB&IFC Report: Doing Business in 2005 and 2006, Slovakia one of the best reformers in the world (regulatory environment)

26. Economy is highly open and fully integrated into EU’s common market Full benefits resulting from the free movement of goods, services and labor in the EU • open and easy access to sophisticated suppliers and customers in the EU’s single market • no customs or duties on any transactions within the EU Legislative and regulatory framework fully compatible with the rest of the EU

27. Entry into Eurozone in January 2009 • Slovakia will probably be the first country in Central Europe to adopt the euro - uncertainty regarding the fiscal treatment of pension reform costs - the government is fully committed to meet all the Maastricht criteria • Slovakia plans to stay in ERM II for two years only - entry in November 2005

28. Business Environment Flat Tax Policy Light, Non-distortive, Simple and Transparent Tax System, GOALS: • Create business and investment friendly environment for both individuals and companies • Eliminate existing weaknesses and inefficiencies in the tax law • Eliminate distortive roles of tax policy as instruments for achieving non-fiscal goals • Improve tax fairness by taxing all types and all amounts of income equally

29. Flat Tax Policy • Radical simplification of the tax system - elimination of virtually all exceptions, exemptions, deductions, special rates, and special regimes - elimination of dividend, inheritance, gift taxes and real estate transfer tax • Introduction of low nominal rates - 19% corporate tax - 19% unified VAT on all goods and services – without any exceptions - 19% flat individual income tax • Shift from direct to indirect taxes

30. Social System Reform, Goals: • “make work pay” – activity should pay more than inactivity and employment should pay the most • Improve skills and prospects of disadvantaged individuals • Reduce the scope for abuse of the social system by improved targeting • Make the labor market more flexible to foster long-term employment growth

31. Other Structural Reforms • Pension Reform - radical reform of the pay-as-you-go pillar - introduction of a fully-funded pillar (private pension accounts) • Health Care - make the system financially self-sustainable, - improve the quality of services provided • Education - improve efficiency and quality of education system - increase capacity and quality of tertiary education • Public Administration - continue the decentralization of public administration - improve the quality of the public service

32. Communicationof Reforms Government needs to improve communications to promote public understanding of and support for structural reforms. The pace of reform has exceeded the public appreciation of wide-ranging policy/program improvements.

33. Challenges of the EU Membership • Capacity to take advantage of EU membership and use newly available resources wisely • Rapid adoption of the EURO will require stringent fiscal management and possible trade-offs with pace of implementation of some structural reforms which require budget support • Implementing the Lisbon Strategy – making knowledge-based society the catalyst for growth in the EU context, overcoming poverty and improving social inclusion

34. National Lisbon Strategy • Education and Human Resources • Information Society • Research and Innovation Policy • Business Environment and Governance Climate • Role of the Government (Framework)

35. Key Priorities for the Future • Fiscal consolidation (public expenditure reform) and completion of structural reforms; economic growth and Euro-adoption • Convergence – building capacity to be able to take advantage of the EU membership; competitiveness of the Slovak economy and sustainable economic growth • Social inclusion of society (poverty reduction, human development); role of the non-governmental sector • Improving public sector performance (EU funds)

36. www.worldbank.sk The World Bank Suché mýto 1 811 03 Bratislava Slovak Republic Tel.: (421 2) 5752 6720 Fax: (421 2) 5752 6701