Managing World Bank Operations in the Balkan Hot Spot—Interview with Country Director Christiaan J. Poortman

Our regional approach is coordinated with the Balkans Stability Pact, signed by countries of the region and the international community after the Kosovo crisis. The Bank, together with the European Commission, is charged with coordinating development assistance to the area. Last year the Bank produced a regional strategy paper, "The Road to Stability and Prosperity in South Eastern Europe," which served as a background document at the first Regional Balkans Donor Conference (see box). So we are increasingly looking at the regional dimensions of our country assistance programs.

A. This being the Balkans, we cannot plan with certainty. After Milosevic was overthrown and a democratic Yugoslavia emerged, it seemed finally that regional integration could become a reality. But this optimism is being overshadowed by the crisis in Macedonia, which erupted so quickly and unexpectedly. We are also facing new problems in Bosnia-Herzegovina, where Croats threaten to create their own entity. A split between Montenegro and Serbia also is a distinct possibility.

We still hope that economic development and greater political stability will elevate these countries to a higher plateau, where conflict is increasingly seen as the wrong way to resolve issues. Significantly, these countries aspire more than anything else to get closer to Europe. The European Commission has indicated a path toward eventual integration into the European Union—the path of collaboration and coordination among the Balkan countries—and the Bank is helping that process along.

A. These conflicts will continue to be a problem and a challenge. Economic development, poverty alleviation, and across the board income generation will certainly contribute to stability and peace among the various ethnic groups, but we are also dealing here with political issues, vested interests, and criminality. In Macedonia, for example, the Albanian minority complains about being treated as second-class citizens—in the political but also frequently in the economic sense. The Macedonian government, in which the Albanians are also represented—has been trying to address that concern.

Q. They are certainly racing against time. Aided by the World Bank, the reconstruction of Kosovo is making impressive progress, but its economy is run by foreign experts. Locals are not involved in a substantive way in the work of the "fiscal authority" or the "monetary authority," as the Ministry of Finance and the National Bank are called in this territory.

A. This is the result of the United Nations Security Council resolution that created UNMIK, the Interim Administration Mission in Kosovo. It is Special Representative of the U.N. Secretary General who has ultimate authority. But UMNIK’s administrative departments, which are analogous to ministries in a national administration, are headed jointly by international civil servants and local officials. A joint interim council has been set up in which both Albanians and Serbs are represented. This is an advisory council, it lacks executive power, but it reviews a wide range of issues.

At the beginning of this year Kosovo held municipal local elections, which went well. Local people now represent the population at the local level. The next step may be elections for an assembly with delegated responsibilities. The recent donor conference underlined the need to train local Kosovars, give them more responsibility, and make sure that they are ready to assume administrative duties. Part of our program is focused on building up local capacities, so that Kosovars can one day manage the economy themselves, whatever political settlement is reached.

A. No, and that is not my business either. But it would be useful to get some clarity, because political developments affect the environment for economic development, too. Uncertainty and insecurity do not create a good climate for private investment. This is the greatest handicap the region faces.

A. Although FR Yugoslavia is not yet a member of the Bank that does not mean that we are not very active there. The Bank’s Board recently approved a $30 million Trust Fund to provide grants to Yugoslavia. We will commit that Trust Fund very quickly to bridge the period between now and the time membership be established and we are up and running with the regular program. In addition, together with the European Union, the Bank co-chaired the first donor conference on supporting FR Yugoslavia. We are also working with the authorities on a major medium-term structural reform program, which will be submitted to the donor conference to be held sometime in May or June.

Membership is a complicated issue, because of Yugoslavia’s arrears. Arrears to the IMF were relatively small ($150 million) and were financed with a bridge loan. Yugoslavia’s debt to the Bank is much larger ($1.7 billion). So we have to work out an arrears clearance plan, which is not easy. All this takes considerable time. But we are making good progress and intend to take the membership recommendation to the Board next month. It was easy for Yugoslavia to join the EBRD, as it had no arrears there. Arrears with the European Investment Bank have not been cleared yet.

A. Yes. We need in particular to support the private sector in the region, creating favorable conditions for private investment, bringing in foreign investors. The conflict in Macedonia could not have come at a worse time: it can destroy the investment climate that was built up in that country over the past 10 years. Macedonians were introducing the right macroeconomic policies, but for a long time investors were absent and the economy stagnated. Later things started to look better. The country was settling its differences with Greece, investors became interested in Macedonia, and the economy started to expand. And then came this crisis, which can harm not only the Macedonian economy but the region as a whole. For example, the tourist industry in Croatia is hoping for another bumper year on the Adriatic, but if the armed conflict drags on, there may be fewer visitors.

A. Very much in the same way it has in other countries. We are combining our investment operations with social programs for the truly needy and vulnerable, while promoting new job creation. It is also important to help micro, small, and medium-size enterprises. We have introduced in the region some extremely successful small and microenterprise projects, but obviously it takes some time before they start to have major effects. Privatization often fails to bring about the desired employment creation and economic growth. Many state enterprises have been stripped of their assets and are in need of radical restructuring, including downsizing their labor force. They require new investment. New private investment is really the key to accelerated development, because that is eventually where the strong supply response is going to come from, which will generate the employment that is so badly needed to deal with these social problems.

A. The short answer is no. Of course, the Bank will continue to be involved in these countries, where per capita income is in the lower range. Most of the countries are IDA recipients, but the pool of IDA money we can offer is limited. On the other hand, many of these countries are only gradually becoming creditworthy, so the amount of IBRD loans we can offer them is relatively small. They also have problems of how to absorb reasonably the borrowed money. Macedonia, beginning this July, will "graduate" and receive only IBRD loans. As a result, none of them may be able to borrow as much as they did earlier. Kosovo might receive more, and new lending is expected to FR Yugoslavia. To sum up, with the exception of FR Yugoslavia, there won’t be dramatic changes in our level of total lending.