A. Europe and Central Asia was the only region in the last five to seven years that consistently grew in importance, becoming a major center of World Bank activities. In terms of the total number of projects and exposure, it is now the third largest region. Looking forward, a lot will depend on what happens in key countries and sub-regions in our area. In the countries of central Europe, including the Baltics, the Bank still has an important—albeit declining over time—role to play in the next three to five years to help their accession to the European Union (EU). We are supporting the capacity building of public institutions, strengthening of sub-national institutions including provincial and local governments. These are important vehicles for receiving and making effective use of funds from the EU and they need to be reinforced to be able to absorb those funds. The Bank also provides support to several EU candidates to modernize their agriculture and mining industries, to spend more on the environment, and to carry out reforms in their education, health care, and pension systems. Let’s not forget our analytical work, and our initiatives to build international networks among research and policy institutions to exchange their findings on accession issues. We are cooperating with private foundations—for example, with the Bertelsmann Foundation in Germany—in this enterprise.

So there will be a decline of our activities in central Europe over time, but this is hopefully going to be a gradual. Hungary is in a way "self-graduating" since it does not want to borrow much from the Bank. The Czech Republic has not borrowed for quite a while. Slovenia, while still having borrowed a little bit, has reached such a high income level that it is actually beyond the graduation threshold. In the next two or three years it will graduate. But in other countries, like Poland, we have a very active program. Whether we will be able to continue our advisory and analytical work—there is high demand for both in these countries—will depend on our overall budget priorities. This is under review.

In south east Europe and the Balkans— where the per capita income, at $2,200, is roughly half that in Poland, Hungary, the Czech Republic, Slovakia or Slovenia—the Bank has been given a new mandate to promote the stability pact that is supposed to bring stabilization, democratization, good-neighbor relations to, and foster reconstruction and development of, Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the Former Yugoslav Republic of Macedonia, Romania, and (in the long term) the Federal Republic of Yugoslavia. Together with the EU, the Bank will coordinate donor activities and loan funding, not only for country-specific development and reconstruction programs, but also for regional and even wider, global integration. Reform and intra-regional cooperation are necessary to overcome the legacy of conflict and poor economic performance, and to reduce poverty and achieve prosperity in this region. In addition, these countries will have to be effecitvely integrated also with the rest of Europe and especially the EU if peace and prosperity are to return for good in south east Europe. We expect to co-chair with the EU the first regional, ministerial-level funding conference on March 29, in Brussels. There is little doubt that in this region, we will maintain our present activities.

A. Both countries have been large borrowers from the Bank. In both countries we provide support in building market institutions, in going forward with key social sector reforms, and in restructuring some industries. I can mention downsizing and restructuring the coal sector in both countries—the recent mining accident in Ukraine is a sad reminder that any delay can cost human life. We also have to make sure that the social impact of this restructuring, the unavoidable labor-shedding, is being addressed, and that the unemployed miners receive proper assistance and retraining.

Much depends of course on the ability of the new governments in both countries to pursue the reforms effectively. In Ukraine the new government under Prime Minister Viktor Yushchenko has laid out an ambitious reform program that we endorse. We hope to move forward together with the government in such areas as reforming the public sector and agriculture, creating a more investment-friendly environment for domestic and foreign private investors, and dealing with corruption issues. It is noteworthy that despite its huge economic potential, Ukraine is the only country in the former Soviet bloc that didn’t experience GDP growth in any of the years since independence in 1991. That was the cost of delaying reforms. In Russia we have to see the outcome of the presidential election and the composition of the new government and its economic plans.

A. Let’s not get into this guessing game. Obviously, the new president’s economic program will be crucial; also of importance is how effective he will be in convincing the Duma to support particular legislation that may be required in key areas. That includes legislation affecting private sector investment, especially the foreign investment code; bankruptcy legislation; banking sector reform legislation; and so on. Thus there is a fair amount of legislation that has to be approved by the Duma.

A. We outlined a number of scenarios in our country assistance strategy. It starts at a very low level of about $150 million annually to fund two new projects. If the situation improves, if the implementation of our existing portfolio accelerates—among committed projects are our three outstanding adjustment loans with more than $1 billion undisbursed balances that can be disbursed quickly when conditions have been met—and if steps are taken toward reforms, we would be able to raise our involvement gradually to $300 million annually as a first step, possibly up to $500–$600 million as the next step. The key issue for the government and for us is not so much to take on new financial commitments, but how quickly we both can move forward and disburse already committed loans.

A. Implementation of the third Structural Adjustment Loan requires legislative action. That is not the case with the second Coal Sector Adjustment Loan—simply the envisaged program should be implemented. The Social Protection Adjustment Loan requires legislation, at least its pension reform-component.

Q. Could you also briefly comment on Central Asia and the Caucasus?

A. These countries were hit very hard by the Russian crisis in 1998. They are still feeling the pain. The downturn in their economies has made it much harder to maintain fiscal stability, to maintain the former momentum of economic growth. As they struggle with fiscal deficits, they can hardly find the domestic matching funds for investments that would have been financed with outside help. In a number of countries in this region our project pipelines slow down because the government doesn’t have the necessary counterpart resources.

Also, a combination of political, economic, and financial factors has pushed several countries, particularly Georgia and the Kyrgyz Republic, into significant difficulties. We are making efforts to assist them in keeping reform on course. Together with the IMF we want to make sure that fiscal resources are sufficient to support an appropriate investment program without endangering macro-stability. In these, in majority low-income countries that are eligible for IDA credits, I expect we will hold the line and even strengthen our presence.