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World Bank Assistance to Russia: An
Unprecedented Challenge The country assistance evaluation for Russia, which covered 1992-2001, showed disappointing, but improving, results for the World Bank’s activities in the Russian Federation. Although the independent Operations Evaluation Department (OED), which carried out the evaluation, rated the outcome of World Bank assistance to Russia as unsatisfactory during 1992-98 and as having only a modest impact on institutional development, for the period 1998-2001 OED rated the outcome as satisfactory and the impact of institutional development as substantial. The OED’s recent country assistance evaluation for Russia concluded that an assistance strategy oriented around analytical and advisory services with limited financial support would have been more appropriate than one involving large volumes of adjustment lending, because such lending in 1996-97 may have delayed rather than accelerated needed reforms. Disbursements should have rewarded actions rather than promises. In support of its overall outcome rating through June 1998, OED highlighted the large size of quick-disbursing and investment loans with unsatisfactory outcomes. Labor Pains of Transition When it joined the Bank in June 1992, soon after the dissolution of the former Soviet Union, Russia was in the midst of a protracted and deep recession. Inflation was high and accelerating, and the balance of payments was under severe pressure, compounded by the heavy external debt inherited from the former Soviet Union and a disintegrating ruble zone. The dissolution of the institutional framework for most of Russia’s trade exacerbated the extraordinary shifts required in relative prices. The Russian people were hesitant about the move toward a market economy, unsure of what this would entail for their livelihoods, and concerned about the risks of a possible political backlash. Successive Russian governments launched stabilization and adjustment programs in the early to mid-1990s with assistance from the IMF and the World Bank. Most of these programs were only partially implemented because of weak institutional capacity and insufficient political will. Poverty has increased, indicators of social and human development have declined, social services have deteriorated, and "market-type" social protection mechanisms have been slow to develop. Macroeconomic stability has been difficult to achieve, partly because the authorities lacked the instruments for indirect control of the economy, but also because of the lack of consensus on how to spread the costs of adjustment. Small and medium enterprises have been discouraged by the high costs of entry and of doing business, including the weak rule of law and bureaucratic harassment. Whether an easier transition path could have been found is unclear, given the initial conditions and the political realities. In August 1998 a year-long stabilization and structural adjustment program collapsed because of external shocks and inadequate fiscal adjustment. Russia defaulted on its debt, the ruble was floated (depreciating by more than 60 percent), and output dropped by more than 5 percent. The crisis was a turning point in Russia’s transition. During the last three years the government has made significant progress in undertaking fiscal adjustment, enhancing the incentive regime, obtaining legislative approvals for structural reforms, strengthening public institutions, and restoring public trust in its ability to implement policies. Aided by a positive terms of trade shock and the effects of the devaluation, growth has recovered and inflation has been reduced. The Great Divide: 1998 In the early 1990s the World Bank, the IMF, and the EBRD were asked by their shareholders to work together in providing advice and financial assistance to facilitate the transition. The Bank was entrusted with encouraging and overseeing structural reforms. This was an unprecedented challenge for the Bank, because it lacked country knowledge and historical precedent for this type of process. Beyond its complementary assistance in support of IMF-funded stabilization efforts, the Bank’s job was to help build the institutions of a market economy, develop the private sector, and mitigate the social costs of the transition. To this end the Bank committed to 55 loans for $12.6 billion through the end of fiscal 2001, of which $7.8 billion has been disbursed and $2.4 billion has been cancelled (see the figure). Until mid-1996 lending focused on rehabilitation and investment, with an emphasis on energy. Thereafter, most lending was directed toward adjustment operations. Policy advice was provided through economic and sector work, technical assistance, and design and implementation of lending operations. At the behest of the international community, the Bank rushed the processing of many projects, both for investment and general budget support, even though their prospects of success were highly uncertain. These high-risk, high-payoff operations did not succeed, as the Bank did not command the resources or the influence to overcome the unprecedented constraints described earlier. Operations dealing with privatization and social protection achieved better results than those dealing with stabilization, the financial sector, and oil sector restructuring. Bank advice and lending played a positive, but marginal, role in the design of policies and in their implementation until 1998. The final outcome rating for Bank activity in Russia before 1998 was unsatisfactory, with institutional development characterized as modest. After the August 1998 financial crisis, both the relevance and efficacy of assistance improved significantly: many of the lessons drawn from Bank operations and analytical advice were put to work. The Bank has been cautious in new lending, which has focused on long-term social and institutional development. The Bank has become the main external interlocutor on the microeconomic and social reform agenda, and the government has adopted many of the policies recommended by the Bank. Achievements supported by Bank interventions include the improvement in fiscal management, the targeting of social assistance programs, and the restructuring of the coal sector. Portfolio performance has also improved since 1999, partly through the cancellation of troubled projects and partly through joint efforts by the Russian government and the Bank to speed up implementation. An open question is the resilience of these achievements to external shocks, in particular, to a significant drop in the prices of oil or other export commodities. Performance Scrutiny As of the end of June 2001, OED had evaluated 15 projects with a total commitment value of $5.1 billion. It rated seven projects as satisfactory for outcome and six as substantial in terms of their institutional development impact. A starker picture emerges in terms of the net value of commitments, as OED rated only 28 percent of Bank lending for closed operations as satisfactory for outcome and 16 percent as substantial for its institutional development impact. Reflecting the irreversibility of most of the policy and institutional changes, OED rated sustainability as likely for 67 percent of projects and 78 percent of commitments. Except for sustainability, Russia’s performance has been well below that of comparators, as well as compared with Bank and regional averages (see the table on the next page). The long average lag of nine months between approval and effectiveness and the large number of restructurings (13 projects) are largely explained by the inadequacies of the operating environment and the weak domestic ownership of project objectives. Note that the overall assessment of closed project outcomes by the management of the Bank’s Europe and Central Asia region differs fundamentally from OED’s. Lessons to Apply The OED evaluation offered certain lessons that can be drawn from the Bank’s lending experience in Russia as follows: • Country ownership is crucial to the success of assistance. The Bank should pay close attention to the political and institutional aspects of reforms and consult with all relevant government units and civil society entities to improve the relevance and design of its activities and avoid operations where commitment is weak. • Large adjustment lending programs, especially ones with immediate disbursements, risk delaying rather than accelerating reform given a poor country track record and narrow country ownership of reform. • Adjustment lending should be offered after the government has publicly adopted the necessary reforms or has begun implementing them, as was the case for the Coal Sectoral Adjustment Loans. Disbursements should be carefully modulated on the basis of solid implementation progress. • Adequate analytical work should be available at the beginning of lending. Projects should be funded to an extent commensurate with the role the Bank is expected to play. • Timetables for implementation should be realistic. • Progress on policy and institutional reform is required for physical rehabilitation and investment projects to succeed. Bank management disagreed that the shift from investment lending to structural adjustment lending was a misguided response to the systemic reform challenges that Russia faced in 1996. In its view, restricting assistance to analytical advice and small loans—as OED suggested—would have meant continuing to exert only a limited impact on policy formulation. Management argues that the two 1997 Structural Adjustment Loans and the Social Protection Adjustment Loan were necessary to influence the design of the structural reform agenda. It further maintains that these operations provided the right tools and built the necessary trust to help prevent economic policy reversals, improved relations between the Bank and Russia, and sowed the seeds of the reform program first endorsed by the government in 2000 and currently under implementation Bank management agreed with OED’s recommendations that the Bank should focus its assistance more on areas where government commit-ment to reform is strong and where relative social consensus can be reached. Management also supported such recommendations as the following: • Public sector management, legal and judicial reform, investment and business climate enhancement, pension reform, land market development, and coal and electricity sector restructuring now offer "high-potential development rewards." • Ongoing policy dialogue and the technical advisory program on banking sector reform should continue. • Bank assistance should provide for an expanded program of good practice advice and strengthen the public debate on reforms. • Policy-based lending should be designed to ensure a tight link between the progress of reform and actual disbursements. • Part of Bank assistance should be targeted to selected regions committed to reform. The author is a senior evaluation officer at the World Bank. This article is based on the findings of the recent country assistance evaluation of the Russian Federation prepared for OED. OED Evaluation Ratings of Closed Bank Projects as of June 30, 2001
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