World Bank’s Ukraine Team on Unchartered Territories—Learning from Past Mistakes
Interview with Country Director Luca Barbone

Preparation of the World Bank’s new Country Assistance Strategy (CAS) for Ukraine broke new ground last year, when for the first time a draft CAS was put on the Internet to generate countrywide discussions. The CAS outlines the Bank’s planned policy and lending program for 2001–03. This initiative enjoyed the support of Ukraine’s reform-oriented government, which was elected to office last year. In addition to posting the CAS draft on the Internet, the Bank’s Ukraine team organized roundtable discussions across the country, gauging the public’s reactions to various aspects of the new strategy, including poverty reduction, environmental protection, energy sector reform, and the fight against corruption. At these meetings, more than 200 NGOs, business groups, professional associations, think tanks, and media representatives were able to criticize and praise the Bank’s "three-year plans" and put forward new suggestions. Transition editor Richard Hirschler asked Country Director Luca Barbone, in charge of the Bank’s operations in Ukraine and Belarus, how the Bank benefited from this free-spirited dialogue with Ukraine’s civil society.

A. Complaints about past lack of transparency were justified because during the preparation of the first assistance strategy we weren’t holding consultations in Ukraine. But there was a more fundamental issue, which became clearer during the implementation of the strategy between 1997 and 2000. We really learned a lot. The way I, and many others, see it is that the Bank’s and the international community’s approach to the former Soviet Union has been an evolving concept. We didn’t really fully grasp the deep legacy of the Soviet Union. We didn’t quite understand how deeply the ideology and the organization of the old system affected society, even after the break-up of the Soviet Union. At their forming, the new independent states were still basically left with a power structure and an organizational and institutional structure that reflected 70 years of "socialism" and authoritarianism, not the previous few years of reforms. I think that this underestimation is the main reason we and the rest of the international community failed in many ways in pushing reforms. We used the lessons gained from Poland and the other countries in Central Europe, without realizing that a huge institutional gap existed.

Based on these reflections, which I am just caricaturing here, we adopted a number of hypotheses. First, we have to plan for the long run—and formulate our strategy—by accepting ups and downs in the transition process, and this should also define our lending policy. More important, we must deemphasize policies and emphasize institutions. Institutions in the sense in which Douglass North interpreted them: ideas, ideologies, prejudices, rules of behavior, not organizations or other physical entities. To transform these kinds of institutions, the culture must be changed. This involves much more than simply privatizing state-owned enterprises or passing laws. It involves changing the attitudes of public officials, even the attitude of the private sector.

Second, we realized that the government cannot just create and legitimize new institutions and behavioral norms and parachute them from the top to the public through laws and policy actions. Civil society should feel the need for change. Therefore we have to be in a position to help both the public and the government—both sides of this transformation. That is why we decided early on that the draft of the country assistance strategy would be the subject of substantive discussion with civil society, which had initially been weak and fragmented, as in other former communist countries. The Bank had been targeting partnership with NGOs for a couple of years; it was talking a lot. But from an operational point of view, it had done relatively little. So for our team it was a year of intensive learning. We set up new activities, often changed our way of doing business, scrutinized our actions in the light of whether they would help civil society, whether they would advance legitimacy of new institutions.

A. The issue of cash collections was, of course, discussed with NGOs and stakeholders. But their perspective was a lot different from what we expected. They made the point that those responsible for the situation are the state-owned enterprises, which have accumulated huge arrears and are withholding payment to their employees and suppliers. Your specific example was not on the agenda, probably because social safety net mechanisms in some degree ease the pain of higher energy prices.

A. Some of the recommendations were not feasible. There were, for example, a lot of requests for changing Ukraine’s government policy. But in many cases we received extremely useful suggestions and reacted positively. We found the environmental concerns of many NGOs legitimate. We recognize that the government needs to strengthen its operations to monitor emissions in a meaningful way, fine polluters, and finance environmentally friendly projects from a national environment fund, which could pool these fines and fees. We have put back this issue in our work program, will review it, and, in agreement with the government, use our Programmatic Adjustment Loan to support capacity building of the government to deal with environmental issues.

A. We have changed—and are still in the process of changing—the way we do business. On a day-to-day basis, we have formed a contact group representing Ukraine’s civil society. With their help, we have identified projects in which NGOs will have a crucial role to play, participating both in project preparation and implementation. We receive continuous feedback from NGOs.

In addition, we are helping the government formulate new laws on civil code and taxation that will ease the present financial squeeze on the NGO sector. Right now by law NGOs are not permitted to sell services. They cannot accept reimbursement, even for such service as treating AIDS patients. As a result, they depend too much on foreign contributions. We cannot hire local groups that care about the poor, because the legislative framework is so inadequate. We are also sponsors of the People’s Voice project, modeled after the famed initiative in Bangalore, which is helping change the relationship between citizenry and local officials in a few cities.

The Ukraine team has developed a series of initiatives aimed at increasing information flows. One project will finance installation of the Internet in Ukraine’s library network. We are also working both with the government and with civil society organizations to help them provide, gain access to, and benefit from more information by using the Internet. Another project will develop tools and methodologies to increase the accountability of public officials. In this sense the civil society strategy has become an integral part of our actions. We travel uncharted waters, learning by doing.

A. The CAS is a living document. Probably in a year or a year and a half, we will review what has been achieved. We will collect more feedback and more suggestions. There is also a CAS interim document. Depending on how the economic situation evolves in Ukraine, we might even increase our assistance.

A. I agree, this year should be another successful year in Ukraine. Last year was the first year of growth since independence; GDP increased 6 percent, industrial production was about 10–11 percent higher than in 1999. Exports have grown substantially, faster than imports. But what is especially heartening is that this positive outcome does not reflect merely the effect of external circumstances, growth in Russia, for example.

There is some evidence that domestic reforms are producing positive effects. Take the progress in energy payment. Not too many people realize that the increase in cash payments in the energy sector has been due to a hardening of budget constraints of unheard of proportions. The authorities disconnected 23,000 enterprises and entities that were not paying their electricity bills, something that is without precedent. Reduction in nonpayments results in a better-oiled economic system, enterprises that can respond to changes in demand, workers that have cash to buy what they want.

It’s not all roses, of course. When you start enforcing payment discipline it means many enterprises that were used to getting free gas or electricity start to pay for it. Many of these enterprises are owned by oligarchs and have very strong political connections and strong connections in the judiciary. These are not pain-free reforms we are pushing.

A. Because the concept of these loans better match the way we want to support the government’s reform program. We have made tremendous progress in preparing the first Programmatic Adjustment Loan (PAL). In our CAS we agreed on a three-year program. The program is the government’s program. They used to negotiate, bargain over conditions. This time when they said they could not reach the targets, we asked them, "O.K., how far can you go?" They told us they could go half way. We agreed. On the government’s side they were genuinley surprised.

The point is, we try to ensure their maximum ownership. Keeping the institutional focus of the CAS, we concentrated not so much on policies and laws but on trying to define benchmarks of outcomes, clear changes in behaviors, and rules of the game that we think are associated with faster growth and a more inclusive society. We have been working with the Ukrainians based on this new concept for a year now. The Ukrainian government achieved a sufficiently critical mass of results and we can provide the loan, once the Bank’s Board of Directors approves it. And we will go ahead every time with these one-tranche operations if we feel confident that there is a critical mass of change.

A. The point we are making is that if they do the right thing, they are not going to need our money. I never really believed in the concept of prepayment of the costs of reforms.

A. We have put a lot of effort into trying to improve the way in which the government handels its money, not just the World Bank’s money. Adjustment loans are budgetary support, so the issue is not what happens to the relatively small amount of money the Bank would put in the budget but how well the budget is executed. That is why, for instance, budget reform and improvements in budget management are very high on the agenda in our PAL. That is the way we need to go. The issue of monitoring individual tranches is a bit irrelevant, because we know the argument of fungibility. The question is the integrity of the whole program.

A. It’s not the Bank that is going to have an impact, it is the government that should solve fundamental problems. In the end, it is their program; our success is measured by their success. We have good relations not only with the new government but also with the presidential administration and the parliament. Another benchmark we have chosen for ourselves is to see to what extent we can succeed with the civil society leg of our strategy. This will imply asking much more often what Ukraine thinks of us. We ran a detailed client survey across Ukraine with focus groups to determine how Ukrainians perceive our activities. We will repeat it year after year to check whether we are sending the right message and if it is understood.