The period since independence has been one of great disappointment in terms of economic and social development in Ukraine. Growth was achieved for the first time only in 2000, and recorded output is still 60 percent below its 1991 value. Poverty has increased (27 percent of Ukrainians consume 75 percent or less of median consumption) and other social indicators have also deteriorated.

These weak economic and social outcomes are due to the lack of pro-development institutions and to the still limited voice that civil society has in influencing its own destiny. The institutional framework is in transition, with old (Soviet) and new rules operating side by side. The result has been poor governance in the public and private sectors. Transaction costs are excessive because of anti-competitive practices and corruption. Property rights are not adequately defined or protected. While government strategic thinking and management have improved, weaknesses remain. In this environment, the logical choice, for those who can, is rent-seeking, which hurts private investment.

Ukraine’s own recent history, as well as international experience, strongly suggest that in the absence of an increased voice by civil society and pressure for greater accountability of public officials, true institutional change is unlikely to be sustained for long. Greater involvement of civil society will have to emerge from within, but the international community can have an important role in both supporting reform efforts at the top and facilitating the emergence of stronger demand for good government from the bottom.

The World Bank’s strategy—as envisaged under the Country Assistance Strategy (CAS) approved in 1996 for 1997–2000—did not materialize as expected, for several reasons. True government ownership was lacking, and the government was unable to deliver—symptoms of institutional weakness and political paralysis. The design of the adjustment assistance, based on separate sector adjustment operations, proved to be a major shortcoming. Stand-alone operations had difficulty addressing cross-sectoral institutional and governance issues. As a result, reforms were reversed or stalled in some areas while Bank resources were being disbursed in others. Weak institutional capacity in key government agencies further hampered implementation.

The Country Assistance Strategy for Ukraine for the 2001–03 aims to help the government and civil society implement a broad-based poverty-reduction strategy and create jobs and sustainable economic growth. To do so, the strategy directly addresses the institution-building challenges faced by Ukraine from both the demand side (civil society) and the supply side (government). The strategy seeks to foster environmentally sustainable development by moving Ukraine closer to European Union standards.

The strategy will be implemented in two key phases (see table on next page). In the first phase, the low-case lending scenario, IBRD loans and nonlending activities, including IFC technical assistance program, of up to $461 million are extended. The loans have to meet two crucial tests, which the government supports. First, they must demonstrably help civil society increase its voice for better government and social service provision or provide tangible benefits in globally sensitive areas. Second, they must be sufficiently shielded from possible paralysis at the center of government so as to stand a good chance of success even under less than favorable conditions.

Once these triggers (benchmarks) are achieved, the second phase of World Bank assistance begins. Under the base-case scenario, an additional $1.4 billion is provided in a mixture of nonlending activities and adjustment lending through performance-based Programmatic Adjustment Loans (PALs) and institution-building operations. Moving to such a scenario requires establishment of a sustainable macroeconomic framework and achievement of agreed-upon benchmarks in five cross-cutting areas: financial discipline in the public and private sectors, an improved regulatory framework for business, transparent definition and protection of property rights, public sector accountability and effectiveness, and mitigation of the social costs of transition and improvements in the delivery of social services.

The first one-tranche PALoan will be presented to the Executive Board for approval once the benchmarks have been achieved:

Two subsequent PAL operations would be presented to the Board (probably at one-year intervals) if the agreed-upon benchmarks for each tranche were met and the overall pace of implementation of reforms was satisfactory.

The Bank’s strategy envisions a major expansion of assistance to reforms in the social sectors and a withdrawal of investment in areas (such as infrastructure and power) in which investment operations have proven unable to achieve for systemic results or demonstration effects. Appropriate nonlending vehicles will be substituted to conduct policy dialogue.

To date, the World Bank has approved 16 loans and 6 environmental grants for Ukraine, amounting to more than $3 billion. The latest loan, $18.29 million for the Kyiv Public Building Energy Efficiency Project, was approved in January 2000.

IBRD Tentative Lending Program—FY2001/03 (US$ million)