Press Release ECE/GEN/00/32
Geneva, 7 December 2000
Panel at ECE "FINANCING FOR DEVELOPMENT"
Conference
Discusses Role of Official Assistance
Group Contends Need Remains for Non-Private Aid, Tailored
to Country Requirements and Status of Infrastructure
A panel of Government, international-agency and banking officials said
this afternoon that official assistance to countries in economic transition remained
important but should be applied carefully according to the extent of development,
particularities, and relative economic health of each recipient nation.
The panel discussion, on the topic of "the role of official
assistance in creating the conditions for sustainable development", was held as part
of a two-day conference on the subject of financing for transition economies in Central
and Eastern Europe.
Entitled the "UN/ECE Regional Conference on Financing for
Development," the gathering is organized by the United Nations Economic Commission
for Europe (UN/ECE) in cooperation with the European Bank for Reconstruction and
Development (EBRD) and the United Nations Conference on Trade and Development (UNCTAD).
One of its aims is to offer input to a High Level Intergovernmental Event on Financing for
Development to be convened next year by the United Nations General Assembly.
A second panel discussion, entitled "mobilizing financial
resources for transformation and development: the domestic dimension" took place
concurrently with the debate on official aid.
Chair of the panel session on official assistance was Cristian Popa,
Deputy Governor of the National Bank of Romania, who noted in his opening remarks that
while there was no substitute for domestic adjustment efforts in transition economies, in
an era of capital shortfalls and other difficulties such efforts were insufficient and had
to be bolstered by strong bilateral and multi-lateral support. What was important was to
understand how such support could best be organized and provided.
The introductory speaker for the session was Marie Lavigne, Professor
at the University of Pau, France, who said, among other things, that the needs of
countries in transition were still substantial and quite varied, making coordination of
assistance both important and hard to achieve. Such aid should be aimed at infrastructure
development and other aspects that weren't addressed by private investment, Ms. Lavigne
said. She added that the countries of southeastern Europe were in especially difficult
circumstances and that there was no clear, coordinated strategy for providing official aid
to them -- a shortcoming that should be rectified.
The panellists were Manuel Pedro Baganha, Secretary of State for
Treasury and Finance of Portugal; Urs Breiter, Minister and Deputy Head of the Division
for Cooperation with Eastern Europe and the CIS of the Swiss Agency for Development and
Cooperation; Christopher Hurst, Head of Division, Chief Economist's Department, of the
European Investment Bank (EIB); Hans Peter Lankes, Director of Transition Strategy of
EBRD; Bertrand de Largentaye, Head of Unit, Directorate General of External Relations of
the European Commission; Krzysztof Ners, Deputy Minister of Finance of Poland; Marcelo
Selowsky, Chief Economist of the World Bank, Europe and Central Asia Region; Emirlan
Toromyrzaev, First Deputy Minister of Kyrgyzstan; and Roberts Zile, Minister of Special
Assignments for Cooperation with International Financial Institutions of Latvia.
Introductory statements
CRISTIAN POPA, Deputy Governor of the National Bank of Romania,
Chairman of the session, said there was no substitute for domestic adjustment efforts, but
in an era of capital shortfalls and other difficulties, domestic efforts were insufficient
and had to be bolstered by strong bilateral and multi-lateral support. What was important
was to understand how such support could best be organized and provided. A key question
was the interface between official assistance and private funding, not only in general but
in terms of sequencing; in addition, distinctions had to be made between emergency funding
to cope with economic crisis and longer-term measures.
MARIE LAVIGNE, Professor at the University of Pau, France, said this
morning it had been said that official assistance was "second fiddle" -- that
first fiddle was domestic financing and domestic efforts. In addition, official assistance
had been dwindling for some years. Nonetheless, such aid was still needed despite wasteful
efforts in the past, gaps in disbursements and commitments, and other problems. What was
necessary was to establish a useful "division of labour". Poor aid coordination
among institutions and bilateral donors had occurred and had to be avoided. The needs of
countries in transition were still substantial and quite varied, making such coordination
hard to achieve. And such aid should be aimed at infrastructure development and other
aspects that weren't addressed by private investment.
Strengthening private domestic financial institutions could be useful
for enhancing cooperation between official assistance programmes and private initiatives,
Professor Lavigne said, but that also wasn't easy; such bank-mediated cooperation often
had been problem-plagued even in economically advanced countries. And the role of the
State could be hard to define in such an arrangement, and the State had important tasks to
perform -- protecting the environment, regulating working conditions, strengthening
infrastructure, and establishing and maintaining pension systems, for example. It had been
suggested that countries now in the accession process for the EU no longer needed official
assistance, that they were "transition graduates". That left countries less
well-advanced in their transitions; Russia had, as a result, been a major focus of such
efforts recently. It also left the countries of southeastern Europe, which were in a mess,
to put it bluntly. It was clear that there was no clear, coordinated strategy for
providing official aid to these countries; it also was clear that such a strategy should
be developed.
Panellists' statements
MANUEL PEDRO BAGANHA, Secretary of State for Treasury and Finance of
Portugal, said Portugal could serve as a kind of case study of "transition". It
had had huge budget deficits, flights of capital from the country, and several economic
crises in the 1970s. An International Monetary Fund (IMF) adjustment programme had been
adopted and a short-term loan received; the intervention had been largely successful, had
been quick -- about two years -- and had been accompanied by economic growth.
But the underlying structural problems had not been addressed, Mr.
Baganha said, and a more serious crisis occurred in 1982, with a greater economic shock,
and by 1984 inflation was over 30 per cent and the budget deficit had grown to an alarming
level. There was another IMF intervention, but -- more important -- Portugal's accession
to the EU was being negotiated, and in order to meet EU criteria, structural measures were
put in place to regulate the economy and allow greater privatization. This time,
Portugal's "transition" was more successful; the internal adjustments needed
were made that allowed sustained growth and macro-economic stability.
URS BREITER, Minister and Deputy Head of the Division for Cooperation
with Eastern Europe and the CIS of the Swiss Agency for Development and Cooperation, said
it was important to realize that transition countries were not a homogeneous block, but
were individual and different. Transition had been difficult and had taken longer than
expected, and it had become clear that technical cooperation was vital for helping them.
The Swiss Agency had learned that cooperation was possible on the community level -- which
was an approach dear to Switzerland.
On the project level, Mr. Breiter said, three major factors appeared to
determine success or failure. Partners had to be well-selected, both in the field and in
the donor country. Ownership of the process and the strengths of the actors had to be
capitalized on. Third, coordination was important; the Swiss agency had cooperation
offices in the transition countries to which it provided aid.
CHRISTOPER HURST, Head of Division, Chief Economist's Department, of
the European Investment Bank (EIB), said it was clear that official aid could be of use in
the utility sector, although private sector involvement was vital. Various institutional
problems meant that Government support and guarantees were often required, along with a
stable regulatory environment; aside from infrastructure investments by utilities were
infrastructure projects funded by Governments -- roads, bridges and tunnels were an
example; here official aid could be useful; such aid meant more investment could later
take place, and it was hoped that as infrastructure progress was made, private funds would
be increasingly attracted.
Involvement of international institutions in such infrastructure
projects could raise confidence among other, potential investors -- they would be more
assured that certain standards would be met and the project would be carried out according
to acceptable practices. Returns were often slow, and so long-term debt support was likely
to be needed, which could be provided with the help of official aid or the help of
international funding agencies. It appeared, therefore, that there was a continuing role
to be played here by official assistance.
HANS PETER LANKES, Director of Transition Strategy of the European Bank
for Reconstruction and Development (EBRD), said official assistance now came to 15 to
20 per cent of financial flows into developing countries, while the preponderance was
private capital flows; the question was how the small amount of official assistance could
be used most effectively to "lever up" the entire development process. Major
questions to be considered were if countries had major development needs and if they had
sustained market access to private financing. For countries that had sufficient
infrastructure and sustained market access, the focus of official assistance should be on
catalyzing the right kind of private investment.
In the opposite case, the focus of official assistance should be much
more along traditional lines -- building up social and educational infrastructure, for
example. Still, effort should also be made to move these countries towards sustained
market access, because substantial rewards could come from it. For countries in between
these two extremes, official aid might help, among other things, to diversify economies
and to carry out reforms.
BERTRAND DE LARGENTAYE, of the Directorate General of External
Relations of the European Community, said the Community had provided substantial aid to
the newly independent States. The aid was aimed at fostering the development of market
economies with the governmental and regulatory changes required for that to happen and to
happen in a transparent, effective fashion. Grants were the primary form of aid provided,
and they were considered most suitable for the needs of sustainable development. Attempts
were made to "tailor" assistance to the specific needs of individual countries.
Extensive efforts were made to coordinate this aid with that coming from other sources.
European Community aid had been concentrated in several areas, such as
structures needed for the functioning of market economies, Mr. Largentaye said. Help also
had been focused on fostering investment in small- and medium-sized enterprises and on
helping such firms develop and propose credible finance plans, which hadn't always been
the case in the past. Other areas of endeavour were matters -- such as the environment --
that were not covered by private financial flows, and infrastructure development.
KRZYSZTOF NERS, Deputy Minister of Finance of Poland, said it was clear
that structural reforms had to be carried out to succeed, but what was really required was
enough courage, in political terms, to implement such reforms. Taking the necessary steps
was very difficult, and many countries couldn't face it. A stabilization fund of US$1
billion organized for Poland had been very helpful, even though it wasn't used in the end
as the country carried out its macroeconomic reform; knowing it was there, having this
commitment, had been valuable in Poland's first year of transition. One rule for official
aid, then, was that it had to be the right kind at the right time. Poland also had got
grant assistance for years from the EU, but it was not a great amount of money -- everyone
had to understand that transition, in the end, was not assistance-driven.
What Poland sought these days wasn't money but conditionality, which
wasn't very popular, but was what was needed. Poland could get the money it needed; what
it needed was rules that it could say were conditions for further progress and that could
result in relevant economic policies. It had never got enough regional cooperation; the
key for countries such as Poland was in developing trade networks. Another important thing
was continuity in funding; donors should not phase out too quickly. Poland thought the
World Bank should reconsider and not phase out as rapidly as anticipated its assistance to
countries in line for EU accession. There were still neglected sectors of the economies of
these countries.
MARCELO SELOWSKY, Chief Economist of the World Bank for the Europe and
Central Asia Region, said the major challenges appeared to be debt and reform.
Reallocation of resources was a problem because many of these countries were isolated from
the real economies of the world and their pricing of resources, especially energy, had
been out of line with reality; now all that had to be adjusted; in some cases, input into
these resources outweighed in value their output. In addition, State enterprises had
accounted for up to 50 per cent of GDP, and philosophies on public expenditure required
major change. Also, targets of aid were often politicized, and so aid went to the wrong
places -- to subsidized industries, for example, instead of to communities. Reforming
institutions required legislation, and that meant having Parliaments; this had been a
major problem. Lately the World Bank had decided to ask Governments to have legislation in
place when large cooperative programmes were planned.
The World Bank adapted its assistance to the level of advancement of
the transition countries helped, Mr. Selowsky said; loans were targeted carefully and
often were of an institutional nature; they were aimed, for example, at pension reform.
Countries at lower levels of transition needed more basic aid.
EMIRLAN TOROMYRZAEV, First Deputy Minister of Kyrgyzstan, said
Kyrgyzstan had been one of the poorest components of the former Soviet Union; after the
collapse of the Soviet system, Kyrgyzstan had suffered an economic decline of some 60 per
cent. The Government could not maintain its basic social programmes and other services;
there was hyperinflation; there was market economic instability which the Government
lacked experience to manage -- decisions were often erroneous or damaging. Multilateral
and official aid had been provided and was necessary, as the country could not have coped
without it; the aid had helped to overcome a social crisis and a severe lack of access to
economic markets.
Market economic stability had been achieved through structural reforms,
Mr. Toromyrzaev said; land reform and privatization and restructuring of the
financial sector had been undertaken. Current accounts had been liberalized and the
fundamentals of a market economy set up. Still, in 1999, inflation was 40 per cent,
private savings were only 8 per cent of GDP, there was a huge external debt, and there was
a large Government deficit. In cooperation with international financial institutions,
long-term plans had been set up; and it had been learned how important appropriate
legislation was and how important comprehensive partnerships were with multilateral
financial institutions. In the medium term, Kyrgyzstan would continue along this path and
expected to surmount its economic problems and to receive greater amounts of private
financial assistance.
ROBERTS ZILE, Minister of Special Assignments for Cooperation with
International Financial Institutions of Latvia, said official assistance had come to the
country in the form of grants, loans, and other aid. More than 400 million Euros had come
in grants and amounted to about 5 per cent of current annual GDP; loans from the World
Bank and other sources came to about 7 per cent. Lessons learned were that with official
assistance, the Government could create legislation that would strengthen market
structures and financial institutions; that all aid programmes were different and those
providing aid should be used for the things they did best; that procedures were often
complex and difficult and took a long time to complete before the aid materialized; and
that civil servants should not be employed as "bankers", as they were not adept
at it and waste could result.
The country still had weak planning institutions and weak horizontal
structures, Mr. Zile said, and these had to be strengthened to take full advantage of
official assistance. Latvia agreed with Poland that it would be useful to have
conditionalities from the World Bank. Meanwhile private investments had been growing and
some Government programmes had shifted from official to private sources of funding.
Discussion
A number of comments came from the floor. Speakers said, among other
things, that skilled resources should be provided by the EU in working with EU accession
countries in development financing; that EU aid to those countries came from three funds
and these programmes sometimes weren't sufficiently coordinated; that in some transition
countries it wasn't possible to coordinate official aid with private capital flows; that
official aid often was seemingly insufficient to what was needed, but in fact was
effective anyway, because it amounted to a seal of official approval that could attract
much greater sums from private investors; that official aid provided helpful ballast at a
time when private capital flows were volatile; that transition countries could be
"punished" by private capital markets even if they didn't deserve it; that
remarks often heard that a "Marshall Plan" was needed for Eastern Europe should
be taken seriously, and that such a plan should be considered in all its aspects; and that
official aid often was still on a bilateral basis, while a regional approach, such as that
used by the Marshall Plan, might be better -- at a minimum, it was important to take
regional development issues and strategies into account in devising programmes of official
assistance.
For further information please contact:
Economic Analysis Division
United Nations Economic Commission for Europe (UN/ECE)
Palais des Nations
CH - 1211 Geneva 10, Switzerland
Tel: (+41 22) 917 27 18
Fax: (+41 22) 917 03 09
E-mail: [email protected]
Website: http://www.unece.org/ead/ead_h.htm