World Bank’s Shigeo Katsu says Ukraine should prefer open economy to closed doors

My meeting with Shigeo Katsu, the vice-president for the Europe and Central Asia Region of the World Bank, took place on Feb. 6 when the World Bank Mission opened a new office in Kyiv. Katsu pursued his graduate studies at the University of Tokyo and obtained a diploma in International Economics and International Relations from the Diplomatic Academy of Vienna. He speaks fluent Japanese, English, French, and German and has a working knowledge of Chinese and Russian. He has worked at the World Bank for 27 years and is a noted expert on international economic relations.

The first topic of my conversation with Shigeo Katsu was photography, because on his desk was a calendar of prize-winning photographs from The Day’s 8th international competition, published by the World Bank in collaboration with our newspaper. “We do these kinds of things in Washington, in our Europe region, and in Central Asia,” he said and offered to exchange photos. Needless to say, The Day gratefully agreed.

Does the grand opening of the new office of the World Bank’s Mission signify a new stage in its relations with Ukraine?

Sh.K.: Thanks for putting your question so nicely. It is a very timely question because the opening of the new office coincides with my colleagues launching consultations here in Kyiv with your government and civil society in regard to a new strategy for Ukraine’s partnership with the World Bank Group for the next three to four years. Of course, this new partnership strategy will be planned in an environment that will be considerably different from the previous one.

As I understand, you had an important international conference in Kyiv today. What decisions were passed?

Sh.K.: It was an internal meeting of the World Bank’s Europe and Central Asia regional team. We discussed matters relating to business planning. It was interesting and informative because Ukraine is a medium-level profit country that is actively evolving and quickly moving forward. We discussed ways to improve cooperation between the World Bank Group and Ukraine. Our conclusions are largely rooted in the assumption that the new partnership strategy will be carried out in a new environment here.

Before discussing the new strategy of relations between the World Bank and Ukraine, I would like to hear your views on the previous stage. Was everything in order or was something preventing projects from being implemented?

Sh.K.: Our partnership strategy with Ukraine, which is still in effect, was mostly aimed at supporting four key spheres: economic growth and competitiveness; matters relating to state administration and its transparency; social protection and social security of the population; and stable progress in the sphere of environmental protection. Speaking of the results, greater progress has been made in the first two spheres; in the other two, work is still underway.

As for the instruments of cooperation, my impression is that everyone in Kyiv knows that there is an instrument known as the development strategy loan. It has been introduced and carried out rather effectively. In terms of investment loans, better work has been done in the sphere of infrastructure. In the sphere of human resources — matters relating to education and health care — the implementation process has turned out a bit slower. We have very successful experience in the sphere of state administration, particularly in modernizing the State Treasury of Ukraine.

There were no obstacles and everything was proceeding normally?

Sh.K.: As you know, a number of important political events have taken place in Ukraine. I mean the elections and instability, in the sense that we had to wait for the government to be formed, and so on. But work continued on the practical level, also, as I mentioned earlier, in the course of implementing a number of joint investment projects, for example, in the sphere of health care, education, and agricultural development. Of course, this process proved to be slower.

How does the new partnership strategy differ from the previous project whose term is ending? What other new opportunities for collaboration with the World Bank will open up for Ukraine?

Sh.K.: As I said before, we are at quite an early stage of preparing a new partnership strategy with Ukraine. Our consultations are just starting, so it may be too early to discuss this aspect, although I do, of course, have my own views. I think that it will be more important for your readers to know about our joint perspective on what has changed in Ukraine. The World Bank Group is well aware of the fact that Ukraine has shown quick economic growth despite political instability. Your economy has been developing very well, and we can see that the private sector has been restructured. We believe that the Ukrainian economy is quite strong. We assume that its growth in the next four or five years will be significant, even if not at such a quick pace as before, because for some time it will largely depend on the long-term trend in the international situation. How long will the world market maintain such low interest rates? Will there be as much spare cash as now? In principle, Ukraine has good prospects.

If you want to know whether Ukraine will be able to maintain this growth rate without continuing reforms, we think this will be very difficult to accomplish. In this sense Ukraine is no exception to the rule. Many countries in a similar situation are facing these kinds of problems. In order to maintain this growth rate, increase its competitiveness in the world, draw closer to the more advanced countries, and increase its per capita income, Ukraine must, in our opinion, create a favorable business climate, carry out reforms in the public sector, and ensure that the population can enjoy the fruits of economic growth. All this is impossible without further reform. As for competitiveness, it certainly requires progress in innovative policies, particularly in the investment sphere, so that the problem of developing new technologies is resolved. A favorable environment should be created by upgrading corporate management. Of course, these aspects are very important.

In order to enhance the effectiveness of the public sector, Ukraine must on the one hand set about creating the so-called fiscal space, without which it is impossible to double government investments in the sector of infrastructure. This sector suffered the worst from the recessive transition period of the 1990s, when there were no investments made in infrastructure. Ukraine’s location between the European Union and Russia makes it a bridge of sorts, a sphere of transportation logistics, a transportation corridor for an open economy from the standpoint of both infrastructure, software, and assistance to trade.

Enhancing competitiveness, of course, requires larger investments in the private sector, although government investments must continue. Actually this is why that fiscal space has to be built.

There are two other spheres that we talked about today. They are becoming increasing priorities. The first one is a tangible improvement of municipal services in the regions, and, of course, the quality of local administration, which is of great importance. Another serious sphere that I am constantly hearing about is energy efficiency, in other words, energy saving that will also be a very important aspect for the next couple of years, especially in view of rising gas prices. We will discuss all this with the Ukrainian leadership. Mr. Birmingham will coordinate the process of creating a new partnership strategy with Ukraine.

So the World Bank will be channeling investments into precisely these spheres?

Sh.K.: We will consult with the government in regard to all these issues because we want to know their opinion and to determine where, in your government’s opinion, we should be active, in which particular sphere. To do so we have a number of existing instruments: on the one hand, loans for concrete projects, but we can also do analytical reports, help with institutional progress, and provide technological assistance. Here we are not necessarily talking big loans. I would also like to point out the role being played by our colleagues, our partners from the International Finance Corporation; unlike us, they handle the private sector.

Enhancing Ukraine’s competitiveness on the world market takes high-tech projects and scientifically intensive products. During your previous meetings with Ukrainian officials, did you get the sense that they want to move in this direction? Perhaps Mr. Birmingham will have more to say on this subject?

Sh.K.: Paul can certainly give better answers to questions relating to discussions with your government. As for the crux of your question, I can say that many countries are seeking investments in the high-tech sphere. But in our opinion, this is work in the private sector, whereas the role of government consists of improving the business environment so as to attract investments to this sphere. In other words, the point in question is a high-tech policy and creation of science and technology parks. This is much better than direct government investments in these sectors of the economy. It is necessary to create a business environment that can be attractive and helpful. Here we are interested in measures aimed at developing an investment strategy to enhance human potential, education, and the real connection between these factors and economic activities. This may have a number of aspects, including the use of both start-up and venture capital. A great deal of such experience has been accumulated elsewhere in the world, particularly in the United States. Now I think Paul can add to my answer.

Birmingham: I think that Mr. Katsu has given you a rather exhaustive answer. Of course, we will continue discussions with the Ukrainian government about how this set of problems can evolve, but I think that he has sufficiently covered this particular aspect.

Can you absolutely trust our government to secure effective cooperation, effective utilization, and of course, effective repayment of the funds provided by the World Bank? What does your past experience say?

Sh.K. (in Russian): Of course, we have confidence. Your government has demonstrated its abilities. We have received very good results from the introduction of projects in the sphere of infrastructure, although at the beginning we probably had to make some corrections. But it was a mutually educational process. As for the other sectors I have mentioned and in which we faced some challenges, human resources sectors, we must first ask ourselves: ‘Was our communication with the government really effective? Did we succeed in making our partners understand our objectives and tasks? Did the design of our projects reflect the restrictions being imposed on the government? Did this design correctly reflect what our partners in government wanted to do?’ We must carefully study these questions and work on them, so that the government can feel that these projects are primarily Ukrainian ones. Objectively speaking, there were certain procedural limitations. It is also possible that some aspects of the processing of the World Bank’s project will prove to be of long duration, so perhaps there is room for simplifying these procedures. Of course, we are also expecting some steps to be made by your government, particularly in terms of government purchases, taxation, and so on.

Don’t you think it’s time Ukraine curbed its appetite for loans?

Sh.K.: Speaking of the public debt, it is a mere 16 percent of your GDP, which is really a very low figure. It’s not a lot at all. If viewed in the context of the future, we have already said, for example, that there must be huge investments in the infrastructure, in other words, some 40 billion dollars for the next ten years, or four billion a year. The same applies to other spheres. All told, this is twice the sums being invested. Let me say again that Ukraine must create a fiscal space and enhance the effectiveness of budget spending. Of course, a more reasonable approach to loans also makes sense. Here lowering tax rates can be of great help while expanding the assessment basis and improving taxation discipline. This will bring more revenues, ease the tax burden on business, and create a better business environment.

Do you have any complaints about the Ukrainian banking sector through which World Bank funds are provided to Ukraine?

Sh.K.: I don’t think there are any problems in terms of security and reliability of World Bank funds passing through the Ukrainian banking system. However, with your permission I will make a general comment on the risks as we see them in the banking system.

We are all witness to a very quick increase in credits both for satisfying the investment needs of businesses and household consumer needs. We have seen a similar situation in other countries where a precipitous rise in crediting creates a certain increased level of risks for the banking system in general. The thing is that this happens in a situation when the financial sector environment is not firmly established. In other words, on the one hand we see serious progress at the National Bank of Ukraine (in terms of banking supervision), but progress notwithstanding, this work is still underway, it still has to be completed, its potential has to be upgraded. As for the judicial system and the possibility of quickly resolving commercial matters, defending creditors in court, the situation remains mainly unsatisfactory. Credits are also quickly increasing against the backdrop of bank and corporate management that is far from perfect, so this can and must be improved. In other words, all this quick development is taking place while the banking system is rather fragile.

You have a meetings scheduled with Mr. Azarov. Will you ask him when Ukraine is going to lift the grain export restrictions?

Sh.K.: Do you want me to ask this question? If so, I can broach the subject, but I can’t answer it at the moment.

Don’t you think that Ukraine depends too much on foreign market demand? If so, what should it do to reduce this dependence and increase domestic market demand?

Sh.K.: The thing is that Ukraine is becoming increasingly open in terms of the economy; it is successfully going through the process of integrating into the world economy. Ukraine has been showing very good dynamics of progress since 2000, so without this dynamic growth, including on foreign markets, Ukraine would not be evolving so quickly. Why stop using these capacities? However, the key, the main challenge for Ukraine’s decision makers is the need to somehow share the fruits of this quick economic growth with the broadest strata of the population. The dividends from this growth for the whole population must be higher profits and lower prices. This is something an open economy will provide in the best way than if the country tried to protect itself behind closed doors. Of course, it is only natural for Ukraine to protect its positions and national interests, but the system of international trade also offers an opportunity for protecting one’s national interests.

You have just given more answers to the previous question than to this one. (Laughter)