cooperation of the international funding organizations for developing countries - the case of turkey

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Cooperation of International Funding Organizations for Developing Countries: The Case of Turkey

Project, 2009 H. John Heinz III College, Carnegie Mellon University

FUNDING FOR DEVELOPMENT

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Project Coordinator Ergul Haliscelik Senior Treasury Controller MSPPM, CIA, MSE Republic of Turkey Prime Ministry Undersecretariat of Treasury Project Advisors Silvia Borzutzky Teaching Professor of Political Science and International Relations H. John Heinz III College, Carnegie Mellon University Lee Branstetter Associate Professor of Economics and Public Policy H. John Heinz III College, Carnegie Mellon University Gordon Lewis Director, Master of Public Policy Program Associate Professor of Sociology H. John Heinz III College, Carnegie Mellon University Project Team Akif Aksam Alison Case Bilal El-Ghali Yildiz Erkmen Lini Fu

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Table of Contents List of Figures .............................................................................................................................................. iv

List of Tables ................................................................................................................................................ v

List of Abbreviations ................................................................................................................................... vi

Executive Summary .................................................................................................................................... 1

Introduction ................................................................................................................................................. 4

Chapter 1: International Funding Organizations and their Relations with Turkey ............................ 6

International Monetary Fund .................................................................................................................... 6

History .................................................................................................................................................. 6

Activities ............................................................................................................................................... 7

Types of Funds ...................................................................................................................................... 8

Turkey Relations ................................................................................................................................... 9

18th Stand-By Arrangement .................................................................................................................. 9

19th Stand-By Arrangement ................................................................................................................ 10

World Bank ............................................................................................................................................. 11

History ................................................................................................................................................ 11

Mission ................................................................................................................................................ 12

World Bank Group Institutions and FY08 Activities ......................................................................... 12

World Bank and the Millennium Development Goals ........................................................................ 14

Evaluation of World Bank Operations in FY 2008 ............................................................................. 15

Types of Funds .................................................................................................................................... 17

World Bank-Turkey Relations ............................................................................................................ 18

European Union ...................................................................................................................................... 23

History ................................................................................................................................................ 23

Mission of the European Union .......................................................................................................... 23

EU Institutions .................................................................................................................................... 24

Member Countries and Enlargement .................................................................................................. 25

Candidate Countries and Potential Candidate Countries .................................................................... 25

Copenhagen and Maastricht Criteria ................................................................................................... 26

Types of Funds .................................................................................................................................... 28

EU – Turkey Relations ........................................................................................................................ 38

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Chapter 2: Recent Collaboration of International Funding Organizations ........................................ 42

Introduction ............................................................................................................................................. 42

IMF – World Bank – EU Collaboration .................................................................................................. 43

Introduction ......................................................................................................................................... 43

Millennium Development Goals ......................................................................................................... 43

Debt Relief .......................................................................................................................................... 44

Responses to the Economic Crisis ...................................................................................................... 46

EU-IMF Collaboration ............................................................................................................................ 50

EU-World Bank Collaboration ............................................................................................................... 51

European Union Accession and the World Bank ................................................................................ 53

European Union and World Bank partnership in Africa ..................................................................... 54

European Union and World Bank partnership in Middle East- Southern Mediterranean and North Africa Region ...................................................................................................................................... 55

Trust Funds ......................................................................................................................................... 55

IMF - World Bank Collaboration ............................................................................................................ 57

Report of the External Review Committee on Bank-Fund Collaboration .......................................... 57

Enhancing Collaboration: Joint Management Action Plan ................................................................. 58

International Aid Effectiveness Movements ........................................................................................... 58

International Conference on Financing for Development, Monterrey Mexico, March 2002 ............. 58

Rome High Level Forum, February 2003 ........................................................................................... 59

Paris High Level Forum, March 2005 ................................................................................................ 60

Accra High Level Forum, September 2008 ........................................................................................ 61

Chapter 3: Background Information on the Turkish Economy ........................................................... 62

Key Economic Indicators ........................................................................................................................ 62

Development Plans and Turkey’s Priorities ............................................................................................ 70

Government Agencies in Turkey Related with the International Funding Organizations ...................... 72

World Bank ......................................................................................................................................... 72

European Union .................................................................................................................................. 74

International Monetary Fund .............................................................................................................. 78

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Chapter 4: Conclusions and Recommendations .................................................................................... 79

Opportunities for Collaboration .......................................................................................................... 79

Globalization ....................................................................................................................................... 79

Current Financial Crisis ...................................................................................................................... 79

Complementary Missions ................................................................................................................... 79

Debt Relief – Africa ............................................................................................................................ 80

Millennium Development Goals ......................................................................................................... 80

Turkey’s Ninth Development Plan ..................................................................................................... 80

IMF Stand-By Arrangements .............................................................................................................. 80

Coordination among Turkish Government Organizations .................................................................. 81

Recommendations ................................................................................................................................. 81

Recommendations for International Funding Organizations .............................................................. 81

Recommendations for Turkey ............................................................................................................. 82

Recommendations for Further Research ..................................................................................................... 86

Appendix 1: Regional Disparities in Poverty Levels ................................................................................. 87

Appendix 2: International Funding Organizations’ Net Financial Flows ................................................... 88

Appendix 3: Millennium Development Goals ............................................................................................ 91

Appendix 4: Joint Activity Plan .................................................................................................................. 92

Appendix 5: EU Funding System 2007 ...................................................................................................... 95

Appendix 6: Paris Declaration Indicators ................................................................................................... 96

Appendix 7: Important Economic Indicators of Turkey ............................................................................. 98

Appendix 8: World Bank Major Development Partners in Turkey (CPS 2008-2011) ............................. 102

Bibliography ............................................................................................................................................. 103

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List of Figures Figure 1: IMF Financial Assistance .............................................................................................................. 8 Figure 2: Recent IMF Stand-By Arrangements in Turkey ............................................................................ 9 Figure 3: IDA Commitments by Region ..................................................................................................... 13 Figure 4: Regional Distribution of World Bank Funds ............................................................................... 15 Figure 5: Thematic Distribution of World Bank Funds .............................................................................. 16 Figure 6: Sectoral Distribution of World Bank Funds ................................................................................ 16 Figure 7: World Bank’s Funding by Sector in Turkey since 1991 ............................................................. 19 Figure 8: 2007 ODA Amounts .................................................................................................................... 52 Figure 9: 2008 World’s Biggest Economies ............................................................................................... 63 Figure 10: GDP Growth Rate ..................................................................................................................... 64 Figure 11: Inflation Rate ............................................................................................................................. 65 Figure 12: Demographic Profile ................................................................................................................. 66 Figure 13: Sectoral Distribution of Employment ........................................................................................ 66 Figure 14: Unemployment Rate .................................................................................................................. 67 Figure 15: Foreign Trade ............................................................................................................................ 67 Figure 16: Current Account Deficit/GDP Ratio.......................................................................................... 68 Figure 17: EU Defined Government Budget Deficit/GDP ......................................................................... 69 Figure 18: Public Sector Debt Stock ........................................................................................................... 69 Figure 19: IPA structure and authorities in Turkey .................................................................................... 75 Figure 20: Projections for Regional Poverty Disparities ............................................................................ 87 Figure 21: IMF Net Financial Flows for the year 2006 .............................................................................. 88 Figure 22: World Bank Net Financial Flows for the year 2006 .................................................................. 89 Figure 23: European Commission Net Financial Flows for the year 2006 ................................................. 90 Figure 24: EU Funding System 2007 – Based on EU Budgetary Headings ............................................... 95 Figure 25: 2008 Europe’s Biggest Economies ............................................................................................ 98 Figure 26: GDP Growth Rate ..................................................................................................................... 98 Figure 27: GDP Growth Rate ...................................................................................................................... 99 Figure 28: Per capita GDP and Targets ...................................................................................................... 99 Figure 29: Periodic Inflation ..................................................................................................................... 100 Figure 30: Foreign Direct Investment Inflow ........................................................................................... 100 Figure 31: Public Sector Primary Surplus ................................................................................................. 101

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List of Tables Table 1: IBRD FY08 Performance* ........................................................................................................... 13 Table 2: IDA FY08 Performance ................................................................................................................ 13 Table 3: IFC FY08 Performance ................................................................................................................. 14 Table 4: MIGA FY08 Performances ........................................................................................................... 14 Table 5: Summary of Cumulative World Bank Funds in Turkey as of Year End 2008 ............................. 19 Table 6: EU Enlargement Process .............................................................................................................. 25 Table 7: Copenhagen Criteria ..................................................................................................................... 26 Table 8: Maastricht Criteria ........................................................................................................................ 27 Table 9: Financial Framework 2007-2013 Revised For European Economic Recovery Plan .................... 28 Table 10: IPA for Eligible Countries .......................................................................................................... 33 Table 11: Regional EIB Funds for past 5 years .......................................................................................... 37 Table 12: Regional EBRD Commitments in 2007 ...................................................................................... 38 Table 13: EU Financial Support before IPA for Turkey ............................................................................. 39 Table 14: Sectoral Distribution of EU Support between 2002 and 2006 .................................................... 40 Table 15: IPA for Turkey between 2007 and 2012 ..................................................................................... 41 Table 16: Conditionalities of Economic Package for Hungary .................................................................. 48 Table 17: Major Trust-Funded Programs .................................................................................................... 56 Table 18: Financing of Current Account Deficit ........................................................................................ 68 Table 19: Development Axes and Target of the Ninth Development Plan ................................................. 71 Table 20: Key Institutions in IPA ............................................................................................................... 74 Table 21: EU Community Programs ........................................................................................................... 77 Table 22: Millennium Development Goals ................................................................................................. 91 Table 23: Paris Declaration Indicators ........................................................................................................ 96 *Abbreviations are listed on page vi

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List of Abbreviations AA Audit Authority ADF Africa Development Fund BETF Bank Executed Trust Funds CAE Country Assistance Evaluation CAO Competent Accrediting Officer CAP Common Agriculture Policy CARDS Community Assistance for Reconstruction, Development and Stabilization CBRT Central Bank of Republic of Turkey CAS Country Assistance Strategy CFP Common Fishery Policy CPS Country Partnership Strategy DCI Development Cooperation Instrument DPL Development Policy Loan DRF Debt Reduction Facility EAEC European Atomic Energy Community EAFRD European Agricultural Rural Development Fund EAGF European Agricultural Guarantee Fund EBRD European Bank for Reconstruction and Development EC European Commission ECSC European Coal and Steel Community EDF European Development Fund EEC European Economic Community EFF European Fund for Fisheries EFRD European Fund for Regional Development EIB European Investment Bank EIDHR European Instrument for Democracy and Human Rights EIF European Investment Fund EMU Economic and Monetary Union ENPI European Neighborhood and partnership Instrument EP European Parliament ESF The European Social Fund EU European Union FCB Financial Cooperation Board FDI Foreign Direct Investment FIF Financial Intermediary Funds FY Fiscal Year GEF Global Environment Facility GFATM Global Fund to Fight AIDS, Tuberculosis and Malaria

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GNI Gross National Income HIPC Heavily Indebted Poor Countries IADB United Nations Children’s Fund IBRD International Bank for Reconstruction and Development ICI Instrument for Cooperation with Industrialized Countries ICSID International Centre for Settlement of Investment Disputes ICT Information and Communication Technologies IDA International Development Association IEG Independent Evaluation Group IFC International Finance Corporation IFFI International Finance Facility for Immunization IMF International Monetary Fund IPA Instrument for Pre-Accession IS Instrument for Stability ISPA Instrument for Structural Policies for Pre-Accession JMAP Joint Management Action Plan MDG Millennium Development Goals MDRI Multilateral Debt Relief Initiative MEDA The Euro-Mediterranean Partnership MIGA Multilateral Investment Guarantee Agency MOU Memorandum of Understanding NAO National Authorising Officer NF National Fund NIPAC National IPA Coordinator OS Operating Structure PHARE Poland-Hungary Assistance for the Reconstruction of the Economy PRS Poverty Reduction Strategy RD Research and Development RETF Recipient-Executed Trust Funds SAPARD Special Action Programme for Pre-Accession Aid for Agricultural and Rural Development SBA Stand-By Arrangement SDR Special Drawing Rights TURKSTAT Turkish Statistical Institute SME Small to Medium Enterprises UN United Nation UNDP United Nations Development Programme UNFPA United Nations Population Fund UNICEF United Nations Children’s Fund VAT Value Added Taxes WBG World Bank Group

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Executive Summary

Many international funding organizations are operating in Turkey to provide assistance in social and economic issues, often generating positive effects. Among these organizations, the IMF, World Bank and EU supported projects, programs, and funds are vital for Turkey. They have supported stabilization policies, economic and social reforms, sustainable development projects and programs through their grants, credits and loans.

While the operations of the IMF, World Bank, and EU have positive effects in countries like Turkey, their assistance could be even more successful. If these three organizations could focus on the needs of specific countries and collaborate effectively, they have the potential to achieve even more. Further, it is imperative that borrower countries help these three organizations to be economic, efficient and effective in their activities.

This project focuses on the following:

• A thorough understanding of the IMF, World Bank and EU • The activities of these three organizations in the world, including their collaboration • Strengths and weaknesses of these three organizations on global issues, on developing

countries, and specifically on development of Turkey • The social and economic situation of Turkey and Turkey’s relations with international

funding organizations • Potential actions IMF, World Bank and EU can take to increase their working efficiency

in borrower countries • Potential actions Turkey can do to take advantage of these three organizations’ assistance

Research for this project has mainly been conducted through literature review, using quantitative and qualitative data obtained from the documents of each institution, such as Stand-By Arrangements for the IMF, Country Partnership Strategies for the World Bank, agreements between Turkey and the EU and other related documents. Due to time constraints, the research conducted for this project is limited; suggestions for future research are discussed in the Recommendations for Further Research section at the conclusion of this report.

Turkey has a rich history of collaboration with multilateral International Funding Organizations. The International Monetary Fund (IMF) works towards fostering international monetary cooperation to advance a healthy global economy. The IMF implements its activities for the benefit of its 185 member countries. The relationship between Turkey and the IMF is approaching its 50th year with almost 20 Stand-By-Agreements.

The World Bank, founded in 1944, serves 185 member countries, both developed and developing. The Bank assists countries in dealing with development issues. Its five institutions collaborate to reduce poverty and encourage economic growth. The Bank works closely with Turkey to overcome a series of economic crises, set the country on a path of sustained economic development, and contribute to improvements in the living conditions of its people.

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The European Union (EU) was actualized in 1993 by the Maastricht Treaty. The EU, consisting of 27 member countries, mainly works to improve the living standards of people in Europe through providing peace, prosperity and stability for its peoples, ensuring safety and security of its members, and promoting balanced economic and social development and economic growth. The Ankara Agreement in 1963 offered Turkey full membership in the European Economic Community (EEC) through the establishment in three phases of a customs union. In 1999, Turkey gained “candidate status” at the Helsinki Summit in 1999. After beginning accession negotiations with EU in 2005, Turkey gained eligibility to receive a great proportion of EU funds. International Funding Organizations have increased their collaboration in recent years. Globalization in recent decades has intensified the need for increased international cooperation. Interrelationships of economies have created the need for international funding organizations to support the stability and sustained growth of all countries around the world. In addition it is obvious that the subjects of development and funding development are diverse in nature and involve various organizations. Therefore, thematic and geographic coordination should be ensured in funding development. Within this framework there are challenges and efforts to align organizations, working together to achieve desired results and facilitate the efficiency of their funds. The common development goals, specifically the Millennium Development Goals and recent financial crises are both challenges and opportunities that push the IMF, World Bank, and EU together with other development partners and international financial institutions to work more collaboratively. IMF, World Bank and EU activities on achieving MDGs and on economic crises, specifically in Hungary, Latvia and Romania, are recent examples of collaboration. World Bank assistance in EU candidate countries and EU contributions for World Bank trust funds are other aspects of collaboration. Although there are different kinds of collaborative activities, more systematic action is needed in terms of collaboration.

International aid movements have been more effective recently. IMF, World Bank and EU collaboration can be characterized by thematic and geographic areas. However, major donor countries and aid agencies use different approaches and techniques in financing for development around the world, yielding huge costs and making aid efforts less effective. This inefficiency has been a great source of concern, from which an aid effectiveness movement has emerged.

The aid effectiveness movement picked up steam at the International Conference on Financing for Development, held in Monterrey Mexico in 2002 where the international community agreed to increase its funding for development but acknowledged that more money alone was not enough. Donors and developing countries alike wanted to know that aid would be used as effectively as possible. From that perspective, the international funding community gathered together again at the Rome High Level Forum in 2003, Paris High Level Forum in March 2005 and Accra High Level Forum in 2008. Twelve indicators and targets that were determined in the Paris Declaration to provide a measurable and evidence-based way to track progress will be monitored in future activities.

Turkey has considerably one of the largest economies in the World and Europe. The Turkish economy has grown by 5.9 percent annually during the period of 2002-2008. According to the IMF World Economic Outlook Database, the (estimated) Gross Domestic Product of Turkey for 2008 is about US$798 billion. The amounts of exports and imports reached US$132 and $202 billion respectively in 2008. The high unemployment rate remains one of the major problems for

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Turkey. From 2002 to 2008 the unemployment rate was over 9 percent. Due to its export-oriented economy and a high rate of unemployment, Turkey has been considerably affected by the current economic crisis. The growth rate dropped to 1.1 percent and unemployment rate increased to 13.6 percent.

Turkey developed a number of Development Plans in order to address the country’s priorities. The Ninth Development Plan is the fundamental policy document that sets the transformations in economic, social, and cultural areas of Turkey in an integrated approach. The necessary documents in the EU accession process, like the Pre-Accession Economic Program and the Strategic Coherence Framework, are based on the Plan. The vision of the Plan is “Turkey, a country of information society, growing in stability, sharing more equitably, globally competitive and fully completed her coherence with the European Union.”

This report concludes with recommendations for International Funding Organizations and for Turkey. All the policies and agreements with international funding organizations should be recipient country oriented. They should perform complementarily with their expertise and collaboratively solve the basic, urgent issues in recipient countries. As for Turkey, there should be more active coordination between different international organizations to meet Turkey’s needs. At the same time, Turkey should firmly adhere to its policies as laid out in its development plan and restructure collaboration among the institutions related to international projects and programs.

Collaboration and possible collaboration of international funding organizations should be further assessed. Future research should devise an econometric model to analyze the distribution of international funds by sector in Turkey and study the changes in pertinent indicators in order to determine the effectiveness and efficiency of international funding in Turkey. The effect of projects funded by international funding organizations on country specific indicators could be measured using cost-benefit analyses of the projects. Additionally, the international funding organizations’ responses to economic crises and the Millennium Development Goals could also serve as potential areas for the research on collaboration.

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Introduction Increased globalization in the latter half of the Twentieth Century has created a global economy starkly different from that of the post-World War II environment from which the international funding organizations emerged. Countries that had seen little economic prosperity or growth prior to the signing of Bretton Woods are now growing faster than the United States during its Industrial Revolution. India and China have been experiencing decades of sustained, high growth, shifting power balances in the global economic landscape. These successes show the importance of advances in technology and education, but also highlight the fact that the world is interconnected. In order to participate in the successes of the modern world, countries need access to resources, technology and quality education, which China and India can undertake, but too many of the poor countries cannot.1 According to the World Bank, living standards for the poor have improved over the past few decades. The proportion of the developing world's population living on less than $1.25 per day has fallen from 52 percent in 1981 to 26 percent in 2005. However, reductions in poverty have been uneven, leading to stark regional disparities (See Appendix 1). Since 1981, East Asia has seen the greatest reduction in its poverty rate and the extreme poverty rate in most other regions has declined. In some regions, like Eastern Europe, the proportion of people living under $2 per day had increased in the 1990s but later decreased. While the poverty rates in much of the world tend to be decreasing, massive population growth in much of the world means that absolute numbers of people living in poverty is, in many cases, nearly the same as it was twenty years ago.2 Despite the international community’s efforts, poverty remains a global problem. One of the key problems in international development and aid is the proliferation of international aid, development, and funding organizations. Worldwide, aid is extremely fragmented; there are too many organizations financing small projects and programs using different procedures and types of funds. The more organizations acting in a country, the less efficient development tends to be; the recipient countries are forced to expend too much time and resources on paperwork.3 According to OECD, in 2007, donors carried out over 15,000 missions in 54 recipient countries, overwhelming most poor countries. In Tanzania alone, the civil service had to complete 2,400 quarterly reports for projects. Also, in many countries, health workers are so busy meeting with representatives of the aid organizations that they can only meet with their patients in the evenings. Similarly problematic is that many countries simply cannot manage all of the necessary bureaucratic processes; in 2007, only 48 percent of aid was accounted for, showing a slight increase from the previous year.4 “Global problems require global solutions,”5 stated Prime Minister Gordon Brown in a 2008 foreign policy speech in Boston. He called on the international financial organizations, specifically the World Bank and International Monetary Fund to reform in order to cope with

1 Stiglitz, Joseph. 2008: 174. 2 World Bank. “Poverty: Overview.” 2009 3 Mulvey, Stephen. 2007. 4 ACCRA. “A scramble in Africa.” 2008. 5 Watt, Nichlas. 2008: 6

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today’s more globalized world. The global economy has changed and so too must the policies and practices of the international funding organizations, which were founded in a bygone era. These reforms, however, should not be made in a vacuum, as many of the international funding organizations’ missions and activities complement and overlap one another. "For the first time in human history we have the opportunity to come together around a global covenant, to reframe the international architecture and build the truly global society," acknowledged Brown.6 This new international architecture should include institutionalized collaboration reforms that respond to globalization and its effects on development; these reforms should emphasize efficiency and effectiveness, as resources are scarce. When the international funding organizations communicate, coordinate, and harmonize their activities, they can more effectively address today’s global and country- and sector-specific problems, ensuring that resources are distributed rationally and efficiently. Likewise, when the recipient countries more clearly define development priorities and coordinate with the international financial organizations, they too can more effectively utilize development assistance.

6 Watt, Nicholas. 2008: 6

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Chapter 1: International Funding Organizations and their Relations with Turkey

International Monetary Fund

History Since its inception amidst the unstable post-World War II global economic environment of 1945, the International Monetary Fund has fostered international monetary cooperation to advance a healthy global economy. The IMF was born out of the Bretton Woods Agreement of 1944, in which delegates from the WWII allied nations established the procedures to regulate the international monetary system. It was originally designed to help member countries manage their currencies to prevent recurrence of the unsuccessful policies that played a part in the Great Depression. A part of this aim involved providing loans and technical and policy advice to support sound macroeconomic policies in order to stabilize the international financial environment. Within the framework of these aims, the IMF provided its first loan in 1947 to France; since then, the IMF has issued loans to countries in need around the world.7 The Articles of Agreement of the International Monetary Fund has set out the main responsibilities of the IMF: promoting international monetary cooperation; facilitating the expansion and balanced growth of international trade; promoting exchange stability; assisting in the establishment of a multilateral system of payments; making its resources available (with adequate safeguards) to members experiencing balance of payments difficulties.8

Twentieth Century international financial crises, revolving around such events as the oil shocks of the 1970s and the fall of the Soviet Union in 1989, have strengthened the IMF as a responder to global financial instability and extended the IMF’s initiatives to heavily indebted poor countries by means of debt-service relief. Additionally, the IMF has evolved into a lender of last-resort to distressed emerging-market nations; since the 1990s, it has influenced the former Soviet Republics to adopt structural adjustment policies, saved Mexico’s currency crisis, and bailed out most of Southeast Asia.9 These activities, combined with its special lending facilities directed toward low-income countries, have contributed to global progress toward the United Nations’ Millennium Development Goals (MDGs).

Continued globalization since the end of the 20th Century, along with the current financial crisis and food and oil price shocks, has advanced a strong movement for reforms in the IMF, with critics calling for a narrowing of the IMF’s scope to its original mission of managing economic crises.10 The IMF has taken this reform movement and lessons learned from its past into account as it adapts to the new challenges of the 21st Century and the IMF’s expanding membership. The IMF continues to provide economic analysis and consultation. Additionally, as the current international financial crisis deepens, the IMF has created a new $100 billion fund that will provide condition-free loans to members with sound policies and balanced budgets.11 The

7International Monetary Fund. About the IMF History. 2009 8 Article I, Articles of Agreement of International Monetary Fund 9 LeVine, Steve. 2008: 30 10 Stiglitz, Joseph E. 2003: 232‐233. 11 Sheridan, Barrett. 2008: 0.

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current crisis poses new challenges in surveillance and efficiency for the IMF and its members as they move forward.

Activities The IMF implements its activities for the benefit of its 185 member countries. Member countries govern and monitor the accountability of the IMF through the Board of Governors, which consists of one governor and one alternate governor for each country. Members have voting rights apportioned according to their rank in the global economy. The United States, with 16.8% of total voting rights, has the most voting power in the IMF, with Japan, Germany, France and the United Kingdom immediately following in voting power. Turkey holds 0.55% of the total voting rights.12

For the IMF, supporting its members entails providing economic surveillance, technical assistance, lending through policy advice to governments and central banks; economic and market research, statistics, forecasts and analyses; loans to countries in need of economic assistance; concessional loans to fight poverty; and technical assistance and training to foster better economic management of countries.13

Providing economic surveillance helps the IMF meet its goal of promoting global growth and economic stability. Economic surveillance includes country surveillance, regional surveillance and global surveillance. IMF’s regular monitoring of economies and associated provision of policy advice is intended to identify weaknesses that are causing or could lead to financial or economic instability. 14The IMF implements this by regularly conducting in depth appraisals of member countries’ economies and discussing the most effective policies for growth with member countries; member countries have the option to publish these assessments, promoting transparency in the IMF system. Additionally, the IMF occasionally organizes multilateral consultations, meetings of relevant members, to discuss economic issues of global importance in order to reduce global imbalances. The IMF also collaborates with the World Bank through its Financial Sector Assistance Program, bringing together experts from various national agencies to assess member countries’ financial sector strengths and vulnerabilities, risks, needs, and policy solutions.15

The IMF provides technical assistance and training to assist member countries in order to promote sustainable capacity building in the countries’ abilities to adopt and implement sound financial policies. The main areas of technical assistance and training include monetary and financial policies; fiscal policy and management; compilation, management, dissemination, and improvement of statistical data; and economic and financial legislation.16

The IMF can also provide financial assistance in order to facilitate recovery to members when they have difficulties financing their balance payments (See Figure 1). Funding is provided in Special Drawing Rights (SDR), an international reserve asset with a value set to a basket of international currencies, including the Euro, Pound Sterling, U.S. Dollar, and Japanese Yen. In

12 International Monetary Fund. IMF Members’ Quotas and Voting Power, and IMF Board of Governors. 2009. 13 International Monetary Fund. About the MIF: Overview: What We Do. 2009. 14 Economic surveillance, 2009. 15 International Monetary Fund. About the IMF: Overview: How We Do It. 2009. 16 Ibid

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order to draw funds from the IMF, member countries must work closely to with the IMF to develop and implement sound macroeconomic policies.

Figure 1: IMF Financial Assistance, in SDRs

Source: IMF

Types of Funds The IMF seeks to support countries in tackling their financial obligations, stabilizing their economies, and achieving sustained growth. Therefore, the IMF mainly provides loans to support sound macroeconomic policies, rather than specific development projects. IMF loans are typically designed for economic programs lasting up to three years and payments are disbursed in multiple installments during the programs; in 2008, the IMF disbursed a total of US$28.36 billion in financial assistance. Prior to the implementation of a new economic program, the borrowing government outlines the details of its new economic program in a “Letter of Intent” and both the IMF and borrowing country must reach agreement on program policies before the disbursement of loans. 17

The IMF has six main lending facilities, as well as additional facilities specifically for low-income countries. The Stand-By Arrangement, which deals mainly with short-term balance of payments problems; Short-Term Liquidity Facility, Supplemental Reserve Facility, which provides large loans quickly with very short maturities to countries experiencing a capital account crisis; Extended Fund Facility, which helps countries address balance of payments difficulties related partly to structural problems that may take longer to correct than macroeconomic imbalances; Emergency Assistance, which helps countries coping with balance of payments problems stemming from natural disasters or military conflicts; and Trade Integration Mechanisms are the lending facilities mainly for middle-income countries.18 In order to reduce poverty, the Poverty Reduction and Growth Facility and Exogenous Shocks Facility, as well as the debt relief initiatives Heavily Indebted Poor Countries and Multilateral Debt Relief Initiative are provided for low-income countries.

The largest and most popular lending facility for middle-income countries is the Stand-By Arrangement (SBA), which provides “financing in support of adjustment to a balance of 17 International Monetary Fund. About the IMF: Work: Lending. 2009. 18 International Monetary Fund. What is IMF? 2009.

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of the program were: floating exchange rate continuation; financial system reform and strengthening; expenditure and tax reform; fiscal adjustment, including disinflation under the planned inflation targeting framework; and structural reform. 23

19th Stand-By Arrangement In May 2005, the IMF approved a three-year SBA under the exceptional access procedures for Turkey’s macroeconomic and financial program, totaling SDR 6.66 billion (approximately US$10 billion). Discussions for the SBA began in September 2004 and concluded in April 2005. Turkey is also requesting that the repurchase expectations for a total of SDR 2.5 billion (approximately US$ 3.75 billion) falling due in 2006 be extended to an obligations basis. An initial amount of SDR 555.17 (about US$837.5 million) was distributed in May 2005 and the remaining balance was disbursed in eleven installments until the program expired in May 2008.24 In support of their request for funds under exceptional access procedures, the Turkish authorities developed a comprehensive three-year economic program. The goals of three-year program included creating conditions for sustained growth; facilitating union towards European Union (EU) economies; and facilitating an orderly exit from IMF fund support. In order to meet these goals, Turkey identified six aims:

(i) manage short-term macroeconomic challenges; (ii) bring inflation closer to EU levels; (iii) make the government debt position more sustainable; (iv) restore Turkey’s net foreign exchange reserve position and lower its vulnerability to balance of payment shocks; (v) maintain financial stability; and (vi) implement a structural reform agenda.25

The Three-Year Program would require substantial financing and, therefore, would require strong capital inflows from: foreign direct investment (FDI); portfolio flows; bank and corporate foreign financing; the World Bank. The requested funds from the IMF would help meet the needs of the Program and ensure manageable debt rollover rates.26 Indicators of Turkey’s capacity to repay the Fund have improved over time. Unblemished record of payments to the Fund, the authorities’ commitment to strong reform program, and the likely continued improvement in access to international capital markets as debt ratios decline assured Turkey’s position to discharge its obligations to the Fund in a timely manner. By the end of the arrangement, Fund exposure was expected to decline by more than half to 652 percent of quota, or 2 percent of GNP.27

23 Turkey: Request for Stand‐By Arrangement‐Staff Report; Staff Supplement and Staff Statement; and Press Release on the Executive Board Discussion. 2002:13 24 Request for Stand‐By Arrangement and Extension of Repurchase Expectation. 2005:1 25 Ibid: 17‐18 26 Ibid: 39‐41 27 Ibid: 44

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While the policies laid out in the Program were deemed strong by the IMF, the Program faced risks, including the uncertainties surrounding the balance of payment projections, the demanding set of fiscal reforms with implementation risks, and the use of the Treasury to repay purchases.28 The SBA would run for three years and would be subject to regular reviews. Program performance would be monitored by quarterly quantitative performance criteria. Also, the Program would include one continuous performance criterion and two structural performance criteria. The Central Bank of Turkey would be subject to a complete safeguards assessment relating to the SBA.29 Turkey’s strong economic success in 2004 and its continued accession negotiations with the EU signaled a “sea of change for Turkey’s prospects.” The IMF staff felt that there were strong signs of continued economic growth and inflation reduction for Turkey, but also expressed that Turkey’s financial situation was still fragile and there should be no relaxation of policies. They felt that the Three-Year Program developed by the Turkish authorities was well-suited for addressing these concerns. The IMF noted also that Turkey’s tax reform should aim for efficiency and EU convergence, the new Banking Law would be a major improvement and would require many operational changes at the supervisory agency, the restructuring of the banking system needed to be completed during the three-year period, and the privatization of state banks would be a lengthy process.30

World Bank

History The World Bank was founded in 1944 to help rebuild Europe after World War II. In 1947, it gave its first loan of $250 million to France for post-war reconstruction. The Bank began its operations with 38 members, which has since increased to reach 185 member countries, both developed and developing. Today, the Bank remains focused on reconstruction, but its emphasis has been channeled towards the reduction of poverty around the world. With this shift in focus, the Bank became an increasingly multidisciplinary organization that became bigger, broader, and more complex, and grew into a Group.

Working separately but collaboratively to achieve the Bank’s mission, the World Bank Group is constituted of five closely associated development institutions:

• International Bank for Reconstruction and Development (IBRD) • International Development Association (IDA) • International Finance Corporation (IFC) • Multilateral Investment Guarantee Agency (MIGA) • International Centre for Settlement of Investment Disputes (ICSID)

The World Bank Group went through several transitions in its history. During the 1980’s, it focused on macroeconomic and debt rescheduling issues, later shifting to social and 28 Ibid: 41‐44 29 Ibid: 44‐45 30 Ibid: 45‐50

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environmental issues. Today, the Bank is playing an important role in the global policy arena. It has effectively engaged with partners and clients in complex emergencies from post-conflict work in Bosnia to post-crisis assistance in East Asia to post-hurricane clean-up in Central America to post-earthquake support in Turkey.31

Mission The World Bank Group is an international multilateral organization that assists countries in dealing with development issues. It provides a vital source of financial and technical assistance particularly to developing countries around the world. The mission of the World Bank Group is to reduce poverty and encourage economic growth. The five different institutions collaborate to advance the Bank’s vision of an inclusive and sustainable globalization. The World Bank Group works to reduce poverty worldwide by promoting growth to create economic opportunities and helping poor people to take advantage of these opportunities.32

World Bank Group Institutions and FY08 Activities The World Bank Group’s five organizations work independently but closely together at the same time to address the priorities set forth by the Bank’s mission. Each of the World Bank Group organizations operates according to the procedures established by its articles of agreement or an equivalent founding document. These documents outline the conditions of membership and the general principles of organization, management, and operations.33 For example, the Bank's purposes have been rearranged according to the articles of agreement, such as the International Bank for Reconstruction and Development’s Article I (as amended effective February 16, 1989).34 It is critical to distinguish between two terms that have been used interchangeably: the World Bank Group and the World Bank. The World Bank Group is used to describe the five institutions affiliated with the Bank. As for the World Bank, it is used to describe two institutions: the IBRD and the IDA. The following section provides a brief description of each of the World Bank Group’s organizations and their respective activities and fiscal year 2008 (FY08) performances. IBRD The International Bank for Reconstruction and Development was established in 1944. Its original mission was to finance the reconstruction of nations devastated by World War II. However, today the IBRD works on reducing poverty by providing loans and development assistance to middle income and credit-worthy poorer countries. IBRD acquires most of its funds by selling bonds in international capital markets. IBRD has three business lines: Strategy and Coordination Services, Financial Services, and Knowledge Services. Among the activities IBRD undertakes, it overhauls financial and risk management products, broadens the provision of free-standing knowledge services and makes it easier for clients to deal with the Bank. Main indicators of IBRD activities for FY08 are summarized in Table 1.

31 The World Bank. World Bank History. 2009. 32 The World Bank. About Us. 2009. 33 The World Bank. Articles of Agreement. 2009. 34 The World Bank. IBRD Articles of Agreement: Article I. 2009.

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Table 1: IBRD FY08 Performance, Number of Projects and Some Indicators in millions of USD

Number of projects 99Operating income $ 2,271Loans outstanding $ 99,050Total assets $ 38,176Total equity $ 2,271

Source: World Bank Group Fiscal Year Highlights FY08 (2008)

IDA The International Development Association was established in 1960. Working with the poorest countries, IDA plays an important role in the Bank’s mission to reduce poverty. It provides interest-free loans and grants to the countries it helps with repayment periods of 35 to 40 years. IDA depends on contributions from its wealthier member countries (including some developing countries) for most of its financial resources. IDA loans address primary education, basic health services, clean water supply and sanitation, environmental safeguards, business-climate improvements, infrastructure and institutional reforms.35 IDA commitments in FY08 reached $11.2 billion (See Figure 3). Africa received the largest share of funding from IDA during 2008.

Table 2: IDA FY08 Performance, Number of Projects and Some Indicators in millions of USD


Figure 3: IDA Commitments by Region

IFC

35 The World Bank. World Bank Group: Working for a World Free of Poverty. 2007:12.

Number of projects 199Operating income $ 1,818Loans outstanding $ 113,542Total development resources/Equity $ 123,619

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The International Finance Corporation was established in 1956. It has 181 member countries. IFC promotes growth in the developing world by financing private-sector investments and providing technical support and advice to governments and businesses. In partnership with private investors, IFC provides loans and equity finance for business ventures in developing countries. Like a bank, IFC lends or invests its own funds and borrowed funds to its customers and expects to make a sufficient risk-adjusted return on its global portfolio of projects. However, IFC’s activities also address a greater goal of reducing poverty. 36

Table 3: IFC FY08 Performance, Some Indicators in millions of USD

Operating income $ 1,438Liquid assets net of associated derivatives $ 14,622Loans, equity investments, and debt securities, net

$ 23,319

Total capital $ 18,261 Source: World Bank Group Fiscal Year Highlights FY08 (2008)

MIGA The Multilateral Investment Guarantee Agency was established in 1988. It encourages foreign investment in developing countries by providing guarantees to foreign investors against loss caused by noncommercial risks. MIGA also provides technical support to help developing countries promote investment opportunities and uses its legal services to reduce possible barriers to investment.37

Table 4: MIGA FY08 Performances, Some Indicators in millions of USD


ICSID The International Centre for the Settlement of Investment Disputes was established in 1966. With its 144 members, it provides facilities for settling investment disputes between foreign investors and their host countries. ICSID also conducts research and publishing activities in the areas of international arbitration and foreign investment law.38

World Bank and the Millennium Development Goals In September 2000, the international community committed to a specific agenda for reducing poverty. This declaration, which was initiated by the United Nations and later listed eight Millennium Development Goals (See Appendix 3), was signed by 189 countries. The goals 36 Ibid: 12. 37 Ibid: 12. 38 Ibid: 12.

Operating income $ 55Operating capital $ 1,019Net exposure $ 3,578Net exposure in IDA-eligible countries $ 1,477

15

provide a road map and a framework for measuring progress for active members and organizations of the global community who work in issues of development39:

The international community set these goals as part of a comprehensive strategy to overcome and reduce poverty around the world. In the spirit of addressing these goals, the Bank set three priorities in fighting poverty: promoting opportunity, giving voice to the poor, and enhancing security of the poor. Overall, the Bank’s strategy for reducing poverty, promoting these priorities and working towards achieving the Millennium Development Goals is to partner with governments, donors, civil society, the private sector, and religious and other groups.

Evaluation of World Bank Operations in FY 2008 The World Bank carries out projects and provides a wide variety of analytical and advisory services to help meet the development needs of individual countries and the international community.40 During FY08, the World Bank committed $24.7 billion in loans, credits, and grants to its member countries. IDA commitments, to the world’s poorest countries, were $11.2 billion, and the IBRD commitments in FY08 totaled $13.5 billion. The projects financed by the Bank are generally designed to overcome poverty and enhance growth by improving education and health services, promoting private sector development, building infrastructure, and strengthening governance and institutions. They are practical plans to help developing countries move from poverty and become more competitive in a globalizing world.41

The World Bank’s lending is tailored to individual country needs. As shown in Figure 4, the IBRD and IDA lending was mostly concentrated in Africa for FY08. Other regions in the world received equal amounts of lending, except for the Middle East and North African region, which received only 6%.

Figure 4: Regional Distribution of World Bank Funds

Source: World Bank Annual Report, 2008: 55

39 The World Bank. Millennium Development Goals. 2009. 40 The World Bank. Projects and Operations. 2009. 41 World Bank Group. 2008 Annual Report. Multicultural Investment Guarantee Agency.

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IBRD and IDA’s lending not only differs at the regional level, but also at the thematic and sectoral levels. Figure 5 shows IBRD and IDA’s lending by theme, which accumulates to a total of $24.7 billion during FY08. The financial and private sector development received the lion’s share of IBRD and IDA lending for 2008 followed by the public sector governance. This was paralleled by 21% of the lending by sector to law, justice, and public administration, as shown in Figure 6. Transportation, energy, and mining were other sectors that received a large portion of the World Bank’s lending share for FY08.

Figure 5: Thematic Distribution of World Bank Funds


Figure 6: Sectoral Distribution of World Bank Funds


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Types of Funds The World Bank Group focuses on helping the poorest people in the poorest countries. It uses financial resources, staff, and extensive experience to help developing countries reduce poverty, increase economic growth, and improve their quality of life. In doing so, the Bank uses a variety of funding approaches, ranging from different kinds of loans to an array of services.

Investment- Project Loans

These loans are made for the support of economic and social development projects. In this type of loans, the World Bank Group funds activities aimed at creating the physical and social infrastructure necessary to reduce poverty and create sustainable development. They comprise about 75 to 80 percent of the Bank’s funding approaches. These loans are available for the IBRD and the IDA borrowers. They are disbursed against pre-identified conditions. The large majority of investment loans are either Specific Investment Loans or Sector Investment and Maintenance Loans. Other categories within this type of funding are the Adaptable Program Loans, Learning and Innovation Loans, which were recently introduced to provide more innovation and flexibility in how funds can be used, the Technical Assistance Loans, the Financial Intermediary Loans, and the Emergency Recovery Loans.42

Program-Development Policy-Adjustment Loans

These loans provide the quick disbursement of funds to support countries’ policy and institutional reforms. They allow countries to deal with actual or anticipated development financing requirements of domestic or external origins. They typically support the achievement of a set of development results through a medium-term program of policy and institutional actions consistent with a country's economic and sectoral policies. These types of loans account for much less than the Bank’s Investment- Project Loans. Funds are disbursed in one or more stages.

Hybrid Loans

Hybrid loans are a combination between a pure investment loan and an adjustment loan. They typically include a portion that pays interest; a payment- in-kind portion, on which interest does not have to be paid until the end of the loan term; and warrants that give the Bank an equity stake.

Other Services

Guarantees

The World Bank Group created the Guarantees Program to address the growing need to offer political risk mitigation products to commercial lenders contemplating financial investment in developing countries. It aims to accelerate growth in developing countries by mobilizing private financing for infrastructure development and other projects of national importance. The World Bank’s guarantee mobilizes new sources of financing at reduced financing costs and extended maturities. This program leads to greater job and income opportunities for people, and thus

42 The World Bank. Investment and Development Policy Operations. 2009.

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contributes to the achievement of the Millennium Development Goals’ overall challenge of reducing poverty.

Credits

These are a loan type of funding that is specific to the IDA. They are unique in that they are interest-free. They address a wide array of purposes that include education, health, public administration, infrastructure, agriculture, and environmental and natural resource management.

Grants

The Bank distributes grants for the facilitation of development projects through the encouragement of innovation, cooperation between organizations, and the participation of local stakeholders in projects. These grants are usually given to address issues such as debt relief, sanitation and water supply, vaccination and immunization programs, HIV/AIDS treatment and preventive programs, and civil society organizations.

Analysis and Technical Assistance and Consultancy Services

These services are provided to facilitate the implementation of the lasting economic and social improvements that are needed in many developing countries, as well as educating members with the knowledge necessary to resolve their development problems.

World Bank-Turkey Relations Turkey joined the World Bank in 1947 and the International Finance Corporation in 1956. The World Bank has helped Turkey overcome a series of economic crises, set the country on a path of sustained economic development, and contributed to improvements in the living conditions of its people. Turkey is the World Bank's largest borrower in the Europe and Central Asia Region and has been among the top three largest Bank borrowers each year over the past four years in terms of new commitments, which have totaled around$6 billion during this time period.43

Figure 7 illustrates the Bank’s funding for Turkey by sector. Similar to the Bank’s sectoral funding in general, the largest shares of this funding in Turkey went to the law and public administration and finance sectors.

43 The World Bank. Country Lending Summaries: Turkey. 2009

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Figure 7: World Bank’s Funding by Sector in Turkey since 1991, in millions of US dollars

Source: World Bank

Table 5 provides a snapshot of the Bank’s lending summary showing the cumulative number of loans, credits, and grants in Turkey as of December 31st, 2008.

Table 5: Summary of Cumulative World Bank Funds in Turkey as of Year End 2008

IBRD IDA Credits IDA Grants

Total

Original Principal

28,540,686,000 178,500,000 0 28,719,186,000

Cancellations 3,700,791,913 1,091,048 0 3,701,882,962 Disbursed 21,014,169,797 196,148,396 0 21,210,318,194 Undisbursed 3,733,156,740 0 0 3,733,156,740 Repaid 13,079,526,767 142,607,673 0 13,222,134,441 Due 7,980,605,940 53,540,722 0 8,034,146,663 Exchange Adjustment

-93,218,674 0 0 -93,218,674

Borrower Obligation

7,887,387,266 53,540,722 0 7,940,927,989

Source: The World Bank Projects and Operations: Country Lending Summary (2008).

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Country Assistance Strategies

The World Bank prepares a Country Assistance Strategy (CAS) for active borrowers from the International Development Association and the International Bank for Reconstruction and Development. Each CAS is catered to meet the needs of the country it is designed for.

Each CAS:

• starts with the country’s own vision for its development, as defined in a Poverty Reduction Strategy Paper or other country-owned process.

• sets out a selective program of Bank Group support linked to the country’s development strategy

• designs a framework of clear targets and indicators to monitor Bank Group and country performance in achieving stated outcomes.

• promotes collaboration and coordination among development partners in a country. • draws on analytic work by the Bank, the government, and/or other partners to

produce a comprehensive diagnosis of the development challenges facing the country, including the incidence, trends, and causes of poverty.

The CAS is developed in consultation with country authorities, civil society organizations, development partners, and other stakeholders in ways that lead to tangible results. The CAS takes into account the performance of the Bank’s portfolio in the country, the country’s creditworthiness, state of institutional development, implementation capacity, governance, and other sectoral and cross-cutting issues. From this assessment, the level and composition of Bank Group financial, advisory, and/or technical support to the country is determined.44

FY 2000-2003 CAS for Turkey

The Country Assistance Strategy for the period FY01-03, based on careful analysis of economic reforms, living standards, and social welfare, assisted Turkey in reducing its economic vulnerability. Unemployment and lack of education partially explain this economic vulnerability. Therefore, the CAS aimed to: implement reforms for growth and employment generation; improve public management and accountability; expand social protection and services; strengthen environmental management and disaster mitigation; and accelerate connectivity and technological capabilities. The strategy continued with a high case program, in parallel with the International Monetary Fund's Stand-By Arrangements, which assisted Turkey's economic reforms, as well as catalyzed substantial private inflows to meet external financing needs. It included additional adjustment lending to help complete reforms, including the Financial Sector Adjustment Loan and the Privatization Social Support projects, while the IFC and MIGA programs also continued the catalytic effect by providing guarantees and attracting investments. Despite political pressure, the Government ensured the funding of safety net provisions and expected social programs to minimize political risks.45

44 The World Bank. Country Assistance Strategies. 2009. 45 The World Bank. Turkey – Country Assistance Strategy. 2009.

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FY 2004-2007 CAS for Turkey

The Country Assistance Strategy for FY04-06 aimed at reducing the risk of reemergence of crises, natural disasters and financial crisis, and helped continue Turkey’s path towards implementing fundamental reforms and strengthening governance. Such assistance was structured around four development themes in line with the Government's priorities:

i. sound macroeconomics and governance ii. equitable human and social development

iii. attractive business climate and knowledge iv. strong environmental management and disaster prevention

The Bank lending scenarios described in this CAS were very different both in size and composition, which reflected the risks associated with the assistance strategy. Under the high case scenario, the program would include support for economic reform, focusing on public sector management, the financial sector and business climate, addressing underlying economic problems. Unsuccessful reforms would lead to a low case lending program, where the Bank would support human development, disaster and environment management, and local interventions to reduce poverty. The Bank strategy recognized that the complex second generation policy and institutional reforms being undertaken needed to be supported over the medium term, a program that entailed significant risks, which could not be sustained by the implementation of reforms alone. The CAS envisaged a graduated response in parallel with the strong economic program, which would allow the Bank to mitigate the risks and increase concrete improvements in Turkey's economic fundamentals. 46 Country Partnership Strategy FY 2008-2011 CPS for Turkey Turkey's economic development has global significance, given its size, role as a regional power, and strategic location, bridging East and West. Turkey has succeeded in reducing poverty, from about 28 percent of the population in 2003 to about 18 percent in 2006, pulling more than 7 million people out of poverty. The goal of the new Bank Group Country Partnership Strategy (CPS) for FY08-11 is for the Bank Group to partner with Turkey in realizing its development vision-to achieve fast and sustained growth with equity through full integration into the Government's formulated development strategy. Accordingly, the CPS is shaped directly by Turkey's Ninth Development Plan and by the Government's Program and aims at contributing to three main development pillars:

(i) improved competitiveness and employment, (ii) equitable human and social development, and (iii) efficient provision of high-quality public services.

46 The World Bank. Turkey – Country Assistance Strategy FY04‐06. 2009.

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A substantial Bank Group program has been planned for the four years in partnership with the authorities in achieving their vision of a prosperous Turkey, with income convergence with the countries of the EU. 47 The CPS set forth for Turkey is characterized by its flexibility. This flexibility is reflected in the demand driven feature of the CPS that is set to respond to evolving priorities.48 The country’s priorities will be the driving force for the CPS and the World Bank Group’s role will be providing the needed expertise to achieve these goals. The two main reasons for flexibility in the composition and phasing of World Bank Group financing, reflecting the Turkish authorities’ preference, are the intrinsic and persistent uncertainties and volatility in global financial markets and the rapid evolution of the Turkish economy. Moreover, the Bank provides Turkey with its full range of analytic, advisory, and financing instruments, such as investment and policy lending and contingent financing tools. The CPS reflects expected levels of actual Bank financing that are equivalent to new commitments up to US$6.2 billion, which will also depend substantially on the availability and terms of other financing, such as from domestic and international financial markets, the EIB, EU, IMF, and other development partners (See Appendix 8).

Among the numerous features of the CPS is that it reflects lessons learned that have emerged from close collaboration with the authorities, the Completion Report for the FY03-07 CAS, and the Independent Evaluation Group (IEG’s) Country Assistance Evaluation (CAE), which covered the 1993-2004 period. There are three main lessons reflected in this CPS:

(i) the programmatic approach to development policy lending has proven useful, (ii) high quality analytical work has been critical as a basis for the in-country policy

dialogue on key development challenges, and (iii) ownership and flexibility will be essential for the effectiveness of the new CPS—

specifically, reliance on the leadership of the authorities in defining the program, and increased flexibility in terms of lending levels and instruments, content to respond to emerging priorities, and portfolio implementation.

This CPS clearly specifies that the Bank Group, and not only the World Bank, will continue to closely collaborate with Turkey’s development partners, among which are the EU and the IMF. Turkey’s economic program and its Bank Group support continue to entail non-negligible risk factors, such as political economy risks, external vulnerabilities, risk of natural disasters, and reform implementation risks. The promising aspect for the CPS was that as of January 2008, Turkey enjoyed a combination of political and economic stability. However, with the recent global economic crisis, Turkey’s economic stability is threatened, consequently threatening its prospects of EU accession and thus the hopes for a sustained high income growth and better lives for the Turkish people. This CPS aims for the World Bank Group to be a partner with Turkey in realizing this opportunity.

47 The World Bank. Turkey – Country Partnership Strategy FY08‐11. 2009. 48 Ibid

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European Union

History The idea of uniting Europe emerged after World War II. In order to terminate the long lasting disputes and competition among European countries and to secure peace between European nations, politicians such as Robert Schuman (Prime Minister of France), Konrad Adenauer (Chancellor of Germany), Alcide de Gasperi (President of the Italian Republic) and Winston Churchill (Prime Minister of the United Kingdom) revealed their ideas to persuade their people to enter a new era. The ideas mainly focused on creating new structures in Western Europe which would be based on shared interests and which would guarantee equality among all countries.49 The Schuman Declaration, a plan for deeper cooperation among European countries presented by Robert Schuman on May 9th, 1950, is generally considered the first step in the realization of a united Europe, which proposed the establishment of a European Coal and Steel Community (ECSC). Based on the Schuman Declaration, the Treaty of Paris which was signed by six countries on April 18th, 1951; Belgium, the Federal Republic of Germany, France, Italy, Luxembourg and the Netherlands, put in place a common market for coal and steel.50 Building the success of the ECSC, the six founder countries signed the Treaties of Rome in March 1957, which aimed to start the process of developing a wider common market for goods and services. The idea was for people, goods, and services to move freely across borders, which created the European Economic Community (EEC) and the European Atomic Energy Community (EAEC). The Treaty of the European Union, also known as the Maastricht Treaty, entered into force on November 1st, 1993, which introduced the term European Union (EU). However the changes were not only in the name of community, the Maastricht Treaty determined more responsibilities for the community institutions as it established a new area of cooperation in foreign and security policy, justice and home affairs, development aid, culture, education, and economic and monetary union.

Mission of the European Union The European Union, consisting of 27 member countries, mainly works to improve the living standards of people in Europe. Within this perspective, its general objectives can be listed as bringing Europe together to provide peace, prosperity and stability for its peoples, ensuring the safety and security of its members, and promoting balanced economic and social development and economic growth to make the European Union and member countries more able to compete on the world stage with other major economies.51

49 European Union. The History of the European Union. 2009. 50 Nugent, Neill. The Government and Politics of the European Union. 1994:34‐35. 51 Fontaine, Pascal. 2006:3

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While the EU could be seen as a regional union, the global relations of the EU in economic, trade, and financial areas make it also a world player. Additionally, the EU and member states provide just over half of all international official development assistance (ODA) to poor countries.52

EU Institutions The EU has a unique structure which makes it different from a federation or an organization for cooperation between governments. In fact the member countries remain independent but they delegate some of their decision powers to EU institutions. The Institutions of the European Union are the governing bodies of the Union and have different roles and responsibilities in the decision making process. The European Parliament (EP) is the parliamentary institution of the European Union. Its 785 members are directly elected once every five years by the citizens of the EU member countries. Its main roles are passing European laws jointly with the Council, adopting the EU budget, and providing democratic supervision over the other EU institutions. 53 Council of the European Union is the EU's main decision-making body. It represents the individual member countries. Council members are ministers from each of the members and are determined by the subjects on the agenda. Each EU country in turn takes charge of the Council agenda and chairs all the meetings for a six-month period. The main responsibilities of the Council include passing European laws jointly with the EP, coordinating the broad economic policies of the member states, developing the Common Foreign and Security Policy of the EU, and concluding international agreements between the EU and other countries or international organizations.54 European Commission is independent of national governments. Its main responsibilities are drafting proposals for new legislation and managing the day-to-day business of the European Union, which includes implementing the decisions, policies, programs, and budget approved by the European Parliament and Council. Members of the Commission are appointed every five years, within six months of the elections to the European Parliament.55 The three main institutions in the decision-making process make up the ‘institutional triangle.” In addition to this triangle, the other institutions are the Court of Justice, which monitors the implementation of EU laws, and the Court of Auditors, which controls the financing issues of the Union.

52 European Commission Directorate‐General for Communication Publications. The EU in the World. 2007:13 53 European Parliament. Parliament‐ An Overview. 2009. 54 Europa. The Council of the European Union. 2009. 55 Europa. What Does the Commission Do. 2009.

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Member Countries and Enlargement The European Union is open to any European country that fulfils the democratic, political, and economic criteria for membership. Since established as the European Coal and Steel Community in 1951, in addition to the six founder members, Belgium, France, Germany, Italy, Luxemburg, and Holland, the EU has passed five enlargement processes and 21 countries have acceded to the Union. This is illustrated in Table 6.

Table 6: EU Enlargement Process

From six member countries to 27 Original member states in 1951 Belgium, France, Germany, Italy, Luxemburg and

Holland First enlargement in 1973 Denmark, Ireland and United Kingdom Second enlargement in 1981 Greece Third enlargement in 1986 Portugal and Spain Fourth enlargement in 1995 Austria, Finland and Sweden Fifth enlargement in 2004 and 2007 2004: Czech Republic, Estonia, Hungary, Latvia,

Lithuania, Malta, Poland, Slovakia, Slovenia, The Greek Administration of Southern Cyprus 2007: Bulgaria, Romania

Candidate Countries and Potential Candidate Countries Candidate Countries Applicant countries for European Union membership are granted candidate country status from the day their application is officially accepted by the European Council. As of 2009 there are three official candidate countries for EU membership: Turkey, Croatia, and the Former Yugoslav Republic of Macedonia.56 Potential Candidate Countries Countries that may apply for EU membership in the near future are recognized as potential candidate countries. The western Balkan countries of Albania, Bosnia and Herzegovina, Montenegro, and Serbia are officially recognized as potential candidates. Kosovo is also listed by the European Commission as a potential candidate but the Commission does not list it as an independent country because not all member states recognize it as an independent country. 57

56 European Commission Enlargement. Countries on the Road to EU Membership. 2009. 57 Ibid

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Copenhagen and Maastricht Criteria The Treaty of the European Union, also known as the Maastricht Treaty, determines the values of respect for human dignity, freedom, democracy, equality, the rule of law, and respect for human rights, including the rights of persons belonging to minorities as the common values of the EU. It is also stated in the Treaty that any European State which respects these values may apply to become a member of the Union.58 The membership application starts with an application form from the candidate country. The European Commission provides its formal opinion about the possible membership, and the Council decides whether to accept the application. Once the Council unanimously agrees on the applicant country, negotiations may be formally opened between the candidate and all the Member States. This is not automatic, though. The applicant country must meet a core set of criteria before negotiations can start.59 Copenhagen Criteria Based on values determined by the Treaty of the European Union, member countries approved a set of fundamental criteria at the European Council in Copenhagen in June 1993. Known as the Copenhagen Criteria, they refer to the overall criteria which applicant countries to the European Union must meet as a prerequisite for becoming members of the EU. Table 7 summarizes the Copenhagen Criteria:60 Table 7: Copenhagen Criteria

In order to meet the Copenhagen Criteria, candidate countries must put the EU rules and procedures into effect. That means, besides transposing EU legislations into their national legislations, EU legislation should be implemented effectively in candidate countries. Therefore, progress toward the Copenhagen Criteria is regularly monitored on the road to membership.

58Official Journal of the European Union. Consolidated version of the Treaty on European Union. Article 2, Article 49. 2008. 59 European Commission Enlargement. Conditions for Enlargement. 2009. 60 EU Information Centre. The Origins and Development of the EU. 2008:4

1. The political criteria - Stable institutions that guarantee democracy, the rule of law, human rights and respect

for and protection of minorities 2. The economic criteria

- A smoothly functioning market economy with the capacity to deal with competitive pressures and market forces within the Union

3. The administrative criteria - The capacity to meet the obligations of membership, including adherence to the

objectives of the political, economic and monetary union

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Maastricht Criteria

The Maastricht Treaty also determines the major steps for the economic integration of EU member states and creates the term “Economic and Monetary Union (EMU)”. The objective of the EMU is to create a single market for goods, services, capital, and labor and establish a euro area to provide full economic integration among members. The EMU deals with coordination of macroeconomic, monetary, fiscal, and economic policy to reach its objectives. All EU Member States are also members of the EMU, which means they coordinate their economic policies for the benefit of the EU as a whole. However, only the member countries who adopted the euro are members of the euro area. Today, the euro area includes only 15 EU Member States. The economic entry conditions to the euro area are known as the Maastricht Criteria, which have been established to ensure that a member state's economy is sufficiently prepared for adoption of the single currency and to integrate smoothly into the monetary regime.61 Table 8: Maastricht Criteria What is measured How it is measured Convergence criteria Price stability Consumer price inflation rate Not more than 1.5

percentage points above the rate of the three best performing Member States

Sound public finances Government deficit as % of GDP Reference value: not more than 3%

Sustainable public finances

Government debt as % of GDP Reference value: not more than 60%

Durability of convergence Long-term interest rate Not more than 2 percentage points above the rate of the three best performing Member States in terms of price stability

Exchange rate stability Deviation from a central rate Participation in Exchange Rate Mechanism for at least 2 years without severe tensions

61 European Commission Economic and Financial Affairs. Who can join and when? 2009

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Types of Funds62 The EU budget, which is mostly composed of financial contributions of every member state by means of national value added taxes (VAT) and an equal share of gross national income (GNI), is used for a wide range of activities in its member states, candidate and potential candidate states, as well as other countries in the world. The EU also has its own resources, mainly consisting of duties that are charged on imports of products coming from a non-EU state. A wide range of activities is funded by EU member countries, reflecting the priorities of the EU such as education, agriculture, infrastructure training, environmental policy, health, and consumer protection. Additionally, pre-accession financial assistance to candidate and potential candidate countries helps those countries to introduce the necessary political, economic, and institutional reforms in line with EU standards. Finally, part of the EU budget is also spent on funding economic development around the world and on humanitarian aid to help non-EU countries affected by natural disasters and other crisis situations. The “Multiannual Financial Framework,” which is a part of multi-annual agreement between members of the European Parliament, the Council of Ministers, and the European Commission, sets the maximum amount of funding in the EU budget each year for broad policy areas and fixes an overall annual ceiling on payments and commitments. The most recent one shown in Table 9 covers spending plans for the seven-year periods from 2007 to 2013.63 Table 9: Financial Framework 2007-2013 Revised For European Economic Recovery Plan, millions of Euros – current prices

62 Within the context of this study the term “EU funds” will be used for funds for different countries in different regions; (i) provided by European Commission via different instruments in its budget and (ii) provided by European Development Fund.

Although funds provided by European Investment Bank and European Bank for Reconstruction and Development are important, in Turkey parts, we will focus specifically on IPA funds, most recent instrument provided by EU.

63 Revision of the Multiannual Financial Framework (2007‐2013) Communication from the Commission to the European Parliament and the Council

COMMITMENT APPROPRIATIONS

2007 2008 2009 2010 2011 2012 2013 Total

Sustainable Growth 53,979 57,653 62,700 63,782 63,638 66,628 69,621 438,001Preservation and Management of Natural Resources

55,143 55,693 58,139 60,113 60,338 60,810 61,289 411,525

Citizenship, freedom, security and justice

1,273 1,362 1,523 1,693 1,889 2,105 2,376 12,221

EU as a global player 6,578 7,002 7,440 7,893 8,430 8,997 9,595 55,935

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EU Funds for Member States The first three headings in the Financial Framework represent EU funds for member states. Under each category there are various financial instruments, funds, and community programs which correspond with the EU's priority areas in member states. The Sustainable Growth heading includes two sub-categories: Competitiveness for growth and employment: Financial assistance under this subcategory concerns Research and Development (R&D), in particular in the field of productivity-generating Information and Communication Technologies (ICT), entrepreneurship, especially the growth of Small to Medium Enterprises (SMEs), education and training investment in information technology for public services, and cost effective energy purchasing and consumption.64 Cohesion for growth and employment: Financial assistance under this subcategory is also known as Structural and Cohesion Funds and mainly focuses on eliminating the disparities and reducing the gaps through investments in the regions of member states. EU Cohesion Policy has three priority objectives: convergence, regional competitiveness, and employment and European territorial cooperation. EU uses three special instruments (funds) to implement its cohesion policies65: The European Fund for Regional Development (EFRD) finances direct aid to investments in companies to create sustainable jobs, infrastructures linked notably to research and innovation, telecommunications, environment, energy and transport, financial instruments to support regional and local development, and to foster cooperation between towns and regions and technical assistance measures. The European Social Fund (ESF) supports actions in adapting workers and enterprises: lifelong learning schemes, designing and spreading innovative working organizations, access to employment for job seekers, the unemployed, women and migrants, social integration of disadvantaged people and combating discrimination in the job market, strengthening human capital by reforming education systems, and setting up a network of teaching establishments. The Cohesion Fund is aimed at Member States whose Gross National Income per inhabitant is less than 90 percent of the Community average. It serves to reduce their economic and social shortfall, as well as to stabilize their economy. Preservation and Management of Natural Resources: Expenditures for Common Agriculture Policy (CAP), Common Fishery Policy (CPF), and Environmental Policy are financed under this heading. The European Agricultural Guarantee Fund (EAGF), the European Agricultural Rural Development Fund (EAFRD), and the European Fund for Fisheries (EFF) are the instruments

64 Kitley Gabor. 2007: 10‐14 65 EU Cohesion Policy 1988‐2008. Inforegio Panorama. 2008:24

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used under this category. A large portion of the money within this category finances direct support to farmers and other market related expenditures.66 Citizens, Freedom, Security and Justice: Expenditures related to ensuring the security of borders, a safe internal environment for citizens, businesses, and the functioning of the internal market are financed under this category. Specific programs for combating violence, drug prevention and information, fundamental rights and citizenship, criminal justice, and civil justice are main focus areas. Additionally, programs designed to celebrate Europe's unique history and the Union's cultural diversity are also financed under the area of citizenship. EU Funds for Non- Member States The fourth heading in the Financial Framework, EU as a Global Player, covers all programs related to EU external assistance for candidate and potential candidate countries, as well as for other developing countries all around the world. Funds used under these headings reflect EU policy about enlargement, trade, development, cooperation, and humanitarian assistance. There are additional instruments under this category.

• Instrument for Pre-Accession (IPA) • European Neighborhood and partnership Instrument (ENPI) • Development Cooperation Instrument (DCI) • Instrument for Cooperation with Industrialized Countries (ICI) • Instrument for Stability (IS) • European Instrument for Democracy and Human Rights (EIHDR) • Humanitarian Aid and Macro Financial Assistance

While IPA is for candidate and potential candidate countries, other instruments reflect the EU’s global policies and funds for the rest of the world. EU Funds for Candidate and Potential Candidate Countries The objective of pre-accession financial assistance to candidate and potential candidate countries is to help those countries to introduce the necessary political, economic, and institutional reforms in line with EU standards. So in general those funds are provided to candidate and potential candidate countries to prepare them for EU membership. Instrument for Pre-Accession Assistance (IPA) is the most current pre-accession financial aid system the EU uses for candidate and potential candidate countries; it came into force on January 1st, 2007, bringing all pre-accession support into one single, focused instrument. Before IPA, the EU used different systems for specific regions or specific countries by means of financial aid. Some of the financial instruments used by the EU before IPA were PHARE, SAPARD, ISPA, CARDS, and the Turkish Pre-accession Instrument. PHARE (Poland-Hungary Assistance for the Reconstruction of the Economy) was originally created to assist Poland and Hungary; the PHARE program covered ten countries: Czech

66 Kitley Gabor. 2007:17‐18

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Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia, Bulgaria and Romania. PHARE’s general objectives were strengthening public administrations and institutions to function effectively, promoting convergence with the European Union’s extensive legislation, and reducing the need for transition periods and to promote economic and social cohesion among beneficiary countries. PHARE support was substantial, amounting to about €5.7 billion over the period 1999-2006. 67 SAPARD (Special Action Program for Pre-Accession Aid for Agricultural and Rural Development) aimed at helping the ten beneficiary countries of Central and Eastern Europe (Bulgaria, Czech Republic, Estonia, Latvia. Lithuania, Hungary, Poland, Romania, Slovakia, and Slovenia) deal with the problems of the structural adjustment in their agricultural sectors and rural areas, as well as in the implementation of the acquis communautaire concerning the common agricultural policy and related legislation. SPAI (Instrument for Structural Policies for Pre-Accession) was designed to deal with environmental and transport infrastructure priorities identified in the Accession Partnerships with the ten applicant countries of Central and Eastern Europe.68 CARDS (Community Assistance for Reconstruction, Development and Stabilization) was established in 2000 to promote stability and peace in the Western Balkan region. Through the program €4.6 billion was provided to this region for investment, institution-building, reconstruction, democratic stabilization, reconciliation, and institutional and legislative development69 Turkish Pre-Accession Instrument Turkey's application for membership to European Union was accepted by the European Council in Helsinki in 1999 and pre-accession assistance has been made available to the Republic of Turkey since 2002 under Turkish Pre-Accession Instrument. Between 2002 and 2006 on a basis of yearly National Programs and Financing Memorandums, the EU provided Turkey with approximately €1.2 billion. Before 2002, Turkey had received support under the MEDA program (The Euro-Mediterranean Partnership) and through two regulations to support the customs union and economic and social development. Until 1999 the key aim of assistance to Turkey had been to accompany the process of structural reform, as with other Mediterranean partners. Following the Helsinki Summit in 1999, a pre-accession orientation was introduced to the financial assistance programs for Turkey. Assistance continued to be available for structural adjustment, in coordination with the international financial institutions, and also began to focus on institution building, investment, and supporting the participation of Turkey in Community program and agencies. 70 67 European Commission Directorate General Enlargement. PHARE: Consolidated Summary Report, 2007:3 68 European Commission Directorate General Enlargement. Instrument for Structural Policies for Pre‐Accession. 2009. 69 European Commission Directorate General Enlargement. CARDS. 2009. 70 Central Finance and Contract Unit. EU‐Turkey Financial Cooperation. 2009.

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IPA, the Instrument for Pre-Accession Assistance (IPA) is the current financial instrument for the pre-accession process for the period 2007-2013. Its main objective is to help candidate and potential candidate countries in facing the challenges of European integration and implement the reforms to fulfill the Copenhagen Criteria for EU membership. The legal basis for IPA is Council Regulation Number 1085/2006, adopted on July 17th, 2006, and more detailed implementing rules are delineated in Commission Regulation 718/2007 of June 12th, 2007. Beneficiary countries of IPA are grouped as: Candidate Countries: Annex I of the Council Regulation, including Turkey, Croatia, and the Former Yugoslav Republic of Macedonia Potential Candidate Countries: Annex II of the Council Regulation, including Albania, Bosnia and Herzegovina, Montenegro, Serbia and Kosovo IPA funds are to be used by candidate and potential candidate countries to support the following areas:

• Strengthening of democratic institutions, as well as the rule of law, including its enforcement

• The promotion and the protection of human rights and fundamental freedoms and enhanced respect for minority rights, the promotion of gender equality and non-discrimination

• Public administration reform, including the establishment of a system enabling decentralization of assistance management to the beneficiary country

• Economic reform • The development of civil society and social inclusion • Reconciliation, confidence-building measures, and reconstruction • Regional and cross-border cooperation • The adoption and implementation of the acquis communautaire • Support for the policy development as well as preparation for the implementation and

management of the Community's common agricultural and cohesion policies • Progressive alignment with the acquis communautaire • Social, economic, and territorial development including, interalia, infrastructure and

investment related activities, especially in the areas of regional, human resources and rural development71

The financial assistance under IPA is generally identified in the European and Accession Partnerships, Enlargement Strategy Papers, Progress Reports, and IPA Multi-Annual Indicative Financial Framework (MIFF) for each country.

71 Council Regulation No 1085/2006 of 17 July 2006. Article 2. 2006:82

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Table 10 shows the amount of funds, in millions of euros, provided under IPA for eligible countries.72

Table 10: IPA for Eligible Countries, in millions of Euros

Country 2007 2008 2009 2010 2011 2012 TOTAL Turkey 497,2 538,7 566,4 653,7 781,9 899,5 3937,4Croatia 141,2 146,0 151,2 154,2 157,2 160,4 910,2Macedonia 58,5 70,2 81,8 92,3 98,7 105,8 507,3Albania 61,0 70,7 81,2 93,2 95,0 96,9 498,0Bosnia & Herzegovina 62,1 7 4,8 89,1 106,0 108,1 110,2 550,3Montenegro 31,4 32,6 33,3 34,0 34,7 35,4 168,1Serbia 189,7 190,9 194,8 198,7 202,7 206,8 1183,6Kosovo (under UNSCR 1244)

68,3 124,7 66,1 67,3 68,7 70,0 465,1

Multi-Beneficiary Programs

109,0 140,7 160,0 157,7 160,8 164,2 892,4

In order to achieve each country's objectives in the most efficient way, financial assistance under IPA shall be programmed and implemented according to the following components:73

• Transition assistance and institution-building involves institution building measures and associated investment, as well as transition and stabilization measures still necessary in the Western Balkans.

• Cross-border co-operation supports cross-border cooperation at borders between candidate/potential candidate countries and between them and the EU countries.

• Regional development supports transport, environment, and economic development. • Human resources development aims at strengthening human capital. • Rural development supports the sustainable adaptation of the agricultural sector and

sustainable development of rural areas.

While components I and II are open to all beneficiary countries, components III, IV and V are only open to candidate countries.

EU Funds for Other Countries As mentioned before, the fourth heading in the Financial Framework, EU Budget, covers all programs and instruments related to EU external assistance both for candidate and potential candidate countries and for other developing countries all around the world. Besides IPA, the following instruments are for non-member and non-candidate or potential countries:

• European Neighborhood and Partnership Instrument (ENPI) • Development Cooperation Instrument (DCI) • Instrument for Cooperation with Industrialized Countries (ICI)

72 Instrument for Pre‐accession Assistance Multi‐annual Indicative Financial Framework for 2010‐2012 73 Council Regulation No 1085/2006 of 17 July 2006. Article 3. 2006:82

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• Instrument for Stability (IS) • European Instrument for Democracy and Human Rights (EIHDR) • Humanitarian Aid and Macro Financial Assistance

Instrument Objective Beneficiary

Countries 2007-2013 Budget

European Neighborhood and Partnership Instrument (ENPI) covers European Union financial assistance to the countries of the European Neighborhood Policy.74

Enable neighboring countries to share the benefits of EU in terms of stability, security and well-being and promote progressive economic integration and deeper political cooperation between the EU and partner countries

Algeria, Armenia, Azerbaijan, Belarus, Egypt, Georgia, Israel, Jordan, Lebanon, Libya, Moldova, Morocco, the Palestinian Authority, Syria, Tunisia, Ukraine, Russia

€10.6 billion

Development Cooperation Instrument (DCI) finances the European Community development cooperation policy, which aims to reduce poverty and achieve sustainable economic and social development in the world.75

Eliminate poverty in partner countries and regions and help them reach the Millennium Development Goals

48 Countries in Latin America, Asia, Central Asia, the Middle East and South Africa

€16.8 billion

Instrument for Cooperation with Industrialized Countries (ICI) reflects European Union’s intends to further deepen its financial, technical, and other forms of cooperation with industrialized and other high-income countries to strengthen its role in the world.76

Strengthen the Community's relationships with other developed countries

Australia, Bahrain, Brunei, Canada, Chinese Taipei, Hong-Kong, Japan, Republic of Korea, Kuwait, Macao, New Zealand, Oman, Quatar, Saudi Arabia, Singapore, United Arab Emirates, United States

€172 million

74 European Commission. European Neighbourhood Policy: Funding. 2009. 75 Kitley Gabor. 2007: 24 76 Europa. Industrialised Countries. 2009.

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Instrument for Stability (IS) reflects European Union’s interests in security-related activities in partner countries as there seems to be a link between security and development.77

Complementary to IPA, ENPI, DCI and EIDHR as it has immediate and integrated response to situations of crisis, instability, drugs, mines, uprooted people, crisis management, rehabilitation and reconstruction

IPA, ENPI, DCI and EIDHR beneficiary countries

€2.062 billion

European Instrument for Democracy and Human Rights (EIHDR) is a European Union program that aims to promote and support human rights and democracy worldwide. 78

Help the creation of a favorable environment for democracy and encourage the respect of human rights

Worldwide €1.104 million

Humanitarian Aid and Macro Financial Assistance

Humanitarian Aid provides emergency assistance to the victims of natural disasters in the world. The European Office for Emergency Humanitarian Aid (ECHO) is responsible for distributing aid, monitoring aid operations, providing training, running pilot micro-projects, and providing information regarding humanitarian issues. ECHO has two sources of funds: the general EC budget and the European Development Fund. For the 2007-2013 financial periods its budget will be €5.6 billion.79

Macro Financial Assistance supports economic and political reform efforts in the beneficiary countries. Under this instrument the EU provides medium and long term loans to the recipient country. European Development Fund All the instruments mentinoned above, providing EU funds for different objectives and for different regions, are in the EU budget. The European Development Fund (EDF) is the main instrument for providing aid for development in the African, Caribbean and Pasific States and, although EDF is also funded by the Member States,it is not under the general EU budget. It is implemented seperately.

77 European Commission. Instrument for Stability. 2009. 78 European Commission. Democracy and Human Rights. 2009. 79 European Commission. Humanitarian Aid. 2009.

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Each EDF program is conducted for a period of around five years and the current one, the tenth EDF, covers 2008-2013. The EDF consists of several instruments, including grants, risk capital and loans to the private sector. Each EDF program is implemented within the framework of an international agreement signed between the European Union and beneficiary countries. For the tenth EDF, CotonouAgreement, which was revised in 2005, describes how the EDF should be programmed and monitored. The tenth EDF has been allocated for €22,682 billion for 78 beneficiary countries.80 Objective: promote the economic, cultural and social development of the ACP states, with a view to contributing to peace and security and to promoting a stable and democratic political environment. Beneficiary Countries: 78 Countries - African, Caribbean and Pacific states (except South Africa) and overseas countries and territories 2007-2013 Budget: 22,682 billion € (not funded from EU budget) European Investment Bank Group The European Union also offers global loans, venture capital, and individual loans by the European Investment Bank Group, which consists of the European Investment Bank (EIB) and the European Investment Fund (EIF). The European Investment Bank (EIB) was established under the treaty of Rome in 1957 and is the European Union's long-term lending institution. The Bank supports the EU priority objectives of European integration and social cohesion through its financing operations. EIB is structured as an international financial institution. Member states of the European Union are the owners of the EIB and they are represented on the Board and Management of the Bank. In addition, the Board of Governors is composed of the Finance Ministers of these States.81

EIB has six priority objectives for its lending activities, which are set out in the Corporate Operational Plan: cohesion and convergence, support for small and medium-sized enterprises, environmental sustainability, innovation, development of Trans-European Networks of transport and energy, and sustainable, competitive and secure energy.82 EIB financed projects are mostly about agriculture, infrastructure, energy, health, education, industry, telecommunication, transport, water and sewerage.

A breakdown of project by region financed by EIB is illustrated in Table 11.83

80 European Commission Directorate General for Development. European Development Fund. 2009. 81 European Investment Bank. About EIB. 2009. 82 European Investment Bank Corporate Operational Plan 2009‐2011. 2009:10 83 European Investment Bank. Projects. 2009.

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Table 11: Regional EIB Funds for past 5 years, in Euros

Regions

EIB Funds

European Union 215,766,889,488Africa, Caribbean, Pacific countries + OCT 3,041,722,506Asia and Latin & Central America 2,865,708,814EFTA countries 801,633,153Commonwealth of Independent States 460,000,000

Mediterranean countries 6,761,827,536South Africa 640,546,000South East Europe 11,385,281,257Total 241,723,608,755 The European Investment Fund (EIF) was established in 1994 and is the European Union’s specialized financial institution for small businesses. It provides venture capital investments and guarantee instruments to a wide range of intermediary banks and financial institutions. The EIF has several shareholders, the EIB being the majority shareholder with 66 percent, the European Commission has 25 percent and other European financing institutions have nine percent of the shares at the fund.84

European Bank for Reconstruction and Development (EBRD)

The European Bank for Reconstruction and Development (EBRD) was established in 1991 and it is owned by owned by 61 countries and two intergovernmental institutions. All EU member states together with European Community and European Investment Bank are members of the EBRD.85

The EBRD uses the tools of investment to help build market economies and democracies in 30 countries from central Europe to central Asia by investing every kind of enterprise and financial institution, mainly in the form of loans and equity. Projects financed by EBRD are mainly focuses on four sectors: agribusiness, manufacturing, property, tourism, telecommunications infrastructure, natural resources and power sector, and financial sector, which includes micro, small and medium-sized enterprises.86

EBRD commitments in 2007 by region are summarized in Table 12.87

84 European Investment Fund. About EIF. 2009. 85 European Bank for Reconstruction and Development About EBRD 2009. 86 EBRD Annual Report 2007. 2008:5 87 Ibid: 6

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Table 12: Regional EBRD Commitments in 2007, in millions of Euros

Region EBRD Commitments

Central Europe and Baltic States 545.5South Eastern Europe 1,000.2Commonwealth of Independent States and Caucasus 1,120Central Asia 620.4Russia 2.3Total 3,288.4

EU – Turkey Relations History

In 1959, Turkey applied to join to European Economic Community (EEC) and the EEC proposed to establish an association until Turkey's circumstances permitted its accession. They signed the Agreement Creating an Association between the Republic of Turkey and the European Economic Community, known as the "Ankara Agreement," in 1963. This agreement offered Turkey's full membership in the EEC through the establishment of a customs union in three phases.

The parties signed the Additional Protocol in 1970 to establish how the Customs Union would be formed. After the implementation of the protocol, the free circulation of goods and services and the harmonization of Turkish legislation with that of the EEC would be attained in 22 years. In 1995, Custom Union was completed and the Association Council adopted its decision 1/95 on the completion of the Customs Union between Turkey and the EU in industrial and processed agricultural goods by December 31st, 1995. Moreover, the EU declared that Turkey was eligible for financial cooperation as part of the customs union package. In the context of the Customs Union, Turkey abolished all duties and equivalent charges on imports of industrial goods from the EU.88 In 1999, Turkey gained “candidate status” at the Helsinki Summit in 1999. In the Presidency Conclusions it was stated that Turkey would be in an equal position with the other candidate countries and Turkey would benefit from the pre-accession strategy. It was also expected to prepare an Accession Partnership Document for Turkey. The first Accession Partnership Document for Turkey was adopted in 2001. The Accession Partnership Document and the National Program were adopted in 2003 and 2005 consecutively. At the Copenhagen Summit in 2002, based on the Commission’s Report and recommendations, the Commission decided to start accession negotiations with Turkey in 2004, on the condition that Turkey fulfilled the political aspect of the Copenhagen Criteria.89

88 Secretariat General for EU Affairs, Turkey‐EU Relations, 2009. 89 Ministry of Foreign Affairs. Relations Between Turkey and the European Union. 2009.

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In 2004, the European Council proclaimed that Turkey sufficiently fulfilled the Copenhagen Criteria and decided to start accession negotiations with Turkey in 2005. Then Turkey signed the Additional Protocol extending the Turkey-EU Customs Union to new member states that acceded to the EU. The Screening Process was started in 2005 and was completed in 2006.90 IPA Process in Turkey After the declaration of Turkey’s candidacy, Turkey became one of the beneficiaries of IPA and in fact it will receive a great proportion of EU funds under IPA compared to other candidate and potential candidate countries. In this context, financial assistance has been a part of the EU partnership between Turkey and the European Union for a long time. The history of financial assistance between Turkey and the European Union can be taken under two headings before the present instrument, IPA, comes to force. From 1964 to 1999, in order to foster Turkey’s economic and social development, three Financial Protocols were signed between 1964 and 1981 and Turkey benefited from European financial support of €752 million. Of the €752 million, €115 million were European Investment Bank loans and €637 million were community loans.

Additionally, since 1980 European Union provided Turkey different types of funds under special conditions, the most important ones of those funds are illustrated in Table 13.

Table 13: EU Financial Support before IPA for Turkey

Financial Support Period Budget Special Aid Package 1980 • Aid : €75 million Gulf Crisis Aids 1991 • Loan : €175 million Emergency Aid and Rehabilitation Activities

1999-2002 • Budget for emergency aid and rehabilitation activities: €30 million • EIB loan: €600 million

EU Funds under MEDA Program

1996-1999 • Total financial support: €376 million • The total amount in the framework of the Mediterranean policy: €544.5 million

From 1999 to 2006, following the confirmation of Turkey’s candidacy at the Helsinki Summit in 1999, financial assistance to Turkey focused on membership preparation. Pre-accession assistance has been made available to Turkey between 2002 and 2006 under the Turkish Pre-Accession Instrument. On a basis of yearly National Programs and Financing Memorandums, EU provided Turkey with approximately €1.2 billion between 2002 and 2006. Assistance continued to be available for structural adjustment, in coordination with the international financial institutions, and also began to focus on institution building, investment, and supporting the participation of Turkey in Community program and agencies. 90 Secretariat General for EU Affairs. Current Situation in Accession Negotiations. 2009.

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Budgetary allocations under the Turkey National Programs 2002-2006, broken down by main sectoral areas under Turkish Pre-Accession Instrument between 2002 and 2006 are given in Table 14.91 Table 14: Sectoral Distribution of EU Support between 2002 and 2006, in Euros

91 Multi‐Annual Indicative Planning Document (MIPD) 2007‐2009 for Turkey: 7

SECTOR 2002 2003 2004 2005 2006 Total per

Sector Political criteria 2.044.000 15.957.000 28.650.200 48.248.180 20.533.125 115.432.505 Energy 1.047.000 5.437.000 2.500.000 1.040.000 1.380.000 11.404.000 Telecommunications 2.260.000 - - 1.200.000 - 3.460.000 Social Policy 7.000.000 - 17.173.750 7.757.325 5.000.000 36.931.075 Transport 2.299.000 4.264.000 4.612.500 1.427.500 - 12.603.000 Environment 15.550.000 5.450.000 12.100.000 - 12.250.000 45.350.000 Internal market 2.250.000 11.375.000 11.321.420 3.973.875 - 28.920.295 Agriculture 17.568.000 6.169.000 6.960.000 28.201.750 60.528.350 119.427.100 JLS 12.207.000 3.832.000 1.840.000 - 13.025.750 30.904.750 Economic Social Cohesion 40.000.000 45.300.000 77.556.000 117.059.000 182.054.274 461.969.274 Community Programs & CSD 18.775.000 27.319.000 32.176.780 40.530.620 99.360.322 218.161.722 Public Administration - 5.740.000 11.157.250 13.361.750 3.335.325 33.594.325

Customs - 5.406.000 22.552.100 - 16.532.854 44.490.954 Others 5.000.000 8.851.000 8.120.000 14.900.000 36.000.000 72.871.000

Total Allocations 126.000.000 145.100.000 236.720.000 277.700.000 450.000.000 1.235.520.000

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From 2006 to 2013, as a candidate country, EU funds for Turkey’s accession were covered under IPA starting from 2007. IPA structure in Turkey was built on five components and will continue to provide pre-accession support to Turkey in the same manner as under the Turkish Pre-Accession Instrument. The novelty is the introduction of pre-accession financial support in environment, transport, regional competitiveness, human resource development, and rural development managed on the same principles of structural funds. The aim of IPA assistance to Turkey is to assist with the objectives of the EU pre-accession strategy. These three objectives are:

• Fully meeting the Copenhagen Political Criteria • Adoption and implementation of the acquis communautaire • Promotion of an EU-Turkey Civil Society Dialogue92

The most recent allocations of funds by component under IPA for Turkey are given in Table 15.93

Table 15: IPA for Turkey between 2007 and 2012, in millions of Euros

Component 2007 2008 2009 2010 2011 2012

Transition Assistance and Institution Building 252.2 250.2 233.2 211.3 230.6 250.9

Cross-border Cooperation 6.6 8.8 9.4 9.6 9.7 9.9

Regional Development 167.5 173.8 182.7 238.1 291.4 350.8

Human Resources Development 50.2 52.9 55.6 63.4 77.6 89.9

Rural Development 20.7 53.0 85.5 131.3 172.5 197.8

Total 497.2 538.7 566.4 653.7 781.9 899.5

92 Ibid:3 93 Multi‐Annual Indicative Financial Framework (MIFF) For 2010‐2012

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Chapter 2: Recent Collaboration of International Funding Organizations

Introduction Globalization in recent decades has intensified the need for increased international cooperation. Now more than ever goods, people, and capital are moving rapidly across borders, making countries more and more dependent on one another as their economies become more inextricably entwined. These interrelationships have created the need for countries to support the stability and sustained growth of all countries around the world. For these reasons, the International Monetary Fund (IMF), World Bank, and European Union (EU) have expanded their work around the globe, blurring the lines of distinction between their missions, goals, and activities. Since its inception at the close of World War II, the IMF has grown from 29 to 185 member countries and adapted its mission to reflect its changing role in the more globalized economy. In addition to its more traditional lending instruments, namely Stand-By Arrangements, it has adopted new lending facilities. The Short-Term Liquidity Facility, created in October 2008, helps emerging markets respond to the current economic crisis and the recently revamped Exogenous Shocks Facility now disburses funds faster to countries hit hard by the food and fuel crisis. Additionally, the IMF has been changing its role in the lowest income countries through its poverty reduction facilities, especially those implemented jointly with the World Bank. In addition to its lending, the IMF provides economic research and surveillance, as well as technical and policy advice for its member countries. The World Bank has grown and adapted similarly to the IMF; it has expanded from its original 38 to now 185 member countries and has refocused its main mission of reconstruction more on poverty reduction. With more than $200 billion in loans outstanding and another $125 billion in development resources in 2008, today’s more complex World Bank (IDA and IBRD) assists countries through its lending facilities and technical support, especially aimed at improving the social sector. With its focus on poverty reduction, can now be seen working more closely with other international funding institutions, including the IMF, EU, and other bilateral aid agencies. As the Iron Curtain dropped in Europe, so too did the final major economic and political divisions throughout the continent. The EU has recently grown to its current 27 members, while many countries remain candidates and potential candidates. This expansion has given the EU greater opportunities for free movement of people and capital in the region, but has also brought challenges in supporting the development and growth of its new members. The EU provides different types of funds under various instruments for its member states, candidate and potential candidate countries and for other developing or under developed countries all around the world. Considering the protection of European citizens and supporting stability and prosperity in countries outside its borders, the EU has become one of the major actors in international cooperation and development assistance, and a major donor in humanitarian aid. The EU, which already provides over 50 percent of all development aid worldwide, has recently agreed to increase its official development assistance to 0.56 percent of its gross national income by 2010 on the way to achieving the UN target of 0.7 percent by 2015. The EU’s development policy is

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designed to help reduce and eradicate poverty in the world and establish a development based on democratic values. As these are major global challenges that can only be achieved with the help of various global partners, the EU strives to align its development strategies with other international financial institutions. The common development goals and activities of the IMF, World Bank, and EU have both naturally and through great criticism pushed these international financial institutions to work more collaboratively. This section discusses various examples of the current collaborative efforts of these organizations globally. It must be noted, however, that their collaborative efforts are not limited to those discussed in this section and current activities are continually evolving.

IMF – World Bank – EU Collaboration

Introduction Multilateral organizations, such as the World Bank, the International Monetary Fund and the European Union are unique in that they bring together a number of countries to put forth a joint effort for a unified goal. Although each organization’s mission may vary from the other, they all work to develop the human race and improve the living of human beings around the world. The first multilateral coordination dates back to the nineteenth century in Europe. The League of Nations, what is known today as the United Nations, was one of the first attempts to join the efforts of states in an international arena. The global efforts of most multilateral organizations, including the World Bank, the IMF, and the EU, have been further brought together due to the launching of the Millennium Development Goals. These organizations have worked together to address many of the world’s pressing issues at many times. Their efforts have come together under the recent unfortunate events of the global economic crisis that has impacted all nations, particularly the developing ones. The following sections briefly outline the collaboration among these three organizations and the Millennium Development Goals, debt relief approaches, and their current response to the economic crisis, with highlights of specific cases.

Millennium Development Goals In September 2000, at United Nations Headquarters in New York, world leaders adopted the United Nations Millennium Declaration. In order to reduce extreme poverty, they committed their nations to a new international partnership with a series of time-bound targets with the final deadline of 2015. In 2002, the United Nations Secretary-General launched the Millennium project to develop a concrete action plan for the world to achieve the Millennium Development Goals. The Millennium Development Goals include: End Poverty and Hunger, Universal Education, Gender Equality, Child Health, Maternal Health, Combat HIV/AIDS, Environmental Sustainability and Global Partnership (See Appendix 3 for complete details).94

94 Millennium Development Goals. 2009.

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Millennium Development Goals and World Bank, IMF and EU The World Bank is a partner of the UN to achieve the MDGs. It is lending to MDG-related projects and actively involved in the process of achieving these goals, especially in Africa. The IMF works closely with World Bank and other partner agencies in aid and financing to accelerate the progress towards the goals. It provides policy advice, technical assistance, financial support, and debt relief, advocates for foreign aid, and maintains a favorable international economic climate.95 In 2005 the EU adapted the European Consensus on Development, which focused on the MDGs and poverty eradication. The EU has taken important initiatives to improve its development agenda. The EU policies are determined to be consistent with development objectives. European policies are evaluated to determine what impact they will have on development and how they can make a positive contribution to the MDGs. The main objective of EU development cooperation is the poverty eradication in the context of sustainable development and the MDGs. The EU has worked to assist the achievement of the MDGs. The EU has made a commitment to promote policy coherence for development. The EU has considered the objectives of development cooperation in all policies and the implementation of these policies are likely to affect developing countries.96 Debt Relief There are different types of debt relief in which the World Bank is involved, the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI). In addition, the World Bank is unique in its Debt Reduction Facility (DRF) for IDA-only Countries. Finally, in order to avoid the need for future debt-relief initiatives, the World Bank has engaged in Debt Sustainability Framework for Low-Income Countries. The Heavily Indebted Poor Countries Initiative Throughout the 1970’s and 1980’s, many countries were faced by the buildup of foreign debt on top of other socio-economic hurdles, until they reached unsustainable debt burdens. By 1992, the 33 most indebted low-income countries faced debts with present values that had more than doubled in ten years, for a value over six times their annual exports.97 By the mid-1990’s, a debt relief initiative geared towards addressing unsustainable debt burdens was called for by the World Bank, the IMF, and other regional development banks. In 1996, the International Development Association, the World Bank’s fund that provides concessional credits and grants to the poorest countries in the world, and the IMF launched the HIPC Initiative. The Initiative called for the voluntary debt relief by all creditors. This Initiative was further advanced in 1999 95 The IMF and the Millennium Development Goals. 2009. 96 European Parliament Council Commission, The European Consensus on Development, Official Journal of the European Union, 2006 97 World Bank. Debt Relief: Overview. 2009.

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in order to provide more rapid relief to a wider group of countries, particularly linking this Initiative to poverty-reduction, the World Bank’s mission. By the end of July 2008, 33 countries had benefited from HIPC debt relief. The Multilateral Debt Relief Initiative In 2005, the World Bank joined the IMF and other regional development banks in the MDRI to forgive 100 percent of eligible outstanding debt owed to these three institutions by all HIPC countries reaching the completion point of the HIPC Initiative.98 MDRI, which targets the Millennium Development Goals, provides countries that have reached the irreversible completion point under the HICP Initiative up-front cancellation of debt in addition to the debt relief received under the HICP Initiative. IDA’s contribution to MDRI amounted up to US$14.5 billion out of a total of US$22.6 billion for 23 countries by the end of 2007. Debt relief-EU The EU has supported the HIPC and MDRI Initiatives. The EU has helped to preserve debt sustainability in low-income countries. EU has acted as a creditor, technical assistant, and contributor to HIPC debt relief operations. 99 The EU has provided €680 million through the European Investment Bank and has donated €934 million to the HIPC trust fund. Most of the EU contributions are allocated for African countries.100 The Debt Reduction Facility (DRF) for IDA-only Countries The Debt Reduction Facility (DRF), created in 1989, provides grants to HIPCs to buy back at a deep discount the debts owed to external, commercial creditors. DRF-supported operations typically involve a government buying back its public and publicly-guaranteed debts from external commercial creditors for cash at a deep discount, thereby extinguishing such debts from the books of the public sector. The DRF is managed by IDA, and financed as a trust fund from transfers from the World Bank’s International Bank for Reconstruction and Development, which lends to middle income countries, and grant contributions from donor countries. The DRF’s current mandate expires on July 31st 2012. 101 The Debt Sustainability Framework for Low-Income Countries This Initiative is an avant-garde approach that assists in achieving the MDGs while at the same time avoiding the buildup of unsustainable debts. Unlike other approaches, this one places responsibility on both the creditor and the borrower.

98 Ibid 99 Council of The European Union, Council Conclusions: Speeding up progress towards the Millennium Development Goals (MDGs), Council meeting Brussels, 26 and 27 May 2008 100 Europa: Collaboration between the European Commission and the World Bank. 2009. 101 World Bank. Debt Relief: Debt Reduction Facility (DRF) for IDA‐only Countries. 2009.

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Responses to the Economic Crisis Since the debut of the Millennium Development Goals, countries around the world have formally committed to joint efforts aimed at eradicating poverty in the world. However, with the current economic crisis, stemming from disputed sources and increasingly infecting the markets in today’s interconnected global economy, the feasibility of achieving these goals effectively through international joint efforts has come into question. As Ben Bernanke, Chief of the U.S. Federal Reserve, has recently stated: “The world is suffering through the worst financial crisis since the 1930s, a crisis that has precipitated a sharp downturn in the global economy….It is impossible to understand this crisis without reference to the global imbalances in trade and capital flows that began in the latter half of the 1990s…These imbalances reflected a chronic lack of saving relative to investment in the United States and some other industrial countries, combined with an extraordinary increase in saving relative to investment in many emerging market nations…. The global imbalances were the joint responsibility of the United States and our trading partners, and although the topic was a perennial one at international conferences, we collectively did not do enough to reduce those imbalances.”102 With effects of the crisis ranging from bankrupt businesses and massive public bailouts in the United States to the complete collapse of the Icelandic banking sector to rapidly increasing inflation and energy prices around the world103, the demand for effective, collaborative responses to these global problems has grown exponentially. The GDP growth in developing-countries worldwide is projected to decline to 4.5 percent in 2009, a decrease of more than 3 percentage points below the past five years’ average.104 The pressing need for a global response to the economic crisis has not been ignored by the international community. In October 2008, the IMF called for a coordinated international response to the global economic crisis, recommending five ways for restoring confidence:

(i) “employ measures that are comprehensive, timely, and clearly communicated; (ii) aim for a consistent and coherent set of policies to stabilize the global financial

system across countries; (iii) ensure rapid response on the basis of early detection of strains in order to contain

systemic repercussions; (iv) assure that emergency government interventions are temporary and taxpayer

interests are protected; (v) avoid losing sight of the objective of a more sound, competitive, and efficient

financial system going forward.” 105

102 Bernanke, B. S. 2009. 103 Faiola, Anthony and Irwin, Neil. 2008 :A01. BBC News. "IMF Approves $2.1 Billion Iceland Loan." 2008. 104 European Commission. Financial Crisis: A Support Plan for the Developing World. Prague: Informal Meeting of EU Development Ministers. 2009. 105 Seager, Ashley. 2008.

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In March 2009, the World Bank’s President, Robert Zoellick, warned that the economic crisis could escalate into a “social or humanitarian crisis;” consequently, he advocated a "multidisciplinary approach" to solving the current problems.106 He also called for developed countries to dedicate 0.70 percent of their economic stimulus packages to a “vulnerability fund” for developing countries, arguing that the vulnerability fund could help developing countries by funding investments in key areas such as infrastructure, safety nets, and SME financing.107

This section discusses the international financial institutions responses to the current global economic crisis by demonstrating some of the exemplary cases of recent collaborative efforts of the IMF, World Bank, and EU in. However, it must be noted that their aid alone will not suffice given the scale of the crisis; ultimately, long-term imbalances among international markets must be harmonized. Economic Rescue Package for Hungary Before the opening of financial markets on October 29th, 2008, the IMF, World Bank, and EU announced in coordinated press releases their approval of an economic rescue package for Hungary. The program package, totaling US$25.8 billion, consisted of a Stand-By Arrangement from the IMF (US$15.7 billion), an EU medium-term loan (US$8.4 billion) and a Financial Sector and Macro Stability Loan (DPL) from the World Bank (US$1.3 billion). The package was greater than anticipated and marked the first time in history an EU member country had been rescued by the IMF. Hungary, which had long been considered a firm investor base in Eastern Europe’s former communist bloc, was extremely susceptible to the shocks of the current economic crisis. Due to Hungary’s prospects for adopting the euro, Hungary’s currency, the forint, had until recently a strong standing in the global economy. A strong currency combined with high interest rates within Hungary led many Hungarians to take out mortgages in foreign currency loans. This heavy flow of money abroad, combined with Hungary’s three percent increase in interest rates in late October, attributed to the need for the economic rescue package, which equated to one fifth of Hungary’s annual economic output. 108 In addition to being the first IMF bailout for an EU country, this particular case set precedence for how non-euro area EU member countries could seek financial assistance from non EU and European Commission sources, as no operating procedures had been established for such a scenario. Article 119 of the Treaty of Establishing the European Community requires that such a country consult with the European Commission and EU’s economic and financial committee before seeking third party assistance. The process that evolved from the case of the Hungary rescue package included early, parallel consultations among Hungarian officials and EU and IMF staff, which agreeably resulted in expedited and efficient implementation. 109 EU and IMF teams consulted one another, at the

106 Bang, John. 2009. 107 World Bank. Zoellick Calls for ‘Vulnerability Fund’ Ahead of Davos Forum. 2009. 108 Connolly, Kate and Ian Traynor. 2003: 29. 109 IMF. "Hungary: Request for Stand‐By Arrangement.” 2008.

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same pace, through conference calls and meetings in Budapest. In the final stages of the discussions with Hungarian officials, the IMF, EU, and World Bank teams coordinated their press releases on the package, emphasizing their joint support for Hungary. Through the collective consultations, the funding institutions were able to harmonize the conditionalities of their particular funding pieces in the package. Table 16 summarizes the different funding facilities and specific conditionalities for each facility. With each program focusing on fiscal reform and financial sector regulation and supervision, Hungary will need to cut public spending in order to receive the full disbursements of funding.110 Table 16: Conditionalities of Economic Package for Hungary

Organization Funding Facility

Conditionalities

European Union

Medium-Term Loan

• Passage of legislative amendments to the draft 2009 proposal, targeting a deficit of 2.6%, and the planned fiscal governance and structural reforms

• Demonstrated progress toward revised 2008 and new 2009 deficit targets • Introduction of support package for the domestic banking sector and

adoption of measures to monitor banks’ funding needs • Strengthened financial sector supervision, including effective emergency

powers for the HFSA111

World Bank Financial Sector and Macro Stability Loan (DPL)

• Strengthened supervisory framework, including adoption of amended HFSA Law

• Loan classification regulations, including more robust regulation on loan classification based on repayment

• Enhanced assisted on-site inspection procedures, including supervision and diagnostics by international auditors

• Scenario analysis required by HFSA and NBH to be conducted by 8 largest banks

• Parametric reforms to the pension PAYG system, including restrictions on early retirement, elimination of pension bonus for early retirees, and a cap for other retirees

• Preparation of the legal regulatory framework for the payout phase of the pension second pillar

• Increased efficiencies in health services management112 International Monetary Fund

Stand-By Arrangement

• Floors on the central government system primary cash balance and the change in net international reserves

• A band around the 12-month rate of inflation of consumer prices • Non-accumulation of external debt arrears • Ceiling on the total debt stock of the central government system • Submission to Parliament of a draft support package for domestic banks

and request of initiation of extraordinary procedures for early passage • Passage of the fiscal responsibility law • Submission to Parliament of a draft law granting the HFSA special

remedial powers to accelerate the resolution of any failed bank113 Source: EU, World Bank, and IMF

110 O'Grady, Sean. 2008: 8 111 European Union. "MOU Between the Euopean Community and the Republic of Hungary." 2008.

112 World Bank. "PID Appraisal Stage." Hungary ‐ Financial Sector and Macro Stability Loan (DPL). 2009. 113 IMF. "Hungary: Request for Stand‐By Arrangement.” 2008.

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Additionally, the international funding organizations were able to agree upon and coordinate the consultation processes for program monitoring. Teams from the funding institutions will coordinate during the interim program monitoring discussions, including discussions in response to deviations from any of the funding institutions’ funding conditionalities. At the time of writing, the initial disbursements had been provided to Hungary and program monitoring had commenced. In mid-February 2009, the IMF team worked closely with the European Commission team working on the European Union’s balance in Hungary; the IMF reported that Hungary met initial program targets. However, the IMF urges the need for additional fiscal reform policy measures in order to restore debt sustainability and maintain liquidity and capital in the banking system. According to a recent press release from the IMF:

"The continued success of the policy package will be a shared responsibility between all stakeholders in the country and the international community. The IMF, in close coordination with the European Union and the World Bank, will continue assisting the Hungarian authorities on how to adapt to the current global financial turmoil and to catalyze financing as needed.”114

Enhanced Coordination for Latvia Following the joint IMF-EU-World Bank bailout of Hungary, the international funding organizations continued to support other economies in demonstrated need of financial and fiscal strengthening. The coldest months of 2008 and 2009 saw additional multilateral bailouts, including a recent US$31 billion, two-year package for Eastern European banks provided by the World Bank, European Bank for Reconstruction and Development, and European Investment Bank. Additionally, the IMF and World Bank have continued to cooperate by providing support through loans to such countries as Romania and Ukraine. Perhaps the largest coordination effort of the current crisis, however, lies in the recent package approved for Latvia involving the IMF (US$2.4 billion), World Bank (US $557.6 million), European Union (US $4.3 billion), the Nordic countries (US $2.5 billion), the Czech Republic (US $ 278.8 million), and the European Bank for Reconstruction and Development, Estonia, and Poland (US $139.4 million each). The funds will be disbursed over the following two years and are provided for macroeconomic policy reform aimed at stabilizing the Latvian economy. The resulting program of the coordinated effort is centered on maintaining Latvia’s exchange rate peg and strengthening domestic fiscal policies. With support from the World Bank, the program also will address the social sector, including education and health. It aims to nurture the economy’s emergence from slow growth, with less stress on corporate and family budgets. Core components of the program include:

• “immediate measures to stem the loss of bank deposits and international reserves; • steps to restore confidence in the banking system in the medium-term and to support private debt restructuring;

114 IMF. "Press Release: IMF Announces Staff‐Level Agreement with Hungary on First Review of Stand‐By Arrangement." 2009.

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• fiscal measures to limit the substantial widening in the budget deficit, and prepare for early fulfillment of the Maastricht criteria; and • income policies and structural reforms that will rebuild competitiveness under the fixed exchange rate regime.”115

Challenges Ahead In late February 2009, the leaders of Britain, Germany, France, and other European nations made an open plea for more countries to contribute to the IMF in light of the new and ever growing problems stemming from the current economic crisis; the leaders hoped to double the IMF’s available resources to US $500 billion.116 Concerns about limited international resources are well validated, as even the economically rich countries, including the United States, have been impacted by the current crisis. However, resources alone will not improve the situation. Coordination among the various stakeholders involved in the economic rescue packages must be continued and enhanced in order to ensure the sustainability of the policies enacted in accordance with their loans. While institutional regulations may constrict coordination, the conditionalities of the disbursement of international resources must be well-coordinated and agreed upon by all stakeholders, even those with historically less representation in order for true progress to ensue. As stated recently by French President Nicolas Sarkozy at the conclusion of an economic summit of European leaders, ''If someone needs solidarity, they can count on their partners; their partners also need to count on them to follow certain basic rules.''117 The current economic crisis has made apparent that today’s global economy is truly interconnected. Therefore, now more than ever, economically supporting a country in need is critical for a healthier, stable global economy. International collaboration, at all levels and sectors, is vital for the successful stabilization of the current economic situation and successful achievement of the Millennium Development Goals.

EU-IMF Collaboration The EU states are members of the IMF and the EU is represented by its Member States. However, the Commissioner for Economic and Monetary Affairs participates in the annual and spring meetings of the Bretton Woods institutions on behalf of the European Commission. Currently, the EU Member States coordinate their positions in the IMF in Brussels at the Economic and Financial Committee meetings and in Washington where the group called EURIMF meets regularly.118

115 IMF. Republic of Latvia: Request for Stand‐By Arrangement. 2009 116 Dougherty, Carter. 2009: 5 117 Ibid: 5 118 European Commission: Economic and Financial Affairs, Relations with IMF. 2009

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The world has been affected by the recent financial crisis and countries and organizations should work together to deal with its effects. There are signs that the crisis is spreading to emerging markets and existing pressures on developing countries will continue. The IMF should be prepared to get involved with financial emergencies as appropriate. Europe aims to work together with the IMF and use its instrument of macro financial support, mainly to help neighboring countries. Europe intends to be an active actor in the coordinated global response. The current financial crisis has emphasized the interaction between macroeconomic policies and financial markets on a global scale.119 The financial crisis has showed its effects on the recently acceded Member States of Central and Eastern Europe. In order to meet this threat, the EU plans to provide substantial medium-term financial assistance, together with the IMF, to the Member States experiencing balance of payments pressures or severe financial-stability risks. The currencies of many new members have fallen against the euro. That has made their debt repayments to European banks and their primary lenders, a much greater burden even as the global recession has meant a plunge in orders from consumers in the West. Some countries are asking for aid, both from their European partners and from the IMF to prop up their currencies and the banks. 120 Recently, Romania has negotiated with the IMF and EU on a loan package. The approval of the loan package made Romania the latest Eastern European country to be bailed out by multinational institutions. Hungary, Ukraine, Latvia, Serbia and Belarus have already received external support.121

EU-World Bank Collaboration

For the last 30 years the EU has become one of the largest and most advanced economic actors in the world. While its ultimate objective is to prompt economic prosperity and stability among its member states, it also has special instruments for economic development in the rest of the world.

Development all around the world is one of the key policy areas of the EU and the EU has been one of the major actors in international cooperation and development assistance, as well as a major donor in humanitarian aid. European Union member states and the European Commission, which combined already provide over 50 percent of all development aid worldwide, have agreed to increase their official development assistance to 0.56percent of its gross national income by 2010 on the way to achieving the United Nations target of 0.7 percent by 2015.122

119 Commission Of The European Communities, COM(2008) 706 final‐From financial crisis to recovery: A European framework for action, 2008. 120 Erlanger, Steven and Stephen Castle. 2009. 121 Lesova, Polya, 2009. 122 European Commission Directorate General for Development. More and Better Aid. 2009.

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Figure 8 shows the net official development assistance (ODA) amounts of Development Assistance Committee (DAC) members in 2007. DAC is an international forum in the OECD where donor governments and multilateral organizations come together to help developing countries reduce poverty and achieve the Millennium Development Goals.123 Figure 8: 2007 ODA Amounts, in billions of US Dollars

On the other hand, considering the World Bank as the largest multilateral development finance institution in the world, and global challenges which call for more effective cooperation among larger donors in the field of funding development, collaboration between the EU and the World Bank is inevitable. Additionally, 27 member countries of the European Union account for almost a third of International Bank for Reconstruction and Development shares, and close to half of the International Development Association.124 Therefore, to ensure a consistent strategy about developing countries, these two institutions try to work together and try to coordinate their development policies.

There have been some formal and informal collaboration activities among two institutions and in recent years cooperation efforts have broadened and deepened from initial information exchange to high-level policy dialogue and coordination on global issues.125

Some key points of collaboration include:

• Partnership agreements for accession process, World Bank assistance in new member states, candidate and potential candidate countries,

123 OECD. Final Official ODA Data for 2007. 2009. 124 World Bank. Europe and World Bank. 2009. 125 World Bank. The World Bank and European Union. 2009.

0

5000

10000

15000

20000

25000ODA AMOUNTS USD BILLION

Source: OECD

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• Partnership agreements for Africa, Middle East, Middle East, Southern Mediterranean and North Africa Region,

• Financing joint operations through parallel or co-financing trust fund arrangement, • Systematic dialogue efforts on important policy issues such as trade, migration, and debt.

European Union Accession and the World Bank

World Bank support in EU member and candidate countries differs by taking into account the countries’ related needs in their relations with the European Union. The World Bank works closely with the European Commission in assisting the new member states (Bulgaria, Romania, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic, Slovenia, and Greek Administration of Southern Cyprus) to build their capacity to use EU structural and cohesion funds. On the other hand, World Bank support in candidate and potential candidate countries focuses on assisting them to meet pre-accession reform needs. In Turkey, Croatia, and Macedonia, the World Bank assists with complementary projects and provides analytical and advisory technical assistance to support reforms that facilitate accession and integration with EU.126

The Memorandum of Understanding (MoU) signed in April 1998, (amended in March 2000, June 2003, and April 2006) between the World Bank, the European Commission and several Europe-based international financial institutions sets the general principles about cooperation to enhance the effectiveness of supports for economic development in new EU member states, and to enhance the effectiveness of the preparation of candidate and potential candidate countries.

As regards to financial support for EU candidate and potential candidate countries, the MoU notes that European Commission and international funding organizations, including the World Bank, will seek to cooperate in co-financing suitable projects.

“EU assistance initiatives, particularly in the form of grants, will play an important catalytic role and, where possible, will be combined with financing from the international financial institutions and other sources, including the private sector, with the view to increasing and better targeting financial support for these countries’ requirements.”127

Within this perspective, the World Bank has provided substantial assistance to countries which are known as EU8 and EU10 that joined the EU in May 2004 and January 2007. Since the late 1980s, aid to these countries has included lending totaling US$20 billion for various operations, and technical assistance for economic and social transformation and convergence. The World Bank has promoted far-reaching economic and social reforms in the eight Central European and Baltic countries (EU8) and supported them in pursuing the reforms necessary to set up the overarching legal framework all EU members states had to adopt. 128

Aside from traditional World Bank support for infrastructure, agriculture, rural development, and other programs, the World Bank helped the EU8 in modernizing social services and meeting 126 World Bank. The World Bank’s Role in the EU10, EU Candidate, and Potential Candidate Countries. 2007:2 127 World Bank World Bank and EU Integration – Memorandum of Understanding 15 January 2009:2 128 World Bank. The World Bank’s Role in the EU10, EU Candidate, and Potential Candidate Countries. 2007:3

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other development goals. The World Bank's support in these areas was closely coordinated with the EU Commission.

In addition to lending, World Bank assistance for new EU member states and candidate countries includes:

-Analytical and advisory services -Sharing of pilot efforts and lessons of successful reforms -Convening seminars and workshops to share experiences across EU members and candidate countries -Flexible support for emergency situations.

European Union and World Bank partnership in Africa

The European Union and World Bank are pioneer institutions in Africa in terms of the amount of funds allocated for development in this region. Both institutions share the same objective of growth and poverty eradication in Africa. Therefore coordination and collaboration between these two institutions are very important and both institutions have worked together to increase the impact of their efforts in Africa over the past several years.

The European Union adopted the European Consensus on Development and the EU Strategy for Africa in December 2005 and the World Bank adopted an Action Plan to support Africa in September 2005. Both institutions engage in frequent consultations to establish synergy and complementarities between their strategies, and Limelette process is one of the examples.129

Known as “Limelette Process,” the European Commission and World Bank come together in an annual meeting where they try to identify areas where they can work closer. The first meeting took place in April 2003 in Limelette, near Brussels, and the most recent one on September 17th and 18th, 2007 in Brussels. Meetings include management and field officers of two organizations. Every year one topic with five selected countries in Africa is discussed in the meetings. 130 Poverty Reduction Papers; Budget Support and Public Finance Management; Infrastructure, Public Finance Management; and Trade, Regional Integration were the topics selected respectively between 2003 and 2007.

In the meetings, an action plan is prepared and sent to all European Commission Delegations in Africa and to headquarters services with the request to implement these actions. Progress on the implementation of these action plans is assessed before and during the next meetings. 131

The African Development Bank (AfDB), the European Investment Bank, the International Monetary Fund, and the International Finance Corporation (IFC) also participate in these meetings.

129 Europa The EC and the World Bank at the forefront of aid to Africa. 2009. 130 Eurodad EU Coordination at the World Bank and IMF. 2009. 131 European Commission Directorate General Enlargement Relations with the International Financial Institutions. 2009.

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European Union and World Bank partnership in Middle East- Southern Mediterranean and North Africa Region The Middle East, Southern Mediterranean and North Africa region generally faces increasing challenges about living standards and some parts of the Region also face long-lasting political crises and wars. But the region has significant development potential as well as challenges. The European Union and World Bank are the major providers of external development assistance in the Region and they work together by means of donor coordination, program implementation and aid programming. Since 2002 there is a formal partnership known as “Luxemburg Group Process” which is a high level semiannual meeting between the European Commission, European Investment Bank, IMF and World Bank. In the meetings, attendees discuss about improving policy dialogue in the region and exchange information about their priorities in the region. Additionally, in 2004, the World Bank, European Commission and European Investment Bank signed a Memorandum of Understanding - Strategic Partnership Agreement to increase cooperation in the region. 132 It is clearly stated in the MoU that “a coordinated approach linking EC grant assistance operations, EIB project financing and World Bank loans and technical capacity may enhance the flexibility of each Partner in responding to the region’s needs and offers significant promise for improving development outcomes” 133 Under the MoU, partners agreed on institutional coordination, joint policy dialogue, sectoral and technical dialogue, joint project monitoring, evaluation, analytical work and joint financing.

Trust Funds

Trust funds are World Bank instruments with an external donor in the means of technical assistance, advisory services, debt relief, post-conflict transition, and co-financing. Trust funds have been used in poverty reduction programs, activities for development operations, building partnerships, and improving development collaboration. The donors of the funds are industrial countries, developing countries, the private sector, and foundations.134

In its 2007 Annual Report of Trust Funds the World Bank states:

“Trust funds have emerged as an important vehicle for channeling Official Development Assistance (ODA). The World Bank Group (WBG)-administered trust funds have been the primary channel for trust-funded aid, in comparison to other multilateral agencies. Other major multilateral agencies channeling trust-funded aid include the United Nations Development Programme (UNDP), United Nations Children’s Fund (UNICEF), Inter-American Development Bank (IADB), United Nations Population Fund (UNFPA), African Development Bank (AfDB) and Africa Development Fund (ADF).”

132 World Bank. World Bank/European Commission collaboration in MENA. 2009. 133 Memorandum of Understanding for a Strategic Partnership between the European Commission, the European Investment Bank signed on 3 May 2004 134 World Bank: Concessional Finance and Global Partnership, Trust Funds. 2009.

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The types of services provided and the role assumed by the Bank are as follows:

• Bank-Executed Trust Funds (BETFs): The Bank is the spending authority for these funds.

• Recipient-Executed Trust Funds (RETFs): The Bank passes on to a third-party recipient for development activities, typically financing the investment and recurrent needs of service delivery, capacity building and technical assistance. These recipients can be explicitly linked to Bank-financed operations or designed as stand-alone funds, and are most similar to IDA and IBRD lending programs supporting country-based initiatives. For these funds, the Bank normally plays an operational role including appraisal and supervision of funded activities.

• Financial Intermediary Funds (FIFs): These funds are heterogeneous mixes of trust funds. The major funds in this category include the Heavily Indebted Poor Countries Initiative (HIPC), the Global Environment Facility (GEF), the Global Fund to Fight AIDS, Tuberculosis and Malaria (GFATM), Carbon Funds, and the International Finance Facility for Immunization (IFFIm).135

In fiscal 2007, the biggest potion of World Bank-administered trust funds was given to the Africa Region. Between fiscal 2003 and 2007, health, debt service, post-conflict/disaster recovery, and the environment were focused sectors.136

Annual cash contributions from most donor groups increased between fiscal 2006 and 2007. Compared to the previous fiscal year, cash contributions from Sovereign Governments were about US$1.64 billion higher. Intergovernmental Organizations, including the European Commission, UN bodies, multinational and regional development banks, and international financial institutions, contributed US$211 million more than in the previous fiscal year. In terms of cumulative cash contributions received over the past five fiscal years, the United States remained the top donor to WBG-administered trust funds with a total of US$3.46 billion, followed by the United Kingdom with US$3.17 billion, the European Community with US$2.55 billion, the Netherlands with US$2.29 billion, and Japan with US$2.22 billion.137

Some of the important trust funds are given in Table 17.

Table 17: Major Trust-Funded Programs, in millions of US dollars

Major Trust-funded Programs 2007 2006 2007 2006 Cash Contributions Disbursements Global Fund to Fight AIDS, Tuberculosis and Malaria

2,060 1,313 1,607 1,138

Global Environment Facility 831 720 544 528Heavily Indebted Poor Countries 165 390 224 769IFFIm/GFA 72 - 735 -Source: World Bank 135 World Bank: Trust Fund Operations Department Concessional Finance and Global Partnerships, 2007 Trust Funds Annual Report. 2008:12‐13 136 Ibid: 11 137 Ibid: 4, 7

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IMF - World Bank Collaboration

From 1966, many reviews regarding the collaboration of the IMF and World Bank have been conducted officially, reacting to the various world challenges. Although the criticisms on the IMF and World Bank still exist, their efforts toward collaboration have improved during the past years.

Report of the External Review Committee on Bank-Fund Collaboration The Report of the External Review Committee on Bank-Fund Collaboration published in February 2007 is the latest document on the issues of IMF and World Bank collaboration. It delineated the coming challenges, past pressures and current situation of IMF and World Bank collaboration. It also analyzed the reasons why the IMF and World Band did not collaborate as well as expected. Against the overall background and the internal situation description, the review committee presented ten recommendations.

• Strengthening the culture of collaboration through a special joint meeting, ongoing dialogue and compositional changes in IDA board in favor of major IDA donors and eligible borrowers. The realization of this recommendation will depend on leadership and accountability.

• Staff exchange with same remuneration and retirement arraignments will make the collaboration more effective. Exchange experience should also be considered while the promotion is in process.

• A new understanding on collaboration does not support the division of responsibility of IMF and World Bank by the income level of borrower countries. Instead, the committee emphasized that “the delineation should be around central issues rather than countries, and the involvement of the World Bank or IMF in a country should depend on a country’s views of its needs and circumstances and the relative expertise of the institutions.”138

• IMF and World Bank cooperation facing shocks should be complementary rather than duplicative.

• The solution of collaboration on fiscal issues lies in the harmonization of recommendations. The IMF focuses on macroeconomic stability and fiscal aggregates. The World Bank focuses on public expenditure. They should depend on each other to get the timely useful information.

• The IMF gradually withdraws from financing the low-income countries. Instead, the IMF should work on the macroeconomic stability and aggregate aids with its expertise while take the sectoral level situation into consideration. Revitalize the Joint Implementation Committee. The Poverty Reduction and Economic Management unit in World Bank and the Policy Development and Review Department in IMF should collaborate in dealing with low-income countries.

• Regarding to the financial sector issues, if the issue is about significant domestic or global stability, the IMF should take the lead; if the issue is the paramount issue about financial sector development, the World Bank should take the lead.

138 Report of the External Review Committee on Bank‐Fund Collaboration. 2007:9‐10

58

• The technical cooperation must be responsive to the need of the country. Technical assistance provided by the IMF and World Bank should depend on the relative expertise of the institutions.

• Both the IMF and World Bank need to make procedural changes to meet the need of effective collaboration and information sharing.

• Monitoring from the board of IMF and World Bank, Board Committee on Collaboration and the Governors should be applied on all aspects of collaboration.

Enhancing Collaboration: Joint Management Action Plan The Enhancing Collaboration: Joint Management Action Plan, published in September 2007 is the follow up to the Report of the External Review Committee on Bank-Fund Collaboration.

Joint Management Action Plan (JMAP) is based on the results of a staff survey, recommendations from six staff work streams, and a joint staff retreat.139 The recommendations can be divided into three categories (See Appendix 4 for complete details).

• Systematic coordination at country level is essential for improving collaboration. The IMF mainly provides short-term financial analysis and related policy advice to governments while the World Bank mainly provides development strategies, sectoral policies, public expenditure priorities and poverty reduction. If the differences exist at staff level, two managements will try to solve the problem. If they cannot solve the difference either, generally, they should respect the judgment of the institution that has the primary responsibility in this issue.

• The communication on thematic issues should be enhanced according to the nature of three different thematic areas, i.e. financial sector, fiscal sector and technical cooperation

• Strengthened incentives and central institutional supports needed to support staff exchange and department collaboration.

International Aid Effectiveness Movements

After the 1990s, major donor governments and aid agencies realized that using different approaches and techniques in financing for development all around the world yielded huge costs on developing countries and made aid efforts less effective. The needs for partnerships between developed and developing countries and collaboration among all stakeholders to address the challenges of development started the beginning of an important process. From that point of view, donor governments and aid agencies began working with each other, and with partner countries to harmonize their work in order to improve their impact on development.

The most current and important steps in aid effectiveness are summarized below.

International Conference on Financing for Development, Monterrey Mexico, March 2002 The International Conference on Financing for Development on March 2002 in Monterrey, Mexico is considered as a major step in aid harmonization and alignment and has been widely 139 Enhancing Collaboration: Joint Management Action Plan. 2007:4

59

regarded as a turning point in the approach to development cooperation by the international community. The conference was organized by United Nations and more than 50 heads of state or government, over 200 ministers as well as leaders from the private sector and civil society, and senior officials of all the major intergovernmental financial, trade, economic, and monetary organizations participated in the conference.140 The official outcome of the conference is known as “Monterrey Consensus on Financing for Development”. The adoption of the Monterrey Consensus at the summit on March 22nd, 2002 established a new partnership in international development cooperation and emphasized the framework for addressing development challenges at the global, regional, and national levels. In order to eradicate poverty, achieve sustained economic growth and promote sustainable development all around the world the international community agreed that it is important to provide sufficient sources; however it requires not only an increased amount of aid to fight with poverty, but also serious commitment and closer coordination between developed and developing countries and between all related stakeholders.

Monterrey Consensus covers six areas of action about “Financing for Development”141: (i) Mobilizing domestic financial resources for development. (ii) Mobilizing international resources for development: foreign direct investment and other

private flows. (iii)International trade as an engine for development. (iv) Increasing international financial and technical cooperation for development. (v) External debt. (vi) Addressing systemic issues: enhancing the coherence and consistency of the international

monetary, financial and trading systems in support of development.

Rome High Level Forum, February 2003 Leaders of the major multilateral development banks and international and bilateral organizations, and donor and recipient country representatives gathered in Rome for the High-Level Forum on Harmonization in February 2003. The European Commission, World Bank and International Monetary Fund together with African Development Bank, Asian Development Bank, Caribbean Development Bank, OECD, European Bank For Reconstruction And Development, European Investment Bank, International Fund For Agricultural Development, Islamic Development Bank, United Nations Development Program and donor and recipient country representatives underlined the importance of harmonization of the operational policies, procedures and practices of multilateral and bilateral development institutions practices with those of beneficiary countries to improve the effectiveness of the development assistance. 142 The High Level Forum concluding statement, “The Rome Declaration on Harmonization”, summarizes the key principles, lessons and messages of the forum;143 140 United Nations. Financing for Development. 2009. 141 United Nations. Monterrey Consensus. 2009: 6‐21 142 Aid Harmonization and Alignment. Rome High Level Forum(2003). 2009. 143 Aid Harmonization and Alignment. Rome Declaration on Harmonization. 2009.

60

• There are areas of improvement in development effectiveness; the variety of donor requirements for development assistance and donor practices which do not fit well with national priorities and systems are issues that require urgent and coordinated action.

• The donor community must simplify and harmonize its requirements, reduce associated costs and implement the good practices, principles and standards for harmonizing donor assistance.

• The donor community must ensure that harmonization efforts are adapted to the country context, and that donor assistance is aligned with the recipient's priorities.

• Partner countries must undertake necessary reforms to enable progressive reliance by donors on their systems as they adopt international principles and standards.

Paris High Level Forum, March 2005 The Paris High Level Forum was hosted by the French Government on February 28th - March 2nd, 2005. Development officials and ministers from 91 countries, 26 donor organizations and partner countries, representatives of civil society organizations, and the private sector attended the forum.

The official outcome of the forum is known as "Paris Declaration on Aid Effectiveness," in which participants committed their institutions and countries to continue and increase efforts in harmonization and alignment in aid delivery. The Paris Declaration also sets out 12 indicators to provide a measurable way to track progress, and sets targets for indicators for the year 2010.144

Paris Declaration on Aid Effectiveness categorized aid effectiveness efforts under five titles:145

• Ownership: Partner countries commit to exercise effective leadership over their development policies and strategies and co-ordinate development actions where donors respect partner country leadership and help strengthen their capacity to exercise.

• Alignment: Donors commit to base their overall support on partner countries national development strategies, institutions and procedures. Therefore partner and donor countries commit to work together to strengthen partner country systems and own institutions to provide a sustainable development.

• Harmonization: Donors commit to work together to reduce and harmonize the number of separate, duplicative actions and procedures. Donors should focus on initiatives such as joint assessments, joint strategies, coordination of political engagement or practical initiatives like establishment of joint donor offices and make full use of their respective comparative advantage at a sector or country by means of delegation where appropriate.

• Managing for Results: One of the key points in aid delivery should be managing and implementing aid in a way that focuses on the desired results and use information to improve decision making.

144 Aid Harmonization and Alignment. Paris High Level Forum (2005). 2009. 145 Aid Harmonization and Alignment. Paris Declaration on Harmonization. 2009.

61

• Mutual Accountability: A major priority for partner countries and donors is to enhance mutual accountability and transparency in the use of development resources.

Accra High Level Forum, September 2008 In September 2008 the Third High-Level Forum on Aid Effectiveness took place in Accra Ghana. More than 100 ministers and heads of agencies from developing and donor countries, emerging economies, UN and multilateral institutions, global funds, foundations, and 80 civil society organizations attended the forum. During the meetings attendants reviewed the progress on the Paris Declaration implementation based on evidence collected by the Monitoring Survey applied in 54 countries and also endorsed the “Accra Agenda for Action” to deepen implementation of the Paris Declaration and respond to emerging aid effectiveness issues.146

Key points agreed in the Accra Agenda for Action include:147

• Strengthening Country Ownership over Development: Developing countries should determine and implement their development policies and ensure the country ownership of development process.

• Building More Effective and Inclusive Partnerships for Development: All development actors, including bilateral and multilateral donors, global funds, and others, should build partnership for development.

• Delivering and Accounting for Development Results: Developing countries and donors should work to develop cost-effective instruments to assess the impact of the results of aid policies. In addition as transparency and accountability are essential elements for development results all actors will be more accountable and transparent.

The next High Level Forum will be held in 2011, although the venue has yet to be decided. Donor and partner countries will keep working on aid effectiveness and focus on the indicators of Paris Declaration 2010 in the next forum.

146 Accra High Level Forum. Accra High Level Forum. 2009. 147 Accra High Level Forum. Accra Agenda For Action. 2009.

62

Chapter 3: Background Information on the Turkish Economy

Key Economic Indicators Before the 1980s, the Turkish economy mostly depended on import substitution strategies, which was a inward-looking economic strategy aimed to build a domestic economy, reduce foreign exchange demand, stimulate innovation, and make the country self reliant in critical areas. Although this strategy worked fairly successfully since the end of the 1970s, sharp increases in oil prices, recession, inflation and rising unemployment in the industrial countries had deteriorated the international environment during the late 1970s and, as in most developing countries, Turkey faced the weaknesses of its strategy. These international factors played a major role in the deterioration of the Turkish economic situation and caused a huge burden on the balance of payments and high inflation rates.148 Unsustainable fiscal policies and heavy reliance on monetary financing have manifested themselves in deep-rooted high inflation and high real interest rates. An important attempt to put the economy on a sustainable growth was in 1980, when the government declared its new policies to liberalize the economy, and to implement an export-led growth policy. After 1980, the Turkish economy changed its strategy to a more outward-oriented economic development strategy; an open economy operating with a market-based approach to curb inflation and fill the foreign financing gaps. With the help of structural change and reform programs, the Turkish economy experienced relatively high growth rates, a healthy balance of payments situation and relatively low inflation in early 1980s. However, towards the end of the 1980s, the annual inflation rate started to rise in a stepwise fashion and the growth performance was poor afterwards.149 During the 1990s, the Turkish economy used to be characterized with the following economic conditions:150

• High inflation rates for long periods • High public borrowing requirements • Lack of fiscal discipline in public sector • Serious structural problems • Instable economic and political environment

Instability in the economic and political environments caused serious economic crises in April 1994, November 2000 and February 2001 in Turkey. The political stability of the post-2002 period created a favorable ground for the implementation of a decisive fiscal consolidation and an ambitious structural reform agenda. Economic programs implemented after 2001 yield some very successful results. Structural reforms, such as public sector reform and financial sector reform, together with fiscal and monetary policy measures improved the Turkish economy

148 Gazi Ercel. 2006:2‐3 149 Ahmet Ertugrul, Faruk Selcuk. 2001: 3 150 Turkish Embassy London Office of the Economic Counselor Problems In The Past. 2009

63

significantly over the last years. As a result of broad-based structural reform initiatives, fiscal consolidation, and significant bank restructuring, the Turkish economy is on a more sound footing and now seems in a good position to embark on a stable and faster growth path. The process of European Union accession is also expected to provide an anchor for the continuation of the reform process in the years ahead. The main areas of recent economic programs implemented in Turkey include:

• Structural reforms in critical sectors such as banking, telecommunication and energy • Privatization; to minimize state involvement in the economy • Establishment of regularity and supervisory authorities • Policies to improve the functions and independence of Central Bank of the Republic Of

Turkey, Inflation targeting • Collaboration with international organizations, (World Bank, IMF, EU)

The most current outcomes of the economic programs in Turkey are summarized by main economic indicators below.

Growth

Today, the Turkish economy is considered among the biggest economies in the World. According to the IMF World Economic Outlook Database; the (estimated) Gross Domestic Product of Turkey for 2008 is about US$798 billion and the (estimated) Gross Domestic Product of Turkey for 2008 based on Purchasing Power Parity is about US$937 billion. Figure 9: 2008 World’s Biggest Economies, in billions of US dollars

01,0002,0003,0004,0005,0006,0007,0008,0009,00010,00011,00012,00013,00014,00015,00016,000 WORLD'S BIGGEST ECONOMIES

(GDP BASED ON PPP, BILLION DOLAR, 2008E)

Source:IMF, World Economic Outlook Database, October 2008

64

There have been impressive results in growth since 2001. The Turkish economy growth with an annual rate of 5.9 percent between 2002 and 2008. Economic programs implemented after 2001 resulted in one of the longest stretches of uninterrupted growth in Turkish economic history; however the international financial crisis at the end of 2008 brought it to an end. In 2008 the growth rate was only 1.1 perecnt and the fourth quarter growth rate of gross domestic product in 2008 compared to the same quarter of previous year has decreased 6.2 percent in constant prices after an increase in 27 quarters since 2001. The next and following quarterly growth rates in 2009 may realize as much worse than expected. Figure 10: GDP Growth Rate, in per cent

It must also be noted that the recent international financial crisis and its effects on Turkey are much more complicated at this time. First of all, as the current economic crisis both affected the domestic and foreign demand together, it is expected that it will take longer to repair the growth. In the previous crises whenever there was problem in domestic demand, the external environment was relatively supportive; however, today markets all around the world are faced with similar problems.

Therefore, the effects of the recent crisis will be substantial for the Turkish economy, which is much more export-oriented in recent years, and has high levels of unemployment. The sharp rises in unemployment rates during the last periods of 2008 and in the beginning of 2009 are the first indicators of the current financial crisis in Turkey. The changes in export/GDP, fixed investment/GDP ratios and decreases in corporate balance sheets and investment plans in all sectors of economy are also notable reasons which explain the effects of crisis.

In order to mitigate the negative effects of the current global economic crisis, the Turkish government and Central Bank of the Republic of Turkey adopted some measures in the last months. The main measures, in broad terms, include:151

- Liquidity support for the Banking sector, - Tax and premium support and other incentives, - Credit and guarantee support for production and export, - Financial supports and other measures.

151 Undersecretariat of Treasury Kuresel Mali Krize Karsi Politika Tedbirleri 21 April 2009 < http://www.hazine.gov.tr/irj/portal/anonymous>

5.34.3 4.4

1.5

5.9

01234567

1982‐1986 1987‐1991 1992‐1996 1997‐2001 2002‐2008

GDP Growth Rate (Annual Average %)

Source: TURKSTAT, Treasury

65

Inflation

High inflation rates have been one of the major problems of the Turkish economy for the last 30 years. After a long period with high inflation rates, over the past eight years Turkey has experinced remarkable low inflation rates and faced single digit inflation since 2004. Figure 11: Inflation Rate, CPI

Population – Employment – Unemployment

Turkey, with its population of approximately 70 million, has a great advantage with its young population rate. The majority of the population consists of young people, about 28 percent of whom are under the age of fourteen. In more developed countries this rate is much lower. Turkey’s young population is an important contributor to labor force growth and has helped Turkey to rank highest among its competitors.

76.1 79.8

99.1

67.7 68.8

39.0

68.5

29.7

18.49.3 10.5 9.7 8.4 10.1 7.9

0

20

40

60

80

100

120

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*

INFLATION RATE (Consumer Price Index)

Source: TURKSTAT, CBRT

*Annualized as of March 2009

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68

Although Turkey has achieved a remarkable economic transformation in the last 10 years, it still faces risks from a large current-account deficit. Regarding the components of the current account, which are goods, services, income and current transfers, Turkey mostly has a deficit resulting from foreing trade transactions. Although the foreign trade deficit is partially financed by surpluses from service transactions, the total amount of the current account has still been an increasing deficit for the last seven years.

The current account deficits, reaching to a degree that cannot be carried out any more, constitute the main reason of the payments balance crisis. Today the current account deficit seems to be one of the structural problems in Turkish economy.

Figure 16: Current Account Deficit/GDP Ratio

The share of Foreign Direct Investment has been increasing in Current Account financing, approximately 45 percent of the deficit was financed by FDI in 2008. The external borrowing of non-bank private sector is also increasing with the aim of financing trade and investment activities.

Table 18: Financing of Current Account Deficit, in billions of US dollars

2002 2003 2004 2005 2006 2007 2008 2009 Jan.

1. Current Account Balance ‐0.6 ‐7.5 ‐14.4 ‐22.1 ‐32.1 ‐38.2 ‐41.6 0.3 2. Total Capital Inflows 7.5 7.1 14.2 37.3 38.2 44.7 36.0 ‐2.3 ‐FDI Inflows 1.1 1.8 2.8 10.0 20.2 22.0 18.0 1.1

‐ External Borrowing of Non‐Bank Private Sector

1.9 2.3 7.7 12.5 17.1 28.7 27.0 ‐0.4

‐ Other (net) 4.5 3.1 3.7 14.7 0.9 ‐6.0 ‐9.0 ‐2.93. Errors and Omissions 0.8 4.5 1.1 2.6 0.0 1.6 4.6 1.7 4. Change in FX Reserves ‐6.2 ‐4.0 ‐0.8 ‐17.8 ‐6.1 ‐8.0 1.1 0.3 Source: CBRT

0.3

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01234567

2002 2003 2004 2005 2006 2007Current Account Deficit/GDPCurrent Account Deficit/GDP (Excluding Energy Price Impact)

With 2002 energy pricesSource: Treasury

CURRENT ACCOUNT DEFICIT/GDP %

69

Public Finance

The recent fiscal policy implementations reflected themselves on the balances of the general government sector and declining debt figures. This enabled Turkey to achieve two relevant Maastricht criteria. The “general government deficit / GDP” ratio has been less than 3 percent since 2005 and the “public debt stock / GDP” ratio has been below the 60 percent threshold since 2004.

Figure 17: EU Defined Government Budget Deficit/GDP

Figure 18: Public Sector Debt Stock

The 5 percent GDP primary surplus target which was established by the most recent IMF Stand-By Arrangements was effectively functioned as a fiscal anchor. The primary surplus target acted as a simple and highly visible benchmark to assess fiscal commitment. Achievement of this target over years has played a key role in restoring confidence and bringing down interest rates.

24.5

10.2 9

4.50.6 0.1 1.3

0

5

10

15

20

25

30

2001 2002 2003 2004 2005 2006 2007

EU DEFINED GENERAL GOVERNMENT BUDGET DEFICIT % OF GDP

Source: TREASURY

73.767.4

59.252.3

46.139.4 39.5

0

10

20

30

40

50

60

70

80

2002 2003 2004 2005 2006 2007 2008

PUBLIC SECTOR GROSS DEBT STOCK, EU DEFINED %GDP

Source: TREASURY

70

Development Plans and Turkey’s Priorities

The first Five Year Development Plan for Turkey was prepared for the period for 1963-1967 by the State Planning Organization (SPO). After this time, the Development Plans have played a significant role in the economic and social development process of Turkey. SPO has followed economic and social developments at the global and national levels. SPO has used macroeconomic models in the development plans to predict the economic situation of Turkey. 152

Annual programs and medium term programs have been prepared in a compatible way with the development plans. In these programs, the current situation has been analyzed and the macroeconomic, sectoral and regional policies, goals, targets, and priorities have been modified. These programs have been monitored and evaluated from the perspective of the related articles of the decree of the Council of Ministers on the Implementation, Coordination and Supervision of Programs.153

In these programs, priorities and their measures have been set in three-year periods to reach long-term objectives. The objectives and priorities of the medium term programs are considered during the preparation of ministries and government agencies and the realization of administrative and legal arrangements and in the decision-making and implementation processes of the agencies.

For the period of 2007-2013, the Ninth Development Plan was prepared with a new approach. The Ninth Development Plan is a transition from a planning concept based on formulating each area in detail to a strategic approach.

The Ninth Development Plan is the fundamental policy document that sets the transformations in economic, social, and cultural areas of Turkey in an integrated approach. The necessary documents in the EU accession process, like the Pre-Accession Economic Program and the Strategic Coherence Framework, are based on the Plan.

The vision of the Plan was determined as “Turkey, a country of information society, growing in stability, sharing more equitably, globally competitive and fully completed her coherence with the European Union”. 154

152 State Planning Organization, Turkey, DPTMAKRO‐ARZ Model. 2008. 153 State Planning Organization, Turkey, Medium Term Program (2009‐2011). 2008 154 State Planning Organization, Turkey, Ninth Development Plan. 2008

71

Table 19 outlines the development axes and targets were established to achieve the Plan’s vision.

Table 19: Development Axes and Target of the Ninth Development Plan

Development Axes Targets

Increasing Competitiveness

• Making Macroeconomic Stability Permanent • Improving the Business Environment • Reducing the Informal Economy • Improving the Financial System • Improving the Energy and Transportation Infrastructure • Protecting the Environment and Improving the Urban

Infrastructure • Improving R&D and Innovativeness • Disseminating Information and Communication Technologies • Improving Efficiency of the Agricultural Structure • Ensuring the Shift to High Value-Added Production Structure in

Industry and Services

Increasing Employment

• Improving the Labor Market • Increasing the Sensitivity of Education to Labor Demand • Developing Active Labor Policies

Strengthening Human Development and Social Solidarity

• Enhancing the Educational System • Making the Health System Effective • Improving Income Distribution, Social Inclusion and Fight

Against Poverty • Increasing Effectiveness of the Social Security System • Protecting and Improving Culture and Strengthening Social

Dialogue

Ensuring Regional Development

• Making Regional Development Policy Effective at the Central Level

• Ensuring Development Based on Local Dynamics and Internal Potential

• Increasing Institutional Capacity at the Local Level • Ensuring Development in the Rural Areas

Increasing Quality and Effectiveness in Public Services

• Rationalizing Powers and Responsibilities Between Institutions • Increasing Policy Making and Implementation Capacity • Developing Human Resources in Public Sector • Ensuring the Dissemination and Effectiveness of e-Government

Applications • Improving the Justice System • Making Security Services Effective

72

Government Agencies in Turkey Related with the International Funding Organizations

World Bank The general project cycle and the responsible government organizations in a World Bank financed project is summarized in the below chart. The information in the chart only gives the general outline of a standard World Bank financed project. Therefore, in special conditions or specific projects there may be different responsible organizations. 155

In a standard World Bank financed project, the project cycle consists of different stages like planning, negotiation, approval, implementation, supervision, and evaluation. Many different government organizations have different roles and responsibilities within this cycle. In addition, the World Bank and related government organizations also work closely throughout the process. Based on documents prepared by the Undersecreteriat of Treasury during a standard World Bank financed project in Turkey, the project cylce consists of the following:

Planning Stage includes: • Project preparation activities • Identification of the scope, objectives, impacts, risks, timetable of the project • Pre-evaluation of the project; assessment of the economic, technical, institutional,

financial, enviromental, and social aspects of the project • Evaluation of the implementing agency

Negotiation Stage includes: • Analysis of the project within the Investment Program • Negotiations on the terms of the loan • Approval of the World Bank Board of Executive Directors

Signature Stage includes: • Official signature of the Project Aggreement • Cabinet Decision on the Project Aggreement

Disbursement Stage includes: • Opening the special account of the project • Disbursement of funds

Implementing Stage includes; • Project implemention activities • Progress reviews • Project completion activities

Audit and Evaluation Stage includes; • Independent audit of the project • Evaluation of the project

155 Undersecretariat of Treasury, Directorate General of Foreign Economic Relations Department Manual. 2004: 17‐23

73

•

COUNTRY PARTNERSHIP STRATEGY

PROJECT

PLANNING STAGE

NEGOTIATION STAGE

SIGNATURE STAGE

• Undersecretariat of Treasury • State Planning Organization • Project Implementing Agency

• Undersecretariat of Treasury • State Planning Organization • Project Implementing Agency

• Prime Ministry of Turkey • Undersecretariat of Treasury • Project Implementing Agency

DISBURSEMENT STAGE • Undersecretariat of Treasury • Project Implementing Agency • Central Bank of the Republic of

Turkey

IMPLEMENTING STAGE • Undersecretariat of Treasury • State Planning Organization • Project Implementing Agency

AUDIT & EVALUATION STAGE

• Undersecretariat of Treasury • Board of Treasury Controllers • Project Implementing Agency

74

European Union IPA Institutional Structure

On June 12th, 2007, the Commission adopted Regulation (EC) No. 718/2007 implementing the IPA Framework Regulation. In this regulation, structures and authorities responsible for planning, implementing, controlling and monitoring IPA funds are described. The key institutions and their responsibilities are listed in Table 20.

Table 20: Key Institutions in IPA Institutions Responsibilities National IPA Coordinator (NIPAC)

Overall coordination of assistance under the IPA Regulation:

- coordination of the programs - annual programming for the transition

assistance and institution building component at national level

Strategic Coordinator for the Regional Development Component and the Human Resources Development Component (Sectoral Coordinator)

Coordination of the regional development component and human resources development component:

- coordination of strategic coherence framework (SCF)

- coordination between sectoral strategies and programs.

Operating Structure (OS) For each IPA component or program, Management and implementation of assistance under the IPA Regulation

Competent Accrediting Officer (CAO) A high-ranking official in the government or the state administration Head of the national fund:

- responsible for the legality and regularity of the underlying transactions;

- responsible for the effective functioning of management and control systems.

National Authorising Officer (NAO) Financial management of EU funds:

- internal management and control - contact point for financial information

National Fund (NF) Acting as a central treasury: - organization of the bank accounts, - authorization of the transfer of funds - financial report to the Commission.

Audit Authority (AA) Functionally independent from all actors in the management and control systems, Verification and function of control systems.

75

According to the Regulation, Turkey designated the following structures and authorities in the event of decentralized management of assistance under IPA:

Figure 19: IPA structure and authorities in Turkey

Sectoral CoordinatorState Planning Organization (SPO)

(SCF)

Regional Development

Trans. Ass.InstitutionalBuilding

Cross‐border

Cooperation

Human Resources

Development

RuralDevelopment

Operating Structure

(OP)Ministry of

Environment and Forestry

Operating

Structure (OP)Ministry of

Transport

Operating Structure (OP)

Ministry of Industry and

Trade

Operating Structure(OP)

Ministry of Labour and Social Security

Operating Structure (OP)

Ministry of Agriculture and Rural Affairs

NATIONAL IPA COORDINATOR (NIPAC)Secretary General for the EU Affairs (EUSG)

Source: Screening Chapter 22: Regional Policy and Coordination of Structural Instruments, Agenda Item II: Institutional Framework, CountrySession: The Republic of Turkey, 9-10 October 2006

UNDERSECRETARIAT OF TREASURY

National Fund (Financial Management)

THE BOARD OF TREASURYCONTROLLERS

Audit

Turkish Court of Accounts will continue to be responsible for external audit.

IMPLEMENTING AGENCIES (IA’s)

‐Operating Structures‐ CFCU

‐ IPARD Agency (Treated ‐separately)

NATIONAL AUTHORISING OFFICER (NAO) (UNDERSECRETARY OF TREASURY)

Source: Screening Chapter 22: Regional Policy and Coordination of Structural Instruments, Agenda Item II: Institutional Framework, CountrySession: The Republic of Turkey, 9-10 October 2006

76

The Financial Cooperation Board (FCB) was established for overall coherence for financial cooperation with the EU as well as participation in Community Programs through political ownership and interministerial coordination. FCB involves:

• Chief Negotiator • NIPAC, • NAO, • Sectoral Coordinator, and • Undersecretaries of Ministry of Foreign Affairs and Ministry of Finance

Regional Development and Human Resources Development Coordination Committee and OP Monitoring Committees were formed for the implementation of assistance IPA components III and IV.

Community Programs and Responsible Government Organizations

“Community Programs” refer to an integrated series of actions adopted by the European Union in order to promote cooperation between its member states, to support the idea of Europeanness, innovation, and entrepreneurship.

On the basis of Association Council decisions or Framework Agreements, candidate countries may also participate in certain European Community programs and agencies.

The Framework Agreement between Turkey and the European Community on the General Principles for the Participation of Turkey in Community Programs was signed on February 26th, 2002, and entered into force on September 2nd, 2002.

The main Community programs that Turkey participates or plans to participate in and related responsible government organizations are listed in Table 21.156

156 State Planning Organizations. Community Programs and Agencies. 2009.

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Table 21: EU Community Programs

Community Program Responsible Government Organization/Unit I. Community Programs Open to Public Sector

IDABC (Interoperable Delivery of European e-Government Services to public Administrations, Business and Citizens)

State Planning Organization Information Society Unit

FISCALIS : Ministry of Finance EU and Foreign Affairs Directorate

CUSTOMS 2007: Undersecretariat of Customs EU and Foreign Affairs Directorate

II. Programs in the Social Area PROGRESS: Ministry of Labor and Social Security EU

Unit, Employment Agency of Turkey, Ministry of Foreign Affairs

PUBLIC HEALTH PROGRAMME Ministry of Health Refik Saydam Hygiene Center

COMBATING DISCRIMINATION Ministry of Labor and Social Security GENDER EQUITY Ministry of Labor and Social Security COMBATING SOCIAL EXCLUSION Ministry of Labor and Social Security INCENTIVE MEASURES IN THE FIELD OF EMPLOYMENT

Employment Agency of Turkey

III. Programs in the Field of Education and Culture

LIFELONG LEARNING PROGRAMME Turkish National Agency Center for European Union Education and Youth Programs

YOUTH IN ACTION Turkish National Agency Center for European Union Education and Youth Programs

CULTURE Ministry of Culture and Tourism IV. Other Community Programs COMPETITIVENESS AND INNOVATION FRAMEWORK PROGRAMME (CIP):

Ministry of Industry and Trade, KOSGEB

SEVENTH FRAMEWORK PROGRAMME

The Scientific and Technological Research Council of Turkey, TUBITAK

e-CONTENT State Planning Organization Information Society Unit

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International Monetary Fund

With its special funding mechanism, the IMF is quite different than other international funding organizations. As the IMF funds are not used for specific projects or sectors but rather the IMF provides “financing in support of adjustment to a balance of payments,” the responsible government organizations in relations with the IMF are more limited than with the World Bank and EU.

In general, the Undersecreteriat of Treasury and Central Bank of Republic of Turkey are the responsible organization with IMF-Turkey relations. However, during the implementation period of Stand- By Arrangements, many government organizations also have different roles and responsibilities.

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Chapter 4: Conclusions and Recommendations

Opportunities for Collaboration

Globalization Since globalization has created a more interconnected international economy, the prospects for multilateral cooperation have also grown. Rapid increases in technology have broken many of the barriers in information sharing. Additionally, long periods of peace and prosperity in many countries since World War II have fostered collaboration in many critical areas, such as environmental protection, human rights, and nuclear nonproliferation. Thus, globalization represents not only a reason but also an opportunity for collaboration among the IMF, World Bank, EU, and other international funding organizations. Globalization has brought on an increased understanding of countries beyond a country’s borders. People today are more able to sympathize with the plight of peoples living in cycles of poverty outside their own countries because technology brings the images of suffering into their homes faster than ever before. Additionally, countries’ institutions have come to recognize that supporting growth in other countries can make them more prosperous trading partners. Therefore, numerous international development and funding organizations have emerged and continue to provide support around the world. Recognizing that the existence of so many different organizations and, inherently, different procedures can be burdensome on the world’s poor countries, many of the world’s international funding organizations and countries’ governments have already met to determine some new goals for aid effectiveness, as discussed earlier in this report.

Current Financial Crisis As the world has become more globalized, an economic shock in one country can easily and quickly cause major problems around the world. The current financial crisis is proof that the world’s economies are inextricably tied and require steadfast monitoring and rapid responses to crises. While the IMF, World Bank, and EU have made efforts to provide increased funding to countries hardest hit by the current crisis, their collaborative work is not yet complete.

Complementary Missions The mission of the World Bank is to help developing countries and their people reach development goals by working with partners to alleviate poverty. The World Bank believes that in order to have sound economies, the developing countries must build capacity in their governments, implement legal and judicial systems, develop financial systems, and combat corruption.157

157 World Bank. About Us. 2009.

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The International Monetary Fund is working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. 158

The missions of the IMF and World Bank are complementary. Both of them have the goal of poverty reduction, while the IMF could contribute much in the development of financial systems. They should be aware of each other’s strengths to avoid the duplication of activity. A clear division of labor and expertise could increase the working efficiency dramatically. On the other hand, EU is also complement IMF and World Bank with its similar concerns and activities on global, sectoral and country level issues. Countries’ needs can also be better met if these organizations take into consideration beneficiaries’ priorities and their specific conditions.

Debt Relief – Africa It is essential to stress the need for rich nations to urgently deliver on their promises of more generous aid, deeper debt relief, and wider trade opportunities for Africa in order to assist the continent in achieving meaningful progress toward the MDGs. Furthermore, multilateral financial organizations should collaborate more closely in order to provide debt relief for countries in the African region, particularly with the growing impacts of political strife, food crises, and HIV and AIDS epidemic. However, this should not translate into a dependency of the low-income countries on these organizations and the respective developed countries.

Millennium Development Goals For Turkey, achieving the MDGs overlaps with attaining EU accession. It is essential for international funding organizations to have standard, understandable, measurable indicators that can be monitored in order to assess the efficiency and effectiveness of their activities for development. The MDGs provide this indicator and present an opportunity to help improve performance of both borrowers and international funding organizations.

Turkey’s Ninth Development Plan Turkey is an exemplary case of development planning. As discussed earlier in this report, Turkey’s Ninth Development Plan puts forth new institutional and structural regulations to develop its economy and increase its relevance in the European Union. Its goals toward EU accession in particular raise numerous opportunities for increased collaboration among Turkey, the EU, IMF, and World Bank.

IMF Stand-By Arrangements Currently, the IMF and Turkey are under negotiations for Turkey’s 20th Stand-By Arrangement. As discussed earlier in this report, Turkey’s most recent Stand-By Arrangement set goals for sustained growth, facilitating union with the economies of the EU, and facilitating an orderly exit from IMF fund support. If this third goal is to be met in the near future, Turkey and the IMF must work closely to ensure that the Stand-By Arrangement is designed with Turkey’s best interests in mind.

158 IMF. About the IMF. 2009

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Coordination among Turkish Government Organizations As it was simply illustrated previously, there are various government organizations that have different roles and responsibilities with EU, World Bank and IMF relations in Turkey. Although there are efforts to align organizations, working together to achieve desired results and facilitate the efficiency of funds provided by different sources, more action is needed in terms of collaboration. It is obvious that collaboration among related government organizations would help to prevent duplication and competition of efforts and provide greater potential for better improvements. We must admit that the subject of development and funding development in Turkey like any other country is diverse in nature and involves various sectors and organizations of the economy. Many organizations and ministries are involved in one or more of the issues separately but they are also interrelated. Within Turkish ministries, undersecretariats, municipalities and other government organizations there can be a World Bank or EU project implementing agency, can be a contact point of European Community program, or can have other responsibilities in EU, World Bank, or IMF relations. There are also situations in which a single government organization has multiple responsibilities. Collaboration among these various government organizations will enhance efficiency of both international funding organizations and Turkey as a fund user. To benefit from this support, Turkey should also ensure the necessary coordination among the international funding organizations.

Recommendations

Recommendations for International Funding Organizations

1. The agreements and goals for increased collaboration are noble strides toward strengthening collaborative partnerships in development. The international funding organizations, donor countries, and recipient countries must all ramp up efforts to reach the targets set forth in the agreements.

2. The IMF, World Bank, and EU must work collaboratively to monitor and evaluate the effectiveness of their financing of countries greatly affected by the current financial crisis. As they met prior to granting funds to countries like Hungary, Latvia, and Romania, they must also continue to coordinate activities and technical advice so as to consistently support the multiple organizations’ efforts in these countries. As their funding efforts complement one another, so too must their monitoring and evaluation efforts.

3. The IMF and World Bank should follow the Joint Action Plan, a detailed follow-up to the Report of the External Review Committee on IMF-World Bank Collaboration designed by the staff of the International Monetary Fund and the World Bank, to make their performance also complementary. They should focus more on the country and sector level, and periodically discuss related projects, programs and technical assistance. When they design agreements with specific countries, they should take the countries’ agreements with other international organizations and country priorities into consideration.

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4. A permanent collaboration working group with experts from both the World Bank and

IMF should be established. The permanent collaboration working group should be located in the specific country that uses the funds and technical services from the IMF and World Bank. World Bank experts could provide their information on government expenditure and sectoral investigation in the related field to help the IMF adjust its preliminary conditions on a country-specific basis. The IMF experts could share their macroeconomic assessment to the World Bank. They could work closely at the country level to meet the Millennium Development Goals. This collaboration working group should exist as long as the country uses the funds from IMF. In this way, both the organizations and the borrower countries could save much time and money in future similar programs.

5. The international funding organizations should reevaluate their activities and funding mechanisms for similar countries and establish initiatives that would build capacity, improve the socio-economic environment, and address the MDGs. The effects of their policies and programs should be sustainable and should provide a long-term focus on poverty reduction.

6. Countries that receive any kind of assistance related to the MDGs should be actively involved in the coordination among the assistance from different international funding organizations. International funding organizations should respect and follow the policies regarding the MDGs in specific countries to help them achieve these goals.

7. Turkey’s 20th Stand-By Arrangement should be Turkey-centered. Countries are usually not willing to implement reforms unless they select the reforms themselves and they rarely sustain reforms if they are imposed by funding organizations. Moreover, the SBA should be based on a strong coordination and cooperation with stakeholders and other international funding organizations such as the World Bank and EU. It should put great emphasis on building Turkey’s capacity to minimize the effects of economic shocks and sustain a rate of growth that is healthy for Turkey. Additionally, the agreement should include much technical assistance from the IMF to guide Turkey out of the current crisis toward a path of sustained growth. Where possible, the IMF should identify and help coordinate complementary activities of the World Bank and EU in Turkey.

Recommendations for Turkey

1. As Turkey has been affected by the current financial crisis (high unemployment rate and decreasing growth rate), it should seek out as much technical assistance as possible to stabilize its current economic problems and work toward a swift agreement with the IMF in order to obtain the proposed Stand-By Arrangement (SBA). The new SBA should be Turkey-centered, taking Turkey’s priorities and development plans into consideration. The SBA based on a strong coordination and cooperation with stakeholders and other international funding organizations will help Turkey to mitigate or eliminate uncertainty. It will also increase credibility and sustainability of the Turkish economy and help Turkey to attract more foreign funds, which will be inevitably necessary especially during the financial crisis period.

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2. World Bank, IMF and EU have projects and funds in Turkey. They have the same

concerns and aims, like helping Turkey conduct economic-social reforms, stabilize the economic growth, and realize EU accession. Turkey can make use of their complementary missions and comparative advantage to maximize the benefits, and help these three organizations to be economic, efficient and effective in their activities.

3. Since the World Bank, IMF and EU continually have projects in Turkey, it will be very time and money efficient if the Turkish government could help these three organizations establish a working group. Experts from these three organizations could work together even though they might work on different projects right now. To know each other in work is the first step for the IMF, World Bank and EU to have effective collaboration.

4. In light of Turkey’s full membership negotiations with the EU, the international financial organizations must collaborate and harmonize their practices and policies in Turkey to ensure Turkey’s development toward EU accession. The financial agreements signed by Turkey and related international funding organiations should promote collaboration and coordination among development partners by considering Turkey’s main development problems, social-economic performance, and development strategy, as well as the funding organiations’ comparative advantages. With its immense resources in financial analysis, the IMF must provide technical assistance and advice to Turkey that would promote Turkey’s advancement toward meeting EU accession criteria. Additionally, the EU must work closely with the World Bank and IMF to ensure that proper accession policies, practices, and goals are met through World Bank and IMF assistance. A lack of communication or harmonization could be highly counterproductive if the funding activities do not promote EU accession.

5. Turkey should focus on achieving the MDGs. As such, critical infrastructure investments should be made, which will raise productivity and efficiency, enable low-cost service delivery, and accelerate EU accession and global integration. Furthermore, investing in education will facilitate the achievement of the MDGs and Education for All goals by 2015, including gender parity at all levels, through holistic sector plans that reflect the country context and include cost-effective expansion of post-primary education.159 Improving employment opportunities is yet another approach to address the MDGs, particularly so in that one of the persistent macroeconomic crises for Turkey has been unemployment. The country has pursued several efforts in an attempt to reduce unemployment. Increased efforts are needed in order to continue to address this issue, such as investments in social enterprises. Finally, Turkey should strengthen health systems that will help reduce infant mortality and improve living standards for many in the country, helping with the reduction of poverty and eventually helping with EU accession.

6. Turkey must firmly adhere to its policies as laid out in its development plan. While doing this may cause Turkey to decline some funding opportunities, remaining true to its goals would likely prove a more efficient use of resources as it could help prevent scope

159 Africa Steering Group. (2008). Achieving the Millennium Development Goals in Africa: Recommendations of the MDG Africa Steering Group. New York.

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creep and allow Turkey to work with resources it has already designated for funding management.

7. Turkey should facilitate increased coordination among the various international financial

organizations in order to ensure that the new Stand-By Arrangement complements other missions’ funding in Turkey.

8. Poor collaboration and coordination between the Turkish government organizations and institutions in relations with the EU, World Bank and IMF yields the failure of achieving a sustained, long-term, cost-effective development in Turkey. Therefore, especially the government organizations that have broad authorities and responsibilities over other institutions and sectors should coordinate the activities of all relevant stakeholders and set policies that consider partnership and collaboration as efficient and effective means of improvement. Specifically, the Undersecretariat of Treasury and State Planning Organization, which have broad responsibilities both in EU, World Bank and IMF relations, should ensure proper coordination among government agencies. To ensure consistency and coherence between the applications of different government organizations on same or similar topics, sectors, or policy areas, the Undersecretariat of Treasury and State Planning Organization should take more responsibility in the coordination of the organizations. During the process that starts from planning and ends with evaluation of the programs or projects, the Undersecretariat of Treasury and State Planning Organization should take into consideration the comparative advantages of different international funding organizations and complementary characteristics of their activities in order to prevent the duplication of efforts and waste of money and time to achieve the maximum benefit of provided funds. Undersecretariat of Treasury and State Planning Organization should:

• Set up policies and procedures to encourage organizations to collaborate that result in consistency with national development strategies

• Establish structures or committees to monitor and evaluate collaboration and coordination activities

• Ensure the necessary coordination among the international funding organizations

9. Sometimes the efforts to collaborate are difficult because of the complex nature of organizational structures of relations with the EU, World Bank and IMF. Considering the World Bank project cycle, the IPA process in Turkey, and the community programs in which Turkey participates, it is always not very easy to understand and analyze the whole system. Therefore, governments should consider undertaking the necessary organizational changes at the national level to achieve integration such as:

• Simplifying and clarifying organizational structures • Clearly determining the terms of reference of government organizations • Minimizing administrative bureaucracy

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In sectors where different types of sources, like EU, World Bank, and IMF funds, are used, parallel structure and policies should be established to ensure integration, and communication channels should be established to ensure the flow of information among related organizations.

Joint assessments, joint strategies, coordination of engagement and practical initiatives such as the establishment of joint departments responsible for relations with all international funding organizations instead of separate departments responsible solely for the EU or World Bank could help to achieve the integration.

Additionally, the government should take necessary actions and put controls to prevent high staff turnover in departments that are responsible with the EU, World Bank and IMF. High staff turnover in responsible departments’ results in the transferring of expertise and lessons learned from these organizations, programs, and projects, and prevents institutional capacity building. Maintaining the stability of experienced staff until the end of implementation of specific projects or programs and benefiting from their experiences in the next projects and programs would help the economy, efficiency and effectiveness of these funds in Turkey.

10. In addition to horizontal coordination there should also be vertical coordination between

parent ministry and subordinate agencies and bodies in the same sector. In organizations like Ministry of Education, Ministry of Health and Ministry of Agriculture where there are many different programs and projects financed by different international funding organizations the parent government organization should ensure proper coordination and integration of all related programs, projects, or activities. There should be specific point of contacts in the parent ministries within each sector/ministry to ensure, monitor and assess collaboration and coordination.

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Recommendations for Further Research This project focused on collaboration and possible collaboration of international funding organizations. The main international funding mechanisms used in Turkey were also analyzed. Due to time limitations and the limited number of collaboration points between funding organizations, a number of useful analyses could not be implemented. First, an econometric model, which would capture the effect of collaboration, could not be established. Under future research, in order to determine the effectiveness and efficiency of international funding in Turkey, it would be beneficial to devise an econometric model to analyze the distribution of international funds by sector in Turkey and study the changes in pertinent indicators. For example, one could research where international funds are being used in Turkey for purposes of developing the education system as a proportion of total public expenditure on education in the respective region, and research changes in key education indicators like primary school enrollment rates (as a percent of total school aged-children). The effect of projects funded by international funding organizations on these indicators could also be measured by doing cost-benefit analyses of the projects. Additionally, the international funding organizations’ responses to economic crises and the Millennium Development Goals could also serve as potential areas for the research on collaboration. As the effects of the current economic crisis on the markets in today’s interconnected global economy have become more and more clear, the international financial organizations have responded swiftly to the crisis. This study revealed some of the recent collaborative efforts of the IMF, World Bank, and EU in Eastern Europe in response to the current crisis. Further study could be carried out to evaluate the outcomes of these efforts, which will appear in the coming months. The Millennium Development Goals, which are good indicators for development, were mentioned as possible collaboration points in this study. Countries and international organizations have been striving to achieve these goals. The MDGs focus on health, education and gender equality. These sectors could be analyzed as a development tool and studied to determine the effects of collaboration.

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Appendix 1: Regional Disparities in Poverty Levels

Figure 20: Projections for Regional Poverty Disparities

Source: World Bank “Poverty Overview" 2009.

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Appendix 2: International Funding Organizations’ Net Financial Flows

Figure 21: IMF Net Financial Flows for the year 2006, in US dollars

IMF Net Financial Flows represents the disbursements of IMF loans and credits, concessional and nonconcessional, less repayments of principal.

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Figure 22: World Bank Net Financial Flows for the year 2006, in US dollars

World Bank Net Financial Flows represents the disbursements of World Bank (IBRD and IDA) loans and credits less repayments of principal.

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Figure 23: European Commission Net Financial Flows for the year 2006, in US dollars

The Net European Commission Donor Flows represents the net bilateral official development assistance (ODA), under the Development Assistance Committee (DAC) definition of ODA, made by the European Commission to countries on the official DAC list of aid recipients.

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Appendix 3: Millennium Development Goals Table 22: Millennium Development Goals

Goal 1. Eradicate extreme poverty and hunger Objectives: • Halve, between 1990 and 2015, the proportion of people whose income is less than one dollar a

day. • Halve, between 1990 and 2015, the proportion of people who suffer from hunger. Goal 2. Achieve universal primary education Objective: • Ensure that, by 2015, children everywhere, boys and girls alike, will be able to complete a full

course of primary schooling. Goal 3. Promote gender equality and empower women Objective: • Eliminate gender disparity in primary and secondary education, preferably by 2005, and to all

levels of education no later than 2015 Goal 4. Reduce Child Mortality Objective: • Reduce by two thirds, between 1990 and 2015, the under-five mortality rate Goal 5. Improve Maternal Health Objective: • Reduce by three quarters, between 1990 and 2015, the maternal mortality ratio. Goal 6. Combat HIV/AIDS, malaria, and other diseases Objectives: • Have halted by 2015 and begun to reverse the spread of HIV/AIDS. • Have halted by 2015 and begun to reverse the incidence of malaria and other diseases Goal 7. Ensure environmental sustainability Objectives: • Integrate the principles of sustainable development into country policies and programs and

reverse the losses of environmental resources. • Halve by 2015 the proportion of people without sustainable access to safe drinking water. • By 2020 to have achieved a significant improvement in the lives of at least 100 million slum

dwellers Goal 8. Develop a global partnership for development Objectives: • Develop further an open, rule-based, predictable, non-discriminatory trading and financial system • Address the special needs of the least developed countries • Address the special needs of landlocked countries and small island developing States. Deal

comprehensively with the debt problems of developing countries through national and international measures in order to make debt sustainable in the long term.

• In cooperation with developing countries, develop and implement strategies for decent and productive work for youth.

• In cooperation with pharmaceutical companies, provide access to affordable essential drugs in developing countries

• In cooperation with the private sector, make available the benefits of new technologies, especially information and communications.

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Appendix 4: Joint Activity Plan160

I. Key Country-level Actions

• As approved by their respective area department directors and regional vice presidents, IMF mission chiefs and World Bank country directors (or other formally designated interlocutors) have responsibility to:

discuss Bank/Fund work programs at the country level (including technical assistance), at least once a year;

agree on key country level instruments, macro-critical sectoral issues, division of work and assignment of responsibilities, inputs by each institution into the other’s work and unfilled gaps—with a summary of these country-level agreements reported to both Boards in relevant documents, replacing the existing annex in Fund documents on World Bank assistance;

routinely share—subject to both institutions’ confidentiality requirements— documents (including drafts for review), data, and analytic frameworks/models— with the objective being the sharing of all final documents unless the country authorities object.

• Early signaling of needed inputs to allow orderly planning—for example, Bank needs for Fund assessment letters and macroeconomic analysis; and Fund needs for Bank analytical work on public expenditure and sectoral issues.

• Efforts to resolve differences at lowest level possible, with escalation through line management.

II. Key Financial Sector Actions

• Steps to strengthen integration of country and financial sector work, including: Area Departments and Regions lead, in line with country focus Better integration of financial sector development issues in FSAPs Greater sharing and input into each other’s documents and work

• Broaden FSLC’s remit while avoiding additional bureaucratic layers Improve information sharing on technical assistance strategies and work

programs FSLC to act as umbrella for coordination in financial sector areas

• FSLC will provide inputs to review of FSAP—including shift to updates FSAP to address challenge of new Basel framework and other evolving

standards Financial sector development content to be enhanced

• Improve collaboration on technical assistance strategies and knowledge management/sharing

160 Enhancing Collaboration: Joint Management Action Plan (Follow‐Up to the Report of the External review Committee on IMF‐World Bank Collaboration). 2007

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III. Key Fiscal Sector Actions

• Steps to strengthen macroeconomic and fiscal composition work, including: Area Departments and Regions lead, in line with country focus Common understandings, longer-term focus, integration of Bank advice

on spending priorities to improve quality of fiscal adjustment Greater sharing and input into each other’s documents and work (Bank

country assistance and partnership strategies, economic and sector reports; and Fund briefing papers and staff reports and fiscal strategy briefs; and PSIAs)

Bank country strategies and budgets to continue to provide the basis for Bank resource allocation for fiscal work, but with greater upstream engagement by Fund

Bank input on MIC Debt Sustainability Analyses (DSAs) and the use of DSAs for long-term fiscal strategy that underpins both Fund and Bank advice

• Steps to strengthen technical assistance work: Establish fiscal focal points of contact in each Bank Region Share mission and planning documents; encourage cross participation in

missions Establish more systematic procedures to share Fund technical assistance

reports Coordinate ROSC/PEFA work and timing

• IMF Statistics Department to target technical assistance to country pilots, pursuant

to improvement in the functional classification of expenditures, subject to the availability of additional resources

IV. Key Actions on Technical Cooperation

• Collaboration on technical assistance led by country teams. • Establish clearer procedures and more formal structures between technical

assistance providing departments Identify contact points for technical assistance areas at the level of

Networks and Regions in the Bank and technical assistance departments in the Fund

• Create a platform to share information Create web portal with contact lists and access to technical assistance

documents Pursue the more systematic sharing of technical assistance reports by the

Fund and the routine provision of standard project and mission documents by the Bank.

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V. Key Human-Resources Actions

• Routinely solicit feedback from the sister institution for use in staff/managerial performance assessments for staff/managers expected to collaborate.

• Open internal vacancies to the sister institution and list vacancies on each other’s web sites.

• Establish a secondment/external service exchange program based on institutional needs, subject to the availability of additional resources.

• Strengthen merit assessment for staff on secondment/external service to sister institution.

• Recognize value of experience in sister institution in making promotion decisions.

VI. Key Institutional Actions • Replace Joint Implementation Committee (JIC) with information and monitoring

clearing-house function anchored in PREM and PDR Provide web resources for staff Coordinate reports to management identifying best practices Central information sharing and policy coordination, including for key

institutional meetings Maintain PREM-PDR policy link to assess and trouble-shoot coordination

problems and to facilitate senior management follow up. • Examine review schedules for joint country products and establish good-practice

standards for review of non-joint products (for example, inclusion in review meetings, commenting on briefs, and so on)

• Develop pilot to manage/fund requests for additional Bank analytic work (for example, further analysis of aid and/or public expenditure composition or PSIA)

• Improve information sharing through providing Bank staff access to Fund intranet and providing Fund staff access to Bank document indexes

• Explore scope for enhancing: joint training possibilities in fiscal and financial sectors co-location / facility sharing in the field

• Continue to develop coordinated crisis response capacity

Append

Figure 2

dix 5: EU

24: EU Fund

Funding S

ding System 2

System 20

2007 – Base

07

ed on EU Buudgetary Heaadings

95

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Appendix 6: Paris Declaration Indicators Indicators of Progress to be measured nationally and monitored internationally

Table 23: Paris Declaration Indicators

OWNERSHIP TARGET FOR 2010

1

Partners have operational development strategies — Number of countries with national development strategies (including PRSs) that have clear strategic priorities linked to a medium-term expenditure framework and reflected in annual budgets.

At least 75% of partner countries have operational development strategies.

ALIGNMENT TARGETS FOR 2010

2

Reliable country systems — Number of partner countries that have procurement and public financial management systems that either (a) adhere to broadly accepted good

(a) Public financial management – Half of partner countries move up at least one measure (i.e., 0.5 points) on the PFM/ CPIA (Country Policy and Institutional Assessment) scale of performance.

practices or (b) have a reform programme in place to achieve these.

(b) Procurement – One-third of partner countries move up at least one measure (i.e., from D to C, C to B or B to A) on the four-point scale used to assess performance for this indicator.

3 Aid flows are aligned on national priorities — Percent of aid flows to the government sector that is reported on partners’ national budgets.

Halve the gap — halve the proportion of aid flows to government sector not reported on government’s budget(s) (with at least 85% reported on budget).

4

Strengthen capacity by co-ordinated support — Percent of donor capacity-development support provided through coordinated programmes consistent with partners’ national development strategies.

50% of technical co-operation flows are implemented through co-ordinated programmes consistent with national development strategies.

PERCENT OF DONORS

Score* Target

5+ All donors use partner countries’ PFM systems.

Use of country public financial management systems — 3.5 to 4.5 90% of donors use partner countries’ PFM systems.

5a use public financial management systems in partner countries, which Percent of donors and of aid flows that PERCENT OF AID FLOWS

either (a) adhere to broadly accepted good practices or (b) have a reform programme in place to achieve these. Score* Target

5+ A two-thirds reduction in the % of aid to the public sector not using partner countries’ PFM systems.

3.5 to 4.5 A one-third reduction in the % of aid to the public sector not using partner countries’ PFM systems.

PERCENT OF AID FLOWS

Score* Target

A All donors use partner countries’ procurement systems.

Use of country procurement systems — Percent of donors and of aid flows that use partner country procurement

B 90% of donors use partner countries’ procurement systems.

5b systems which either (a) adhere to broadly accepted good PERCENT OF AID FLOWS

practices or (b) have a reform programme in place to achieve these.

Score* Target

A

A two-thirds reduction in the % of aid to the public sector not using partner countries’ procurement systems.

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B

A one-third reduction in the % of aid to the public sector not using partner countries’ procurement systems.

6 Strengthen capacity by avoiding parallel implementation structures — Number of parallel project implementation units (PIUs) per country.

Reduce by two-thirds the stock of parallel project implementation units (PIUs).

7 Aid is more predictable — Percent of aid disbursements released according to agreed schedules in annual or multiyear frameworks.

Halve the gap — halve the proportion of aid not disbursed within the fiscal year for which it was scheduled.

8 Aid is untied — Percent of bilateral aid that is untied. Continued progress over time.

HARMONISATION TARGETS FOR 2010

9 Use of common arrangements or procedures — Percent of aid provided as programme-based approaches.

66% of aid flows are provided in the context of programme-based approaches.

10 Encourage shared analysis — Percent of (a) field missions and/or (b) country analytic work, including diagnostic reviews that are joint.

(a) 40% of donor missions to the field are joint.

(b) 66% of country analytic work is joint.

MA NAGING FOR RESULTS TA RGET FOR 2010

11

Results-oriented frameworks — Number of countries with transparent and monitorable performance assessment frameworks to assess progress against (a) the national development strategies and (b) sector programmes.

Reduce the gap by one-third — Reduce the proportion of countries without transparent and monitorable performance assessment frameworks by one-third.

MUTUAL ACCOUNTABILITY TA RGET FOR 2010

12

Mutual accountability — Number of partner countries that undertake mutual assessments of progress in implementing agreed commitments on aid effectiveness including those in this Declaration.

All partner countries have mutual assessment reviews in place.

Important Note: In accordance with paragraph 9 of the Declaration, the partnership of donors and partner countries hosted by the DAC (Working Party on Aid Effectiveness) comprising OECD/DAC members, partner countries and multilateral institutions, met twice, on 30-31 May 2005 and on 7-8 July 2005 to adopt, and review where appropriate, the targets for the twelve Indicators of Progress. At these meetings an agreement was reached on the targets presented under Section III of the present Declaration. This agreement is subject to reservations by one donor on (a) the methodology for assessing the quality of locally-managed procurement systems (relating to targets 2b and 5b) and (b) the acceptable quality of public financial management reform programmes (relating to target 5a.ii). Further discussions are underway to address these issues. The targets, including the reservation, have been notified to the Chairs of the High-level Plenary Meeting of the 59th General Assembly of the United Nations in a letter of 9 September 2005 by Mr. Richard Manning, Chair of the OECD Development Assistance Committee (DAC). *Note on Indicator 5: Scores for Indicator 5 are determined by the methodology used to

measure quality of procurement and public financial management systems under Indicator 2 above.

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Appendix 7: Important Economic Indicators of Turkey

Figure 25: 2008 Europe’s Biggest Economies, in billions of US dollars

Figure 26: GDP Growth Rate, yearly change

0

1000

2000

3000

4000

EUROPE'S BIGGEST ECONOMIES (GDP BASED ON PPP, BILLION DOLAR, 2008E)

Source:IMF, World Economic Outlook Database, October 2008

‐5.7

6.25.3

9.48.4

6.94.7

1.1

‐8‐6‐4‐202468

1012

2001 2002 2003 2004 2005 2006 2007 2008

GROWTH RATE OF GDP (YEARLY CHANGE %)

Source: TURKSTAT

99

Figure 27: GDP Growth Rate, yearly change

Figure 28: Per capita GDP and Targets, in US dollars

‐15.0

‐10.0

‐5.0

0.0

5.0

10.0

15.020

01 IQ

2001

2Q

2001

3Q

2001

4Q

2002

1Q

2002

2Q

2002

3Q

2002

4Q

2003

1Q

2003

2Q

2003

3Q

2003

4Q

2004

1Q

2004

1Q

2004

3Q

2004

4Q

2005

1Q

2005

2Q

2005

3Q

2005

4Q

2006

1Q

2006

2Q

2006

3Q

2006

4Q

2007

1Q

2007

2Q

2007

3Q

2007

4Q

2008

1Q

2008

2Q

2008

3Q

2008

4Q

GROWTH RATE(QUARTERLY CHANGE %)

Source: TURKSTAT

35174531

57797027

7609

930510436

0

2000

4000

6000

8000

10000

12000

2002 2003 2004 2005 2006 2007 2008

Source:SPO, 2009 Annual Program

Per capita GDP (USD)

10913

11348

12164

10250

10500

10750

11000

11250

11500

11750

12000

12250

12500

2009 2010 2011

Per Capita GDP Targets (USD)

Source: SPO, 2009 Annual Program

100

Figure 29: Periodic Inflation, in average

Figure 30: Foreign Direct Investment Inflow, in billions of US dollars

62.771.6

13.37.9

0

10

20

30

40

50

60

70

80

1983‐1994 1995‐2001 2002‐2008 2009 March

Source: TURKSTAT, CBRT

AVERAGE INFLATION IN PERIODS %

1.1 1.8 2.8

10.0

20.222.0

18.0 17.9

0.0

5.0

10.0

15.0

20.0

25.0

1993‐2002 Average

2003 2004 2005 2006 2007 2008 2009*

*Annualized as of January 2009Source: CBRT

FOREIGN DIRECT INVESTMENTS (BILLION USD)

101

Figure 31: Public Sector Primary Surplus

0.3

4.85.5

5.04.6

3.52.7

0

1

2

3

4

5

6

1993‐2002 2003 2004 2005 2006 2007 2008*

*EstimationSOURCE: Treasury

PUBLIC SECTOR PRIMARY SURPLUS (IMF DEFINITION % OF GDP)

102

Appendix 8: World Bank Major Development Partners in Turkey (CPS 2008-2011)

103

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