In 2018, following five years of a program of support for the Kyrgyz Republic focused on governance reforms, the World Bank shifted its strategy. In view of limited progress with governance reforms, and based on analysis that highlighted the need to shift the country’s economic growth model, attention turned to fostering private sector-led economic growth. The Kyrgyz Republic was an early leader among Central Asian countries in economic liberalization, but broad-based economic growth had remained elusive. Yet one major obstacle the new approach faced was the vital importance of robust governance systems for sustainable development and private sector growth.

A new report from the Independent Evaluation Group assesses the relevance and effectiveness of World Bank support to the Kyrgyz Republic from the years 2013 to 2021 and traces the impact of this strategic shift. The report identifies several lessons to inform future World Bank support to the Kyrgyz Republic, with a key lesson focused on the cost of neglecting governance reforms.

An ambitious start

Three years after the 2010 revolution, the World Bank returned to a standard four-year partnership strategy with the Kyrgyz Republic. Under the strategy, the World Bank set out to deliver support for an ambitious agenda that aimed to help  build a meritocratic public administration, contribute to reduce corruption, improve access to justice, improve public financial management, and make public procurement more transparent. This strategy aligned with the government’s development objectives, and the consensus among a broad alliance of partners that governance weaknesses were the country’s overriding development challenge.

Unfortunately, these objectives proved overly ambitious given the country’s political and governance context. Ongoing political instability, weak institutional capacity, and frequent resistance to change slowed progress. By 2018, the Bank decided to pivot away from direct support to governance reforms and focus on supporting conditions for diverse sources of growth driven by the private sector.

This marked a significant shift from governance reform to private sector–led development. This departure from governance-oriented objectives compromised the effectiveness of the strategy given that governance challenges were a major deterrent to private sector activity. The report found that the Bank’s support for private sector development only achieved modest outcomes, corroborating that reducing corruption, increasing the rule of law and the predictability of business environment, and reforming the judiciary were key preconditions for economic growth.

Repercussions on private sector development

Governance shortcomings continue to exert a profound impact on private sector development in the Kyrgyz Republic. The protection of property rights significantly lags behind comparator countries, with frequent changes in regulatory enforcement escalating business costs, and nudging firms into the informal sector. This, in turn, intensifies competitive pressures on companies in the formal sector while limiting access to finance for those in the informal sector. The uncertain business environment extends to foreign investors, as reflected in numerous international disputes and complaints regarding government decisions.

Before the shift from a direct focus on governance, the World Bank was supporting reform of public administration and the justice sector, and the strengthening of transparency, accountability, and anticorruption policies. The Bank also provided effective support for public financial management, including public procurement (some of which was subsequently reversed), budget transparency, and tax administration. After the shift, the Bank engagement relied on technical fixes to support the anticorruption agenda and improve the business environment that did not address the overarching political economy challenges at the root of the problems. Not surprisingly, these technical solutions were not effective.

For example, the Bank supported an attempt to transition planned business inspections to a risk-based system to enhance predictability. However, a government moratorium on planned inspections from January 2019 to early 2022 nullified expected impact. Unplanned inspections increased by 35% from 2016 to 2020, and the online platform for information on planned inspections experienced downtime during the evaluation period.

Efforts to increase transparency by cataloging the documents required for businesses to operate faced similar challenges. Despite support from the Bank to establish an online registry, the incomplete and outdated status of the registry as of May 2023 underscored the lack of tangible progress. Regarding international commercial disputes where the government is a counterpart, an investor grievance mechanism was adopted in mid-2022, but its impact remains uncertain.

By not effectively addressing governance issues, the enabling environment for businesses remains constrained. The rule of law remains weak, and the public sector lacks efficiency. These factors deter both domestic and foreign investment, hampering private sector growth and stifling economic development.

Lessons for future World Bank support                                                                                                                  

The report found that to achieve diversified, export-oriented, inclusive, and sustainable growth, the World Bank should prioritize attention to governance weaknesses, such as reducing corruption, increasing the rule of law and the predictability of the business environment, and reforming the judiciary. Addressing these can also reduce incentives for informality.

Even when the pace of reform is slow, the World Bank should stay engaged and current through analytical and diagnostic work that deepens its understanding of governance shortcomings. This will allow the World Bank to act swiftly when a window of opportunity presents itself. The World Bank should also engage with civil society to inform debate about the costs of inaction and strengthen domestic demand for reforms.

A new four-year World Bank supported strategy of engagement with the Government of the Kyrgyz Republic was launched this year which offers cause for optimism. Along with integrating lessons from experience, it builds on encouraging improvements in transparency as well as a strengthened  focus on governance and renewed support for judicial sector reform.

Also available in Russian.