Main Findings

Governance weaknesses remain a major impediment to fostering private sector development to drive economic growth and achieve development results in the Kyrgyz Republic. The lack of elite consensus and political instability, driven by competition among patronage networks, continue to undermine developmental progress. The 2018 SCD notes that a “substantial body of evidence exists to support the notion that corruption/nepotism, weak accountability, and conflicts of interest are rife in the Kyrgyz Republic, but little has been done by the way of detailed and actionable political economy analysis, specifically focusing on grand corruption and vested interests” (World Bank 2018c, 36–37). The CLR Review for the CPS argues that addressing corruption “will also require a detailed and actionable political economy analysis of grand corruption and the role of vested interests.... Engaging in dialogue with the [g]overnment on actions derived from such an analysis will be critical to make significant inroads in supporting the government to address corruption” (World Bank 2018d, 3). Despite these lessons, the Bank Group–supported program did not address the knowledge gap in this area or adequately mitigate the risks associated with not improving governance.

Frequent, and at times disruptive, changes in government have given the Kyrgyz Republic some characteristics of a fragile state, suggesting that deeper engagement with civil society would have been appropriate for the country context. International experience and the World Bank’s governance and anticorruption strategy suggest that engagement with civil society can help build demand and momentum for reform (World Bank 2011b, 2012). The Bank Group facilitated participatory planning processes in local communities, conducted substantial consultations with civil society during CPF and project preparation, and worked with business associations during the implementation of specific reforms (particularly tax administration). However, more engagement with civil society could have been helpful to support pro-reform coalitions, strengthen long-term demand for governance reforms, communicate and address social protection aspects of energy tariff reform, and raise awareness of investment climate issues (for example, that of inspections by law enforcement agencies outside the scope of the Inspections Law).

The World Bank learned from experience when it paused development policy lending, but, other than in the water sector, it did not adapt its approach to local public services in the face of weak results. The World Bank paused development policy lending after FY17 because of limited progress on energy sector reform and backtracking on public procurement reforms. Since then, the lack of reform appetite has kept development policy lending on hold. In contrast, the World Bank’s approach to improving essential local public services (except in the water sector) remained virtually unchanged since 2003. Throughout the evaluation period, it used a CDD model that did not strengthen service delivery systems; improve clarity on responsibilities, access to resources, and institutional capacity; or monitor service delivery results. Capacity-building efforts at the local level focused primarily on participatory planning and budget transparency, not project planning or implementation.

Public services where the World Bank took a holistic approach, working with central government authorities, had more positive outcomes. The experience in the education and health sectors, including in the water sector, shows that a holistic approach that addresses delivery of public services (rather than focusing mostly on infrastructure investment) can improve outcomes in the Kyrgyz Republic.

DPO prior actions were spread thinly across multiple reform areas, lacked complementary implementation support, and have not been very effective (World Bank 2022f). DPOs attempted to advance reforms in areas with weak government ownership or in need of complementary capacity building and institutional support to have impact. In other cases, DPO prior actions were not strategic or focused on more binding constraints—for example, reforms to clarify the process of starting a business, improve protection of minority shareholders, and abolish sales tax for exporters (World Bank 2022f). IEG rated the relevance of half of 30 prior actions in DPOs for the Kyrgyz Republic moderately unsatisfactory or worse. Many of the DPO prior actions consisted of draft laws and regulations submitted to parliament and action plans, which failed to meaningfully move reforms along the results chain toward program objectives. In addition, DPO results frameworks had significant shortcomings.

Bank Group interventions to support private sector development did not address weak firm-level capabilities needed to improve productivity and spur growth, except in the dairy sector. This was despite the FY16 PLR’s and FY19–22 CPF’s shift toward emphasizing private sector–led growth and the World Bank Productivity Project’s findings on the importance of targeting growth-oriented firms. The 2018 SCD noted that small firms were not growing; the FY16 PLR, SCD, and CPF discussed the importance of improving agribusiness product quality; and the Kyrgyz Republic performs below comparators on measures of management quality and innovation. Nevertheless, Bank Group work did not target growth-oriented firms or directly address firm capabilities or quality (which is predominantly needed for agribusiness).

The implementation of World Bank–supported projects through quasi-public implementing agencies such as ARIS generates important sustainability concerns. The strong capacity of these agencies is considered one of the factors for successful project implementation, particularly because it helps reach remote areas of the country, provides continuity in project implementation in the face of political volatility, and has the capacity to comply with World Bank guidelines (financial management, procurement, and safeguards). However, working with these semi-independent entities for several decades limited the impact of World Bank–supported projects on capacity building in local governments and in institutions that deliver agriculture and public services in rural areas. In addition, there is a need for stronger World Bank oversight to ensure that projects adapt appropriately to evolving local circumstances.

Lessons

The findings point to the following lessons that could be of relevance to the next CPF for the Kyrgyz Republic.

1. Promoting diversified, export-oriented, inclusive, and sustainable growth—the main objective of the FY19–22 CPF—requires more attention to governance weaknesses and constraints on firm-level growth. Preconditions for economic growth include the interrelated objectives of reducing corruption, increasing predictability of the business environment (for domestic firms and for foreign investors), and reforming the judiciary. Addressing these can also reduce incentives for informality. Firm capabilities and compliance with quality standards in export markets, particularly in agriculture, also need to be improved. The Bank Group may wish to engage with stakeholders to identify opportunities for providing greater regulatory stability and fostering growth.
2. In areas that are preconditions for the achievement of broader and higher-level development objectives (for example, increasing the predictability of the business environment as a precondition for private investment and thus economic growth), even when the government does not have appetite to reform, the Bank Group should remain engaged, including by remaining current on issues through analytical work. The Bank Group can remain engaged by conducting analytical and diagnostic work to deepen its understanding of constraints and priorities so that it is prepared to act quickly when a window of opportunity opens. It should also engage with civil society to inform debate about the costs of inaction and strengthen demand for reforms.
3. The use of DPOs should continue to be contingent on the government’s appetite for reform; if and when development policy financing lending resumes in the Kyrgyz Republic, it should be used more selectively and strategically. The pause in development policy financing demonstrated learning from experience. However, before the pause, reforms supported by DPOs either lacked ownership and complementary implementation support or did not address major constraints.
4. Achievement of development objectives related to essential local public services requires strengthening the institutional and financial capacity of local governments. Binding constraints to local service delivery include clarity in the respective responsibilities of different levels of government, access to adequate resources, and sufficient technical capacity. Future World Bank–supported projects in local infrastructure should address the full system of service provision, not just provide infrastructure outputs; multiple CDD-type projects implemented to date have not addressed such systems. The Bank Group should draw on the experience with its education and health sector work in the Kyrgyz Republic in this regard.
5. In the context of the Kyrgyz Republic, investment projects should be used to build institutional capacity within all levels of government. This includes central and local governments and institutions that deliver agriculture services in rural areas.