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A. Draft
resolution
(open)
Report | Doc. 13594 | 12 September 2014
The activities of the European Bank for Reconstruction and Development (EBRD) in 2013-2014
Committee on Political Affairs and Democracy
Summary
In providing assistance to its member countries in their transition to market economies, the European Bank for Reconstruction and Development (EBRD) contributes to their progress towards democracy and the rule of law.
By regularly debating the activities of the EBRD, the Parliamentary Assembly provides a parliamentary oversight of the Bank's operations.
The expansion of the EBRD's activities to the countries of the southern and eastern Mediterranean (SEMED) is to be welcomed; the experience of the EBRD in helping countries to make the transition to open market economies can be of valuable assistance also in that region.
It is regrettable that many of the EBRD's countries of operations do not seem to be committed to, and are not applying, principles of multiparty democracy and pluralism. It is proposed that the Assembly assist the Bank in a more effective implementation of the EBRD's new methodology to assess the compliance of its countries of operations with the political aspects of its mandate.
A. Draft
resolution 
(open)1. The Parliamentary Assembly has reviewed the activities
of the European Bank for Reconstruction and Development (EBRD) for
the period 2013-14 in the light of the reports by the Bank. In line
with the last report, the Assembly has sought to make the debate
more political and to focus more on a political assessment of the work
of the Bank.
2. The Assembly recalls that the Agreement Establishing the European
Bank for Reconstruction and Development includes a significant political
element, in that it specifies that the Bank may conduct its operations
in countries of central and eastern Europe which are not only proceeding
in their transition towards market-oriented economies, but are also
committed to and applying principles of multiparty democracy and pluralism.
3. According to the preamble to the agreement, the successful
transition of member countries to market-oriented economies is closely
linked to parallel progress towards democracy and the rule of law.
Thus, the political aspect of the Bank's mandate extends to all
elements of its objectives and should be monitored and promoted
by the Bank as part of the process of assisting the transition of
its countries of operations to market economies.
4. In the co-operation agreement concluded between the Council
of Europe and the EBRD in 1992, the two organisations agreed to
exchange information, particularly regarding the monitoring and
assessment of the development of democracy in central and eastern
Europe. The Assembly supports the activities of the EBRD by providing
a parliamentary oversight of the EBRD's operations.
5. The time period covered by the current overview of the activities
of the EBRD (2013-14) has witnessed the beginning of recovery from
the financial crisis which had hit especially hard in Europe. The
sovereign debt crisis in a number of European States is now under
control, but confidence in the single currency of the eurozone has
not been fully restored. Austerity programmes have continued to
be implemented throughout the review period and the economic slowdown
in the euro area, and western Europe in general, has had a negative impact
on the countries of the transition region.
6. Political uncertainty is a key factor affecting growth, and
the outlook for economic growth in 2014 and 2015 in the transition
region has been negatively affected by economic factors and the
geopolitical tensions between Ukraine and Russia. While in Russia
economic growth is forecast to come to a halt in 2014, and to remain
low in 2015, Ukraine is expected to suffer from severe output losses
in 2014 and stagnate in 2015. Increased geopolitical tensions between
Russia and Ukraine could also impact upon neighbouring countries and
no doubt the effect of the latest sanctions on Russia and of Russian
sanctions on western economies will figure largely in the next report.
7. The prolonged period of slower growth that has followed the
global financial crisis has affected the prospects of the EBRD transition
region in achieving convergence with the living standards of advanced
market economies. On the other hand, the increase in long-term unemployment
brought about by the crisis and the prolonged period of fiscal austerity,
often recommended by supranational bodies, is eroding public support
for market-oriented reforms and some of the most advanced countries
in the transition region even experienced reform reversals. It is
possible that support for democracy may also suffer as opposition
to the effects of the austerity programmes on growth and jobs mounts.
8. The Assembly welcomes the expansion of the EBRD's activities
to the countries of the southern and eastern Mediterranean (SEMED)
in the past two years, with Jordan, Morocco and Tunisia becoming
full countries of operations and Egypt being a potential country
of operations. Although the situation in these countries is very
different from that in central and eastern Europe 25 years ago,
the Assembly believes that the experience of the EBRD in helping
countries make the transition to open market economies can be of
valuable assistance also in the countries of the SEMED.
9. The EBRD should seek to share its experience and expertise
in supporting transition with other countries as well, including
outside its current region of operations. At the same time, regardless
of continuing expansion towards south and east, the EBRD should
maintain strong support for economies of its “old region”.
10. The Assembly took note of the revision and updating by the
EBRD of the methodology to assess the compliance of its countries
of operations with the political aspects of the EBRD's mandate,
notably on the basis of: representative and accountable government;
civil society, media and participation; rule of law and access to
justice; and civil and political rights. It regrets, however, that
many of the EBRD's countries of operations do not seem to be committed
to, and are not applying, principles of multiparty democracy and
pluralism.
11. The Assembly looks forward to the effective implementation
of this new methodology and encourages the EBRD to strengthen its
co-operation with the Council of Europe – and in particular with
the Assembly – in making and monitoring its assessments.
12. Finally, the Assembly notes the recent criticism concerning
the lack of transparency of the EBRD and encourages it to start
publishing more comprehensive information in line with international
standards and to inform it of the measures it takes to this effect.
B. Explanatory memorandum by Mrs Cheryl Gillan, rapporteur
(open)1. Introduction
1. The Council of Europe and the European Bank for Reconstruction
and Development (EBRD) signed a co-operation agreement in 1992,
whereby the two institutions agreed to exchange information with
the specific aim of monitoring democratic progress in central and
eastern Europe. In June 2011, the Parliamentary Assembly decided
on certain reforms of its structures and a new division of labour.
2. The new terms of reference of the Committee on Political Affairs
and Democracy state that “the committee shall prepare reports on
the activities of the Organisation for Economic Co-operation and Development
(OECD) and the European Bank for Reconstruction and Development
(EBRD). For the preparation of the reports and the debates in the
Assembly, the committee maintains relations with the OECD and the
EBRD”.
3. On 22 January 2013, the Assembly held a debate on a report
on the activities of the EBRD in 2010-12, presented by Mr Tuur Elzinga
(Netherlands, UEL), and adopted Resolution 1913 (2013). On 6 June 2013, the committee appointed me as rapporteur.
4. This report, which is based on a memorandum prepared by Mr
Gabriele Ciminelli, economics researcher at the Tinbergen Institute,
Amsterdam, reviews the activities of the EBRD in 2013 and 2014.
Particular emphasis is dedicated to the economic and political developments
that have characterised the EBRD region of operations in the last
two years and to the recently announced medium-term strategic directions
that will guide the Bank's operations in the second half of the
decade.
5. A short survey of the literature investigating the relationship
between economic development and democracy and an analysis of how
market reform could benefit multiparty democracy in the EBRD transition region
are also provided. Special attention is dedicated to the progress
achieved by the Bank in the new region of the southern and eastern
Mediterranean (SEMED) and the relations of the EBRD with other European Institutions.
6. In preparing this report, the rapporteur held bilateral meetings
with a number of EBRD officials and Board Directors who have provided
her with useful insights into the running and activities of the
Bank. The Sub-Committee on Relations with the OECD and the EBRD
held a meeting at the headquarters of the EBRD in London on 4 February
2014.
2. Background
7. In the year that marks the twenty-fifth anniversary
of the fall of the Iron Curtain, policy makers around the world
are still striving to improve living conditions in the former eastern
bloc. In this context, the EBRD has a unique role to play. Established
in 1991 with the purpose of fostering transition towards an open
market economy, the EBRD is the only financial institution to have
a clear commitment to the principles of multiparty democracy, pluralism
and market economy in its mandate. In fact, the Bank can only carry
out its operations in those countries that are committed to and
apply these principles. As of June 2014, the EBRD was the largest single
investor in its region of operations.
8. The EBRD promotes transition to market economy by making or
co-financing loans, investing in equity capital, and facilitating
access to capital markets of private corporations and State-owned
enterprises operating competitively in the market economy. The extent
of the Bank's engagement with the State sector is however limited
to not more than 40% of the amount of its transactions. To finance
its operations, the EBRD raises funds in the international capital
market. This includes those of its countries of operations, thereby
contributing to the development of the local capital markets.
9. The Bank also provides technical co-operation to its clients,
with the objective of supporting project preparation and implementation.
The EBRD constitutes a unique case among development banks insofar
as technical co-operation is paid for via grants financed by donor
partners. Parallel to the investment and technical co-operation
activities, the EBRD also engages in policy dialogue with recipient
countries to foster structural economic reforms. Thanks to the specific
knowledge and expertise acquired during more than twenty years of operations,
the policy advice provided by the Bank has often proved instrumental
in building up the appropriate degree of institutional capacity
that is conducive to the development of an open market economy and
multiparty democracy.
10. Originally, the EBRD region of operations not only comprised
countries of central and eastern Europe and the Balkans, but it
stretched farther east to include the Central Asian republics. Over
time, the EBRD region was gradually broadened, and as of June 2014
it encompassed 35 countries. The operations of the EBRD were first
expanded to Mongolia (2006) and Turkey (2009). Following the historic
changes that occurred in North Africa and the Middle East, in 2011
the Bank's shareholders asked the Bank to extend its geographic
remit to include countries in the southern and eastern Mediterranean
(SEMED) region, notably Egypt, Jordan, Morocco and Tunisia. Other
SEMED countries have already expressed their desire to join the
Bank.
11. In November 2012, without prejudice to the position of individual
members on the status of Kosovo,* it was announced that the country
would become a member of the EBRD and recipient country. During
its Annual Meeting, held in Warsaw on 15 May 2014, EBRD shareholders
agreed on a further expansion of the Bank. Founding member Cyprus
was granted the status of recipient country in order to help the
government to restructure and rebalance the country's economy in
the wake of the financial crisis. The Bank expects its engagement
in Cyprus to be of a temporary nature and plans to carry out its
operations across the whole island, for the benefit of both communities.
it was announced that the country
would become a member of the EBRD and recipient country. During
its Annual Meeting, held in Warsaw on 15 May 2014, EBRD shareholders
agreed on a further expansion of the Bank. Founding member Cyprus
was granted the status of recipient country in order to help the
government to restructure and rebalance the country's economy in
the wake of the financial crisis. The Bank expects its engagement
in Cyprus to be of a temporary nature and plans to carry out its
operations across the whole island, for the benefit of both communities. 12. In order to benefit from EBRD investments, any country first
needs to become a shareholder of the Bank and then receive country
recipient status. This is why, following the intention of the authorities
to seek EBRD investments, Libya's request to become the 67th shareholder
of the Bank has been accepted. The EBRD specified that the decision
to grant recipient country status to Libya would be taken separately,
following a thorough assessment by the Bank of the political, economic
and operational environment in the country, on the basis of Article
1 of the Agreement Establishing the Bank (AEB).
13. The economic and financial challenges that emerged during
the global crisis profoundly affected the prospects of achieving
transition in the EBRD region. Firstly, the financial crisis has
caused the transition region to enter into a prolonged period of
slower growth. This, in turn, has significantly slowed down the
process of convergence to the living standards of western Europe.
Secondly, free markets have often been blamed for the economic malaise.
Consequently, the crisis has dented public support for market-oriented
reforms in a number of countries.
14. The EBRD is well aware that the challenges posed by the financial
crisis and the request for the Bank's expertise and financing coming
from the SEMED region have invariably strengthened its role in the
post-crisis world. During the 2014 Annual Meeting, EBRD shareholders
discussed the new medium-term directions that would guide the Bank's
activities over the following years. Building upon its core competencies
and the important initiatives developed over time, the EBRD aims
to re-energise transition by concentrating its efforts around three
key aims: i) supporting governments in hastening transition through
policy dialogue and the financing of pivotal projects; ii) promoting
economic integration both globally and regionally; and iii) addressing global
common challenges. The medium-term directions provide a starting
point for the discussion over the Bank's Fifth
Capital Resources Review (CRR5), which will cover the
period 2016 to 2020 and is to be approved at the Bank's 2015 Annual
Meeting in Tbilisi.
3. Governance and structure
15. The EBRD has 66 shareholders. These include all the
member States of the European Union, and two European institutions,
the European Union (represented by the Commission) and the European
Investment Bank (EIB). Furthermore, some developed countries, including
the United States, Japan, South Korea, Canada and Australia, which
are neither European nor countries of operations, are also shareholders
of the Bank. Among the member States of the Council of Europe, only
Andorra, Monaco and San Marino are not shareholders of the Bank.
16. The overall structure of the EBRD is organised along seven
lines, based on shared operational priorities. The division of labour
well embodies the Bank's dual nature of being a publicly owned financial
institution operating according to private sector principles. All
the powers are vested in the Board of Governors, which is composed
of one Governor from each shareholder, usually a civil servant from
the Ministry of Finance or the President of the Central Bank. The
Board of Governors holds a general meeting every year and delegates
most of its powers to the Board of Directors. The Board of Directors
is responsible for the EBRD’s strategic direction and internal evaluation.
The President is elected by the Board of Governors and is the legal
representative of the EBRD. Under the guidance of the Board of Directors,
the President manages the Bank's operations. In carrying out his
tasks, the President is advised by the Executive Committee, which
consists of five Vice-Presidents and other senior management officials,
including the Chief Economist, General Counsel and Secretary General.
17. The meetings of the Board of Directors are usually held every
two weeks and are chaired by the President. The Board makes formal
decisions concerning investments, technical co-operation assignments, borrowing
and other Bank activities. Importantly, it also has the task of
monitoring compliance with the political aspects of the Bank’s mandate.
Should the Board express serious concerns over a country's compliance,
it might decide to limit the Bank's involvement with the State,
while remaining engaged in the private sector to support economic
transition.
18. This policy, known as the calibrated approach, currently concerns
two countries, Belarus and Turkmenistan. The Board of Directors'
decisions are determined by majority voting, provided that the said majority
represents no less than two-thirds of the subscribed shares in the
Bank's capital. The Board is composed of 23 Directors, each representing
one or more members. Only a few countries of operations are directly
represented in the Board by their own Director. However, in April
2013, some Governors asked for a reconsideration of the composition
of the Board of Directors, with the aim of increasing the weight
of recipient countries. This process would be concomitant with the
Bank's Fifth Capital Resources Review.
19. The Bank's day-to-day business is carried out in 13 departments.
Banking, Finance and Risk are responsible for lending, borrowing,
and risk-management activities. The provision of legal advice and operational
support falls within the competence of the Office of the General
Counsel, while the Office of the Secretary General administers the
Bank's institutional relations, in particular with its shareholders.
Perhaps, however, what most characterises the EBRD as a unique financial
institution are the External Action and Political Affairs department
(EAPA) and the Office of the Chief Economist (OCE).
20. Although all the Bank's activities are directed towards promoting
transition, it is within these two departments that both economic
and political progress is monitored and assessed. The OCE is responsible
for economic analysis; in particular, it evaluates the potential
impact of the Bank's individual projects in fostering transition
to a market-oriented economy. The OCE also assesses the degree of
economic transition achieved at sector and country levels. Political
transition is monitored by the EAPA, which provides regular updates
and insights into political developments in the countries of operations.
Its advice is instrumental in order for the Bank to carry out its
policy dialogue initiatives. Furthermore, the EAPA is also responsible
for the management of the donor-funded activities, which include
technical co-operation with the Bank's clients and policy dialogue
with recipient countries.
21. Alongside the political and economic assessments provided
by the EAPA and OCE, the crucial task of evaluating the Bank's effectiveness
in delivering transition is carried out at the Evaluation Department
(EvD). The EvD operates in complete independence from the rest of
the Bank's management and reports directly to the Board of Directors.
Through the provision of an independent and evidence-based assessment
of its performance, its evaluations contribute to strengthening
the Bank's performance and institutional accountability. A relevant
part of the EvD activities consists of the ex
post evaluation of the transition impact of the Bank's
projects, with respect to private sector development achieved and
improvements at the institutional and policy levels. The activities
of the EvD, however, are not confined to the evaluation of individual
projects; they also include the evaluation of the Bank's strategies,
programmes and policies. A thorough overview of the EvD's work is
provided in the Annual Evaluation Review.
22. The Bank also supports transition by promoting the highest
standards of corporate governance, transparency, and integrity in
its region of operations. The responsibility for overseeing the
application of these standards lies with the Office of the Chief
Compliance Officer (OCCO). The OCCO, which answers to the President
and the Audit Committee of the Board of Directors, evaluates the
integrity and transparency of the Bank's clients and assesses the
hypothetical reputational risks associated with its investment activities.
As part of its tasks, the OCCO investigates allegations of fraud
and corruption arising in relation to the Bank's projects. Equally
important, it also administers the Project Compliant Mechanism (PCM),
which allows individuals and local groups in the countries of operations
to raise grievances or complaints in relation to EBRD projects. Moreover,
the OCCO is responsible for the application of international best
practices and standards also in relation to the Bank's internal
conduct.
23. As part of its commitment to democracy and good governance,
the EBRD regularly engages with a variety of civil society organisations.
Dialogue with the civil society concerns both individual projects
and more encompassing initiatives, including the review of the Bank's
key policies and strategies. In December 2013, the EBRD approved
the new Energy Sector Strategy, which will govern the Bank's investments
in the energy sector from 2014 to 2018. Crucially, its approval
followed an extensive consultation process with more than 1 000 organisations,
during which the Bank incorporated and responded to comments from
external stakeholders. The
President and members of the Board of Directors also hold meetings
with civil society organisations and other key stakeholders during
their visits to the countries of operations.
The
President and members of the Board of Directors also hold meetings
with civil society organisations and other key stakeholders during
their visits to the countries of operations. 24. Soon after his election, in 2012, President Chakrabarti unveiled
a modernisation agenda, which aims to make the internal organisation
more responsive to the ever-changing challenges that the Bank will
face in the future. The initiative, which was denominated One Bank, focuses on the need to
streamline the Bank's internal procedures and modernise its management
culture. The Bank foresees achieving further efficiency gains through
the adoption of several measures, including the reduction of underperforming
staff and of allowances for travel and missions. The most concrete
result of the Bank's modernisation initiative was perhaps the creation
of two new vice-presidencies in 2012, one for policy and one for
human resources and corporate services. In this context, in 2013
the EBRD identified a set of core values – professionalism, integrity, leadership,
innovation, diversity and teamwork – which could contribute to improving
the management of the Bank's staff. This led the EBRD to enhance
inclusion and diversity among its staff by joining diversity programmes
and networks and by introducing compulsory training on inclusive
leadership. The Bank also expanded the project selection criteria,
with the aim of becoming more effective in areas of social inclusion
and equal opportunities.
25. The establishment of the Vice-Presidency for Policy had highly
symbolic and operational relevance, since it constituted an important
part of the Bank's overall effort to re-energise transition via
enhanced policy dialogue. The aim is to use policy dialogue to achieve
transition impact going beyond individual projects by, for example,
strengthening the link between the Bank's investments and the economic
reforms to be adopted at the broader sector and country levels. In
this respect, in May 2014 the Bank accomplished a remarkable achievement
by signing the Partnership for Re-energising the Reform Process
in Kazakhstan with the Kazakh authorities. The partnership enables
the EBRD, together with other international financial institutions,
to channel US$2.7 billion provided by the government into strategic
sectors of the economy. This will increase the Bank's critical mass
in the country, thereby providing enhanced opportunities for policy
dialogue and technical co-operation. According to the EBRD Managing
Director, Olivier Descamps, the partnership may become an important
way to boost market reform and, if successful, it may constitute
a blueprint to re-energise transition in other middle-income countries.
In
this respect, in May 2014 the Bank accomplished a remarkable achievement
by signing the Partnership for Re-energising the Reform Process
in Kazakhstan with the Kazakh authorities. The partnership enables
the EBRD, together with other international financial institutions,
to channel US$2.7 billion provided by the government into strategic
sectors of the economy. This will increase the Bank's critical mass
in the country, thereby providing enhanced opportunities for policy
dialogue and technical co-operation. According to the EBRD Managing
Director, Olivier Descamps, the partnership may become an important
way to boost market reform and, if successful, it may constitute
a blueprint to re-energise transition in other middle-income countries. 26. The EBRD has been criticised recently for its lack of transparency.
In 2013, the EBRD was ranked by the Aid Transparency Index (ATI)
as the lowest among 67 International Financial Institutions and
multilateral organisations in respect of transparency. According
to the ATI, the Bank “lags on commitments indicators and on organisation
and activity financial information”. The Parliamentary Assembly
should therefore encourage the EBRD to join the International Aid
Transparency Initiative (IATI) and to start publishing data to IATI standards.
4. Political and economic developments in 2013 and 2014
27. In its 2013 Annual Report, the EBRD noted that since
the early 2000s a number of countries in the transition region had
seen a levelling off of democratic progress. Later, the financial crisis
triggered a sense of resentment towards market economy, which had
delayed the implementation of reforms. The intertwining of the two
processes led the EBRD to define some of its countries of operations
as stuck in a lower-than-optimal level of political and economic
reform. In
the second half of 2013 and the first half of 2014, episodes of
public discontent calling for better governance occurred in several
countries across the transition region. Social unrest has temporarily
increased political uncertainty, which in some countries is hindering
economic activity. On the other hand, however, these episodes offer
an important window of opportunity to rekindle the reform agenda. Crucially,
the chances of success in unleashing a new wave of political as
well as economic reforms also depend on leadership and external
support. It is in these areas that the EBRD maintains an instrumental
role.
Later, the financial crisis
triggered a sense of resentment towards market economy, which had
delayed the implementation of reforms. The intertwining of the two
processes led the EBRD to define some of its countries of operations
as stuck in a lower-than-optimal level of political and economic
reform. In
the second half of 2013 and the first half of 2014, episodes of
public discontent calling for better governance occurred in several
countries across the transition region. Social unrest has temporarily
increased political uncertainty, which in some countries is hindering
economic activity. On the other hand, however, these episodes offer
an important window of opportunity to rekindle the reform agenda. Crucially,
the chances of success in unleashing a new wave of political as
well as economic reforms also depend on leadership and external
support. It is in these areas that the EBRD maintains an instrumental
role. 4.1. The EBRD region between democratic progress and geopolitical tensions
28. In 2013 and 2014, political developments in the EBRD
region have seen mixed results. While the escalation of geopolitical
tensions between Russia and Ukraine and the challenges in the political
transition of Egypt and Tunisia dominated events, democratic progress
in a number of other countries was tangible. On 1 July 2013, Croatia
officially became the 28th member of the European Union. Georgia
and the Republic of Moldova signed an Association Agreement with
the European Union in 2014. Notable democratic progress was also
evident in countries of the Central Asia region, particularly in
Mongolia and in the Kyrgyz Republic. In April 2014, the Parliamentary
Assembly granted Partner for Democracy status to the Parliament
of Kyrgyzstan.
29. In the Western Balkans region, the process of reconciliation
between the different countries continued, although significant
challenges stemming from inter-ethnic issues remained. In February
2014, a series of demonstrations and social unrest rapidly spread
in Bosnia and Herzegovina, with the population demanding an end
to the political inertia that had characterised the country since
the end of the war. The deep-rooted causes of the government's failure
to act could be found in the fragile constitutional equilibrium
that had emerged from the pacification process following the war
in the former Yugoslavia. This provided the country with a complex
system of checks and balances which hampers an efficient functioning
of the State. In the Country Strategy adopted in January 2014, the
EBRD indicated the reform of the country's constitutional set-up
as a pivotal step to progress towards a more efficient and democratic
State.
30. In Turkey, the government reacted firmly to manifestations
of public discontent following the demolition of Istanbul's Gezi
Park in May 2013. This caused a wave of protest, mainly against
alleged limitations to the freedom of expression and assembly, to
spread around the country. In December 2013 and in the first months of
2014, a corruption scandal involving associates of some government
ministers unleashed new public protests, to which the government
responded by temporarily limiting access to social media. In March
2014, however, the ruling party won local elections in the most
important cities of the country, and the level of social unrest
gradually decreased. The EBRD remains firmly committed to addressing
the remaining transition gaps in the country.
31. Apart from the progress in the Republic of Moldova, developments
in the Commonwealth of Independent States (CIS) raised concerns,
particularly with respect to corruption, weak adherence to the rule
of law and instances of human right violations reported by international
organisations. The lack of democratic progress in Belarus and Turkmenistan
was especially noted as a cause of serious concern in the 2013 Annual
Report. The scope of
the Bank's engagement in those two countries is limited to specific
sectors of the economy and is defined against a well-specified set
of both political and economic benchmarks, in the context of the
so-called calibrated approach.
The scope of
the Bank's engagement in those two countries is limited to specific
sectors of the economy and is defined against a well-specified set
of both political and economic benchmarks, in the context of the
so-called calibrated approach. 32. The EBRD responded to the developments which occurred in the
first part of 2014 in Ukraine by stating its readiness to step up
both its financial engagement to the country and its policy dialogue
initiatives with the authorities. The Bank's investments in the
country are expected to increase to €1 billion per year, as part
of an international financial assistance programme. In May 2014, the EBRD signed a Memorandum
of Understanding with the government for the Ukrainian Anti-Corruption
Initiative. At the heart of the initiative, which aims to monitor
corruption and increase transparency, is the creation of an independent
Business Ombudsman Institution, to which businesses can bring their
complaints of unfair treatment.
In May 2014, the EBRD signed a Memorandum
of Understanding with the government for the Ukrainian Anti-Corruption
Initiative. At the heart of the initiative, which aims to monitor
corruption and increase transparency, is the creation of an independent
Business Ombudsman Institution, to which businesses can bring their
complaints of unfair treatment. 33. As for its engagement in Russia, the EBRD did not make any
formal decision regarding the scope of its operations in the country
following the Crimean crisis. However, the Russian economy is expected
to decelerate as a consequence of the escalation of the geopolitical
tensions. This might cause the volume of EBRD investments in the
country, which had already slumped from €2.6 billion in 2012 to
€1.8 billion in 2013 because of deteriorating investment conditions,
to decline further. During his address to the 2014 Annual Meeting,
President Chakrabarti emphasised the concept of managed flexibility,
which allows the Bank to reallocate to other countries the spare
capacity resulting from lower investments in one region.
34. In the SEMED, political reforms proceeded steadily, albeit
with some difficulties. In Jordan and Morocco, the role of elected
parliaments was strengthened by the adoption of further reforms.
Following a period of stalemate, in February 2014 Tunisia approved
the new Constitution, which was seen as an important step in the
country's transition to democracy. In Egypt, progress was more uneven.
The political transition following the 2011 uprising was interrupted
by mass demonstrations against elected President Mohamed Morsi. Following
his deposition in June 2013, a prolonged period of political tensions
and social unrest ensued. A new road map for the transition process
was finally agreed upon in December 2013. This resulted in the approval of
the new Constitution in a referendum in February 2014, and in the
election, at the end of May 2014, of Abdel Fattah el-Sisi as the
new President of the Republic. Parliamentary elections are to be
held in October 2014. Despite the period of political uncertainty,
the EBRD made significant progress in carrying out its operations
in the SEMED region. Although Egypt maintained the status of potential
recipient country, the Bank had been investing in the economy through
the ad hoc EBRD SEMED Investment Special Fund. Meanwhile, Jordan, Morocco
and Tunisia were granted recipient country status in November 2013.
The Parliament of Morocco was granted Partner for Democracy status
by the Parliamentary Assembly in 2011 and the Parliament of Jordan has
also submitted a request for such status.
4.2. Heightened uncertainty and the risks to the outlook for growth
35. With the exception of Russia, Turkey and Poland,
the transition region is formed of countries of a relatively small
economic size, which makes them vulnerable to external developments.
This was evident in the aftermath of the financial crisis, as the
region was hit particularly hard by the collapse in global trade
and by the withdrawal of foreign capital. Whereas trade rebounded
in 2009-2010, the process of cross-border deleveraging, in which
foreign-owned banks withdraw funding from the transition region,
was still ongoing, albeit at a slower pace. Overall, economic output
expanded by less than 3% in both 2012 and 2013. In May 2014, partly
as a consequence of the tensions between Russia and Ukraine, the
Office of the Chief Economist forecast it to further decline to
1.4% in 2014.
36. Analysing the dynamics of growth in closer detail, it appears
that in 2013 the decrease of financial tensions in the Euro Area
benefited countries with close links to the monetary union. The
gradual recovery in economic activity in the Euro Area was reflected
in substantial higher growth rates in the South East Europe (SEE)
region, averaging 2.7% of Gross Domestic Product (GDP) in 2013 compared
to 0,4% in 2012. This was despite the fact that cross-border deleveraging
had not come to a halt in the SEE region and in central Europe and
the Baltic States (CEB), thus further delaying the resumption of
credit growth. On the positive side, however, deleveraging mostly
took place in the form of foreign currency lending, while local
currency lending, which does not expose the borrower to exchange
rate fluctuation risks, increased in a number of countries, including
Poland, Hungary, Bulgaria and “the former Yugoslav Republic of Macedonia”.
Political uncertainty, however, was a key factor in affecting growth
in other regions of EBRD operations. In Ukraine, the beginning of
social unrest in the last months of 2013 contributed to further
deteriorating the already weak consumer and business confidence,
with output stagnating in 2013. Output growth in the SEMED region
in 2013 was slightly below expectations, due to a mix of domestic
and regional turmoil.
37. Economic expansion was dampened in eastern Europe and the
Caucasus (EEC), as the worsening of the external environment, which
before was confined to the western part of the transition region,
expanded eastwards. This was mostly due to developments in the global
economy. In May 2013, the American Federal Reserve Bank announced
that it would soon start to scale down the so-called quantitative
easing, a large-scale asset purchase programme that it had carried
out during the five preceding years in response to the financial crisis.
As quantitative easing had contributed to increasing short-term
capital flows to emerging market economies, the mere announcement
of its scaling down, known as tapering, caused volatility in the
financial markets of these countries to increase, and financial
flows to reverse. Partly as a result of heightened uncertainty about
future swings in global monetary policy, key emerging markets, including
China, India and Russia, experienced a slowdown in economic activity,
thereby contributing to weakening external demand in neighbouring
countries. In the third quarter of 2013, net private capital flows
turned negative in the EBRD region. Increased volatility and the
reversal of capital flows were particularly evident in the depreciation
of the currencies of those countries that were dependent on capital
flows from abroad, such as the Turkish lira and the Mongolian tögrög,
which lost about 15% of their value against the US dollar in the
seven months between 13 May and 13 December 2013.
38. With the exception of the SEE and the SEMED regions, which
should benefit from the recovery in Europe, the outlook for economic
growth in 2014 and 2015 in the transition region has been negatively
affected by the geopolitical tensions between Ukraine and Russia.
As the Crimean crisis escalated, volatility in the financial markets
heightened. Capital flights out of Russia in the first quarter of
2014 reached the overall level registered in the whole of 2013.
The downward pressure on the Russian rouble intensified, while the
domestic stock market plunged. As a result, investor and business
confidence has worsened, and economic growth is forecast to come
to a halt in 2014, and to remain low in 2015. In Ukraine, the depreciation
of the currency and the jump in the country-risk indicators only
became subdued in early May 2014, after the government signed a
preliminary agreement on an international macroeconomic adjustment
programme led by the International Monetary Fund (IMF). As a result
of the implementation of the structural reforms envisaged in the
programme, Ukraine is expected to suffer severe output losses in
2014 and stagnation in 2015.
39. Increased geopolitical tensions between Russia and Ukraine
are also likely to impact neighbouring countries. The EEC region
is forecast to suffer from direct negative financial and economic
spill-over from the crisis. In May 2014, the Office of the Chief
Economist revised its forecast for growth in the region for 2014
to -2.6% of GDP, from +2.0%. In
the CEB region, increased geopolitical tensions are likely to neutralise
the positive effects stemming from the pick-up in external demand
coming from the Euro Area and the first sign of recovery of private
investment. The Crimean crisis could affect growth in the region,
mostly through trade links with Russia and due to energy security
concerns, resulting from gas supply uncertainty. The EBRD forecasts growth
in the CEB region to be 2.2% of GDP in 2014. In the Central Asia
region, the outlook was dampened by two factors: the slow-down in
remittance growth coming from Russia and the contagion in the financial
and currency markets, which was already evident in the devaluation
of the currencies of countries with close links with Russia, such
as the Kyrgyz Republic and Kazakhstan. However, the EBRD still expects
growth in the Central Asia region to average 6.2% in 2014.
In
the CEB region, increased geopolitical tensions are likely to neutralise
the positive effects stemming from the pick-up in external demand
coming from the Euro Area and the first sign of recovery of private
investment. The Crimean crisis could affect growth in the region,
mostly through trade links with Russia and due to energy security
concerns, resulting from gas supply uncertainty. The EBRD forecasts growth
in the CEB region to be 2.2% of GDP in 2014. In the Central Asia
region, the outlook was dampened by two factors: the slow-down in
remittance growth coming from Russia and the contagion in the financial
and currency markets, which was already evident in the devaluation
of the currencies of countries with close links with Russia, such
as the Kyrgyz Republic and Kazakhstan. However, the EBRD still expects
growth in the Central Asia region to average 6.2% in 2014. 40. As far as macroeconomic policy is concerned, developments
in the transition region in 2013 and 2014 reflect broader global
trends. Monetary policy remains accommodative in most EBRD countries
of operations, also thanks to declining inflation rates. Declining
inflation, in turn, is caused by lower commodity prices, weaker growth
in key emerging markets and high unemployment in developed economies.
Notable exceptions are Russia and Turkey, where inflation remains
above the central bank's goal. Evidence on fiscal policy is more mixed.
Consolidation efforts continue in all European Union member States,
with the aim of complying with the European Union fiscal rules.
However, the primary balance, a measure of the fiscal stance of
the government, deteriorated in some countries as a result of the
decrease in revenues caused by slowing economic activity. Primary
balance deteriorated also in a number of commodity exporting countries,
due to lower commodity-related revenues. Fiscal deficits remain
relatively high in Egypt and Tunisia, due to an increase in spending and
the failure to reform energy subsidy schemes.
5. Transition fatigue and the response of the EBRD
5.1. The legacy of slower growth: declining public support for market-oriented reforms
41. The prolonged period of slower growth that has followed
the global financial crisis has profoundly affected the prospects
of the EBRD transition region to achieve convergence with the living
standards of advanced market economies. The main economic reason
that has caused growth in the transition region to slow and remain
below pre-crisis levels is well understood and lies in the persisting
decline of international capital flows to the region. According
to the Office of the Chief Economist, however, the cure for the
economic malaise should not be a return of capital flows to pre-crisis
highs, since in many cases these reflected unsustainable investment
bubbles. Rather, a more pressing concern is the lack of political
resolve to implement those structural reforms that are crucial to
improve market-supporting institutions and rekindle growth. As noted in
the 2013 Transition Report, reforms had already been losing momentum
since the mid-2000s, before the financial crisis hit, and the period
of slower growth following the financial crisis further exacerbated
this structural problem.
42. The increase in long-term unemployment brought about by the
crisis and the prolonged period of fiscal austerity, often recommended
by supranational bodies, is eroding public support for market-oriented
reforms. Some of the most advanced countries in the transition region
even experienced reform reversals. For instance, Hungary and Bulgaria
have seen administrative tariff reductions, pushing energy prices
below cost-recovery levels. This risks deterring investment in the
sector, thus undermining economic competitiveness. Delays in privatisations,
the re-nationalisation of banks and increased State interference
in the economy occurred in a number of countries, including Russia,
Ukraine, Kazakhstan and Latvia. In Poland and Hungary, capital market development
suffered from a setback when the governments passed legislation de facto eliminating the fully-funded
private leg of the pension system.
43. The Office of the Chief Economist has developed the so-called
transition indicators, in order to assess progress in transition
to an open market economy. At country-level, there were 11 downgrades
across the EBRD transition region between 2010 and 2013, of which
six concerned European Union members. During 2013, downgrades outnumbered
upgrades across the EBRD transition region for the first time since
the Bank's establishment. The
fact that the majority of downgrades affected the most advanced
countries comes only partially as a surprise. Due to the close links
with western Europe, the crisis is felt the most in the CEB and
SEE regions. In addition, in many of these countries the crisis
appears to have been blamed on the economic institutions prevailing
at the time, thus denting support for free markets. However, structural
reforms are seen as a crucial element for achieving convergence.
According to long-term forecasts made by the Office of the Chief
Economist, if countries did restart reforms, yearly growth could
increase between 0.8% and 1.5% of GDP over the longer term. The
policy challenge lies in the fact that, in order to rekindle growth,
it is necessary to whet the appetite for structural reforms. However,
this needs to be accomplished during a period in which the support
for reforms has declined, precisely because of slow growth.
The
fact that the majority of downgrades affected the most advanced
countries comes only partially as a surprise. Due to the close links
with western Europe, the crisis is felt the most in the CEB and
SEE regions. In addition, in many of these countries the crisis
appears to have been blamed on the economic institutions prevailing
at the time, thus denting support for free markets. However, structural
reforms are seen as a crucial element for achieving convergence.
According to long-term forecasts made by the Office of the Chief
Economist, if countries did restart reforms, yearly growth could
increase between 0.8% and 1.5% of GDP over the longer term. The
policy challenge lies in the fact that, in order to rekindle growth,
it is necessary to whet the appetite for structural reforms. However,
this needs to be accomplished during a period in which the support
for reforms has declined, precisely because of slow growth. 5.2. Re-energising transition: medium-term directions and the Fifth Capital Resources Review
44. During the 2014 Annual Meeting, President Chakrabarti
unveiled a three-pronged approach jointly devised by the Board of
Directors and Senior Management to re-energise transition in the
EBRD region. This approach is part of a more comprehensive strategy
defined as “medium-term directions”, which constitutes the basis
for the discussion over the Fifth Capital
Resources Review, covering the period 2016 to 2020. In presenting
the medium-term directions, President Chakrabarti noted that in
order to deliver most effectively the Bank has to fine-tune its
business model and he made an explicit reference to the need to
enhance the Bank's risk-taking capacity.
45. The new strategy develops around three key points: the first
one concerns the need to build resilience in the transition process,
especially in terms of institutions and economic structures. At
the EBRD, the necessity to revitalise the appetite for market reform
in order to rekindle transition is well understood. Ultimately,
however, it is the role of governments to adopt the policies that
are necessary to foster transition. Despite that, the Bank still has a decisive role
to play in formulating and bringing forward those policies. Furthermore,
thanks to its long experience in the region, the Bank is in a privileged
position to pinpoint and provide finance to those projects that
could have a sustainable impact on transition, because the right
policies and institutions are in place. The medium-term directions
regard precisely these two elements, the formulation of policy reforms
and the financing of pivotal projects, as the way forward for the
Bank to contribute to improving economic structures and institutions.
46. The second aim of the medium-term directions consists of developing
further economic integration in the transition region. Besides raising
growth, integration could also help to prevent reversals in the
transition process, as the costs of undoing reforms are higher in
more interconnected economies. Concretely, the Bank could intervene
in this sector in two ways, by providing financing to projects aimed
at developing cross-border infrastructures and by introducing new
international investors to the region.
47. Finally, the need to address common global challenges, such
as food security, climate change, water scarcity and energy security
constitutes the third main point of the strategy. The
EBRD has already been tackling these challenges and aims to further
strengthen its engagement. For example, the Bank reacted to the increase
in food prices between 2010 and 2012 by increasing its investments
in the agribusiness sector. Furthermore, with the objective of reducing
carbon emissions and making the countries of operations more energy
efficient and independent, in 2006 the EBRD launched the Sustainable
Energy Initiative, through which it invested €13.5 billion in sustainable
energy projects between 2006 and 2013.
The
EBRD has already been tackling these challenges and aims to further
strengthen its engagement. For example, the Bank reacted to the increase
in food prices between 2010 and 2012 by increasing its investments
in the agribusiness sector. Furthermore, with the objective of reducing
carbon emissions and making the countries of operations more energy
efficient and independent, in 2006 the EBRD launched the Sustainable
Energy Initiative, through which it invested €13.5 billion in sustainable
energy projects between 2006 and 2013. 48. The medium-term directions are not confined to the three points
referred to above. An important aspect of the new strategy concerns
the Bank's geographic planning. In this respect, the medium-term
directions present a consensus view on gradually phasing out investments
in the seven EBRD recipient countries that joined the European Union
in 2004, in the context of the so-called “graduation” policy. It
is not yet clear, however, whether graduation is foreseen to take
place within the period of the Fifth Capital Resources Review. In
order to make the graduation process smoother and politically attractive,
the Bank is also working to devise a new Post-Graduation Special
Fund to which countries can access after graduating to get financing
for cross-border investment projects. This fund will also benefit
the Czech Republic, which is the only EBRD member to have already
effectively graduated in 2007. Whereas the Bank expects to gradually
scale down its operations in the western part of the transition
region, the medium-term directions maintain the general orientation
towards increasing operations in the east and south of the region.
Finally, the new approach to geographic planning also aims to increase
the Bank's flexibility in responding to changes in the business
environment across the region. Importantly, the scope of increased
flexibility would always be determined under the guidance of the Board
of Directors.
49. The Bank is also working to modernise its planning process.
Concretely, this consists of the introduction of a Strategic Implementation
Plan (SIP), on a three-year rolling basis. Currently, the guidelines
for the activities of the Bank over the medium term are outlined
in the Capital Resource Review (CRR), which covers a five-year period,
whereas implementation is defined in the Annual Business Plan (ABP).
A drawback of this approach is that it does not leave much room
for changes in the Bank's strategic direction. As a result, in some
cases the Bank had to deviate from the original plan set out in
the CRR. The most notable example was the postponement of the graduation
of the recipient countries that joined the EU in 2004, which was
expected to take place within the period covered by the Third Capital
Resources Review (2006-2010). The intention of the reform is to
make the planning process more flexible by allowing the SIP to draw
some of the work out and ease the burden of the CRR and the ABP.
This would make the CRR less prescriptive, thereby contributing
to improving the alignment between the Bank's priorities and the
constraints posed by the environment in which it operates.
6. Democratic progress of recipient countries
50. In February 2013, the EBRD updated the processes
and procedures concerning the implementation of the political aspects
of its mandate. The Bank's operations, which are designed to foster
private sector development and narrow economic transition gaps,
are only indirectly targeted to the promotion of democratic transition.
It follows that the Bank neither assesses the potential contributions
nor evaluates the impact of individual projects for the development
of multiparty democracy. Nevertheless, democratic progress is recognised
as being closely interrelated to the main purpose of EBRD operations,
namely to foster transition to an open market economy. For this
reason, political assessments are an integral part of the triennial
Country Strategies and of the annual Country Strategy Updates.
6.1. Does market reform promote democracy? Theory and evidence from the transition region
51. Market reform is typically thought to have both broad
political and institutional implications. More specifically, economic
development is often associated with the consolidation of democratic
institutions and institutional capacity building. However, economic
transition and democratic progress do not always come together.
In particular, whereas the correlation between economic development
and democracy is significant, such correlation does not need to
imply a causal relationship.
52. To the extent that the EBRD mandate is to foster transition
to an open market economy in those countries committed to the principles
of multiparty democracy, the nature of the relationship between
economic and political development acquires a critical relevance.
If economic and political transition were known to be two unrelated
processes, the EBRD could be expected to operate only in those countries
that were already applying the principles of multiparty democracy.
On the other hand, in the case that market reform was to benefit
political transition to more democratic systems, the EBRD could
be legitimately thought to carry out its operations also in non-democratic
countries. In reality, the Bank is active both in fully democratic
countries, such as those belonging to the European Union, and in
less democratic ones, such as Belarus and Turkmenistan, suggesting
that political transition is to benefit from economic development.
53. When the Sub-Committee on Relations with the OECD and the
EBRD met at the headquarters of the EBRD in February 2014, we asked
in particular how the Bank handled the fact that it was helping
countries which were not working towards democracy, and bringing
credibility to certain countries which did not deserve it. We were
told that although the aim of the Bank was not to foster democracy
and experience had shown that democracy and market economy did not
always go together, it was nevertheless hoped that they would converge
in the long term. We were also told that the EBRD Board had felt
that walking away from such countries would not help them.
54. The 2013 Transition Report dedicates an entire chapter to
reviewing the literature explaining the relationship between markets
and democracy and tests whether its main findings apply to the transition
region. A large strand of the literature finds wealth, industrialisation,
urbanisation and education to be statistically associated with the
development of democratic systems. Building upon this finding, the
well-known modernisation theory regards economic development, as
measured in per capita income level, to be critical for the creation
of a wealthy and politically active middle class, which demands
and supports democratic reform. Another important channel through
which economic development is thought to benefit democratisation
consists of the higher level of educational achievement that typically
characterises countries with higher GDP per capita, the reason being
that education positively influences the perception of individuals
about democracy.
55. On the other hand, another strand of literature holds the
view that it is economic equality, rather than economic development
per se, that makes democratic systems more likely to come about
and later survive. In particular, in an unequal country the small
minority controlling most of the wealth would prefer an authoritarian regime
acting in favour of the minority, rather than a democratic one operating
in favour of the majority. Of course, this is contingent upon the
assumption that the less well-off majority would seek redistribution
through the ballot box and the tax system if it were given the possibility
to do so, as in the case of democratic systems.
56. Using international data, the 2013 Transition Report empirically
investigates the relationship between economic and democratic development
and concludes that market reform and economic growth globally appears
to benefit democratisation in the long term and reduce the chances
of democratic regression. Specific evidence from the transition
region is more mixed. Over a longer period, the impact of economic
growth on democratic development was not significant. This is not
surprising, however, since most countries in the EBRD region experienced
economic development but remained part of undemocratic States or
empires as late as 1989. The picture changes considerably when only
the period between 1989 and 2012 is considered. The 2013 Transition
Report finds that democratic development depended strongly on lagged
economic growth, and perhaps more importantly on the adoption of
market reforms. Note that the level of economic equality, as measured
by the GINI coefficient, does not seem to have played a decisive
role.
57. There are, however, a few caveats. Globally, countries with
large endowments of natural resources are found to be less likely
to develop a democratic system even when economic development is
achieved. This also applies in the EBRD region. There, countries
having a high share of GDP stemming from natural resource extraction
are substantially less democratic than their level of economic development
would otherwise predict. The large revenues generated by extractive
industries make the authorities less dependent on a fiscal system that
taxes the general population, which in turn decreases the pressures
to enhance accountability to the taxpaying population through the
development of more democratic institutions.
58. Furthermore, the large revenues related to natural resource
extraction allow the authorities to maintain consensus by redistributing
subsidies to the population, thereby reducing the demands for political
reform. Since some of its recipient countries are endowed with large
stocks of natural resources, the fact that this might impede democratic
development is particularly relevant for the Bank's policy. The
Bank's engagement in such countries is particularly focused towards
institutional capacity building, via increased policy dialogue and economic
diversification. The latter, which is promoted by financing projects
in sectors other than those related to natural resource extraction,
is crucial to develop other sectors of the economy, thereby making
the population less dependent on the subsidies distributed using
revenues related to extraction. The development of sound institutions
is essential to guarantee that the windfall revenues stemming from
resource extraction are used to finance productive investments that
are beneficial for economic growth, rather than for consensus-seeking
redistribution.
59. The 2013 Transition Report also finds that the effects of
economic development on democratisation are likely to take between
one or two decades to materialise. In the short term, economic growth
could even increase the chances of survival of non-democratic regimes.
Therefore, the international development community needs to act
with patience and persistence in supporting market reform, as this
would only gradually promote democratic progress.
6.2. Degree of achieved transition in recipient countries relative to quantity of EBRD investments
60. The lack of an assessment of the potential contribution
of individual projects in fostering democracy increases the difficulty
in establishing a causal relationship between the volume of the
EBRD investments in a recipient country and the degree of democratic
transition achieved. On the other hand, a simple comparison of relevant
democratic governance indicators between 1992 and 2012 suggests
that a few countries in the EBRD region have made significant progress
in their level of democratic development.
61. Figure 1 presents a chart showing changes in the level of
democracy, as measured by Polity scores, between 1992 and 2012,
both for countries in the transition region and others. The Polity
project provides a series of data widely used in social sciences
research. Its analysis focuses on the most formal class of polities, that
is States operating within the modern world's State system. Democracy
is conceived as the presence of three interdependent elements: the
existence of institutions and procedures through which citizens
can express effective preferences about alternative policies and
leaders; constraints on the exercise of power by the executive;
and the guarantee of civil liberties.
62. Polity's conclusions about a State's level of democracy are
based on an evaluation of: i) competitiveness of executive recruitment;
ii) openness of executive recruitment; iii) constraints on the chief
executive; and iv) competitiveness of political participation. A
Polity score ranging from -10 to +10 is determined for each year and
country. Values from -10 to -6 are used to classify autocracies,
-5 to 5 for anocracies, and 6 to 10 for democracies. Countries above
the dotted line experienced improvements in democracy, those below worsened.
Turkmenistan and Uzbekistan were already so undemocratic in 1992
that they could not get any worse and maintained their position
at the bottom. Belarus, Azerbaijan and Kazakhstan, by this order,
had the worse evolutions, with Belarus dropping 15 points from +7
to -7. Kyrgyzstan had one of the more positive changes, rising from
-3 to +7.
Figure 1: Changes in the level of democracy between 1992 and 2012
Source: EBRD 2013 Transition Report, p. 26
63. By 1992, democracy had already developed in most
of the countries that would join the European Union in 2004, which
prevented them from experiencing further significant improvements
in the period considered. It is not surprising that democracy had
sprung up in the western part of the transition region soon after
the fall of the Berlin Wall; thanks to a well-educated population
and a largely manufacturing-based economy, the right environment
for democratic development to flourish was already in place in these
countries. The fall of the wall then constituted the right window
of opportunity for an orderly political transition to take place.
A similar story holds for the countries of southern and eastern
Europe, whose transition to democracy mainly came about following
a large shock, such as the dissolution of the former Yugoslavia.
On the other hand, Russia and Ukraine started with relatively high
democratic indicators in 1992 but failed to develop further. This
possibly reflected how a combination of the old elite and a new
class of political entrepreneurs managed to preserve or take control
of strategic sectors of the economy, including those involving natural
resource extractions.
64. The Central Asian republics perhaps constitute the most interesting
case to analyse. These countries started their transition with a
relatively low level of democratic development and had a largely
agrarian and resource extraction-based economy. Some, like Uzbekistan
and Turkmenistan, have experienced virtually no change, whereas
in other countries democratic indicators either substantially improved
(as in Mongolia and the Kyrgyz Republic) or declined (as in Kazakhstan
and Azerbaijan). With the exception of the Kyrgyz Republic, the
rate of EBRD investment in the central Asian region seems to be
somehow correlated to the countries’ democratic performance.
65. Crucially, Mongolia had the highest EBRD investment rate in
the transition region, as the Bank invested on average €32 per year
per person in the eight years of operations in the country. The
same figure is only €1 and €2 for Uzbekistan and Turkmenistan, respectively.
High annual per capita investment rates, between €18 (in Slovenia)
and €29 (in Montenegro), also characterise countries in the SEE
region, which all realised improvements in their democratic indicators
between 1992 and 2012. In Belarus, Azerbaijan and Kazakhstan, the
countries with the most negative changes in democracy indicators,
the EBRD investment rate is respectively €7, €10 and €14 per year
per person.
66. To some extent, these numbers indeed suggest the existence
of a positive correlation between the Bank's investments in recipient
countries and the degree of democratic progress achieved. It should
be noted, however, that these are very rough figures and do not
take into account important aspects, such as country’s economic
size and potential reverse causality issues. They are therefore not meant
to infer a causal relationship between EBRD investments and democratic
progress.
They are therefore not meant
to infer a causal relationship between EBRD investments and democratic
progress. 7. Special issues regarding EBRD activities
7.1. Operations in the southern and eastern Mediterranean region: an early review
67. The political breakthrough in the SEMED countries
in 2011 was the result of a home-grown process rather than of external
developments. After a long period of non-democratic rule, mass protests
calling for more equality of opportunities initiated an era of change.
The events that followed offer a unique window of opportunity to
foster both economic and political development.
68. The success of the transition process, however, depends on
several factors. Issues in the new transition region are quite different
from those in east European countries in the 1990s, which makes
the SEMED a unique case for the EBRD. The stock of human capital
in the region is slightly below that of CEB and SEE countries when
they started their transition. This could increase the time needed
to develop those political, legal and economic institutions that
are crucial to foster development. Moreover, the young unemployed
constitute a large share of the population in the SEMED, which makes
political reform more susceptible to regression in the event that
they do not feel sufficiently included in the transition process.
69. On the other hand, private sector development, particularly
that of small and medium-sized enterprises (SMEs), and the modernisation
of the infrastructures and energy distribution systems constitute
two areas with large transition impact potential where the EBRD
could play an important role. Another area where transition gaps
are evident relates to female participation in the labour market
and more specific gender issues. In this connection, the Bank recently
added economic inclusion as one of the areas to be considered in
its assessment of transition. Economic inclusion, intended as the
extension of opportunities to individuals regardless of their circumstances
or social background, could contribute to increasing female and
youth participation in the labour market.
70. Following the shareholders’ agreement to extend the Bank's
geographic remit to include Egypt, Morocco, Tunisia and Jordan,
the EBRD has carried out preliminary work to understand country
priorities and, since 2011, develop first contacts with stakeholders.
In 2012, the Board of Governors allocated €1 billion from the Bank's
net income into the SEMED Investment Special Fund, to implement
early investments in the region. Following the approval of potential
recipient country status for Egypt, Tunisia, Jordan and Morocco,
the first project in the SEMED was approved in December 2012. In
November 2013, Tunisia, Jordan and Morocco were granted the status
of recipient country, while Egypt still remains a potential recipient
country. Furthermore, the Bank opened resident offices in Tunis,
Cairo, Casablanca and Amman, to cultivate relationships with the respective
authorities and business communities.
71. Three years after the events of the Arab Spring, the EBRD
is fully engaged in the new transition region and intends to significantly
expand its financial and institutional commitments. Crucially, the
EBRD is also engaged with the authorities in policy dialogue activities,
with the particular aim of developing the legal environment. Overall,
in 2013 the Bank invested €449 million in 21 operations in the region.
The EBRD, however, expected its investment volume to increase up
to €2.5 billion by 2015. The EBRD identified five main priority
areas consisting of: i) supporting SMEs development, in order to
achieve a major impact on growth and job creation; ii) enhancing
the agribusiness value chain by improving yields, logistics and
resource efficiency; iii) assisting financial institutions through
capacity building and product innovation; iv) supporting the governments
in gradually liberalising the energy sector and introducing energy
efficiency and sustainability practices in the economy; and v) modernising
the infrastructure system, also via decentralisation of municipal services
and the involvement of the private sector.
7.2. The relations between the EBRD and the European institutions
72. Ever since it was set up, the EBRD has dedicated
itself to cultivating its relations with other international organisations,
and European institutions in particular. The Bank has regular contacts
with the Council of Europe, the Council of Europe Development Bank
(CEB), the European Investment Bank (EIB) and the European Commission.
The relationship between the EBRD and the Council of Europe is directed
at monitoring democratic progress in central and eastern Europe.
Additionally, in October 2013 the EBRD and the CEB updated an existing
bilateral agreement which foresees regular exchanges of information
in order to facilitate collaboration in areas where their mandates
overlap and enhance impact in common countries of operations. When
we met at the EBRD, Sir Suma Chakrabarti expressed his appreciation
for co-operation with the Assembly's Monitoring Committee.
73. The relation between the EIB and the EBRD has a unique characteristic,
insofar as the EIB is an EBRD shareholder, but not vice versa. The
two banks have shared interests in several of the EBRD countries
of operations and often co-finance the same projects. In 2011, the
EBRD, the European Commission and the EIB updated an already existing
Memorandum of Understanding, aimed at supporting the fulfilment
of European Union external policy objectives in the countries where
both banks operate.
74. The European Union is itself a shareholder in the EBRD, as
are all EU member States. Furthermore, both EU member States (such
as Bulgaria, Croatia, Cyprus, Estonia, Hungary, Latvia, Lithuania,
Poland, Romania, Slovakia and Slovenia), and EU candidate and potential
candidate countries (such as Albania, Bosnia Herzegovina, Montenegro,
Serbia and “the former Yugoslav Republic of Macedonia”) are also
EBRD recipient countries. European partners, such as the European
Commission, the EIB, and some EU member States, are among the largest
donors for crucial EBRD activities, such as technical co-operation
with the Bank's clients and policy dialogue with the governments
of recipient countries. Through these activities, the Bank improves
standards in corporate governance and transparency and promotes
the development of market supporting institutions in key transition
sectors of the economy. A new development in the EBRD activities
was the establishment in 2013 of an External Policy Coordination
Team and the opening of an office in Brussels, which aim to further
enhance collaboration with the European institutions and other key
external partners.
8. Conclusions
75. Before the recent financial crisis of 2007-2008,
the transition to market economy was considered to have been broadly
achieved throughout a significant part of the EBRD region. The severe
recession that followed jeopardised the convergence process and
challenged the results achieved in previous years. Due to the diminished
availability of foreign capital and the related credit crunch, investments
and consumption suffered, which had a negative impact on economic
growth. The crisis and the continued efforts towards fiscal adjustment
in the European Union countries also dented public support for free
markets. In this context, it would be wise to reconsider the extent
of the fiscal adjustment to be sustained by those countries. Furthermore,
the lack of political resolve to implement structural reforms, which
had already lost momentum since the mid-2000s, is evident. Moreover,
since the early 2000s a number of countries in the transition region
have seen a levelling off of democratic progress.
76. Recent developments in some countries in the SEMED region,
however, have been encouraging. In Morocco and Jordan the role of
elected parliaments has been further strengthened. After a period
of uncertainty, in Tunisia the new constitution was finally approved
in 2014, which can be seen as a positive development in the country's
transition to democracy. Challenges in the political transition
in Egypt are still present, and the country maintains the status
of potential recipient. Nevertheless, despite the political uncertainty,
the Bank made considerable progress in the region. In November 2013,
Tunisia, Jordan and Morocco were each granted the status of recipient
country. The Bank also opened resident offices in Tunis, Cairo,
Casablanca and Amman, to cultivate relations with the respective
authorities and business communities. The EBRD invested €449 million
in 21 operations in the region in 2013 and expects its investment
volume to increase up to €2.5 billion by 2015. Social issues in
the new transition region relate to the high unemployment rate among
young people and low female participation in the labour force. With
this in mind, the expansion of the Bank's project selection criteria
to include social inclusion and equality of opportunity should be
welcomed.
77. The developments in Ukraine in the latter part of 2013 and
first part of 2014 offer an important window of opportunity to foster
transition. The EBRD is in a position to play an instrumental role
by providing leadership and external support. In this connection,
the stated intention of the Bank to support Ukraine by augmenting
its financial engagement in the country and increasing policy dialogue
with the authorities should be supported and further encouraged.
The new drive towards increased policy dialogue already resulted
in the signing of a Memorandum of Understanding with the government
for the Ukrainian Anti-Corruption Initiative.
78. The EBRD is well aware that the case for its operations has
considerably strengthened in the post-crisis world. During the 2014
Annual Meeting, the EBRD shareholders discussed the new medium-term
directions that will guide the Bank's activities over the following
years. These include a three-pronged approach to re-energise transition
in the EBRD region, a new focus on the Bank's geographic vision
and a modernisation of its planning process. The medium-term directions
provide a starting point for discussion of the Bank's Fifth Capital
Resources Review (CRR5), which will cover the period 2016 to 2020
and is to be approved at the Bank's 2015 Annual Meeting in Tbilisi.
79. In an attempt to better align the Bank's priorities and the
constraints posed by the environment in which it operates, the EBRD
aims to introduce a Strategic Implementation Plan (SIP). This is
to be welcomed as it would make the planning process more flexible
and less prescriptive by easing the burden of the Capital Resources
Review and the Annual Business Plan. Finally, the Bank's Fifth Capital
Resources Review is also expected to propose a reorganisation of
the composition of the Board of Directors, with the aim of increasing the
weight of the countries of operations. The strategic directions
also include a consensus view on the expectation of graduation from
the Bank's operations of the seven EBRD recipient countries that
joined the European Union in 2004. Furthermore, they maintain a
general orientation towards increasing operations in the east and
south of the region, also in accordance with recent geopolitical
developments.
80. The EBRD aims to re-energise transition by concentrating its
efforts around three key aims: i) supporting governments in hastening
transition through policy dialogue; ii) promoting economic integration
both globally and regionally; and iii) addressing globally common
challenges, such as climate change, energy and food security and
water scarcity. Increased emphasis on policy dialogue is to be supported,
as it is crucial to re-think institutional capacity. In this connection,
the signing of the Partnership for Re-energising the Reform Process in
Kazakhstan constitutes a significant achievement and its progress
should be carefully monitored. If successful, it may constitute
a blueprint to re-energise transition in other middle-income countries.
Concretely, the Bank could promote regional economic integration
by introducing new international investors to the region, and by
financing projects aimed at the development of cross-border infrastructures.
In this respect, the Bank is also devising a new Post-Graduation
Special Fund, to which countries can access after graduating in
order to finance cross-border infrastructure projects. The establishment
of such a fund should be welcomed, insofar as it has the potential
to deepen regional integration and increase the palatability of
graduation.
81. In the meantime, the Bank has already experienced relevant
changes concerning its internal structure, in the context of the
modernisation agenda initiated by President Chakrabarti. The initiative,
which was denominated One Bank,
focuses on the need to streamline the Bank's internal procedures
and modernise its management culture. This resulted in the creation
in 2012 of two new vice-presidencies, one for policy and one for
human resources and corporate services. The establishment of the
Vice-Presidency for Policy should be seen as an effort to strengthen
the link between the Bank's investments and the economic reforms
to be adopted at the broader sector and country levels. Meanwhile,
the Bank's expansion has continued. During its 2014 Annual Meeting,
EBRD shareholders granted the status of recipient country to Cyprus,
in order to help the country to rebalance its economy. Moreover,
Libya's request to become the 67th shareholder of the Bank was accepted.
Any further decision to grant recipient country status to Libya
would be taken separately, following a thorough assessment by the
Bank of the political, economic and operational environment in the country,
on the basis of Article 1 of the Agreement Establishing the Bank.