Lessons from the early 1990s

The transition impact concept aimed to define what the EBRD wanted to achieve with its projects and to help inform the selection and design of its projects.

When I first joined the Bank in early 1993, we conducted cost-benefit-analyses on project proposals. However, that method told you what economic value a project might generate, not whether that project advanced the transition to an open market economy. What is more, the method was static, when the transition was all about dynamic change. The EBRD had to find a different method and there was no blueprint for it.

The solution, which we developed under Nick Stern’s leadership, was very simple. This was, I believe, the reason for its robustness and longevity. We described what a market was and what its essential components were. Then we asked how an EBRD project could boost these market components and through which channels. The result was a “checklist” and a narrative. It allowed each project team to tell a story, a story of dynamic change, and left the Board to judge whether that story was consistent with our mandate – a world away from the complexities of cost-benefit analysis. However, even though it was a qualitative approach that relied on judgement more than hard facts, it gave rise to a decent accountability framework.

As markets transitioned, that simple checklist offered a clear sense of direction. But while it told us whether we were building markets, it did not tell us much about how well these markets worked. We might have privatised firms and designed power off-take agreements, but did that result in competitive pricing? Did the markets innovate? Did they give opportunities to women? Did they avoid polluting the atmosphere? As the transition progressed, these were increasingly the questions we needed to answer. We did not just need to foster market economies, but well-functioning market economies.

The review of the transition impact concept in 2016, therefore, put the focus on the quality of markets, rather than their mere existence. Working with Tim Besley, Sergei Guriev and Beata Javorcik, we identified six qualities that markets should seek to embody: they should be competitive, inclusive, well governed, green, resilient and integrated.

Outcomes mattered, not just (market) process. This built a bridge between the EBRD and the traditional multilateral development banks. It also made it easier to understand what the Bank’s purpose would be in new regions of operation, such as the southern and eastern Mediterranean, where the primary challenge was not just market development, but economic development more broadly.

Almost a decade on, we must ask ourselves whether those six transition qualities are still serving their purpose? Given the rise of anti-environmental, social and governance (ESG) politics, the qualities are certainly facing headwinds. At the same time, I suspect that most people, if asked, would still like their children to grow up in a world with these characteristics. Could there be a shift in emphasis, for instance, to acknowledge the growing centrality of technology and innovation? In a development finance approach that puts countries in the driver’s seat, these are questions that should be put to Bank clients. Perhaps this would prompt the Bank to unpack some of the qualities (such as competitiveness) and merge others (such as governance, resilience and integration).

Hans Peter Lankes
Managing Director and Deputy Chief Executive at ODI | Former EBRD Managing Director, Institutional Strategy