Building a Balanced Economy

Speech transcript: Building a Balanced Economy - Sir Suma Chakrabarti, EBRD President

Delivered by: 

Sir Suma Chakrabarti, EBRD President

Venue: 

Montreal, Canada

Event: 

International Economic Forum of the Americas

Supporting private-sector led growth and delivering sustainable and secure energy solutions is key

I. INTRODUCTION

Good morning. As a member of the Board of Governors of the International Economic Forum of the Americas, and as President of the European Bank for Reconstruction and Development, I am very pleased to be with you in the beautiful city of Montreal.

The topic of this year’s Conference of Montreal, Building a Balanced Economy, is dear to my heart. This is something I have spent most of my professional career in the development field thinking and working on, and it is a subject that is core to the work of the EBRD.

In my introductory remarks to this inaugural session of the conference, I want to touch briefly on three issues: (1) first, on the impact of the global financial crisis on the region where EBRD invests and the need for reforms to generate balanced and sustainable growth; (2) second, on the importance of balancing the role of the state and the market in supporting entrepreneurship and private-sector led growth; (3) and third, on the need to promote sustainable and secure energy solutions in a region with extremely high energy intensity.

II. GROWTH AND REFORM PROSPECTS IN THE TRANSITION COUNTRIES

For those of you in need of a refresher, the EBRD was created in 1991, just after the fall of the Berlin wall and the collapse of communism in eastern Europe. The mandate was to support the transition to a market economy, to support the private sector in particular, and to promote private entrepreneurial activity in countries in central and eastern Europe and the former Soviet Union which had just shrugged off decades of central planning. For a period of time, all seemed to be going rather well with a few notable exceptions.

In the first decade or so of transition, after a short and sharp transition recession, countries in the region began to achieve impressive rates of income convergence with their richer neighbours. One of the drivers was the catch-up in productivity – resulting from the collapse of inefficient sectors, first-generation reforms, and the re-orientation of trade. Critical reforms like price liberalisation and the opening up of trade and foreign exchange markets were pushed through in the initial years of transition. More difficult reforms, such as governance and enterprise restructuring, competition policy and infrastructure have been slower in coming.

Although reforms and growth were taking off, trouble was brewing. Underneath the region’s catch-up growth, which began to bring countries back to the level of output achieved prior to the onset of the transition recession, inequalities started to grow.  There were clear winners and losers in the transition process; important regional disparities; and increasingly divergent paths across countries. These imbalances and growing tensions were also reflected in politics: political crises and new sets of powerful vested interests partially reversed or hindered reforms.

Nevertheless, through most of the 2000s growth in many countries in the region was sustained through financial and FDI flows and a sizeable credit boom. Financial and trade integration in much of the region, as well as reliance on energy exports in a few of the resource rich countries of the former Soviet Union, kept the convergence process on track.

With the international finance crisis in 2008/09 and the Eurozone crisis that began in 2011, this came to an abrupt end. For the past six years, the region has experienced sub-standard growth. The lessons of the crisis were loud and clear: transition countries would need to embrace development models that rebalance finance in favour of more home grown sources through the development of local capital markets; they would need to diversify the economic base; and they would need to step up the pace of structural and institutional reforms that create a more attractive investment climate and better business environment.

In 2013, we published a landmark edition of our annual Transition Report. Titled ‘Stuck in Transition’ the report showed that transition momentum in the EBRD region has slowed considerably since the first decade of transition. Some countries are indeed stuck, while others are actually going in reverse. This matters even more now, as the easy catch-up growth of the first decade of transition has exhausted itself. Unless the reform process can be reinvigorated, transition economies are likely to see significantly lower growth rates over the next 20 years.

III. REENERGISING TRANSITION: WHAT COMPANIES NEED FROM THE STATE

What types of reforms are needed to re-energise transition? As a private-sector focused bank that invests in projects, we have a strong bias in favour of the kinds of reforms that support companies and entrepreneurship. This includes, in particular, reforms designed to improve the business environment, create a level playing field and promote competition, enhance corporate governance, facilitate knowledge-transfer and skills, and deepen local capital markets to ease firms’ access to finance.

What this boils down to is an effective state. The private sector and the entrepreneurial spirit cannot thrive where the state is weak and unable to provide the underpinnings of functioning markets. Whereas the transition began during an era of market fundamentalism and small-state bias, the consensus that is emerging today is for a better balance between state regulation and unfettered markets.

I like to think of the following four main broad pillars of our thinking about transition in the 21st century:

First, POLICIES matter. The policies that underpin a modern market economy and that enable private-sector led growth. Which toolkit of policies are we talking about? 

  • We know that a stable and growth-promoting macroeconomic environment is fundamental.
  • We know that an appropriate regulatory framework for private sector development matters. This includes competition, product, labour and financial market regulations, tax policies, and all of the policies that together form an attractive investment climate and business environment
  • We know that tariff, subsidy and other policy reforms to promote sustainable development of infrastructure and a role for the private sector also matter, both in financing and service delivery.
  • And more recently, we know that policies that ensure equality of opportunity, promote social justice and inclusion for women, minorities and other excluded groups and regions also matter. Without these, transition can easily falter or stall, as economies fail to take full advantage of the productive capacity of the workforce and social cohesion around the goals of transition fails to take hold.

Second, INSTITUTIONS matter. Effective institutions are accountable, legitimate, transparent and competent. Which institutions do I have in mind?

  • The basic institutions of the state such as a modern and effective judiciary that can enforce the rule of law, uphold contract and property rights and enforce commercial legislation.
  • Effective public administration and a merit-based civil service is also key. The best policies in the world will not result in very much if there is not the effective capacity in the civil service to implement the policies.
  • Political institutions are also fundamental to this pillar. Market economies generate powerful interests that can attempt to influence or ‘capture’ the state. The key political governance challenge is to put in place a system that can allow markets to flourish while keeping these powerful interests at bay. Democratic systems tend to perform better at this. By replacing failed policies and leaders with new ones. By guaranteeing a level of transparency and accountability.  And by dealing more effectively with corruption.
  • Finally under this pillar, we should not overlook the importance of a free press and active civil society in a well-functioning market system. These institutions foster accountability and transparency, promote a balance of power in society and can act as a referee in upholding the ‘rules of the game’.

Third, LEADERSHIP matters. Strong political leadership is critical for reform success. Reforms are difficult, obstacles can seem insurmountable and temptations to succumb to corruption or populism can be great. Reform breakthroughs like in Georgia after the Rose Revolution or in Slovak Republic after the replacement of the Meciar government were made possible by the energy and drive of the leadership.

Finally, a LONG-TERM PERSPECTIVE matters. As we’ve learned after nearly 25 years in the business, transition is a long and winding road. There will be setbacks along the way. We in the development community need to be patient but persistent in promoting reforms. We also need to encourage governments to take the long view. Policies that are failing should be corrected. But policies that are working should not be jettisoned when new governments come to power.

IV. SUSTAINABLE ENERGY FOR SUSTAINABLE DEVELOPMENT

Ladies and gentlemen, transition is not over. We all know that tackling the transition challenges I’ve pointed to in my remarks so far will take concerted effort by the leaders, businesses and citizens of those countries.

There is another element to the transition that will be crucial for the competitiveness of companies as well as the region’s long-term success: the provision of secure and sustainable energy at affordable prices.

The legacy of central planning, with its absence of market signals, reliance on energy-intensive industry and, in some countries, abundance of energy resources, combined to make energy usage in the transition region wasteful and carbon intensive. In parts of the region, the carbon and resource (energy, water, waste) intensity of output remains among the highest in the world. There has been progress over the past 25 years in dealing with this legacy of misallocation of resources and market failure, but much remains to be done.

EBRD has been helping countries tackle the challenges of reducing energy usage, enhancing energy efficiency and finding innovative private sector solutions to the problems of climate change for over a decade. As the world’s attention to these problems deepens and intensifies, with agreement on the Sustainable Development Goals to be launched in September at the UN General Assembly meeting, and a major conference on Climate Change at the upcoming UN COP21 meeting in Paris, the EBRD transition mandate with its private sector focus and the global development agenda are on a path of convergence.

For both the new Sustainable Development Goals and the climate change agenda, the dialogue is all about the importance of sustainable inclusive private-sector led economic growth, backed by strong infrastructure, and shored up by strong institutions and an effective state. Climate resilience is widely seen to be key to the sustainability of any development efforts. EBRD is helping countries and companies address the global challenge of climate change through private sector solutions: by supporting project development and implementation capacity, by putting the focus on financial sustainability, a dynamic entrepreneurial approach and innovation; and by leveraging private sources of finance for energy efficiency investments.

V. CONCLUSION

When the transition began in the early 1990s in eastern Europe, many people expected the process to be short (if painful) and linear. There was no script to follow, no tried and true remedies for transforming distorted and inefficient planned economies and authoritarian systems into thriving, market-based democracies. Even so, there was a sense – perhaps deriving from the ‘End of History’ triumphalism of the end of the Cold War – that with the West’s help the countries coming out from behind the iron curtain would converge readily to their neighbours norms, institutions and living standards.

The reality has been different. The transition countries have learned some hard lessons along the way, as have we at EBRD. As we have embarked on new challenges in new regions, like the Arab Spring countries in the Southern and Eastern Mediterranean region or the crisis-hit countries in southern Europe, we take those lessons with us.

Of course, every country is different, and supporting transition requires a tailored rather than a one-size-fits-all approach. But what I’ve talked about in my brief remarks this morning, and what we will be talking about much more intensively over the next three days of this conference – about the need to build a balanced economy on a sustainable footing at both the national and the global levels – is an enduring lesson no country should forget.