The EBRD and economic research

By Anthony Williams
@ebrdtony


Mapping and understanding the process of transition

When the EBRD published its first Transition Report in 1994, its purpose – the preamble said – was “to examine the transition in the Bank’s countries of operations and to measure, interpret and understand its progress.”

That dry definition masks a wealth of insight into the Bank and the countries that it has served. Over 21 years the reports have provided a living document of the developments that have shaped the region since the start of the transition period. They have tracked the progress of those countries – the many steps forward – and sometimes the many steps back.

That first 1994 Transition Report set out clearly what we know only too well over two decades later: “Some of the early euphoria and the simplistic messages have subsided. Most now understand that the (transition) process can be neither instantaneous nor painless.”

The reports have tracked the transition successes and the setbacks, set against often fast-moving economic developments. The reports’ economic forecasts are eagerly awaited and digested by professionals covering the region.

A major collective effort, the annual reports track economic and transition progress, providing comprehensive and up-to-date assessments of every country in which the EBRD invests. They also address themes that affect and reflect the transition process.

The annual assessments have neatly captured key events such as the 1998 Russian crisis, the landmark dates of EU accession – such an important reform anchor for many of our countries of operations – and of course the global financial crisis that has dominated so much of the EBRD region for so long.

The 2007 report reflects accurately the spirit of that time when the crisis was first emerging. It was a period of two extremes. On the one hand, EBRD countries were heading for another year of record economic growth. But it was also then that the first waves of concern were crossing the Atlantic following the collapse of the US mortgage market.

Even that cloud appeared at first to have a silver lining. “The global financial turmoil that started in August 2007 is making external finance dearer, which may help overheated economies in the transition region to cool down,” the report said.

But a less sanguine assessment turned out in the end to be something of an understatement: “In a less benign scenario, countries with high external funding needs may experience a stronger economic downturn.”

That “stronger economic downturn” lasted several years and it was the EBRD region that in the end saw the sharpest economic contractions as a result of the crisis of all emerging markets.

A whole series of reports was dedicated to the crisis and its impact. The 2009 report said there was no doubt that the transition region was in deep crisis. But the report also asked whether transition itself was in crisis. And the answer was a resounding “No”.

The region had avoided the currency collapses, systemic banking crises and spikes in inflation that were the staple of previous crises – a success that was partly due to the EBRD’s own efforts in driving the establishment of the Vienna Initiative.

The 2009 report refers to an “unprecedented effort to coordinate public and private financial sector crisis responses of which the EBRD is proud to have been a part. For all these reasons, this crisis has not spiralled out of control.”

What does emerge from a re-reading of the reports is just how many of them served as a signpost for future bank activities and priorities.

As Hans Peter Lankes, the EBRD’s acting Chief Economist, puts it: “The Transition Reports have been hugely influential in highlighting gaps in the transition process which the Bank is well placed to address. They have consistently provided intellectual momentum for the EBRD’s activities.”

Already in 2008, the Transition Report was urging the countries where it invests to place a high priority on the stabilisation of their banking systems and, in particular, to get foreign currency lending under control. Within weeks the discussions were starting that would lead to the EBRD-led Vienna Initiative which had the stability of the banking system at its heart.

Another report which stands out was the 2010 Transition Report  which called for a reassessment of the role of the state in supporting reforms in emerging Europe.

That appeal caused a mild frisson among those who saw an about-turn by a bank that had put so much emphasis on reducing the role of the state and on encouraging private ownership and market forces.

However, a closer analysis of the report made clear that the EBRD was not calling for a greater role for the state but a more effective role for the state. Not “more state” but “better state”.

The report set the tone for the Bank’s determination to work more closely with authorities to make sure the public sector created an environment in which the private sector could flourish.

If that message wasn’t clear enough in 2010 it was repeated in the seminal 2013 Transition Report “Stuck in Transition?”. That report argued forcefully that, by ignoring the urgent need to reform, emerging countries were in danger of forever trailing behind the living standards of their more advanced neighbours.

It was a clarion call which ensured that the EBRD put economic resilience at the heart of its activities and that its investments were more tightly twinned with policy reform than ever before.