Addressing growth challenges in south-eastern Europe


Delivered by: 

Sir Suma Chakrabarti, EBRD President

Venue: 

Athens, Greece

Event: 

Bank of Greece symposium on ‘Growth Challenges and Economic Integration in South-Eastern Europe’

Deeper integration and better business environment are key

Ladies and Gentlemen. I am very grateful to Governor Provopoulos for the opportunity to address this distinguished gathering. For two reasons.

Why Is Growth a Priority Issue

First, because this subject - the challenges to growth in south-eastern Europe – is crucial to us all who care about the region and about Europe more broadly. And second, because the EBRD, with its long and proud history in the region, feels a responsibility to tackle these challenges head on.

The starting point must be that those challenges are still there – even though it is now a full five years since the global crisis began to hit the region with full force.

Emerging Europe was at the time experiencing its strongest economic growth since the start of the transition period - just what was needed for the eventual convergence of living standards with the more prosperous west.

But as we now know only too well, this period of optimism turned out to be short-lived. In fact, after the collapse of Lehman Brothers, Eastern Europe became the region of the world that suffered most severely from the crisis. Indeed, the Eurozone sovereign debt problems cut short the recovery and further prolonged the economic hardship, especially in south-eastern Europe.

Here today in Greece, one needs no reminder of the impact of the crisis after six continuous years of recession along with a large increase in unemployment.

These social costs have taken their toll on the population. I do believe that there is light at the end of this very dark tunnel and that expectations of a return to growth in the coming year will remain firmly on track.

We now see a recovery on the horizon for south-eastern Europe as well – however halting and fragile. But annual growth is unlikely to exceed two to three per cent for some time to come.

Unemployment and poverty remain serious problems. These forecast growth rates will not turn the situation around – and neither will they give impetus to economic convergence with western Europe.

Stuck in Transition – the Need for Sustained Reform

This question mark hanging over convergence is at the heart of the EBRD’s most recent annual Transition Report with the provocative title: “Stuck in Transition?” It is a landmark report in telling some home truths to policy-makers but also to EBRD itself.

The report observes that in much of the EBRD region crucial reforms have been put on hold or have been reversed, which explains part of the slowdown in expected growth.

The study takes a critical look at what has brought this about and what can be done to put the reforms back on track.

What emerges as very positive news for south-eastern Europe is that it continued to engage in reforms, even during the crisis – this testifies to the determination of the authorities in the region to push ahead, and it underscores the catalytic role of the prospect of EU accession.

But we also need to look at what is needed to sustain reforms in the longer term. The EBRD report places a strong focus on the interplay between the development of strong political institutions on the one hand and economic institutions on the other. Only by putting in place both, is it possible to break through the vicious circle of slow reform, slow growth and low investment levels.

In our view, in south-eastern Europe three critical factors in this respect include trade and financial integration, a healthy business environment and an efficient civil service. Let me take up these factors in turn.

The Importance of Economic Integration: Trade, Finance and Infrastructure

First, economic integration, which can play an especially important role in a region such as this, comprising a number of relatively small economies.

It is particularly encouraging therefore to see countries in south-eastern Europe continuing to make progress in reducing trade barriers. There has been a notable increase in intra-regional trade relative to 15 years ago, a trend that the EBRD is eager to support through cross-border investments.

At the same time, however, the share of trade within the region is below 10 per cent of total trade. Given the proximity of these small countries, that is well below potential. So, further work is needed to remove remaining obstacles to trade.

Cross-border financial integration has also served the region well, although it comes inevitably with risks, especially in a downturn. Since the Eurozone debt crisis, we have witnessed significant withdrawal of funding from banks that have played a very important role in the region.

The EBRD has worked to limit the impact of this “deleveraging” primarily via the Vienna Initiative – the forum that brings together the private financial sector with relevant public sector authorities and institutions. The Initiative has provided an opportunity for cross-border financial cooperation that in the longer term will help to build more sustainable financial sectors.

The economies of south-eastern Europe face the related problems of deleveraging, weak credit growth and high levels of non-performing loans. Non-performing loans are typically at double-digit levels as a percentage of total loans in the region, and more than 20 per cent in several countries. Tackling these problems is an urgent task and one where a coordinated approach can yield major benefits.

The Vienna Initiative has urged banks and regulators to design action plans to identify and measure the true level of non-performing loans and to formulate a plan for their reduction. It has been a strong voice for non-EU countries that will be affected by the new European banking union, ensuring there is an effective interface with host countries outside the banking union. And a working group is developing proposals for enhancing credit to small and medium enterprises.

Economic integration also depends on good-quality infrastructure. Important energy and transport links are being developed, with the support of institutions such as the EBRD and the EIB. The Energy Community for south-eastern Europe is a landmark in sectoral regional integration. But good policy and implementation coordination among the countries of the region is needed to ensure that weak links in the energy chain are addressed.

The development of transport corridors is also driving integration. Such corridors provide crucial support for the commercial development of the region. They can break down bottlenecks, opening up the free flow of commerce. As a result, the region should see gains in competitiveness and become more attractive for investors.

The Importance of Business Environment: Corruption, Investment Climate and Governance

Let me turn to the second issue, the business environment.

The recent World Bank Doing Business report paints most of south-eastern Europe in a rather poor light. A sustained assault on some persistent problems such as licensing and permits, paying taxes and having access to electricity could bring long-term benefits.

That said, Greece’s performance this year – jumping 17 places in the overall ease of doing business ranking and 111 places in starting a business – is impressive and can serve as an example to others.

But when we look generally across the region, it is clear that one of the major barriers to doing business is corruption. This remains a persistent problem, as highlighted by the latest Transparency International Corruption Perceptions Index report published at the start of this month.

It is imperative that all countries in the region devote efforts to combatting this curse and improving the investment climate, especially via more effective corporate governance, transparency and leadership.

Exposure of the problem, commitment to tackling it, and actual implementation of measures are the only way to overcome cynicism that this will always be with us in the region. The steps taken by the new Albanian government, which has very publicly made the fight against corruption a central part of its programme, are encouraging.

For its part, the EBRD is working on a plan of activities that specifically target the investment climate and good governance. We will work with the authorities in Albania, as well as other countries in the region that show a political and non-partisan commitment to tackling this cancer. There will of course also be close coordination with other international partners, primarily the EU, focussing on areas where we can bring added value in promoting these objectives through our investments and policy advice on the ground.

The Importance of Building Administrative Capability

The third priority is the establishment of a stable, merit-based, de-politicised public administration. Without this it will be very hard to develop efficient institutions.

Having returned to working on the region after nearly a decade away, I have been very surprised at the lack of progress – even slippage – in building administration capability.

Frequent post-electoral “cleansing” of public administrations undermines the investments made in training, including by the international community. It discourages foreign investors and is not conducive to the objectives of a modernisation of public administrations in line with EU standards.

This requires cross-party efforts, supported by the European Commission and donors, to move away from treating public servants as a politicised football to kick around. It requires serious investment in public administration capability for example through internationally-accredited regional training centres and twinning with public institutions in more advanced economies.

A professional public administration is an essential part of a programme of sustainable growth. Why? The private sector cannot exist in a vacuum. In order to flourish it needs a stable, effective institutional and legal framework.

A professional administration helps ensure that policies and regulations are designed sensibly and are implemented as intended. And administrators with professional training and long career horizons are less likely to be corrupt. As a result, a well-functioning public administration can provide the continuity and predictability that investors crave.

Conclusion: the EBRD Role

Deeper integration, a better business environment and a professional administration – these are three achievable components of a programme to boost medium-term growth.

The EBRD will continue to focus on helping to achieve these objectives. But this is a broad collaborative effort.

The joint EBRD-EIB-World Bank Action Plan for Growth in Central and South-eastern Europe has already achieved a number of notable results through significant financial investments combined with policy reform initiatives.

At the same time private sector finance and expertise will need to play an increasing role in the years to come, including in infrastructure, where public funding is constrained by the limited fiscal space.

Further integration requires strong political support. The EBRD will stage a high-level conference at our headquarters in London on 24 February next year. Seven Prime Ministers will take part in this “Invest in the Western Balkans” symposium, which will attract business leaders from the region and foreign investors who want to take a share in a region which still has enormous potential.

This conference, while promoting the region as a whole as an investment destination will help streamline discussions on various regional projects and consolidate the political and financial support that they need.

Specifically in this context, Greece has a major role to play. Once recovery takes hold here, Greece – as it already has done in the past – will be able to contribute to the economic upturn throughout southern and eastern Europe. The EBRD and Greece will remain strong partners and will work together in this endeavour.

This serves the ultimate goal of achieving integration, bringing about far greater convergence in the quality of life and providing for economic, political and social stability.

The last five years have set us back. But the region has the potential for a brighter future. We have to work to work together to ensure that potential is achieved. Indeed, we have a duty to make sure it is!