Sir Suma Chakrabarti, EBRD President
Close coordination with IFIs needed
Dear Governor Belka, dear Governors, ladies and gentleman, it is a great pleasure to join you here today and to be asked to give the keynote address.
Tribute to Poland and Michal Kalecki
I came to Warsaw with a book. Not just any book. A medium-sized red book. No, it isn’t the long version of Mao Tse-Tung’s thoughts. It’s a book I picked up at a second hand bookshop when I was studying economics at university some thirty years ago. These are the thoughts on economic development of Michal Kalecki, one of Poland’s greatest economists. While I don’t agree with every word of Kalecki’s thinking, his views have stayed with me over all these years while I have tilled the fields of development across the world.
Why do I mention Michal Kalecki today? Because his explanation of the importance of certain factors as crucial to the development transition economies is very relevant to Poland’s experience since the fall of Communism.
[They are lessons in how to build up economic resilience. Lessons from a people who have built up their resilience as a result of centuries of political upheaval and turbulence. They are lessons we should remember as we think about helping the countries of our region which have not been so resilient.]
I’ve been coming to Poland for over 20 years. When I first visited, Warsaw’s shops had little in them – it was easier to get pickled cucumbers than batteries for my shaver as I recall. Today, Poland is on the road to transformation because it has done as Kalecki would have recommended:
- capital has been accumulated , and, equally important, it has become more productive – the share of private investment in total investment rose from very low levels in early 1990s to 57 per cent in 2010. The stock of foreign direct investment within Poland accounted for only 17 per cent in 1990, but amounted to 38 per cent last year;
- Poland has become outward oriented, seeking export markets while building up the domestic market – Poland’s exports/GDP ratio has increased from 26 per cent to 45 per cent in 2011; and
- the country has built institutions that promote long-term growth. For instance, Poland’s strategy to develop the local capital markets, and a more resilient financial system.
Resilience during the crisis: Poland and CEE Region
That excellent performance over a twenty year period has enabled Poland to be resilient in the teeth of the most extraordinary economic crisis in modern times.
(i) The crisis in waves
I know it’s painful, particularly over such a lovely dinner. But let’s remind ourselves of the shape of the crisis in the European economy that we have been living through
- The first wave of the crisis in late 2008 hit the Central and Eastern Europe region hard. Emerging Europe then suffered from serious macro imbalances and home-grown vulnerabilities. There was a painful, and quite successful process to correct many of these weaknesses.
- The second wave is now quite different. Emerging Europe is less suffering from domestic vulnerabilities. But it is increasingly threatened by the crisis in the Eurozone.
- First through the trade channel, with growth fading in core western European markets.
- But most importantly through the financial channel. Emerging Europe is the region that most benefitted from financial integration during the credit boom years. It is also the region now most at risk of becoming ‘collateral damage’ in the process of deleveraging of European banks.
- The most disruptive scenarios seem to have been avoided. But there is still a steady outflow in bank funds from the CEE region.
(ii) Poland’s resilience
So why has Poland contained the vulnerabilities and managed both these crisis? Why has Poland’s growth during this period constantly exceeded expectations?
- First, unlike most other European counties, Poland was fortunate in having some fiscal leeway. Allowing the fiscal stabilizers to work averted a recession in 2009, and may again help in the coming years.
- Second, Poland avoided many of the excesses of the credit boom period. For instance, the tightened regulations on consumer lending were widely discussed within EBRD at the time. Even today, the government, the National Bank, and the supervisor have jointly taken on an agenda to further strengthen the resilience of the financial sector. This is foresighted policy-making that is exemplary.
- Third, there was effective engagement with EU, most importantly of course through a determined utilisation of the structural and cohesion funds.
- And finally, we need to admit there was also luck – for instance the luck of a relatively resilient consumption growth within a large domestic market.
(iii) Poland was not alone
Poland is perhaps the best known example of resilience in the face of the crisis. But it has not been alone in this respect.
- Take the Baltic economies, which adjusted rapidly at the onset of the crisis even within fixed exchange rate regimes. These countries are now finding fresh sources of growth in new markets and sectors.
- Or others, such as Slovakia, which have very closely aligned their economies with industries in core Europe oriented towards exports to other emerging markets, and so far have escaped a recession.
- More broadly, the CEE region has demonstrated an impressive crisis management record and ability to withstand external shocks. Key to this success has been adept policy adjustment, engagement with the international and European institutions, and coordination of public and private stakeholders.
The fire down below: SEE
While these countries were weathering the storm, the picture in south and south-eastern Europe has become much bleaker.
This is the region most at risk due to its strong links with the troubled Eurozone countries such as Greece – links in terms of the presence of Greek banks, though also through trade and remittances. Growth has faltered, and several countries have re-entered a second recession.
And even in Poland, the Baltics, and the CEE region more broadly, the chill winds from the crisis have knocked back growth rates, although recession has so far been avoided.
Why should we act?
Some may dismiss these external threats, in particular in the more closed economies. Yet, it is clear that inaction risks a range of adverse consequences.
Europe’s second recession could significantly damage long term growth trend – as the potential for productivity increases and labour force participation is eroded.
Market structures could shift in a way that diminishes competition, and make these sectors less resilient. We at EBRD have been very outspoken about the risks from a fragmentation of financial markets in Europe.
The reversal of financial integration is a striking example. But the risks go well beyond this. In times of crisis, economic nationalism threatens to undermine the whole European single market – and ultimately the very project of political integration itself.
What is to be done?
So, if we care about the European project – and, yes, some British citizens do! – then what should we do to ensure the gains of the last twenty years are locked in? To ensure that this region can ride out the crisis and return to the path of growth and prosperity?
In the field of finance, as you know, the Vienna Initiative was revived earlier this year.
- This is a unique forum that brings together the authorities of home and host countries, both within and outside the EU. Crucially, the informal structure has allowed a productive dialogue with all key European stakeholders in the public and private domains.
- The key ambition is to support the development of a framework that matches Europe’s deeply integrated financial systems. Right now the focus is on coordination between supervisors – giving more prominence to the interests of host countries.
- There is also a need to design resolution procedures that pre-empt bank stress becoming truly disruptive.
- In a nutshell, we are building up something that is in short supply in Europe: trust.
Of course the discussions have now been overtaken by the proposals for an EU banking union. Many expressed fears that a single supervisor for the Eurozone could further segment the European market. But a single supervisor of all EU banks could be very positive for all. It is a pre-condition for a resolution of the sovereign debt crisis and the return of confidence.
EBRD’s crisis response is very closely coordinated with the other IFIs, as was the case in 2009. Our collective business volumes may be insufficient to stem the substantial bank flows now exiting the region.
But we can work on pre-empting the most damaging impact on market structures. We must target our lending. For instance sustaining SME credit or refinancing existing corporate clients with key roles in their markets.
But policy reforms at the national level will continue to be the key focus of investors. Foreign direct investors will continue to look for consistent and predictable tax policies. They will look for a consistent commitment to privatisation programmes and private sector development. There has been much experimentation and, sometimes, backtracking recently.
And investment growth in the real sector will need to rely on continued growth of the financial sector. This requires a sound banking system at its core and supportive local capital markets.
Leadership and voice
A plan of action is no good without an assertive voice and leadership. The EBRD has a duty as the IFI with the greatest policy and operational knowledge of this region. We have to be vocal. To the rest of the international community. To remind them of the historic importance of this region and the responsibility to help to protect the gains of the last two decades. And to the region. To push back against any retreat from the open market approach that has served it so well.
But we need leadership from the region too. From those who live here and are in the thick of the political and economic debate. That is why I am so pleased that Marek Belka has agreed to chair the Vienna 2.0 initiative. With Marek leading us, we have a very good chance of working together to help the region through the crisis. And back to the path of growth and prosperity.
So, ladies and gentleman, this agenda is timely. As Michal Kalecki might have said had he been here tonight: the agenda is also vitally important. The NBP is right to challenge us all to play our part in ensuring the future of the European economy is once again as bright as it was a few years ago. And Marek and the NBP have done a great job in pulling together such a range of excellent speakers. Let’s challenge ourselves. To come up with the ideas and plan that will make a difference.
Thank you very much.