‘Economic Integration is the key’

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Delivered by: 

Sir Suma Chakrabarti, EBRD President

Venue: 

London, UK

Event: 

Launch of the EBRD Transition Report

Our Transition Report recognises the link between economics and politics

Welcome to the launch of this year’s EBRD Transition Report. It is my particular pleasure to welcome a panel of speakers that have played a role, and still play, central roles in shaping the process of transition to democracy and markets in their own countries, and beyond. I am grateful to you for making it to London today, in spite of your many duties and busy schedules, to kick off what I think is an important discussion.

The EBRD takes its Transition Reports very seriously. But this one occupies a special place in our history, which by and large coincides with the history of transition to democracy and markets. It takes a broad, bird’s-eye view of the process of transition, focusing on the 15 years since the end of the transitional recession, as well as on the prospects for growth and income convergence in the next three decades.

This year’s Transition Report straddles the boundaries between economics and politics. In my view, this stance is necessary to understand transition – and economic development more broadly. The link between economics and politics is also explicitly recognised in our founding charter, and we are mindful of this in our operations. A failure to acknowledge the political conditions under which economic reforms take place can often cause well-meaning reform attempts to founder.

As an institution that is tasked with promoting market-based reform, we cannot be content with simply calling for and recommending specific changes. We also have to understand why countries often have difficulties implementing reform, and how these constraints can be relaxed or circumvented. That, in one line, is the purpose of the 2013 Transition Report.

It is not my role here today to summarise what is in the report, but let me give you a personal view on it, and also say why I think it matters for our institution.

The 2013 Transition Report begins rather bleakly. The basic message is that – with important exceptions – transition has essentially been flatlining since the mid-2000s, and has been worsened by the financial crisis. But this stagnation is not solely a result of the crisis. Rather, it is a trend that has become recognisable now, as the dust of the crisis has begun to settle.

The stagnation of transition is deeply worrying for two reasons. First, it affects a large set of countries that simply cannot afford to become stuck in transition. They are too far from the transition frontier. As the report shows, if these economies become stuck, their living standards will not begin to approach those in advanced economies over the next half-century.

The other worrying fact is that, in some countries, reform has not only stalled but has in fact gone into reverse – at least in certain sectors. This includes some advanced transition economies that have been shining lights of reform in past years. Some of these reform reversals have been driven by populist policies that were in turn a response to social strains during and after the crisis.

Countries must address these strains, but there are other ways to do so. In this regard, equality of opportunity and inclusive institutions are of great importance. This is an area to which the EBRD can contribute. We have recently expanded our criteria for project selection and design to become more effective in this area.

For the EBRD, the report poses major challenges. We often take credit for having been part of the incredible success story of transition, dating from the fall of the Berlin Wall and through the mid-2000s. If we do this, should we also share some responsibility for the subsequent stagnation of transition? We are, of course, a small player. But we also think of ourselves as an important catalyst and coordinator. We like to think that we made a significant contribution to containing the 2008-2009 crisis, helping to protect transition in turbulent times.

Fortunately, the report reassures us on one aspect that has been absolutely central to our role: economic integration is indeed the key to bolstering reform and supporting improvements in institutions and human capital. This works through many channels, including trade, foreign direct investment, and cross-border banking. All of these have been vital to our business model for many years. International integration is a robust motor of transition. It works in all geographies, and in many political environments.

Finally, the Transition Report confirms the complementarity of economic reform on the one hand and targeted political and governance reforms on the other. The latter includes, in particular, the quest for transparency and accountability.

This is an area where the EBRD can do more, and in which we have begun to take steps, in partnership with political leaders in our region and in coordination with other key international stakeholders. We are calling this our Investment Climate and Good Governance Initiative. I am happy to say that Albania, under the leadership of Prime Minister Rama, is among our first partners in this endeavour.

We knew that transition would not be easy. The process is having a mixed start now in some of the Arab transition countries, just as the process was far from seamless in most of our countries of operations in the early 1990s. However, after the early 1990s, the transition process enjoyed a long stretch of success.

As the EBRD begins its discussions with shareholders about the Bank’s strategic direction for the next four years, the main challenge will be to revive that success, particularly in countries that still have a long way to go. My hope is that today’s discussion will help us define the critical themes with which our countries – and all of us – must engage if we are to make this happen.

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