EBRD highlights key role of the private sector plus an effective state in delivering successful economies

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Market forces alone are not sufficient, says President Chakrabarti

Successful economies and a thriving private sector need the support of effective state institutions and cannot rely solely on the forces of the market, EBRD President Sir Suma Chakrabarti said in Washington on Wednesday.

In an address entitled “What the private sector needs from the State”, Sir Suma defended a private sector-led model for development and rejected alternatives of so-called ‘state capitalism’. At the same time, he said, sustainable, inclusive growth should not simply be left up to the invisible hand of the market.

“The preconditions for an effective market economy have to be delivered by the state,” the EBRD President said at an event organised by the Carnegie Endowment for International Peace.

Achieving an appropriate balance between state and market had become increasingly important since the onset of the global financial crisis which had exposed the fragility of the transition process and led to transition reversals in some countries. Sir Suma also reflected on the slowdown in reforms in many countries where the Bank invests and the importance of reenergising the reform process in countries that had become ‘stuck in transition’.

“In EBRD we question whether countries can get back on the right path and catch up to the living standards of their more advanced neighbours without fundamental reforms and strengthening of the state and governance in a number of areas,” Sir Suma said.

The President highlighted four key areas where the state had to play a role in achieving these goals – policies, institutions, leadership and long-term perspectives.

  • Government policies had to create a stable and growth-promoting macroeconomic environment, provide appropriate frameworks for regulation and supervision and ensure fairness and inclusiveness across society.
  • Institutions such as the judiciary and the civil service had to be accountable, legitimate, transparent and competent while a free press and active civil society were also key to a well-functioning market system.
  • Strong political leadership was critical for overcoming obstacles to reform and avoiding the temptations of corruption or populism.
  • Long-term perspective provided the stability and predictability upon which investment relied.

The President noted that this imperative of creating the right balance between state and market was reflected increasingly in the EBRD’s own activities and its approach to investment choices and priorities.

“We have become much more aware of the need to package investments together with policy advice and technical assistance in a more ‘integrated approach’ to promoting transition,” Sir Suma said.

He referred specifically to how EBRD financial investments in improving water management in Romania had been backed with support to build sector expertise at the municipal level or how it had helped to introduce harvest financing legislation in Ukraine and Serbia that was also a spur to further investment in the agriculture value chain.

Sir Suma also highlighted the EBRD’s Investment Climate and Governance Initiative where the Bank was joining up with authorities to reduce investment obstacles, strengthen the legal framework and tackle corruption in countries where there is a strong reform commitment such as Albania, Moldova and Ukraine.

The EBRD would continue to strengthen its policy dialogue and capacity building efforts as it worked to re-energise transition over the coming five years, the President said.

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