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Transition success and challenges ahead

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Sir Suma Chakrabarti, EBRD President

Delivered by: 

Sir Suma Chakrabarti, EBRD President


Vigadó Hall, Budapest, Hungary


Reinvigorating Growth, Competitiveness and Investment - the EU from the Baltics, through Central Europe, to the Mediterranean

  1. Introduction

Good morning and welcome everybody to the Vigadó and what I hope will be a fascinating day’s discussion and debate.

This conference would not have been possible without substantial help and support from the Hungarian government.

So thanks are in order both to the authorities as a whole and to the Prime Minister personally for everything they have done to make it happen.

And, more broadly, for their nurturing of what is the very warm relationship between Hungary and the EBRD.    

We organise many conferences in our different regions.

But today it really feels as though we have gone back to our beginnings, to where it all started, 25 years ago.

  1. Transition success

Today’s event, with its emphasis on reinvigorating growth, competitiveness and investment in all the countries where we work which are EU members, takes place at a special moment in history.

But before I examine the challenges those countries currently face and how to address them, I do want to take a step back and attempt a longer view of where we stand today.

This year the EBRD has been celebrating the 25th anniversary of its creation so we’ve been adopting a historical perspective more than usual of late.

But please cast your mind back to the state those countries were in a quarter of a century ago.

And now look around you at Hungary – and all the other EU members we invest in – in 2016.

The transformation, I think you will agree, has been little short of miraculous.

As Simeon Djankov highlights in his excellent background paper for our first panel this morning, GDP per capita at purchasing power parity in Estonia, Poland and the Slovak Republic has more than quadrupled.

All three performed better than Singapore and Korea at similar stages of their development.

Hungary too has been a star performer over this period.

And the rest of the region is converging towards average European income.

This is, of course, the achievement first and foremost of the countries themselves.

And of their peoples, who have displayed resilience and strength of purpose in good times and in bad.

And indeed, in some of those countries, continue to do so in difficult economic circumstances.  

One of the most heartening findings from our latest Life in Transition Survey, conducted with the World Bank and made public earlier this week, was the way the ‘transition happiness gap’ has closed between former communist and other advanced countries.

While these survey results require careful interpretation, I believe they show that we have reached another important milestone in these countries’ journey post-communism.

I’m proud of what the EBRD has done to spur their development over the years.

We’ve helped their private sectors, encouraged entrepreneurship, boosted market competition and better integrated their emerging economies into global supply chains.

We call it investing in changing lives.

In fact, we’ve invested in more than 1,900 projects for a cumulative investment of nearly €33 billion in EU13 countries of operation since we were created. 

But I would also highlight the absolutely critical role played by the European Union in helping deliver these changes.

Before these countries joined, the EU and its values provided a vital anchor point and the strongest of incentives for reform.

Now that they have joined, they and their populations have derived huge benefit from membership of its single market.

And they continue to enjoy the many advantages of the resulting integration of their economies and the rigours of competition.

Had the EU not existed, or these countries not joined it, reforming, attracting investment and achieving economic growth would have been far harder. 

  1. Global challenges

Even a brief review of recent history underlines how far these countries have come in the last 25 years.

But at the same time we all know that the prospects for the world economy they are part of are not as bright as we would want.

So let me first examine - very quickly - the challenges these countries face in common with other EBRD regions.

Then I’ll move onto the problems they are suffering which are specific to them.   

Most obviously, the global challenges include the negative effect of sluggish or non-existent growth on the world economy as it emerges, still, from the financial crisis of the last decade.

As our most recent Regional Economic Prospects report points out, productivity growth in advanced markets has been slowing down for a decade or so.

And the growth of global trade has remained weak, below GDP growth, reflecting subdued investment, lower spending on machinery and equipment, and rising protectionism.   

All of us recognise the damage done to our societies by rising inequality.

Quite apart from the injustice of such a dynamic, it undermines the rationale for reforms, makes them much less sustainable and indeed increases the risk that they are reversed.  

And we haven’t even begun to talk about the threat posed to us all by climate change.

This, by the way, is an area in which we at the EBRD are pioneers of the private sector approach to growing the green economy.

  1. Regional challenges

Such is the big picture, the context for all our EBRD regions.

The particular situation which confronts many of the EU countries we work in includes a number of special challenges.

Here again I will be relying on some of the excellent insights contained in Simeon’s paper.

He lists three principal factors acting as constraints on growth in this region.

I am going to go over them briskly now.

Then I will suggest responses which will NOT work as solutions.

And then, finally, we can look at measures which, I hope, will resolve the problems at hand – and help deliver the growth, competitiveness and investment the region needs.  

  1. The first of the three main constraints is the rapid decline in the number of people in the workforce.

So if you leave out Cyprus and Greece and take the other EBRD countries which are in the EU, you see a net reduction in the working-age population of 10 million people from 1990 to 2015.

That’s the result of both low birth rates and emigration.  And all the signs are that the next 25 years will see a similar fall in the numbers.

That’s the very opposite of the ability to attract and retain skilled workers which an economy needs for growth. And it’s obviously fraught with the risk of ‘brain drain’.

  1. The second constraint on the potential for growth is the innovation gap. 

The region lags well behind Western Europe, which is itself some way behind the US and Asia, in the field of hi-tech or ‘smart’ companies.

The reasons for this are several but they can be summarised as the absence of a genuine single market in services, digital or otherwise, or capital, the lack of venture finance in Europe as a whole and the underdevelopment of R & D.   

  1. And the third and final major constraint on growth is the region’s inefficient use of energy.

I touched on the green economy earlier when looking at the global context.

But Eastern Europe is a special case.

Despite major capital stock transformation over the last 25 years, carbon intensity in the region is significantly higher than in other middle-income countries.

And it’s particularly dependent on energy imports.

The upshot of all this is that the region is handicapped by energy costs which are, relatively speaking, higher than in the US and Western Europe.   

  1. Anti-globalisation is not the solution

My diagnosis of the problems the region is suffering from has been, of necessity, rather brief.

But as I listed them one by one, I wonder how many of you said this to yourself.

I know the answer.

It’s obvious.

What we need to do to kick start growth and boost investment in the region is to halt the momentum towards greater integration in the world economy in general and Europe in particular.

Even better, maybe, put into reverse the integration we’ve achieved so far. 

To rise to the challenges of today and tomorrow, climate change among them, we need more protectionism and more isolationism.

And less free movement of capital, goods, services, people and ideas.

Of course, the very idea of such a response, when expressed in those terms, seems absurd.

But not so absurd that we do not hear more and more calls for policies that amount to the same thing every day. 

  1. The solutions

You won’t be surprised to hear that we at the EBRD disagree most strongly with such sentiments.

We are not blind to the flaws of globalisation as it has been practiced in recent decades, in particular the way in which its benefits have been shared out unequally.

Indeed only last week we formally expanded our definition of what a successful modern economy is, updating the concept of transition at the very heart of our mandate.

In no small part to address the criticism that globalisation has created too many losers - and not enough winners. 

So we now think that a successful modern economy has to be much more than just competitive.

It needs to be well governed, inclusive, resilient, integrated and green as well.

Those are the themes that inform what the EBRD is now doing in all our regions.

They are also the values the EBRD countries within the EU should embrace if they are to address the challenges, global and regional, I mentioned earlier.

I don’t have time now, unfortunately, to go through all those challenges and match policy actions to each one.

We’ll be discussing them in more detail in the next panel. Indeed the rest of today’s proceedings will, I hope, give us ample time to explore them in depth.

Not all these solutions will be easy. But, as the discussions later will make clear, we can deliver them.

And whatever the required response – raising productivity in the average firm to counter the decline in the numbers in the workforce or attracting investment in companies from new sources, such as pension funds, to close the innovation gap – there are recurring motifs.  

One is that economies need to be open to regional and global markets, not closed, if they are to deliver growth. And that means more economic integration, not less.

Another motif is that the fruits of growth need to be shared out more equally if we are to avoid the sort of populism which will sabotage reforms – and hurt vulnerable members of society most of all.

  1. Conclusion

Ladies and gentlemen, I recognise that in a region such as this, the EBRD countries of operation within the EU, stretching from Estonia on the Baltic coast to Mediterranean Cyprus, different countries will of course pursue different routes to economic growth.

Indeed, within the broad approach I have sketched out, differentiated policy responses are possible.

Our role at the EBRD is to help our countries of operation on their journey.

Indeed we already do that in countries even more diverse than yours, from Morocco in the West to Mongolia in the East.

I referred at the start of my speech to the special moment in history your region finds itself in.

What I meant by that was the huge progress your countries have made in the last 25 years – and the enormous potential they have for the future.

But also the risk that the rhetoric hostile to integration, rhetoric now common in both advanced and emerging economies, could lead to a misstep – or even a fateful wrong turn.

One which would undermine rather than realise that potential.

It’s a risk, rather than an imminent peril.

But I did want to touch on it today because I am such a believer in the fundamental strengths of your economies – and what they have to offer.

We can all see the backlash against globalisation - and not just in the United States.

We need to make globalisation work better.

To ensure that it is more inclusive.

Clearly, many people feel left behind by recent changes in the world economy.

But abandoning globalisation is not the answer.

Adapting it is.

If we do that, then with more growth, enhanced competitiveness and new investment, the EU countries where we work will secure their rightful place within the wider world.   

Thank you very much.

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