The New Europe: The Real Economy

By EBRD  Press Office
@ebrd

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Industrial district

Following the collapse of communist rule the countries of central Europe and the Baltics faced the complex challenge how to build sustainable, competitive market economies after nearly five decades of state ownership and central planning. There was general consensus that only a return to privately-owned enterprises would create the necessary conditions for such economies to thrive. But there was far less agreement, let alone expertise, on how to get there.

The EBRD was specifically set up to “foster the transition towards open market-oriented economies and to promote private and entrepreneurial initiative” and over the years the Bank has played an important role in the transformation of the economies where it operates. “The EBRD very much set the tone,” said Philippe Belot, who served as Senior Portfolio Manager for the Bank in central Europe. “By nature we could not be everything to everyone, but what we did had an exemplary effect.”

Communist rule had created a highly industrialised economic structure, not least for political reasons. In many cases leaders had yet to create the working class in whose name they supposedly ruled. The huge state-owned companies that provided almost “from the cradle to the grave” with facilities ranging from nurseries to retirement homes, were unable to survive the competitive conditions of a market economy. Often they were broken up along the vertical value chain, with many support services being spun off.

There were also different approaches to privatisation. Programmes like the voucher privatisation in the Czech Republic did not create the clear majority ownership that could drive business development or raise additional equity. In fact, the voucher programme exposed many companies to takeover bids which did not always produce the desired results. Meanwhile, case-by-case privatisation as in Hungary and Poland in particular – saw the transfer of assets from the state to the private sector at a much slower pace.

 

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One example of the EBRD’s involvement in the process of economic transformation was the US$ 110 million loan and US$ 15 million equity investment the Bank provided to Slovalco, a subsidiary of ZSNP a.s., the Slovak Republic’s state-owned aluminium monopoly. The Bank’s goal was to prepare the company for privatisation through corporate restructuring, which it successfully achieved. EBRD funds were also used for energy efficiency investments which improved the company’s competitiveness.

Over the years, the EBRD adopted its approach to suit the needs of these countries and the market. “As countries developed, the Bank’s approach, and the tools it used, were able to develop in parallel,” said Gavin Anderson, EBRD Executive Counsellor. “The Bank needed to learn to walk before it could run. We gained confidence and were able to move up the risk spectrum, stepping up our equity investments.”

To date, EBRD cumulative investments in central and Eastern Europe and the Baltic states – the group of countries that joined the EU in 2004 – amount to €18 billion across more than 900 projects. Industry, commerce and agribusiness (read more about this sector in next week’s instalment) account for 33 per cent of these investments.

The countries in the region made “tremendous progress”, said Alain Pilloux, EBRD Managing Director for Industry, Commerce and Agribusiness. This was mainly due to a benign global macroeconomic environment and the aspiration of central European and Baltic states to join the European Union. It was as much a political as an economic decision. The late Czech president Václav Havel coined the term “return to Europe” for this process.

The EU was also an important source of funds in preparation for membership of the Union. However, states often lacked the project design and implementation skills to develop strong, privatised industrial sectors. Here the EBRD was able to extend a helping hand. “Our projects were examples of how to use funding well, and we were able to demonstrate what a good project looked like,” said Gavin Anderson.

As industry was being restructured, privatised, renewed or closed down, engagement with the small business sector became ever more important. The most efficient way to reach small and medium-sized enterprises was through equity funds and banks. For broad reach into the industrial and commercial sector the EBRD used local banks.

On 31 March 1998 EU accession negotiations began with six applicant countries – Cyprus, the Czech Republic, Estonia, Hungary, Poland and Slovenia. This was followed on 13 October 1999 by the European Commission recommendation to open negotiations with Bulgaria, Latvia, Lithuania, Malta, Romania and the Slovak Republic. Finally, on 1 May 2004 the EU accession treaties with Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia went into force.

“The goal of EU accession was always to act as a beacon, helping to drive people forward and sustaining momentum for the wave of reforms,” said Gavin Anderson. “The EBRD was able to ride this wave but also to push it forward.”

Four years after EU membership the global financial crisis hit these countries hard. It also demonstrated that the reform process was not over. “The job was not finished,” Alain Pilloux observed. “The EBRD could play a role in continuing the work of reform.” In response to the crisis, from 2009 the Bank dramatically stepped up its engagement in the region as a temporary measure to overcome the economic challenges.

The restructuring of industry has not been without costs and sacrifices. Hundreds of thousands of jobs were lost, old structures were destroyed, and what seemed to be set in stone quickly changed.

So are people better off today? Gavin Anderson believes they are.

“This was a generation of change. Some people had opportunities previously undreamt of, and some people had very painful experiences,” Anderson said.

“However, we’ve ended up in a situation where the new generation has access to opportunities that the preceding generation never had.”

 
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