The EBRD Transition
Report for 2013, published last November, was entitled Stuck in Transition? By the time of the EBRD Annual Meeting of 14-15
May 2014 the cosmetic question mark was no longer appropriate.
In 1991 the EBRD –
European Bank for Reconstruction and Development – was set up in London in
order to assist the post-socialist transition countries, and to promote their
sustainable development as open market economies. Initially the EBRD operated
in 28 countries: the 15 Republics from the Former Soviet Union, 6 countries
from Central-Eastern Europe (Bulgaria, the Czech Republic, Hungary, Poland,
Romania, Slovakia), 5 Republics from Former Yugoslavia, plus Albania and Mongolia.
Soon the Czech Republic was declared to have completed its transition and
dropped out, but two additional members from the further split of Former
Yugoslavia were added: Kosovo and Montenegro. Then 6 countries from Eastern and
Southern Mediterranean were added, assimilated to transition economies because
of similar problems of stabilization, re-structuring, and the change of their
political and economic institutions: Cyprus; Turkey; Egypt, Jordan, Morocco,
Tunisia. Today the EBRD has 35 countries of operation, and 66 shareholders.
Next Libya is lined up for membership.
Since 1994 the
EBRD has published in November every year a Transition Report,
monitoring economic and institutional developments and constructing synthetic
indices summarizing the progress of individual countries in various aspects of
their transition process. In November 2013 their Transition Report was
entitled: Stuck in Transition?, with a cosmetic question mark at
the end. The Report acknowledged that since the mid-2000s the reform process
seemed to have stagnated in transition countries, actually registering some
reversals reflected in the “downgrading” of EBRD indices. The inflow of Foreign
Direct Investment had slowed down and in some countries was reversed, also as a
result of the end of US Monetary Easing pre-announced by Ben Bernanke. Economic
growth, as a result of the 2008-2009 global crisis and the Eurozone Crisis of
2011-2012, had slowed down to well below pre-crisis levels: only 2% was
expected in 2013. Productivity growth - under current policies and institutions
– was going to be modest during the current decade and decline further in the
next decade: therefore economic convergence with developed countries was at
risk. Further economic reform meets social, political, human and capital
constraints.
But for the EBRD Stuck
In Transition? was only a rhetorical question. The preannounced end of
US Monetary Easing did not materialise under Bernanke or his successor Janet
Yellen. The Eurozone Crisis was countered by the ECB unorthodox new measures
introduced by Mario Draghi. FDI was bound to resume its course. In November
2013 economic growth in the area was projected to accelerate to 2.7% in 2014.
There was said to be a virtuous circle between democratization and institutional
development, and between the progress of institutions and economic growth. For
the EBRD all was well really in the Transition.
The question mark
may or may not have been justified in November 2013, but by the time of the
EBRD Annual Meeting in Warsaw on 14-15 May 2014 it undoubtedly was no longer
appropriate. The virtuous circle between institutional development and economic
performance would turn into a vicious circle if exogenous shocks adversely
affected either factor. In 15 of the EBRD countries of operation, as a result
of the global crisis, public opinion had turned against market reforms,
especially in the more democratic countries, thus breaking the link between
democratization and the development of institutions. “Private capital flows to
the transition region as a whole had remained relatively low and a continuation
of cross-border deleveraging was delaying the resumption of credit growth”
(EBRD, May 2014). Turkey took a turn for the worse, with widespread political
unrest and its violent repression, and associated economic slowdown. There were
adverse political developments and serious new economic problems in Egypt. And
above all the confrontation between Russia and Ukraine caused a slowdown in
Russia (with consequent rouble devaluation and stock exchange fall) and a
recession in Ukraine, which adversely affected other Central European
countries, especially the Baltics and Serbia. The end of recession in Slovenia
is not enough of a compensatory factor.
The latest EBRD
growth forecasts for 2014 in the transition area have been cut back from 2.7%
to 1.4%, and an improvement to 1.9% in 2015 was regarded as possible but
problematic. The EBRD most likely outcome is near zero growth in Russia this
year and minimal growth in 2015, and in Ukraine a 7% decline this year and
stagnation next year. But the EBRD worst-case scenario is extremely worrying:
the implementation of threatened economic sanctions against Russia would
immediately precipitate a Russian recession, and bring growth in the whole area
to a complete halt, with serious contagion implications for the entire global
economy.
On 26 July in
Saint Petersburg Professor Ruslan Grinberg, Director of the Institute of
Economics of the Russian Academy of Sciances, convened a Founding Conference
with the purpose of setting up a new Centre for the Economic and Socio-Cultural
Development of the CIS and Central-Eastern Europe. Against the background
illustrated above a renewed focus on these countries, with their distinctive
features due to the common Soviet-type starting model, is undoubtedly most
opportune, timely, indeed absolutely necessary.
In brief, the
Agenda of such a Centre ought to include a re-consideration of alternative
models of capitalism other than the hyper-liberal, crony [“oligarch” in
Russian] capitalism that has prevailed in the transition; re-thinking the role
of the State in the transition process, re-vamping its functions in market
regulation and the very creation of market institutions, infrastructure
investment, the financing of research and innovation, the alleviation of
poverty and unemployment and the guarantee of social peace. On this last
point the EBRD 2013 Report rightly lays great emphasis on the need for
“economic inclusion” for the success of any market economy. Inclusion is
understood as broad access to economic opportunities regardless of gender,
social class and urban/rural background, especially for young adults.
More generally,
intellectual inspiration could be drawn from the comparative analysis of
transition experiences to-date but also from recent publications including for
instance Thomas Piketty’s Capital in the Twenty-First Century (2013),
Mariana Mazzucato’s The Entrepreneurial State (2011) and
Grzegoz Kolodko’s monumental work on transition and on globalization.
Inter-disciplinarity is essential. We wish Professor Grinberg every success
with his new venture.
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