Stuck In Transition

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.