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EBRD: What's Next For The Bank's Second Decade? (Part 2)

  • Mark Baker

The European Bank for Reconstruction and Development (EBRD) was formed in the aftermath of the collapse of communism to help the countries of Eastern Europe and Central Asia build market economies. That was more than 10 years ago, however, and many of those countries -- especially in Central Europe -- are firmly on the road to accomplishing that goal. Officials and shareholders of the bank are meeting this weekend in the Romanian capital, Bucharest, and one of the items on the agenda is the bank's future. RFE/RL correspondent Mark Baker files the second in a two-part series on the EBRD.

Prague, 16 May 2002 (RFE/RL) -- It's been more than 10 years since the European Bank for Reconstruction and Development, the EBRD, set up shop to help the former communist countries of Europe and Central Asia build market economies.

Since 1991, the EBRD has made thousands of loans and committed billions of dollars to the 27 countries in the region it was set up to help.

In many of those countries, the commitments -- along with the reforms and the addition of private and other capital -- are paying off. While living standards in Central Europe remain well below those in the West, a future can now be glimpsed when these differences will dramatically narrow. Many EBRD target countries are actively negotiating entry into the European Union.

Despite this progress, however, bank officials say the EBRD has no plans to wind up its activities anytime soon -- even in Central Europe.

Norbert Radermacher is the executive director for Germany, one of the bank's leading shareholders, at the EBRD's main office in London. "In our view, the transition for all of the countries is not over. Transition is an ongoing process in all of the 27 countries of our operations. There's still a need to support that transition. In this transition, the bank is moving to the east, [but] there are still remaining tasks in Eastern Europe."

The bank's mandate is open-ended. The EBRD's purpose is to assist the transition countries of Eastern Europe and the former Soviet Union to build market economies and democratic political systems. No time frame for completing these goals was ever envisioned.

But clearly the bank's future lies to the east -- to the former Soviet countries in the Caucasus and Central Asia, as well as Moldova, Belarus, and Ukraine. The EBRD refers to these countries euphemistically in its reports as being in the "early and intermediate" stage of transition.

Radermacher says that, in the medium term, the bank would like to apportion its investments so that at least 40 percent goes to "early and intermediate" countries. The rest would be divided equally between Russia and the more advanced countries of Central Europe and the Baltic states. He says the EBRD is already making progress toward that target: "We have already reached -- in the so-called early and intermediate countries of transition -- the objectives we wanted to reach in volume in the year 2003, and also this year when it comes to commitments for lending and in terms of equity investment. We can also prove that the bulk of it is now being done in those countries that belong to the early and intermediate stage of transition."

But any serious transfer of EBRD resources to underdeveloped countries in Central Asia will run into formidable constraints. The EBRD is mandated to work with private companies, and many of these are still reluctant to invest in countries that lack transparent political and economic structures.

Noreen Doyle, the bank's first vice president, explains the bind the bank finds itself in: "Because we're oriented toward the private sector, we [at the EBRD] depend upon foreign direct investment and that depends upon the environment, the institutional environment, being appropriate. We would like and strive to move south and east, moving into the countries that have not advanced as far as Central Europe, but we're constrained by the investment atmosphere."

Many outside the bank would like to see the EBRD accelerate its transition away from Central Europe in favor of needier regions. They argue that private and commercial banks stand ready to provide all the capital that countries like the Czech Republic, Poland, and Hungary need, and that the EBRD, by offering subsidized loans, only competes with private banks.

Sam Vaknin, an economic adviser to the Macedonian government, is an outspoken critic of the EBRD. "No, in my view, [the EBRD does not] have a role to play. If there is place for capital, then the private-sector investment banks would fill the vacuum. Nature does not tolerate a vacuum." Vaknin says the notion of regional development banks, like the EBRD, is outdated. He says research shows injecting capital through existing government and banking structures, as the EBRD does, does not usually work.

Doyle defends the EBRD's continued presence in some of the fastest-growing and best-performing countries in the world. She says countries like the Czech Republic and Hungary will need huge amounts of capital in the years ahead, especially given their ambitions of joining the European Union. "There has been very good progress, but even in the most advanced countries, if you project forward their growth rates -- which you know are 3 and 4 percent, they're reasonably good -- for the next 10 years, they will only be at GDPs (gross domestic products) per capita in 10 years' time that the least well-off existing members of the European Union are at today. So there is a significant amount of capital needed to grow these countries."

She says that in Central Europe, however, the EBRD will start shifting its focus away from issuing loans to existing companies in favor of making higher-risk direct investments in start-up companies where, she says, the capital shortage is most serious.