Transformation: Paradigm and Reality. An EBRD Case Study


(written version of a talk given to the Workshop “Change in Economy and Arts” at the Wissenschaftszentrum Berlin, February 13-15, 2013)

20 months after former President Mitterand had launched the idea in 1989, EBRD was already up and running, having been founded by an array of Western (EU, USA, Japan, AUS, CDN, Egypt, Mexico, etc.) and transforming countries. The aim was to engage the international community to bring the ex-Socialist countries of Central and Eastern Europe on a “sustainable path towards market economics and democracy”.

The main paradigm – supporting this objective – was founded on the belief that the best way forward was to radically push “liberalization”, to take government out of running the economy, to promote private entrepreneurship, to liberalize prices and to promote economic integration with the “West”. In another context, this would have been called conforming to the much-maligned “Neo-liberal Washington Consensus”. The business model was based on a country-by-country approach, in order to be able to take account of country-specific states of development and resources, but also because this conformed to the country-by-country model implemented by all other International Financial Institutions (both development banks and IMF). The definite emphasis of the Bank’s activities (loans and equity investments) should be on the development of the private sector, both by building up financial systems (banks, insurance, leasing, private equity, etc.) and real sector enterprises in agriculture, mining, services and manufacturing.

From the beginning EBRD defined itself as a “transition bank”, differentiating itself from existing “development banks”. The purported difference being that the former had at its aim to promote a private market-led economy, while the latters’ aim is to fight poverty. What does this difference mean? In concreto, it means that EBRD for its first 20 years did not pay much, if any, attention to employment and welfare aspects of the economies it supported, let alone to other social indicators of well-being. Its “philosophy” which became a dogma was: what is good for the private enterprises, must be good for the populations. Well-being would trickle down to the people.

This is where I would like to direct my remarks, because change has come to EBRD. Today, EBRD has started to talk about “inclusive growth”, about employment, about peoples’ welfare. It is now possible to ask the question, whether EBRD’s activities contribute to the well-being of the 200-300 mill people in its countries of operation. What has engendered this change?

There are 3 avenues I would like to mention – and this may be a very subjective view by someone who has been one of 23 board members of the EBRD between 2008 and 2012.

Avenue 1: Rational Argument

Soon after I joined EBRD’s board in March of 2008, during one of my first board meetings when discussing a project, I enquired about the employment effects of the project in question. First, the question was not understood, then I was given what would be the standard answer on many following similar occasions, that as a “transition bank” we were not involved in employment generation, that was not part of our mission. My political economist’s heart found this a very ideological, “neo-liberal” answer, which also made me understand some of the criticisms a number of NGOs has directed towards EBRD. Repeated discussions with my board colleagues showed to me that only very few shared my concern that at least our democracy mandate should draw our interventions towards the people on the ground. But the pure market economy paradigm was strongly entrenched in board members’, top management’s and staff’s minds, as many attempts at discussions showed. Thomas Kuhn’s “paradigm” entrenchment was (nearly) complete.

Avenue 2: Data Collection

But then, something happened. In 2006 and 2010 (the publications occurred about 2 years later in each case), EBRD together with the World Bank undertook the “Life in Transition” surveys, canvassing around 30.000 persons (heads of households) in EBRD 29/30 countries of operation about their experiences with the transformation of their economies/societies, their personal economic situation, their income situation, etc. The second survey was conducted in the middle of the ongoing crisis, thus showing the deep effects which this second crisis in less than 20 years has and had on the well-being of citizens.
The most striking result– among many other data in these surveys – is that in both surveys the percentage of persons who responded that their life situation had deteriorated since transition began is larger than 50%, in the second survey even higher than in the first. This gave cause for a sometimes heated debate in the EBRD board, whether the Bank’s objectives, resp. its activities on the ground, should not pay more heed to bringing positive results to the citizens – and not only to business. Today, there has not yet been a study of the employment effects of about 60 bill Euros worth of EBRD financing; employment effects, as a main indicator for material well-being, are not part of the project documentation, are not reported. Clearly, this is a major gap in EBRD’s reporting system. One of the arguments why this is so had always been the doubtfully proud statement that “we are a transition bank, not a development bank!” But now we had extensive data which showed that people were not happy with transition, that maybe the business model of EBRD (whose exact role in the transition process is, of course, hard to ascertain) might require adjustment.

Avenue 3: Extension of EBRD’s regional mandate

This strand relates to the new regional mandate of EBRD, imposed by its owners (led by the G-7 countries) in 2011, to include four countries with “Arab Spring” events as countries of operations and to help them to build up sustainable market economies. None of these 4 countries (Egypt, Morocco, Tunisia and Jordan – the former two of which had been founding members of EBRD) had been a Communist country, thus to include them in EBRD’s operations requires a lengthy change in the statute of the Bank. Moreover, while in its 20 years of existence EBRD staff has built up very significant expertise in dealing with ex-Socialist countries in Eastern and Southern Europe for 20 years, there was zero experience in dealing with Arab countries. Of the 1400 EBRD employees, at the time of the extension of the mandate 2 could speak some Arabic. This has changed, since around 100 new positions have been created.
The point I would like to make here is that since these “new” countries were more developing than traditional “transition” countries, and since there was widespread agreement (also in EBRD) that the Arab Spring revolutions had been more social, anti-poverty rebellions than democracy-oriented ones, EBRD recognized that in order to fulfill its mandate (and obtain the necessary backing of these populations), relatively quick success in employment creation was needed and that welfare considerations should be one guiding force of financing projects there. For this you need to pay attention to employment effects of EBRD’s loan and equity operations, you need a conceptual framework how to deal with employment creation and anti/poverty private investment, in short you need more of an economic strategy, going beyond creating sustainable businesses. (I will not go into the details of such a strategy here).

The point I am driving at is the following: reasoning, however enlightened, by a number of board members by itself was not able to shake the entrenched “market development is the panacea for social development” paradigm at EBRD. While in the end, it may have helped, it was first hard-and fast data on satisfaction and perception of the transition performance, but probably more so the addition of countries with very obvious employment and exclusion problems which led to a change in attitude. At this time, there is a project going on in EBRD, how to measure “inclusion effects” and make them part of the decisive “transition impact matrix” which serves to evaluate each EBRD project relative to EBRD’s mission. This is a first, but important step, even if there still is a long way to go.

To be fair, EBRD has also in the past put some emphasis indirectly on welfare aspects. Since 2009, there exists a “gender policy” with an action plan. Thus, many if not all projects are investigated as to their gender effects, and a number of projects include gender-specific activities as conditionality for financing the projects. In this, EBRD is also a latecomer, but has been catching up quite well.
Second, there is a strong small-business finance and advisory program and an increasing number of micro-finance activities in many countries of operations. Under the (plausible) assumption that SME development has stronger and wider employment effects than e.g. the financing of large FDI projects, this indirectly promotes the well-being of citizens.
Third, a very large part of EBRD’s portfolio is in urban infrastructure, i.e. the financing of water and electricity supply, wastewater, mass transport, the management of traffic systems, etc. There are very large gaps in the supply of such services, both in quantity, and more in quality, in EBRD’s countries of operation. Thus, once more, these activities benefit the populations on the ground directly.

Back to the topic of this workshop: how do new ideas gain ground in bureaucratic institutions? The above points to a troika of reasons: a) credible, quantifiable information identifying a problem; b) the pressure from facts on the ground, as exemplified by the inclusion of the 4 non-traditional (Arab) countries; c) the commitment of a small number of (relatively enlightened) persons who – in spite of an less than welcoming environment – use the former two factors to engender a change in attitude.

There should not be any illusion that the change I have described conforms to a new paradigm – yet. I doubt whether it is sustainable, but there is hope that once procedural changes in an organization have been put in place, they might turn this into a mainstream activity before long. I am not sure whether this pattern of (enforced) change can be generalized beyond the case in point.

I do hope that this story does not discourage individual persons to pursue rational arguments in the face of adverse reactions. But as this experience shows (and I have a number of other ones from my own career stations which are similar), it helps a lot if conditions “on the ground” help to force change to support such arguments.

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4 Comments

Filed under Crisis Response, Life, Socio-Economic Development

4 responses to “Transformation: Paradigm and Reality. An EBRD Case Study

  1. Eva Belabed

    Thanks for this clear point of view. I used to work on EU enlargement in the European Economic and Social Committee for several years and it took me quite some time to realize that the former Communist countries who had applied for EU accession in fact were exposed to two parallel processes: the EU accession process which basically made sure the countries adapted their legal, political and socio-economic institutions to the EU-Acquis. In addition to this the countries were exposed to a parallel transformation process influenced basically by the IMF, the World Bank and some others. The EU accession process was – to some degree at least – based upon what used to be called the European Model of Society (or European Social Model) which at that time (1990s and early 2000s) still was a Model widely accepted among part of the European elite and an important element of the debates in the Convention established to draft the Lisbon Treaty. The IMF and the World Bank, however, based their recommendations on the Washington Consensus and the so-called Anglo-Saxon Model. Countries that had turned to these institutions for financial help clearly felt the impact: deregulation, liberalization and privatization were the strongest elements in those recommendations, to an extent that made the World Bank make a kind of “mea culpa” at a conference in Prague in 2000 where some even suggested that (voucher) privatization or shock therapy should go into reverse and the whole process be started “from scratch” again.
    What do we learn from all of this? Those countries and forces in society that still adhere to a Model of Society aiming at improving living and working conditions – which by the way is a goal included in many national constitutions and founding conventions of International Organizations – characterised by economic and social cohesion, democratic participation of citizens,sustainability and the recognition of human and social rights, need to speak up loudly and clearly – even if they come just from a small country.

    • kurtbayer

      Dear Eva, I agree widely with what you say, even though my own recollection of how strongly Western European countries at the beginning of the 90s adhered to a model of a European Welfare State is different from yours, since already at that time the mainstream market-oriented dogma had gained a lot of ground in Europe. And there certainly was no concerted effort to counteract the US-American, Jeffrey Sachs-driven onslought of shock therapy, apart from a few persons on the fringe (including the Austrian Egon Matzner and friends).
      The question now is how to move on, and this is where we should direct our efforts and attention, of course in strong cooperation with reformers from the transition countries who have not compromised themselves as beneficiaries of the privatizations.

    • kurtbayer

      Dear Eva, I agree widely with what you say, even though my own recollection of how strongly Western European countries at the beginning of the 90s adhered to a model of a European Welfare State is different from yours, since already at that time the mainstream market-oriented dogma had gained a lot of ground in Europe. And there certainly was no concerted effort to counteract the US-American, Jeffrey Sachs-driven onslought of shock therapy, apart from a few persons on the fringe (including the Austrian Egon Matzner and friends).
      The question now is how to move on, and this is where we should direct our efforts and attention, of course in strong cooperation with reformers from the transition countries who have not compromised themselves as beneficiaries of the privatizations.

  2. Thanks for these insights. I well remember the shameful EBRD spin that accompanied the first Life in Transition report particularly, along the lines of “The post-communist youth are happy enough, it’s only the old commie laggards that want a return to the bad old days.” If things are changing in terms of recognising employment, let’s hope the necessary changes are realised more quickly than happened on gender issues.

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