The EBRD at 25: building private sector-led economies to strengthen economies and societies
LONDON, 11-Apr-2016 — /EuropaWire/ — “Nothing is more powerful than an idea whose time has come,” is a quote commonly attributed to the French writer Victor Hugo. It was the idea of freedom and democracy that in 1989 brought down the Iron Curtain and ended the division of Europe.
But bringing down the Berlin Wall in many ways soon turned out to be the easy part. Communism had severely damaged the economic foundations of the countries where it had ruled. After the failure of the state-controlled economy the private sector had to be rebuilt, often from scratch.
In order to do this on a systematic and long-term basis, the European Bank for Reconstruction and Development (EBRD) was set up 25 years ago by shareholders from all over the world. From the outset, the ownership structure of the institution brought together donors and recipients of EBRD investments who were united in the mission – as the Bank’s Article 1 states – “to foster the transition towards open market-oriented economies and to promote private and entrepreneurial initiative in countries committed to and applying the principles of multi-party democracy, pluralism and market economics.”
The powerful idea at the heart of the EBRD was to promote market economies by acting in line with market principles and rules, not by providing aid and grants. The EBRD started investing alongside pioneers who were the first to explore business opportunities in central and eastern Europe. Ambitious reform programmes and huge pent-up demand made the countries attractive destinations for investment and within a few years the EBRD had established itself as a major market participant with loans and equity investments in all vital sector of the economy. In its first 25 years of existence, the EBRD has invested over €107 billion in almost 4,500 projects.
Over the years the Bank widely expanded its operations. The successor states of the former Soviet Union each became countries of operations, as did the countries that emerged following the break-up of Yugoslavia. The success of the EBRD in fostering market economies and promoting the private sector subsequently allowed the Bank to also add Mongolia, Turkey and the southern and eastern Mediterranean countries (Egypt,Jordan, Morocco and Tunisia) to its portfolio. The EBRD is currently also investing on a temporary basis inCyprus and Greece in order to support their recovery from severe economic crises.
In addition to expanding its geographical outreach, the focus of EBRD investments and policy engagement has also evolved over the years. While the first period after the liberation from communism was characterised by rapid growth, the global economic and financial crisis of 2007/08 represented a major setback for many countries in the EBRD region. Thanks to strong shareholder support, the Bank was able to respond quickly and decisively by increasing its investment volume by almost 50 per cent in order to address the most pressing challenges. Today, as growth remains sluggish and the convergence process has slowed down markedly, the EBRD is focusing on strengthening economic resilience through investments and support for policy reform.
In the words of EBRD President Sir Suma Chakrabarti: “The EBRD has consistently delivered, and time and again has shown it responds quickly to changing circumstances.”
The Bank’s strategic directions are tailored to address the most urgent needs of its regions. Investment in privately-owned small businesses – the backbone of the economy in many countries – accounts for roughly one-third of all EBRD investments and has recently been streamlined under the Small Business Initiative.
Realising the vast importance of energy, the Bank has been a frontrunner in developing investment in energy and resource efficiency and renewable sources of energy. Under its new Green Economy Transition approach, the Bank is aiming to increase its green financing to around 40 per cent of total annual investments by 2020. With its local currency and capital markets initiatives, the EBRD is leading the effort to grow the resilience of local markets without losing sight of the benefits of regional coordination and integration.
The EBRD is a commercial operation. The Bank is a bank. It makes profits which provide a sound capital base and allow the EBRD to invest in projects where other banks or investors are not yet prepared to accept the associated risk. The EBRD is able to do all this thanks to generous support of donor governments and institutions who to date have contributed a total of €4.4 billion to the Bank’s activities. In addition to their substantial financial support, donors also provide inspiration and leadership, for instance in the development of climate change, gender or inclusion policies.
The EBRD has played a crucial role in the establishment of private sector-led market economies in its countries of operations. The private sector share of its investments today is 80 per cent. Over the past 25 years there has been marked progress in the transition process but much remains to be done. Improving the investment climate by guaranteeing the rule of law and fighting corruption becomes ever more important in a global economic environment characterised by high volatility and fierce competition for scare sources of investment.
The countries where the EBRD invests offer many attractive features, from rich natural resources to competitive cost structures and a well-educated labour force. The Bank will continue to support the countries’ development and progress with a strategy adapted to the new challenges, but with the same determination and enthusiasm as when it was set up 25 years ago as a powerful idea whose time had come.
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