Reinvigorating Market Momentum and Inclusive Economies in Europe and Eurasia

7 min read
The EU and its member states are facing unprecedented internal and external political challenges and churn including a migration crisis, Brexit, democratic backsliding and Russia.

The EU and its member states are facing unprecedented internal and external political challenges and churn including a migration crisis, Brexit, democratic backsliding and Russia. Many have argued that economic disillusionment has been a key factor in the rise of populism and nationalism in Central, Southern, and Eastern Europe. Over the last 25 years, the United States, European counterparts, and international financial institutions have advocated, provided political, financial, and technical resources and macroeconomic support for countries across Europe, including new EU member states, as they transformed to democratic open market oriented economies.

The success of this transformation is under significant duress and the United States and Europe in an era of growing corruption, state capture, and sharp power, must redefine and reinvigorate the goal of advancing the transition to open, market economies, while also fostering inclusive growth. Fraying U.S.–European political and trade relations over the past year, most recently at the G7 summit, only exacerbates these troubling trends and is hampering the ability of the transatlantic community to respond effectively.

Pierre Heilbronn is vice president of the European Bank for Reconstruction and Development. GMF hosted him in Washington, DC for a discussion about the challenges to unlocking economic potential and advancing market and inclusive economies in an era of instability and political turmoil in Europe and its neighborhood.

The European Bank for Reconstruction and Development (EBRD) was created following the post-Cold War to support progress toward market-oriented economies and the promotion of private and entrepreneurial initiative in Eastern and Central Europe. There was a great deal of success transforming former communist states but that success is being marred by democratic backsliding, corruption and state capture. How is the EBRD adapting its focus and resources to address these challenges? 

Pierre Heilbronn: We see Europe at a crossroads — facing a range of daunting challenges. Prominent among these are Brexit, the development of a new Multi-Annual Financial Framework, the rise of populist forces in several countries, and the migration crisis, which is likely to peak again during the summer months.

As you note, we still see major challenges ahead — in advancing market based principles, fighting corruption, and unlocking economic potential in our countries of operation, including in the EU’s Eastern neighborhood region (the Western Balkans, Ukraine, Moldova, Belarus, and the Caucasus). I take the Western Balkans as an example, a region that aspires to and has a clear trajectory laid out to join the European Union. This is a region of significant potential, but it has a lot of catching up to do: GDP per capita in this region is on average just one-quarter of the level in the richest EU members in western Europe; firm-level productivity is significantly below EU standards, reflecting years of under-investment, weak institutions and a difficult business environment; and the rule of law and corruption remain pervasive problems, both in public institutions and in the private sector. Nevertheless, the glass is half full — all countries have made major progress in the field of economic reforms and the prospect of closer cooperation with the EU remains a key anchor for further reforms.

This is where the EBRD comes into the picture. EBRD’s model, whether in prospective EU member states or not, is always to link its investments to policy dialogue (on sector reforms) and to extend technical cooperation alongside investments where needed (practical help for example to improve procurement practices, corporate governance, study cross-border linkages, or support regional initiatives). This approach helps to strengthen good governance practices and regional integration — and at the same time will keep economies more open and more resilient to shocks.

Eastern and Central Europe is and remains a major focus for us, and we are working with other institutions, the EU but also other international financial institutions, and bilaterally, to use resources smartly and efficiently to address the challenges at hand.

How is EBRD prioritizing gender and can you discuss the impact of the EBRD’s Strategy for the Promotion of Gender Equality?

Pierre Heilbronn: The EBRD’s Strategy for the Promotion of Gender Equality 2016–2020 (SPGE) recognizes gender equality as a principal element in the promotion of well-functioning market economies, sound business management, and inclusive societies — and therefore critical to the advancement of transition. Our aim with the SPGE is two-fold, to first increase women’s economic empowerment and equality of opportunities using a combination of investments, technical cooperation and policy dialogue, and second to create an enabling environment to address the constraints that gender inequality places on transition, through targeted research and policy dialogue.

In its operations the Bank focusses on three key approaches:

Access to Finance and Entrepreneurship: We aim to improve women’s access to finance and support female entrepreneurship through credit lines and technical support to commercial banks and women-led businesses. To date we have financed €400 million across 17 countries working with 30 partner financial institutions and over 35,000 beneficiary women-led SMEs.

Access to Employment and Skills: We aim to improve women’s access to skills and employment by promoting women’s participation in our client’s workforce. To date we have financed 44 individual projects — providing technical assistance to private sector clients in industry, agribusiness, energy, and infrastructure sectors throughout the EBRD region. An example of this work is our investment with Tofas, a leading car manufacturer in Turkey. In the course of EBRD’s support the company has gone from not having a single woman working on the factory floor to hiring 400 female blue-collar workers. EBRD accompanied Tofas in the process, which involved training of male leaders, provision of a night transport service, changes in the design of the uniform, to the development of a harassment and bullying policy.  

Access to Services: We do this by supporting clients to deliver gender responsive services, and by promoting equal access, with a particular focus on Central Asia, the Southern and Eastern Mediterranean, and Turkey. One example, is the Egyptian National Railways which we supported to make its services safer for men and women, and prevent sexual harassment (this included among others installing CCTV, a sexual harassment prevention campaign and protocol, information booths, and improved lighting in stations).

 The impact of the SPGE has been dramatic. The Bank has signed more gender focused projects in the 30 months since launching the SPGE (December 2015-Jun 2018) than in the previous ten years (2005-2015). These gender projects are also more impactful than before, as are leveraged to drive policy dialogue, using business-led innovation and solutions to overcome policy barriers to equal opportunity.

I am pleased to say that EBRD-led policy dialogue on behalf of our natural clients in Kazakhstan recently contributed to the removal 100 jobs from the 287 currently banned to women under the Labour code — a singular achievement attesting to the role the Private Sector has in helping Governments unlock growth by addressing outdated regulation. Similarly, the Bank is working with the Green Climate Fund (GCF) on gender mainstreaming as part of its $1.5 billion renewable energy project portfolio in Egypt and Kazakhstan, with GCF describing EBRD work as “new best practice in gender mainstreaming in GCF projects.”

How important is it for the West to modernize development finance to ensure it is a catalyst for economic change and market oriented reforms?

There are indeed many reasons to believe we must develop a shared perspective globally on some key political, economic and social topics. This is vital not only to embrace positive change but also to confront the scale of the challenges facing us: climate change, inclusive growth, migration. Multilateral development banks and other multilateral organizations can be channels for this shared perspective. In order for them to be credible and impactful, effectiveness must be part of the solution.

We need to modernise development finance to ensure that our financing does not crowd out private investors and we need multilateral institutions to link investments to reforms that are at once truly owned by those who have the choice of implementing them and secondly aligned among all development actors. Otherwise we will not be able to unlock the economic change that builds sustainable market economies.

In Europe we have for the past months advocated for a discussion about the European Development Architecture to make it more efficient and fit for purpose — to respond to the long-term interest (shared on both sides of the Atlantic) to see stability and security in Europe’s neighborhood.