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Stuck in Transition, the EBRD

The European Bank for Reconstruction and Development (EBRD) was created in 1991 as a multilateral development bank (MDB) to help former Soviet states in Central and Eastern Europe (CEE) transition to market-based democracies. In roughly two decades of existence, the EBRD has failed to successfully transition the states it works with and consequently has failed to fulfill its mandate. In order to be a more effective MDB, the EBRD needs to invest in more effective aid channels.

Since its inception, the European Bank for Reconstruction and Development has failed to buttress democracy in the states where it operates. The Bank has failed to clearly define for the states it works with a model market-based democratic state for them to try and emulate. Moreover, the countries the Bank deals with are corrupt, which prevents funds from reaching their intended destinations and having the intended effects. Recently, the EBRD has wavered from its original area of operation, by expanding to work with countries in the Middle East, North Africa, and South-Eastern Europe. The Bank is no longer dedicated solely to the states it was created to help the transition. The EBRD’s weighted voting structure that gives top financial contributing states more influence has also resulted in the EBRD’s decisions to diverge from the intended goals of the organization. Opaque aid channels have also resulted in the Bank funding projects indirectly supporting authoritarian politicians, which detract from the EBRD’s ability to support democracy.

In order to become a more effective MDB, the EBRD needs to utilize several mechanisms to invest in more advantageous aid channels. Creating more effective aid channels to increase transparency is the Bank’s most pressing issue. By addressing its form of funding, the EBRD can increase transparency to ensure it is funding transitioning countries with projects that bring them closer to market-based democracies.

Funding projects with grants instead of loans removes the pressure to pump out loans that often make poor states assume unnecessary debt. Grants are more efficiently and fairly distributed among member states compared to loans that favor middle-income countries. The EBRD needs to offer concessional loans; it is the only MDB that does not.

When MDBs extend concessional loans to countries, the window’s resources steadily decrease over time. Consequently, the donor countries have to meet periodically to replenish resources. By having to regularly meet and discuss loans, it would allow the donors of the EBRD to steadfastly look at these states to determine if they are transitioning towards market-based economies and if they warrant further financial and technical support. Upon identifying transitioning countries the EBRD needs to use technical assistance programs (TAPs) to introduce parliamentary legislation to strengthen institutional capacity, increase bureaucratic transparency, formalize accountability procedures, and formalize decision-making procedures.

The EBRD attempted to do this through its Technical Cooperation Funds, which provides funding to improve the penetration and implementation of the Bank’s investment projects. Despite these efforts, increasing transparency remains imperative for the EBRD to ensure its projects are indeed helping states privatize their economies. Due to the highly centralized nature and high risk of corruptibility of the states in the Bank’s area of operations, investing in more effective aid channels will help correct many of these problems.

Adopting more effective aid channels has certain costs and benefits. The various mechanisms would require tailoring technical assistance for each individual state, thus requiring significantly more resources. However, the benefits far outweigh the costs. Implementing this strategy would help support small and medium enterprises, and better prepare states for outside investment, including EBRD financed projects. Making the necessary investments in these measures will yield much more effective results from the Banks’ projects.

Implementing these strategies can be done in several ways. To offer state-specific technical assistance the EBRD needs to closely analyze the strengths and weaknesses of each state’s political and economic institutions, allowing tailoring of TAPs to maximize effectiveness and efficiency by targeting weak domestic institutions. The EBRD can offer more concessional loans and grants by redirecting net income from non-concessional loan windows. To make the EBRD itself more transparent, it needs to publicly disclose the voting results and transcripts of the Board of Governors’ and Directors’ meetings. Lastly, to increase transparency among the boards, private sector project reports should be disclosed to the public on a quarterly basis as a safeguard to guarantee projects have their intended privatizing and democratizing effects. Contractual requirements for projects sponsors, and results from its projects in real transitional indicator terms must also be released for public consumption.

Therefore, for the EBRD to be a more effective MDB, it needs to invest in more effective aid channels. If it fails to do this it will fail to fulfill its mandate and continue to be an ineffectual international organization. The EBRD was created to help transition former soviet states to free-market democracies, and thus far, in over 20 years of operations, it has failed to do so. Time still remains for it to implement the changes necessary to propel the states it works with to become market-based democracies.