B Explanatory memorandum
by Mr Hendrik Daems, rapporteur
1 Introduction
1. The Council of Europe and the
European Bank for Reconstruction and Development (EBRD) have formally
co-operated for some 27 years following the signature of the Agreement
between the Council of Europe and the EBRD in 1992. In 1992, a further
agreement, via an exchange of letters between the President of the
Parliamentary Assembly and the President of the EBRD, designated
the Assembly as a parliamentary oversight for the EBRD’s activities.
The EBRD also agreed a Memorandum of Understanding with the Council of
Europe Development Bank in 1999. This memorandum was renewed in
2013.
2. The terms of reference of the Committee on Political Affairs
and Democracy state that the committee shall “prepare reports on
the activities of the Organisation for Economic Co-operation and
Development (OECD) and the European Bank for reconstruction and
Development (EBRD). For the preparation of the reports and the debates
in the Assembly, the committee maintains relations with the OECD
and the EBRD”.
3. On 2 October 2014, the Assembly held a debate on the activities
of the EBRD in 2013-2014, presented by Dame Cheryl Gillan (United
Kingdom, EC) and adopted
Resolution
2017 (2014). On 15 December 2016, the committee appointed me as
rapporteur for a new report.
4. This report aims at starting a review of the history and present
state of co-operation between the EBRD and the Assembly; it also
looks at the evolution of the EBRD’s remit over the past 27 years,
democratic progress among countries of EBRD operations, and recent
political developments affecting its regions of operations.
5. Attention is paid to the connection between the promotion
of market economy and the development of democracy, an oblique relationship
which is coming under increasing scrutiny in current political discourse. This
is of central importance to the work of the EBRD as its founding
purpose, as stated in Article 1 of the 1990 Agreement Establishing
the Bank, is “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 multiparty
democracy, pluralism and market economics”.
Note
6. Understanding the political implications of promoting open
markets is therefore essential to understanding the effectiveness
of the EBRD in achieving its stated goals. In this respect, the
committee agreed with my proposal to modify the title of the report
as follows: “Promoting democracy by developing market economy: does
the EBRD model work?”
7. To prepare this report, I took part in the meeting held by
the Sub-Committee on Relations with the OECD and the EBRD at the
headquarters of the EBRD in London on 26 October 2017. This was
useful to collect insights into the activities of the EBRD and the
relationship between the promotion of open markets and democratisation
more generally.
8. In addition, at its meeting on 11 September 2018 in Paris,
the Committee on Political Affairs and Democracy held an exchange
of views with Mr Marek Dabrowski, Non-Resident Fellow at Bruegel,
Brussels, Professor at the Higher School of Economics, Moscow, and
Fellow at CASE – Center for Social and Economic Research, Warsaw.
On 11 December 2018, I met with a representative of the Council
of Europe Development Bank.
2 Background
9. The EBRD was founded in 1991,
in response to the fall of the Iron Curtain, to foster transition
towards open markets and democratic governance in central and eastern
Europe (CEE). Since its founding, it has been considered unique
as a financial institution for its explicit commitment towards promoting
democracy as well as open markets in the economies it invests in.
10. Over the past 28 years, the success of the EBRD’s investments
in transitioning economies has seen demand for its expertise grow
far beyond CEE. The EBRD has gradually expanded its region of operations
to the economies of central Asia, Mongolia, Turkey, the southern
and eastern Mediterranean region (SEMED), Cyprus, Greece and most
recently the West Bank and Gaza. Although these economies hold backgrounds
and historical trajectories distinct to those of CEE, the EBRD’s
expansion has been welcomed by many, who regard this expansion as
testimony to its continued success and relevance.
3 Co-operation
with the Council of Europe
11. On 14 April 1992, the Agreement
between the Council of Europe and the EBRD noted the overlapping interests
of the two organisations with regard to the promotion of pluralist
democracy, respect for human rights, and the rule of law. It consequently
made broad provision for co-operation between the two organisations through
exchanging documents of shared interest, mutual consultation, invitations
to meetings in London and Strasbourg, and technical co-operation
between their respective experts. This agreement has hardly ever
led to any concrete action at the intergovernmental level.
12. An exchange of letters between the then Presidents of the
Assembly and of the EBRD on 3 October 1992 provided for special
co-operation with Parliamentary Assembly in several areas. It was
agreed that the President of the Parliamentary Assembly and the
chairpersons of its committees would be invited to the EBRD’s annual
assembly; the President of the EBRD would participate in an annual
debate in the Assembly; information concerning monitoring and assessment
of countries of operations would be shared; and the two institutions
would co-operate in election observation missions. In short, it
was agreed that the Assembly would provide parliamentary oversight
to the “executive” branch of the EBRD.
13. The Assembly held a first debate on “The European Bank for
Reconstruction and Development Bank: achievements, activities and
priorities” in June 1993, based on a report prepared by the Committee
on Economic Affairs and Development. The President of the EBRD took
part in the debate. Since then, the Assembly has debated the EBRD
18 times and the President (14 times), or a Vice-President, of the
EBRD took part in all debates. Reciprocally, the Assembly committee
or sub-committee in charge of relations with the EBRD met regularly
at its London headquarters, thus making co-operation at parliamentary
level much more visible than at intergovernmental level. This being
said, we also have to acknowledge the fact that very seldom, if
ever, did the EBRD give follow-up or even a reply to the Assembly’s
recommendations.
14. Since the 1990s, the EBRD and the Council of Europe Development
Bank have developed a successful tradition of exchange of information
on common policy and operational challenges, as well as operational
co-operation and co-financing in sectors where their mandates overlap.
In 1999 they signed a Memorandum of Understanding, which was renewed
and updated in 2013. The purpose of this agreement is to stimulate
co-operation and to make it more efficient. Though having different
mandates, priority will be given to operations with significant
contribution to local development and social inclusion. The two
Banks co-operate directly on a water pipeline project in Bosnia
and Herzegovina and there is indirect co-operation, for instance,
in the frameworks of the Western Balkans Investment Framework (WBIF),
the Eastern Europe Energy Efficiency and Environmental Partnership
(E5P) and the EU Platform for Blending in External Co-operation
(EUBEC).
15. Over the past 27 years, the role and remit of the EBRD has
evolved. It is fair to say that the EBRD of today is quite different
from the EBRD which the Assembly agreed to co-operate with in 1992.
This much is obvious from even a cursory overview of the history
of co-operation between the two organisations, which has not always
stood up to the lofty ambitions of those who first agreed to it.
Despite the comprehensive nature of co-operation formally agreed
at the time, the exchange of information, joint co-operation in
electoral missions and participation in meetings, originally envisioned,
has never been fully realised.
4 Governance
and structure
4.1 Transparency
16. In the previous report (“The
activities of the European Bank for Reconstruction and Development (EBRD)
in 2013-2014”,
Doc
13594), it was noted that the EBRD had been criticised in
the past for a lack of transparency in its operations. Assembly
Resolution
2017 (2014), adopted on the basis of this report, noted this as
a cause for concern and encouraged the EBRD to begin publishing
more information.
17. In 2013, the EBRD was rated “poor” and ranked by the Aid Transparency
Index as the lowest among 67 international financial institutions
and multilateral organisations with regard to transparency. This
“poor” rating was maintained in 2014 and 2015 and in 2016, it was
upgraded to “fair”. The EBRD maintained its “fair” rating in 2017
and 2018 and is now ranked 24th out of 45 international financial
institutions.
Note The reasons for this improvement
in assessment include an improvement in the depth and frequency
of its publications. While this progress is to be welcomed, it must
be noted that there remains room for improvement: the EBRD still
does not provide certain information publicly, in particular performance-related
information, and it should work to promote the use of the data it
publishes more widely. Such information would allow research on
the possible links between the Bank’s investments and the democratic
evolution in its countries of operations.
4.2 Updated
measures of transition
18. In 2016, the EBRD updated its
measures of transition that clarified how it would fulfil its mission
of developing market economies. As these are the standards by which
the EBRD measures its own success, and its guidelines for informing
investment decisions and policy dialogue engagements, their impact
on the EBRD’s political mandate is of obvious interest to the Assembly.
19. This new transition concept requires that a well-functioning
market economy must be competitive, inclusive, well-governed, environmentally
friendly, resilient and integrated. The change intends to reflect
a global evolution since the EBRD’s founding of what a successful
market economy is and the variance in needs among different recipient
economies. This was crafted particularly in response to awareness,
following the 2008 financial crisis, of the risk for reform reversals
in the region of operations.
Note
20. Although these values are arguably implicit in the founding
articles of the EBRD and have to some extent been reflected in its
activities over the years anyway, to have them officially defined
and articulated as the policy of the EBRD is a welcome development.
Note
21. The new concept should be welcomed for its more holistic approach
to transition, one that recognises that there is more to transition
than purely building markets and the private sector. The new indicator
of “well-governed” is of particular interest in this regard. According
to the EBRD, this comprises two key pillars: the notion of national
or subnational economic governance, i.e. the institutions and processes
supporting economic activity on State-wide or subnational levels;
and corporate-level governance, i.e. the system of rules, practices and
processes by which companies are directed and controlled. The former
of these is of greater relevance to this report.
22. As the EBRD itself states, “recognising that poor governance
can contribute to countries being ‘stuck in transition’ might be
easier than finding ways to assess challenges and incentivise a
combination of projects and policy dialogue that can help countries
back onto the path of success”.
Note Therefore, for assessing national and
subnational governance, the EBRD uses a set of indicators relating
to the quality of both State and private sector institutions, integrity
standards and the control of corruption as well as the rule of law.
The individual country strategies of the EBRD are the means for
examining these indicators.
5 Democratic
progress: crisis of trust and transition
5.1 The
relationship between market reform and democratic transition
23. Market reform in transitioning
countries is often associated with the construction and consolidation
of democratic institutions. In recent years however, this assumption
has been increasingly challenged by the defiance of certain countries
around the world that have, to some degree, successfully opened
their markets while retaining centralised, authoritarian political
regimes. When the Sub-Committee on Relations with the OECD and the
EBRD met in London on 26 October 2017, its President, Sir Suma Chakrabarti,
indicated that Ukraine was a good example of how it went wrong:
for twenty years, massive investment had gone in parallel with regression
in democracy.
24. It must be reiterated that the EBRD’s operations are primarily
designed to facilitate private sector development and economic transition,
and not to directly promote democratic transition. Article 1 of
the Agreement Establishing the EBRD declares its mandate to work
in countries “committed to and applying the principles of multiparty
democracy, pluralism and market economics”, not to take direct responsibility
for the enactment of these principles. Nevertheless, the EBRD should
be held to account for engaging in activities in countries where
these principles are neither committed to nor applied.
25. As the mandate of the EBRD is to foster specifically market
– not political – transition, then the relationship between opening
of markets and democratic reform is of obvious relevance. If there
is no relation, or only correlation but no causality between the
two, then the EBRD could be expected to work only in countries explicitly
and evidently committed to the principles of multiparty democracy.
If economic reform naturally and necessarily results in political
reform, even indirectly, then it would have reasonable justification
to invest also in non-democratic countries. As it currently stands,
the EBRD invests in the economies of a wide variety of political
regimes across the transition region, from autocracies to full democracies.
26. In his presentation to the committee on 11 September 2018,
Mr Dabrowski dwelt on the interdependence between market economy
and democracy. There were examples of market economies without democracy
but none of democracies without market economy. There was a certain
degree of correlation between economic and political freedom in
the world. Markets could help democracy in many different ways as
democracy could also help the market system. The experience of post-communist
countries showed that market transition could start only after the
collapse of the communist political system. In the first stages
of transition, authoritarianism strengthened the role of former
elites and old groups of interests; at a later stage, authoritarianism
helped in building privileged positions for oligarchs and government
bureaucrats. Between 2005 and 2018, more countries in transition
had seen their democracy scores decline than improve. There are
many variants of market economy. In China, for instance, there is
a kind of marker economy although there is no rule of law, unlike
in Hong Kong or Singapore.
27. Previously, when the EBRD has been questioned about its investments
in countries that appear to show little commitment to the principles
of multiparty democracy and pluralism, its response has been that
it believed long term convergence between economic and political
reform was inevitable, and that abandoning countries which show
little sign of democratising in the near future would not help them
in the long run. Whether or not the EBRD is fulfilling its mandate
depends on the veracity of these assumptions.
28. The previous report on “The activities of the European Bank
for Reconstruction and Development (EBRD) in 2013-2014” engaged
in a thorough and highly valuable study into the connection between
markets and democracy which remains of direct interest. Its conclusions
were as follows:
- wealth, industrialisation,
urbanisation and education are strongly statistically associated
with the development of democratic systems;
- democratic development is strongly dependent on economic
growth;
- countries with large endowments of natural resources are
less likely to develop a democratic system even with strong economic
development;
- the effects of economic development on democratisation
can take between one to two decades to materialise.
29. With respect to the above conclusions, EBRD investment in
countries which are not currently democratic does not present an
issue, providing that these countries at least appear willing to
enact political reform in the long term. Almost 30 years after the
EBRD was originally founded, we have a great deal of experience
and information concerning these countries but no conclusions as
to whether or not this really is the case.
30. The EBRD itself has also undertaken a serious study into the
relationship between market and political reform, in particular
in its 2013 Transition Report “Stuck in Transition?”. It concluded
that increasing per capita gross domestic product (GDP) leads to
more democracy, with the exception of countries rich with natural resources,
which are, on average, less democratic than their GDP per capita
would suggest. Beyond its effect on growth, market reform has the
added benefit of preventing the entrenchment of anti-democratic
political and economic elites. This report also, however, applied
the crucial caveat that “the international development community
will have to exercise patience and persistence in supporting long-term
transition objectives and the underlying institutions that are most
conducive to achieving them”. The questions of exactly how patient
the international community must be, and just how long the long-term
is, remain to be answered.
31. The question of whether or not opening markets necessitates
similar political reform has acquired a critical relevance in the
past decade, since the 2008 financial crisis. A working paper commissioned
by the EBRD in February 2018, on “the European trust crisis and
the rise of populism”, noted that a decline in political trust and
loss of confidence in how democracy functions observed across Europe
– not only in the transition region – posed a profound threat to
the work of the EBRD, which has long relied on the near-universal consensus
of democracy’s desirability.
Note It
was posited that the 2008 financial crisis and ensuing recessions greatly
contributed to an erosion in confidence of citizens in their political
and even legal institutions, and that this trust has proven slow
to re-establish since. Specifically, in many cases this was the
result of the rise in unemployment, which in turn led to political
fallout resulting in anti-market policies which undermine long-term economic
growth.
32. The “crisis of trust” seen across Europe posed a particular
threat to countries in the transition region due to the potential
for reform reversals. In some of the most developed EBRD economies,
this is especially problematic as they no longer have the prospect
of European Union accession as an anchor against such reform reversals.
Supporting this idea is the fact that reforms stagnated the least
in south-eastern Europe, where many countries are European Union
candidates or aspirants
Note.
33. We have no means of directly assessing the impact of any EBRD
specific project or investment on democratic progress, given the
oblique nature of the link between the two. There are, however,
various means of viewing the improvement in democratic governance
that takes place in individual countries through measures such as
the Polity scores or the Democracy Index. Again, this is something
difficult to link directly to the amount invested in economies,
as the total amount invested depends on a number of other variables
like the size of the country, its capacity for investment absorption,
and the dominant industries there.
5.2 Graduation
34. Given the EBRD’s declared purpose
in supporting economies in transition, the question of what happens when
transition is complete is critical to its very existence. So-called
“graduation” of a recipient country of operation to donor-shareholder
is a positive reflection of the EBRD’s work, a profound achievement
for the graduating country, and a necessary process to free up resources
for countries in greater need. However, it appears that most of
the more advanced recipient economies are hesitant to graduate,
arguably in order to continue receiving EBRD investment. The fact
that only one country of operations (the Czech Republic) has graduated
in the history of the EBRD clearly illustrates a lack of progress,
incentive or a clearly-defined path to graduation for transition
countries.
35. The graduation of EBRD countries of operations is clearly
a political issue of direct interest to the Assembly, as transition
can only be considered complete when both economic and political
consolidation has been achieved. Graduation is especially important
as it will free resources for the EBRD to reinvest in countries in
greater need.
36. According to the EBRD’s Third Capital Resources Review (2006-2010),
the eight countries which joined the European Union in 2004 were
expected to graduate by 2010. Only the Czech Republic was able to
do so, graduating in 2008, and then the impact of that year’s financial
crisis on the others made clear that the EBRD’s resources would
be required a while longer, and so the deadline was accordingly
postponed to 2015.
37. The 2015 deadline was also missed and the most recent transition
report (2017-2018) made no mention of graduation. In the 2016-2020
Strategic and Capital Framework it was declared that “the main instrument
for decision-making on graduation will be the respective country
strategies, jointly agreed by the Bank and country authorities”.
It is unclear what, if any, the precise criteria are for graduation,
economic or political, and what is currently preventing countries
from meeting them. So far, the EBRD has proven disappointingly reticent
to clarify exactly what its policy is in this regard.
38. Although the EBRD has not been clear in defining how graduation
is to be done, in order to better incentivise it, it devised a Post-Graduation
Operational Approach (PGOA), which defines the activities in which the
EBRD can engage in graduated economies, as well as a Post-Graduation
Special Fund (PGSF), which finances these activities. As the Czech Republic is the only
country to have used these however, they remain relatively underutilised
and untested instruments.
6 Political
and economic developments (2015-2018)
6.1 Reviewing
SEMED expansion
39. In 2012, the EBRD expanded
its geographic remit to the SEMED region, which now receives more investment
than any other region of EBRD operations. Understanding the impact
of the EBRD in this region and how the Assembly can co-operate is
especially important given that the Parliaments of Morocco, Jordan, and
Palestine hold partnership for democracy status with the Assembly.
40. In May 2017, the EBRD expanded to the West Bank and Gaza and
in July 2017, Lebanon became a shareholder. No investment was made
in these economies in 2017 but any political implications arising
as a result are nevertheless of interest to the Assembly. The EBRD
is developing a financing facility of up to US$15 million in the
West Bank and Gaza to support small and medium-sized enterprises
in the area.
6.2 Geopolitical
tensions
41. Since the crisis in Ukraine
began, the EBRD has completely withdrawn investment from Russia
as economic relations between the Russian Federation and Europe
have steadily deteriorated. When it met in London on 26 October
2017, the Sub-Committee on relations with the OECD and the EBRD
was told that five out of seven EBRD offices in Russia had been
closed and only those in Moscow and Saint Petersburg remained in
service. A further report should therefore assess the political
impact of this divestment and the economic fallout of worsened trade
relations not only to Ukraine but also to other economies in the
region.
6.3 Refugee
crisis
42. The refugee crisis, caused inter alia by the war in Syria,
is one of the most significant political developments in recent
years and one of direct concern to EBRD shareholders. As a result,
the EBRD has committed significant amounts of financial support
(up to €900 million) to private sector and infrastructure projects
in Turkey and Jordan, two EBRD recipient economies and some of the
largest host countries for persons displaced by the conflict.
43. This approach to mitigating the refugee crisis is commendable
and in line with the work of the Assembly’s Committee for Refugees,
Migrants and Displaced Persons, in particular the 2013 report “Syrian
refugees: how to organise and support international assistance?”
(
Doc. 13372).
7 Conclusion
44. There are three co-operation
agreements between the Council of Europe and the EBRD: a Memorandum
of Understanding with the Council of Europe Development Bank, which
is the basis of fruitful co-operation between the two Banks; an
exchange of letters between the Presidents of the Parliamentary Assembly
and of the EBRD, which is the basis of the Assembly’s parliamentary
oversight of the EBRD; and the formal agreement with the Secretary
General of the Council of Europe, which never led to any concrete
action at the intergovernmental level, perhaps because it did not
address any real concern, either of the EBRD or of the Council of
Europe. It is my opinion, however, that revising the co-operation
agreements is not necessary.
45. We do not have enough information to give a concrete answer
to the question in the title of this report: namely whether the
development of market economy in the EBRD countries of operations
contributes positively to the promotion of democracy in that area
and therefore whether the “EBRD model” works or not. It would be
useful if the EBRD published, for instance, performance-related
information, which would allow a better assessment of the impact
of investments on the progress of democracy.
46. The Parliamentary Assembly resolves to continue its oversight
of the EBRD from a political point of view and to make a new political
assessment of the activities of the Bank when appropriate.
