The title of the EBRD’s transition report 2019-2020 – “Better Governance, Better Economies” – summarises its message well. Good governance matters. It matters at the level of countries, subnational regions and firms, and it also matters for people’s well-being. That is why the EBRD’s transition concept emphasises the importance of strong governance as one of the six key qualities of a well-functioning market economy, in addition to looking at whether economies are competitive, green, inclusive, resilient and integrated.
Featuring: Beata Javorcik, Chief Economist, EBRD
Host: Deepesh Patel, Editor, Trade Finance Global
Deepesh Patel: Beata, thank you very much for joining us on Trade Finance Talks TV. A pleasure to have you on the show.
Beata Javorcik: Thank you for having me.
Deepesh Patel: So today we’re here live the BAFT Annual Global Meeting here in Frankfurt. So to start off with a quick elevator pitch, who are you? Where are you from and what do you do?
Beata Javorcik: I am Beata Javorcik. I’m Chief Economist of the European Bank for Reconstruction and Development in London. I am on leave from Oxford, where I’m a Professor of Economics and fellow of All Souls College. I’m no stranger to international financial institutions. Prior to coming to Oxford. I was working for the World Bank in Washington DC, where I was involved in providing policy advice and lending operations in countries of Eastern Europe, the former Soviet Union, Asia and Latin America. I have a PhD from Yale and I come from Poland.
Deepesh Patel: Great, thank you very much. So what is the role of the EBRD and also what is your specific remit within EBRD?
Beata Javorcik: At the EBRD we invest in changing lives. We lend to the private sector in order to foster systemic change. In other words, we hope that our projects don’t benefit just firms to whom we lend directly, but have a wider impact. So for instance, our projects may involve innovative technologies and thus provide demonstration effects. We are heavily involved in the green economy transition. About 46% of our projects, last year were devoted to that area. We lend to small and medium enterprises and women-led businesses through our partner banks. My role at the EBRD is to be the custodian of the transition impact, to help the institution become even better at fostering systemic change.
Better Governance, Better Economies
Deepesh Patel: So Beata, your recent reports is all around better governance and better economies. What is governance?
Beata Javorcik: Governance is one of those concepts that elude an easy definition. Interestingly, not all languages have a term that’s exactly equivalent. You can think of governance as determining who has the power to make decisions, who is ultimately accountable for these decisions. You can think of it as the quality of institutions or the rules of the game.
Deepesh Patel: So what is the report about?
Beata Javorcik: Our report looks at governance at the level of countries, sub-national regions, and firms. We also have a chapter on “Green Governance in Firms”. The title “Better Governance, Better Economies” summarises its message well. Better governance means clear, stable and predictable rules. That means less uncertainty, greater investment, faster economic growth. Better governance means less need for corrupt payments and hence greater competitiveness. Better governance means level playing field and translates into the greater wellbeing of citizens.
The Governance at Regional Level
Deepesh Patel: Great. And I think it would be good to focus on the CEE region (Central and Eastern Europe). In the reports, you talk about the governance gap. What is the governance gap in the CEE region?
Beata Javorcik: We show in the report that Central and Eastern European countries have entered the 1990s with a deficit in governance. The quality of their institutions was rather poor, they have made a lot of improvement, however, for a decade or so, this improvement has stopped. So, the governance deficit, the difference between the quality of institutions in Eastern Europe and in high-income countries still persist. And that matters because the easy sources of growth in Eastern Europe are slowly being exhausted. For the past 30 years, the countries have been catching up, they have been accumulating capital, importing knowledge, technologies, know-how. And catch-up growth is always easier than innovation-led growth. Now they have to move to this new phase: to foster growth through own innovation. And as we show in our research at the EBRD, firms that innovate are much more sensitive to the business climate and the quality of institutions. That means that the deficit in governance is going to be detrimental for future growth in the region.
Higher Quality of Institutions Translate into Greater Individual Well-being
Deepesh Patel: Great. So what are the key findings and the key themes for the report?
Beata Javorcik: We show that higher quality of institutions at the regional level translates into faster growth. But going beyond growth, higher quality of institutions translates into greater individual well-being, as reported by people to Gallup or other pollsters. We also show that higher quality of institutions translates into lower intention to leave the country, to emigrate. And the magnitude of that effect is quite significant. For instance, if you think about Albania if its citizens have confidence in the government fighting corruption that has the same impact on the probability of emigration as getting an extra $400 of income a month.
Deepesh Patel: So I think that’s really interesting, particularly around some of the developing new markets – Turkey, Azerbaijan, etc. Does the report have any implications on some of the older countries in the EU?
Beata Javorcik: I think two messages of the report should resonate well in Western European capitals. One of the challenges faced by the European Union is managing migration from outside. And policymakers often talk about creating economic opportunities in the countries, where migrants come from. That helps in the long run. In the short run, it actually may stimulate migration because people need resources in order to leave their countries. What our report shows is that putting effort into improving the quality of governance, of institutions, will by itself, not just through the income channel, but will directly reduce people’s willingness to emigrate, because it simply translates into greater wellbeing. The second message that may be interesting to Western European capitals pertains to green investments. Through firm-level surveys, we have asked why managers may not be interested in undertaking energy-saving investments. 60% of managers said they do not consider such an investment as a priority. That means that firms need a nudge in order to undertake energy-saving investment.
Deepesh Patel: An economic nudge?
Beata Javorcik: An economic nudge. The report shows that firms that face energy taxes or firms that face pressure from customers are much more likely to undertake green investments in general.
Deepesh Patel: Great. So that’s very interesting, particularly the dynamism within the EU of the developing markets that need to think about some of those innovative structures and innovative business models versus some of the developed EU shareholding countries that perhaps need to take a slightly different approach in terms of looking at investment. Perhaps EBRD to look at financially supporting that green transition. Thank you very much, Beata. Just to conclude, what are some of the take-homes for new markets in the EU.
Beata Javorcik: New EU member states have done tremendous work reforming their economies and their institutions during the EU accession process. But the reform momentum has stopped after the accession. And as I mentioned, in order to foster growth in the future, in order to stimulate innovation-led growth, they need to improve their institutions. So we need to find ways of reigniting the reforms zeal in the region. And hopefully you can help with that.
Deepesh Patel: Beata it’s been such a pleasure having you on Trade Finance Talks TV. Really looking forward to spending some time with you and hearing from you over the next few days. Thank you for joining us.
Beata Javorcik: Thank you for having me. Bye, bye.