Institutions seldom die

Recent news that the EBRD (European Bank for Reconstruction and Development) is thinking of lending to Sub-Saharan Africa shows how institutions evolve to find new goals rather than quietly close down. The EBRD, which I believe enjoys a high reputation in the development finance world, is a multilateral financial institution set up in 1991 to help convert the former Soviet bloc nations of central and Eastern Europe into capitalist economies, to help build ‘market-oriented economies and the promotion of private and entrepreneurial initiative’ as the EBRD website tells us. By providing funding and advice it would accelerate the transformation of these economies to market-based principles and institutions.

While Eastern European nations remain on average poorer and less developed than those of Western Europe, I think it’s fair to say that the EBRD has done its job and done it pretty well. One might then think that the EBRD would be gently run down and its talented staff allowed to find useful work elsewhere. But apparently not.

Changing the scope of a project is sometimes known as “mission creep“, a term that originated in US foreign policy over-reach. A few years ago I learned that the EBRD was lending to…Mongolia, which is quite a long way from Eastern Europe on any reasonable definition. Now it’s considering lending to Sub-Saharan Africa, which may well need additional funding and advice but the African Development Bank and World Bank are already providing that, so why exactly is a bank with the word “European” in its name getting involved?

It is no disrespect to the excellent people of the EBRD to point out that it seems to be moving far beyond its original mission. But this is not surprising: institutions acquire momentum and political support and it becomes hard to close or even shrink them. Take the case of the IMF.

The IMF was set up to police the Bretton Woods system of fixed exchange rates. It did (and still does) annual surveys of member nation’s macroeconomic and fiscal positions, and would lend to countries which were facing difficulties in maintaining the fixed exchange rate, providing a breathing space for policy reforms that were supposed to put the economy on a sustainable track.

In the early 1970s the system of fixed exchange rates came to an end. The main developed economies all saw their exchange rates float and it appeared the IMF’s raison d’être had disappeared. But the IMF very adroitly changed into a champion of floating exchange rates, supporting the now largely discredited orthodoxy known as the Washington Consensus (the IMF, World Bank and US State Department are all based in Washington DC).

By the mid-2000s, with international private capital flows growing strongly and few crises around, the IMF was looking rather surplus to requirements and was facing pressure to cut costs and hire fewer people. Morale was poor, and it was becoming more of an open question, what exactly is the IMF for?

But the global financial crisis reminded people why a well capitalised international lender of the last resort (sort-of) was needed. The IMF found itself suddenly in demand and was given a big increase in its financial resources (more detail in this post).

International institutions have political value: national politicians can use their power to influence senior appointments as ways to reward favoured people, or on occasion to put them safely out of the way of national politics. Once created, this patronage is hard to abolish. There is inertia in the fact that the UK remains a permanent member of the United Nations Security Council, reflecting its international political position in 1945. It’s not clear that the UK would have such a position today, if the Council was being created from scratch.

The danger in not periodically reevaluating institutional goals and purposes is that scarce resources – skilled people and financial power – are mis-allocated. If Africa needs more funding then surely it would be better to strengthen existing institutions like the African Development Bank?

But that is not how international politics works.


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5 Responses

  1. Neil McKain

    Thanks Simon for this thought-provoking piece.
    Just a minor correction. You are right that EBRD was established to assist the countries of central and eastern Europe and the former Soviet Union. However, this has always included the newly independent states in Central Asia which have been our countries of operations from the start. So explaining the “European” part of the name is not a new challenge.
    Neil McKain, Director, Central Asia, EBRD

    • Simon Taylor

      Neil, thanks very much for the correction. I didn’t think of Mongolia as part of Central Asia (its longer term history is closer to China, which is usually regarded as East Asia) but my current Mongolian student tells me she does regard it as part of Central Asia, and in any case it is clearly a former Soviet Republic and therefore part of the original EBRD mission, as you say. Sorry for the error.

      • Neil McKain

        Actually you are right on Mongolia – became a country of operations only in 2006. But Turkmenistan, Kazakhstan, Tajikistan Uzbekistan and Kyrgyz Republic have been with us from the start.

      • Andrew Aus

        Mongolia was never part of the USSR. It has a rich and interesting history all of its own.

        • Oyu Bayarsaikhan

          Indeed, Mongolia has a very rich history with the Mongol Empire and its independence. And it was not a part of the USSR but it was under strong Soviet influence at the time.

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