Saturday, Sep 10, 2011

By Paul Hannon

Of DOW JONES NEWSWIRES

MARSEILLES, France (Dow Jones)--The transition to more democratic forms of government, and more open economies in north Africa and the Middle East, will not be without setbacks, the president of the European Bank for Reconstruction and Development warned.

The EBRD was established in 1991 to help countries in eastern Europe and the former Soviet Union make a similar transformation. It is now being asked to bring its expertise in financing private sector development to bear in helping countries that are part of the "Arab Spring."

Meeting here, finance officials from the Group of Eight leading industrialized nations Saturday reaffirmed their commitment to supporting those countries on their journey, but the EBRD has learned some hard lessons over the last two decades. Some of the countries it was established to help have made little progress in becoming market economies or democracies, and because it is required to promote political as well as economic change, the EBRD has been unable to invest heavily.

"This is not a clear-cut road in only one direction," EBRD President Thomas Mirow said in an interview with Dow Jones Newswires. "You have progress, and you have setbacks. Post-revolutionary situations are difficult, complicated and normally not one-size-fits-all."

Mirow spoke Friday as tens of thousands of youth-led activists descended again on Cairo's Tahrir Square to demand that the military government roll back Mubarak-era security rules and vent their anger against recent Israeli action on its border with Egypt, in which five Egyptian border guards were killed. The protests led to at least three deaths and the evacuation of the Israeli embassy.

In a move that has raised doubts about the transition to a more democratic form of government, the Egyptian military has declined to allow Western organizations to observe parliamentary elections scheduled for November, calling such observation a violation of national sovereignty.

Mirow said the EBRD will stick to its political mandate, but said it will also be aware of the consequences of withdrawing from countries if progress is not smooth.

"There will be difficult judgements to make in situations that won't always be clear-cut," Mirow said. "Any withdrawal or non-engagement could create new disappointment, make life more difficult for people but also further deteriorate political developments."

Mirow said there are many similarities between the countries embarking on political change in north Africa in 2011, and those that began that process in 1989. But there are also differences, and one may be key for the EBRD.

"For many who have contributed to changing the political situation, capitalism is not such an overall convincing idea as it was for many who played that role in central and eastern Europe," Mirow said.

The G-8 and other supporters of the Arab Spring are hoping that economic and political change will go hand in hand, with economic growth, and particularly the creation of more and better jobs for an expanding and young population, will help underpin support for more democratic forms of government.

But generating growth will be a challenge at a time when the global economic recovery is faltering, with nearby Europe in particular facing a host of major challenges.

In a statement Saturday, the G-8 laid out some of the immediate problems facing the Arab Spring nations, while pledging that total aid from development banks, including the EBRD, would total USD38 billion through 2013, an increase from the USD20 billion pledged at a meeting of G-8 leaders in Deauville in May.

"Some countries have been experiencing a drop in economic activity, including tourism, and investment flows, while also suffering from high and volatile commodity prices and increased domestic social pressures," the G-8 said.

Mirow said that while conditions may not be at their most promising right now, the long-term outlook was more encouraging.

"We should avoid being overly nervous," Mirow said. "No region will be insulated should another downturn be unavoidable. On the other hand, this new region offers opportunities as well. It has a growing, young population striving to be part of the modern world. Central Europe has taught us to look at it (transition) in terms of decades and generations."

Mirow said that the legal process that will allow the EBRD to invest in Egypt, Morocco, Tunisia, Jordan and possibly other nations is continuing, with the first transactions likely in the second quarter of next year.

In its statement, the G-8 said it was "determined to ensure that this extension becomes effective as quickly as possible" and called for the "rapid" establishment of a transitional facility that would allow the EBRD to start investing before the formal ratification process is complete.

The G-8 also said it "stands ready" to help Libya's new government rebuild its economy.

Mirow said the EBRD may invest in Libya, although there have yet to be any contacts between the development bank and the new government.

"Should the international community ask us to engage with Libya, we can do so," he said.

Mirow said the development bank will be able to invest EUR2.5 billion annually in its new countries of operation "some few years from now," and stressed he didn't want to create higher expectations than the EBRD can deliver on, given that it has pledged not to ask its 61 government shareholders for any more capital or cut back on its investments in eastern Europe and the former Soviet Union.

"We will not be the institution with the big figures, but rather the one that tries to make a difference in terms of the private sector," Mirow said.

-Paul Hannon, Dow Jones Newswires, +44 20 7842 9491, paul.hannon@dowjones.com

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10-09-11 1400GMT