FROM THE OFFICE OF PUBLIC AFFAIRS

Governors, Ladies and Gentlemen:

It is a pleasure to be in Riga for the Ninth Annual Meeting of the EBRD. I want to thank Minister Niinisto as chairman of the Board of Governors, and Charles Frank, who has once again assumed the mantle of Acting President of the EBRD. I join others in welcoming the Mongolian delegation, and congratulate Mongolia on joining our membership, dedicated to democratic and market-oriented development. I also want to thank to tthe Latvian authorities and the people of Riga for their hospitality.

I want to convey the appreciation of my country for the leadership former president Horst Koehler provided the EBRD and in particular for helping to focus the Bank's operations on the critical issues of small business development, governance and broader improvements in the investment climate.

As the Bank enters its tenth year, we face a very different region, a different transition challenge and a different institutional challenge than we did at the EBRD's inception. The increasingly diverse task of transition also prompts more fundamental questions about the Bank's unique role in the region and among the international financial institutions going forward.

During the past year, most countries in the region have recovered from the fallout of Russia's crisis in 1998 and the impact of Kosovo in 1999. This year, for the first time in the Bank's history, every recipient member country is expected to achieve positive GDP growth. Nonetheless, the pace and depth of the recovery are uneven. The gaps in performance across the region are increasing, and the scale of human deprivation in many countries remains unacceptable. Countries face significant challenges, even when they have sustained impressive reforms and even where the optimism surrounding the region's recovery and potential EU accession has led to a virtuous circle of lower borrowing costs.

The past decade has demonstrated that economic reform and restructuring is a more complex, time-consuming, and difficult process than many had imagined.

In the early 1990s, the challenges of macroeconomic stabilization, the loss of traditional trade ties, and the lack of clear price and exchange rate signals were the focus of attention throughout the region. With the help of the international financial institutions, a number of countries have had remarkable success at meeting these challenges. Increasingly, structural reforms, such as strengthening governance and the rule of law, developing capital markets and financial intermediation, boosting private sector growth, and building institutions to regulate a market economy, have come to dominate the policy agenda.

The different paths that countries have taken in the past ten years have led to a greater diversity of challenges they face today:

• Today, over one-third of the EBRD's borrowing membership, measured as a share of GDP, have access to private capital markets at sovereign spreads of less than 300 basis points above Treasuries. Yet as we look south and east, other countries, particularly in the Caucasus and Central Asia, have very limited capacity to borrow in international capital markets.
• Some regional members with strong investment climates, such as the Baltic states, have attracted sizable foreign investment, cumulatively exceeding $500 per person, or as high as 9% of GDP. Poland, Hungary, and the Czech Republic have collectively received more than $50 billion in net FDI inflows since 1989. Other countries with better resource endowments have attracted minimal foreign investment of less than $100 per person, or 1% of GDP, and are defined more by the scale of flight capital that has left the country and remains reluctant to return.
• The economies of Central Europe have made substantial progress in transition, and are on the path of convergence with the structures and performance of their West European counterparts. These governments' commitments to liberalization and reform over the last decade have dramatically expanded the productive potential of their economies, improved the standard of living of their citizens, and attracted high levels of foreign investment.
• In Southeast Europe, in contrast, most countries are lagging behind in the transition towards a market-based economy. More consistent implementation of macroeconomic stabilization programs and deeper, faster-paced structural reforms are clearly needed to redress the growing divergence with Western and Central Europe.
• Russia has recovered strongly from the August 1998 crisis in large part because of high oil prices and the effect of the huge real depreciation of the ruble. The challenge for the new Russian government will be to build on these gains by implementing key structural changes in areas such tax reform, fiscal federalism, social sector reform, trade liberalization, banking reforms, attacking non-payments in barter, and strengthening the rule of law.

This complexity and diversity of its members' circumstances shapes the institutional challenge before the EBRD today.

The crucial task before the Management and the Board is to identify and target those geographical and functional areas where the EBRD can have maximum transition impact, shifting resources from activities where the impact is more limited. I want to suggest five areas where we believe the Bank should focus in the near term to meet this challenge:

• Targeting projects that yield maximum transition impact;
• Supporting improvements to the policy environment;
• Shifting operations to areas where the EBRD is most needed;
• Supplementing, not supplanting, the private financial markets.
• Ensuring that its own practices set the highest standardsbeyond finance;

First, the EBRD is uniquely placed to help create the success stories that can catalyze the transition process. We would like to see the Bank devote significantly more resources to enable it to bring financial and intellectual capital to bear in building new markets from the ground up. New initiatives in micro-, small, and medium size enterprise development are well suited to this task. We encourage the EBRD to use this engagement to better integrate the legal transition and policy dialogue with specific financing proposals. In this connection, I am pleased that the United States is in the final stages of establishing a fund at the EBRD to support SME development linked to improvements in the investment climate, for which President Clinton has pledged $50 million. We would welcome the contributions of other donors.

Second, we believe it is essential that project-specific finance be accompanied by strong conditionality to improve the investment climate through improving corporate governance, market structures and regulatory frameworks. Where countries are willing to accept the challenge of reform, the Bank should be ready to support the legal transition and cooperate actively with governments and other organizations to use and shape laws and institutions to serve the needs of market-oriented societies. We look to the Bank to ensure that its specific operations make full use of the wide range of reform opportunities they present.

Third, perhaps the most important operational challenge for the Bank is to sharpen its focus on countries where its financing and expertise are most needed, and where transition opportunities are high. In areas where there is already good access to private capital, the Bank should be much more selective in what it finances; where that access has not yet been won, the Bank should intensify its efforts. The advanced transition countries, many on an accession path to the European Union, are clearly able to rely increasingly on private finance. We should welcome this success and move them to graduation, deploying the Bank's limited resources instead where they are both more clearly needed and more likely to have real impact. We favor a more ambitious set of aspirations regarding scaling back in the advanced countries and scaling up in countries less far along in the transition process.

Fourth, we think the Bank needs to be more selective in the choice of projects it supports to ensure that it is truly adding value to the region rather than simply competing with the private sector. The challenge of supporting rather than supplanting private finance is much simpler aspirationally than it is operationally. Clearly, it means rigorous selectivity in the choice of projects, which means in turn ensuring that the "additionality bar" is set appropriately high. And clearly it means very close cooperation with private sector investors and financiers, and careful attention to their actions and plans. But it also means that the Bank's own products need to be consistent with this objective and structured accordingly. In particular, we believe that loan pricing must be used as a tool to discourage countries and companies that have access to private capital from seeking funds from the Bank.

Throughout the MDB system, pricing must create incentives for lower risk borrowers with the best prospects for market access to make the most of such access. MDB-supported financing must be targeted at those for whom the prospects of market access are minimal to non-existent. In this way, the Bank can put its money where it matters and continue to take risks others won't, achieving maximum impact for every dollar of investment.

Finally, we look to the EBRD, as we do the other multilateral financial institutions in which we have invested, to be an active and consistent instrument of progress in promoting issues of transparency, governance and strengthening civil society. They fundamentally define the Bank's unique niche in a system crowded with institutions and, for the most part, well-stocked with available finance. Strong markets producing equitable results cannot grow and flourish where there is a weak commitment to openness, pluralism and democracy.

This core responsibility applies not only to the standards the Bank adheres to in its projects, but also to the standards it adheres to at home. For this reason, we look forward to a new information disclosure policy that we expect will make the EBRD a model of transparency and openness. We believe strongly that it should include clear and simple procedures to ensure that interested people have an appropriate voice in the work of the institution. And we believe strongly that such a policy can only strengthen the institution and deepen its influence.

The appointment of a new Presidentsuccession in leadership and the upcoming Capital Resources Review give us the opportunity to assess the Bank's work and mission going forward. The formidable challenges remaining across this diverse region make a compelling case for a strong IFI role, and a strong role for the Bank,. But, this review must take a hard look at the future operating environment of the Bank, and ask some hard questions about its role in the region and in the IFI system. These are some of the key questions that should frame and guide the Review:

• How should the Bank's role and operations change as the challenge in the region shifts from issues unique to transition to development problems common to emerging market economies worldwide?
• What unique contribution does the EBRD bring to this diverse and changing environment, relative to other international financial institutions?
• As the Bank's portfolio shifts to areas of highest need and highest impact, what is the impact on its how will its financial base be effected, and how should it be addressed?
• In an environment where the capital base of the institution is likely to be constrained, what options, such as selling a portion of its portfolio, can the Bank use to create room for responding to its borrowers' needs going forward?In this context, we should examine transferring parts of the Bank's portfolio to the private markets.
• How do we strengthen and implement the Bank's graduation policy to provide incentives for countries and firms with access to borrow from the market rather than the EBRD?

We believe there is a strong case to be made for the Bank and its mandate in furthering transition. But as the needs of the region change, so must the EBRD. When the EBRD was created in 1990, we structured it as a unique institution to promote private-sector led development. The past ten years have demonstrated in this region, as well as around the world, that private sector-driven growth provides new jobs, allowing governments to use its resources to address critical social and environmental challenges, as they try to provide a better life for their citizens. In this sense, the rationale for the EBRD remains as strong as ever. But, where it succeeds, its role will naturally diminish. We look forward to working with Management and shareholders to develop an institution that remains true to its mission in a rapidly changing environment.