FROM THE OFFICE OF PUBLIC AFFAIRS

It is an honor to be with you again in London and to celebrate the Tenth Anniversary of the European Bank for Reconstruction and Development. I want to extend my sincere gratitude to our hosts, the Right Honorable Clare Short and the UK Governor and Right Honorable Gordon Brown, to Minister Laurent Fabius, Chairman of the Board of Governors, and to President Jean Lemierre for their warm hospitality.

Ever since the first proposals to create the EBRD began to circulate in 1989, the United States has been an enthusiastic and active supporter of this important institution. It is worth remembering how Secretary Nicholas Brady and his Treasury team in the first Bush Administration worked constructively alongside our European friends during 1989 and 1990 to create a whole new kind of institution dedicated to the problems of transition economies. It was a strong founding conception. Now more than ten years later a new team at Treasury under the leadership of Secretary Paul O'Neill and President George W. Bush looks forward to continuing our active participation. Indeed, in a speech in New York last Thursday, Secretary O'Neill reiterated the importance of all the international financial institutions in today's economy.

This tenth anniversary also affords us the pleasure of welcoming the delegation from EBRD's newest member country, the Federal Republic of Yugoslavia. We hope that EBRD will be able to support the Federal Republic's economic and political transition to a free, peaceful and prosperous market democracy.

As we look back on the Bank's history, we should acknowledge the strong founding conception, but also a slow and, at times, rocky start. I remember well the early years when cumulative operating expenses exceeded the loan portfolio and when Bank officers had too hard a time focusing on transition impact rather than risk avoidance.

Overall, we should marvel at the progress made by both the Bank and the region, even as we acknowledge the further progress that might have been achieved with different regional leadership, policy and program choices. We recognize that much of the Bank's progress has resulted from the strong leadership provided by Presidents Jacques de Larosière and Horst Köhler. President Lemierre and Vice President Charles Frank continue in that tradition.

Today we can observe both remarkable and disheartening variations in country performance. That reform works is clear; countries that have achieved the deepest reform are performing best. But for all of the countries in the region - even the best performers -- there remains much work to be done.

The countries of Central Europe and the Baltics have, for the most part, established themselves on a path of growth and development. Having completed much of their progress through transition, a number of them are now members of the OECD and moving steadily toward entry into the European Union. Most importantly, they have greatly improved the lives of their people.

At the other end of the spectrum are a number of countries where there has been little meaningful reform, where poverty remains high, where political developments are troubling, and where economic conditions remain bleak.

Between these extremes, the slowing of Russia's growth this year has caused it to focus on the need for further reforms. We encourage Russia to take key steps to improve its investment climate by enforcing the rule of law, improving corporate governance, attacking nonpayments and barter and strengthening the banking system.

For Southeastern Europe, this is a time of potential. The improved political situation brings renewed possibility of post-conflict recovery and sustainable growth, provided that authorities focus on putting in place the measures needed to support private sector development.

The challenge for Bank shareholders, in light of the efforts and results to date, is to define and delineate the proper continuing role for the EBRD. Our Directors began this discussion as part of the Capital Resources Review and settled on a reasonable path for the next five years.

We believe the increasing disparity in country performance suggests that the Bank needs to intensify its focus on early transition economies. The imperative is to deploy the institution's resources in a focussed, effective and justifiable manner, where they can make the greatest difference in furthering the Bank's mission.

The Bank can effectively pursue its shift to early transition economies by improving the focus on transition objectives and results. The transition impact of a project should be explicitly described and, as much as possible, quantified. In this manner, the Bank can accurately and meaningfully incorporate lessons learned into the design of future projects. We also repeat our belief that the Bank's activities are not additional when they compete with available private capital. Rather, the Bank should aggressively seek projects with high potential transition impact, where the Bank's capital and expertise are truly needed to bring a project to fruition.
Achieving meaningful transition impact for us suggests:

• Quality, not volume
• Strong conditionality
• Lending to small and medium-sized companies
• Projects that promote energy efficiency
• Municipal infrastructure that improves people's lives and health
• Coordination with other IFIs, particularly on country strategies and large enterprise restructuring

These suggestions may not be altogether new, but we urge renewed intensity on translating them into operational reality.

Finally, I would like to highlight a unique aspect of the Bank. In designing this institution in 1989 and 1990, founding governments clearly intended it to be of a character different from that of other international financial institutions. Thus, the Articles of Agreement state the purpose of 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 multi-party democracy, pluralism and market economics."

There has been great progress in opening the economies of the region to market principles, and many countries have demonstrated a commitment to multi-party democracy. However, there has been a notable lack of progress - and even backsliding - in some member countries in moving toward the establishment of truly democratic forms of government. The EBRD's founders were clearly committed to both the market and political mandates.

This commitment will be tested over the next several years, and in some ways the challenge to the EBRD may be greater than the financial crisis in Russia two years ago. The United States will stand strongly behind the founders' intent and we call on all the Governors to take this responsibility seriously.
Thank you.