Policy Norms, the Development Finance Regime Complex, and Holding the European Bank for Reconstruction and Development to Account

Policy Norms, the Development Finance Regime Complex, and Holding the European Bank for Reconstruction and Development to Account Susan Park University of Sydney Abstract Created to facilitate the transition of economies of Central and Eastern Europe towards democracy and the free market, the European Bank for Reconstruction and Development (EBRD) is a regional institution in the development finance regime com plex. This article examines how the EBRD’s independent accountability mechanism (IAM) emerged and changed to demon strate how policy norms filter through regime complexes. This is important because new ideas can change behavioural expectations and institutional practices across a complex. Tracing where the idea originated from and how it took hold is therefore central to understanding member state interests, the EBRD’s response considering its organisational preferences, and how the policy norm solidified through inter-institutional learning. This deepens our understanding of the development f inance regime complex in two ways: first, it, shows how ideas can filter through to seemingly independent institutions via member states, bureaucrats, and stakeholders. This supports the argument that the development finance regime complex is coherent with increasingly consistent rules and obligations. Second, it reminds us not to reify states; while they demanded institutional change nonstate actors influence what constitutes appropriate behaviour for development financiers. Policy Implications • Member states must ensure that development financiers mitigate the negative impacts of development on beneficiaries. • Regional development finance institutions like the EBRD should be consistent with the World Bank and the International Monetary Fund in providing recourse for people affected by their activities. • Reviews of the institutional design of oversight mechanisms like the Independent Accountability Mechanisms, can improve their consistency across development finance. • It is essential that non-state actors be part of the review process of oversight mechanisms like the Independent Account ability Mechanisms. The development finance regime complex is one of coher ence (Held and Schmidke, 2019), competition (Rana and Pardo, 2018), and inefficient duplication (Kellerman, 2018). Central to the development finance regime complex is the World Bank and the International Monetary Fund (IMF), with an increasing number of development finance institutions operating at the regional and sub-regional levels (Kellerman, 2018). Little analysed is the European Bank for Reconstruc tion and Development (EBRD), which was created in 1991 to facilitate the transition of economies of Central and Eastern Europe (CEE) towards democracy and the free market (Weber, 1994). The multilateral development banks (MDBs) were modelled on the World Bank, but the EBRD has a dis tinct political and economic mandate, with a provision to lend 60 per cent of its loans to private sector operations. Nevertheless, it contributes to the coherence of the devel opment finance regime complex through its fivefold mis sion: mobilising capital to promote private and © 2020 University of Durham and John Wiley & Sons, Ltd. entrepreneurial activities; fostering productive investment; providing technical project assistance; stimulating capital markets; and supporting viable projects (EBRD, 1990). While the EBRD has largely flown under the radar of scholarly attention, it is an institution worth investigating: it is a major contributor to fostering development in Central and Eastern Europe; it has expanded its geographical scope to include the Middle East and North Africa after the Arab Spring; its capital was boosted in 2009 in light of the Global Financial Crisis; and both China and India have joined as donors. This article examines the emergence and restructuring of the EBRD’s independent accountability mechanism (IAM), to document how a policy norm spreads and solidifies within the development finance regime complex. A regime com plex is as ‘an array of partially overlapping and non-hierar chical institutions governing a particular issue area’ (Raustiala and Victor, 2004, p. 279). The literature on the development finance regime complex has focused how Global Policy (2021) 12:Suppl.4 doi: 10.1111/.12881 Policy Norms and the EBRD 91 states facilitate regime shifting for their own interests (Held and Schmidke, 2019; Henning, 2019), with some arguing that ideas, networks, and endogenous feedback loops within the regime reinforce its coherence (Fioretos and Heldt, 2019). Supporting the latter argument, this article shows how states spread policy norms within the regime complex and work with nonstate actors to solidify it. This is impor tant because new ideas can filter through regime com plexes, changing behavioural expectations and institutional practices. I use a constructivist analysis to examine how an independent and relatively autonomous institution, the EBRD, took up ideas about the importance of being held accountable to those they affect. This goes beyond simple explanations of the EBRD reacting to member states’ demands, which do not account for why donors demanded the policy norm’s establishment, nor how the EBRD chose to implement and improve it. A policy norm is defined as ‘shared expectations for all relevant actors within a commu nity about what constitutes appropriate behaviour, which is encapsulated in (Fund or Bank) policy’ (Park and Vetterlein, 2010, p. 3). Tracing where the idea originated from and how it took hold is therefore central to understanding member state interests, the Bank’s response considering its organisa tional preferences, and how the policy norm solidified through inter-institutional learning. This deepens our under standing of the development finance regime complex in two ways: first, it shows how ideas can filter through seem ingly independent institutions via member states, bureau crats, and stakeholders. This supports arguments that the development finance regime complex is coherent with increasingly consistent rules and obligations. Second, although states demanded institutional change and institu tions sought to circumscribe it, nonstate actors can influ ence what constitutes appropriate behaviour for development financiers. This qualitative research is based on 23 in-depth interviews with EBRD staff including former and current accountability officers, former executive directors, as well as former US officials and environmental activists between 2009 and 2017. This is backed by official EBRD publications and accountability mechanism annual and case reports. The following section situates the EBRD within the devel opment finance regime complex, and debates over the dri vers of regime complexity and institutional effectiveness. I argue that more research is needed to show how regime complexes become coherent. A constructivist analysis can show how rules and obligations become more consistent by tracing how policy norms spread and solidify, changing behavioural expectations for the MDBs and their institu tional practices. The second section examines how the EBRD’s donors took up the policy norm not in reaction to EBRD activities, but from the interests of the United States that all the MDBs should have IAMs to provide recourse to people affected by the projects they finance. The US stance in the EBRD only makes sense if examined consider ing its engagement with stakeholders and other MDBs in the regime complex. The third section documents the EBRD’s implementation of the policy norm, creating the IRM in 2003 to accord with its organisational preferences. It promoted a highly technical, compliance oriented, over sight mechanism under management control with minimal outlay, which made it difficult for project-affected people to access. The fourth section analyses how the policy norm solidified over time through inter-institutional learning where periodic reviews of the mechanism enabled non state ‘Accountability Experts’ and non-government organi sations (NGOs) to apply normative pressure to make the IAM independent, solidifying the policy norm and creating consistent rules and obligations across the development f inance regime complex. Policy norms and the development finance regime complex Global governance is crowded with institutions that increasingly overlap as they seek to provide the means for states to cooperate and regulate the international system. International regimes are complex ‘because of the coexis tence of rule density and regime complexes’ (Alter and Raustiala, 2018, p. 333).1 This has raised questions as to how institutions interact, whether this creates institutional competition, duplication, fragmentation, and ultimately, contributes to greater institutional effectiveness. Scholars argue that the proliferation of institutions is being driven in part by coalitions contesting multilateralism, or ‘when states and/or nonstate actors either shift their focus from one existing institution to another or create an alternative multilateral institution to compete with existing ones’ (Morse and Keohane, 2014, p. 387). Contested multilateral ism is evidenced by regime shifting between institutions to better enable actors to achieve their interests, for example as states move between global and regional institutions in response financial crises (Henning, 2019). It may also be evident through competitive regime creation or establish ing new institutions to challenge the status quo. The rise of the Asian Infrastructure Investment Bank (AIIB) and other development finance institutions driven by rising powers have been viewed as competitive regime creation arguably because they were borne of discontent with Western dominated institutions (Wang, 2015), and challenged their dominance (Weaver, 2015). The new insti tutions create competition that could encourage forum shopping (Henning, 2019), and fragmentation through inconsistent rules and obligations (Cooper et al., 2008). Yet the governance of the AIIB and New Development Bank reveals complementarity with the World Bank and the IMF (Held and Schmidke, 2019), and their operations demon strate that they are engaging in ‘healthy’ competition (Rana and Pardo, 2018). In other words, while there may be competitive regime creation occurring, with some degree of duplication, fears of fragmentation and ineffec tiveness may be overstated.2 In this article I investigate how the EBRD came to adopt rules and obligations consistent with other MDBs (Park, 2017), as a means of demonstrating how coherence is pro duced within the development finance regime. This Global Policy (2021) 12:Suppl.4 © 2020 University of Durham and John Wiley & Sons, Ltd. 92 Susan Park supports institutionalist research that points to the role of ideas, networks, learning and endogenous feedback loops that occur within the development finance regime complex (Fioretos and Heldt, 2019). It also supports the importance of state action driving institutional inter-play (Henning, 2019), while recognising that both state and nonstate actors create behavioural expectations and institutional practices. I explicitly document this in relation to the EBRD’s adoption and strengthening of its IAM. By tracing how ideas are taken up by the EBRD and turned into policy, a constructivist anal ysis documents how ideas change behavioural expectations as to what constitutes appropriate behaviour for the bank (management and staff), and change institutional practices in the form of new units, new job positions, and new report ing activities. This is important for three reasons: first, it demonstrates how states can drive the creation of policy norms and solidify it with bureaucrats and stakeholders. This upholds research on the role of nonstate actors shaping institutions (Johnson, 2014). Second, policy norms change over time (Park and Vetterlein, 2010). I therefore investigate how the EBRD created and improved its IAM to become more consistent with rules and obligations across the regime complex to independently hold the MDBs to account. Finally, the focus on the accountability policy norm reveals how human rights (in this case, the right of recourse for people adversely affected by an MDB-financed project) can be made socially appropriate for the MDBs, while the latter continue to resist engagement with both the human rights regime (Clapham, 2006) and environmental regimes (Park, 2020). The next section details the EBRD’s similar operations and governance structures to the other MDBs, before tracing how the accountability policy norm spread and solidified. The EBRD and the development finance regime complex The regional development banks, like the EBRD, are func tionally similar and were designated to provide additional f inancing within their regions beyond the World Bank and the IMF (Park and Strand, 2016). From its inception the EBRD was given both a political and economic mandate to spread liberal democracy and capitalism across Europe (EBRD, 1990; Weber, 1994). However, once operational the Bank con formed to the apolitical norms of the more established MDBs with its lending operations focused on meeting tech nical economic and financial criteria (Stein, 1996). Like the other MDBs, the EBRD primarily dispenses loans, equity investments, and guarantees to the private sector, as well as to municipalities and publicly owned entities. Its neoliberal economic prescriptions work with the advice promoted by the World Bank and the IMF but specifically tailored to CEE (Shields, 2016). It uses its ordinary capital resources drawn from the Bank’s capital for its operations, as well as facilitat ing regional and thematic multi-donor trust funds. The Bank has grown over time: from its initial investment of nearly 500 million European Currency Unit (ECU) for 16 projects in 1991 to invest its largest amount ever in 2017: 9.7 billion euro for 412 projects (EBRD, 1992: 10, 2018, 4).3 This compares with the AIIB, who committed US$1.9 billion United States dollars (USD) for just 15 new projects in 2017 (AIIB, 2018a; see Table 1). In terms of its operations, the EBRD is much smaller than the largest MDBs, the European Invest ment Bank (the European Union’s investment bank) and the World Bank (see Tables 1 and 2; see Baroncelli, this issue). Of the EBRD’s 2017 investments 71 per cent went to the private sector (EBRD, 2018a). One third of these were in the f inance sector, followed by infrastructure, diversified corpo rate sectors, and energy (EBRD, 2018b). Currently it operates within 39 states and territories. In terms of governance, the EBRD is located in London with over 2,000 multinational staff comprised of investment bankers. It is a regionally focused organisation with 67 member states and two institutions as members, the Euro pean Union and the EIB. The EBRD’s regional focus has not impeded a strong representation of non-regional members, foremost the US but also Japan. China joined in 2016 and India in 2018 as donors. Membership is determined by the amount invested, a governance model that emulates the World Bank’s ‘one dollar, one vote’ system. To become a member, states provide ‘paid-in’ capital and ‘callable’ sub scriptions with the latter held in reserve to cover lending risks (Mistry, 1995). The MDBs raise additional capital via loan repayments, interest, and international capital markets. The EBRD’s governance system means there is an unequal distribution of shares in the Bank, with shares translating into voting power. The US is the largest shareholder (10.1 per cent), which is marginally larger than the equal second shares held by France, Germany, Italy, Japan, and the United Kingdom (8.6 per cent each). The Group of Seven (G7) have the largest shares, thus controlling the direction of the Bank (see Table 3). This has remained stable since the EBRD’s inception, with recipient shareholders holding much smaller Table 1. Comparing MDB loan commitments, 2017 FY 2017 Commitments (US$m) World Bank Group* African Development Bank Group Asian Development Bank** Inter-American Development Bank Group*** EBRD AIIB**** European Investment Bank 61,783 8,824 28,899 13,869 11,625 1,947,528 100,684 Notes:: All figures are taken from the MDB annual reports and have been converted into United States dollars. *Includes IBRD, IDA, IFC, Recipient-Executed Trust Fund (RETF) commitments, and MIGA gross issuance. **Total commitments, including technical assistance, cofinanc ing and trust funds. ***Loans and guarantees (including ‘other funds’), grant financ ings and the Multilateral Investment Fund. ****Figure may include 2016 commitments. All data taken fro