by Stephany Griffith-Jones
In the wake of the 2007/09 Global Financial Crisis, support for National Development Banks (NDBs) as well as for Multilateral Development Banks (MDBs) grew worldwide. A basic reason is the private financial system is pro-cyclical, lending too much in booms, and rationing credit during crises.
Furthermore, the private financial sector often is incapable to provide adequate finance to small firms, and deliver sufficient funding for innovative companies and infrastructure. It insufficiently supports investment urgently required for transformation towards more dynamic, inclusive and sustainable economies.
The failure of private financial markets to deliver adequate funding prompted many governments, especially progressive ones, to rely more on NDBs. They are an important feature of financial sectors of most developed and middle-income countries, especially the most successful ones like China, Germany, India and South Korea.
It is progressive parties that most clearly recognize the where the so-called “Invisible Hand” fails, like in financial markets, it has to be complemented by the “Visible Hand” of governments. This will help ensure the stable and long-term financing is available to promote sustainable growth-compatible with the limits of the planet- and dynamic growth, that increases productivity and thus generates sufficient well-paid jobs.
During and after the global financial crisis, the World Bank and regional MDBs sharply increased financing.
The largest MDB, the European Investment Bank (EIB), the bank of the European Union governments, saw its paid-in capital doubled, and its role increased by the Junker Plan, also called EFSI which will generate €500 billion of additional loans in 2015-2020, and an equivalent amount of investment. It is planned that in the 2020-2027 period, the successor program, InvestEU will generate up to €650 billion of additional investment. It should be emphasized that it was the progressive political parties, which gave the initial impetus and political support for the doubling of the capital of the EIB, and for creating the Juncker Plan
The recent creation of two large MDBs, the Asia Infrastructure Investment Bank and the BRICS’s New Development Bank, also reflects the shift in the development finance paradigm towards a more balanced public-private mix. A number of European countries recently created new NDBs, whilst others expanded existing ones.
The scale of existing NDBs is very large, and therefore has a large impact, in particular in emerging economies. The level of total assets of NDBs reaches approximately US$5 trillion in 2015.
Our research defines five crucial roles these banks play in the development process: (i) counteracting pro-cyclical behavior of private financing, by providing counter-cyclical finance; (ii) promoting innovation and structural transformation, essential for economic growth; (iii) enhancing financial inclusion; (iv) supporting financing of infrastructure and (v) supporting environmental sustainability, particularly combatting climate change.
National development banks were very clearly counter-cyclical in the wake of the global financial crisis. According to World Bank data, NDBs increased their lending from US$ 1.16 trillion to $1.58 trillion, – by 36% between 2007 and 2009; this increase in lending in hard times was far higher than the increase in private bank credit in the same countries.
Many development banks, though having paid-in capital provided by governments, raise their funds on national and international private capital markets. Typically, their loans are also co-financed by private agents. Leveraging public resources with private ones has been especially valued in contexts of limited fiscal space, typical during and after crises.
It is important that what should be promoted are “good” development banks. This implies institutions with clear mandates, are well governed, so they fulfill their functions well. Their main objective is maximize their development impact rather than profits, though assuring minimal returns.
In a just published book, where we analyze NDBs in seven countries, including German KfW, we conclude that overall these banks tend to be successful at what they do. They have been broadly efficient development policy instruments in the various countries studied, helping overcome major market failures, and doing so in a flexible way over time. Furthermore, they have played important roles in funding national development strategies.
NDBs have been innovative in several aspects. They have gone into new activities, supporting innovation and entrepreneurship. For example China’s CDB, and Germany’s KfW have supported technological innovation; others like Chile’s CORFO have supported entrepreneurship.
NDBs played an important role supporting key new sectors, like renewable energy and energy efficiency. For example, German KfW was initially the sole lender to private companies investing in solar energy in Germany; later private banks followed. In China, CDB, both helped design broad policy to encourage investment in renewables, especially solar, as well as playing a major role in initial funding. Germany and especially China have been major actors in promoting the spread of solar energy world wide, at increasingly competitive cost with fossil fuel energy.
NDBs have developed new instruments, such as guarantees, equity (including venture capital) and debt funds, as well as new instruments for financial inclusion, like correspondent stores.
Expanding the role of NDBs in EU countries that have them, or creating them in those that do not, would help create, therefore, a financial system that better serves the needs of the real economy and society. Progressive parties and governments will promote the creation and expansion of good development banks, so they can contribute to fund a more dynamic greener and fairer economy, for the many not the few.
The Future of National Development Banks, co-edited by Stephany Griffith-Jones and José Antonio Ocampo, was published by Oxford University Press.
Stephany Griffith-Jones is an economist researching and providing policy advice on capital flows, macro-economic management of capital flows in developing and transition countries and reform of international financial architecture from a development perspective. Led several major international research projects on international financial and macro-economic issues with networks of senior academics, policy-makers and bankers from developed and developing countries. Published widely, having written or edited eighteen books and numerous journal and other articles. Has advised many international organisations (the European Commission, the World Bank, various UN agencies (UNDP, UNICEF, DESA, ECLAC), IADB and several governments and Central Banks, including the UK, Chilean, Swedish, Tanzanian, Brazilian and Czech. Organised and directed several major international conferences and workshops (in collaboration with IMF, World Bank, the United Nations, Commonwealth Secretariat and others).