Why the World Needs National Development Banks

by Stephany Griffith-Jones and José Antonio Ocampo – May 15, 2019

Project Syndicate

By counteracting major shortcomings of the private financial sector, national and multilateral development banks play a crucial role in supporting economic growth. Countries that already have national development banks should aim to expand their role, while others should consider establishing them.

Support for national and multilateral development banks has grown worldwide in the decade since the global financial crisis. And the continued success of national development banks (NDBs), in particular, will be vital to achieve more sustainable economic growth in the future.

Development banks help to counteract the pro-cyclical nature of the private financial system, which lends too much in booms and rations credit during crises. The private sector also often fails to provide enough financing for small and innovative companies and infrastructure projects. Nor does it support enough of the investments in innovative activities, credit to small producers, and environmental projects that are urgently needed to make economies more dynamic, inclusive, and sustainable.

Although governments provide their paid-in capital, development banks raise funds on national and international capital markets. Moreover, these banks’ loans are typically co-financed by the private sector, which is especially helpful for governments facing budget constraints during and after economic crises.

The World Bank and regional multilateral development banks (MDBs) sharply increased their lending during and after the 2007-2009 financial crisis. The European Investment Bank, the largest MDB, doubled its paid-in capital and is playing a central role in implementing the European Commission’s so-called Juncker Plan, which aims to generate €500 billion ($561 billion) of additional investment across the European Union by the end of 2020. In addition, the recent establishment of two other large MDBs – the Asian Infrastructure Investment Bank and the New Development Bank established by the BRICS countries (Brazil, Russia, India, China, and South Africa) – will contribute further to a more balanced public-private mix in development finance.

The financial crisis also prompted some European, African, and Asian governments to establish new NDBs, and other countries to expand theirs. As a result, the total assets of NDBs reached approximately $5 trillion in 2015. Today, they are an important feature of most developed and middle-income countries’ financial sectors, notably in China, Germany, India, and South Korea. And large NDBs can have a big impact, especially in emerging economies.

Unsurprisingly, academic researchers are finally starting to pay more attention to NDBs after a long period of neglect. They are looking to understand how these banks operate, which instruments, incentives, and governance structures work best, and how such institutions interact with the private sector and government policies.

Read full article online at Project Syndicate (subscription may be required).