By Ross Jackson/Staff Reporter
Development banks are becoming more “fashionable”, as they provide valuable opportunities to lower inequality and unemployment, help economies mitigate financial crises and combat climate change, a panel of experts have said at a special session held on the sidelines of Unctad XIII. João Carlos Ferraz, vice president of the Brazilian Development Bank, said that in every country with an active development bank, these institutions have “expanded lending” and “irrigated the economy in a significant way when the private sector pulled the brakes”. These measures have “proved instrumental in fighting off the crisis”. Ferraz also said that “the way out of crisis is growth, and investment is behind the process of growth”.Lutz-Christian Funke, senior vice president for management affairs & communication at KfW, a German development bank, echoed this idea saying KfW responded to the crisis with debt financing for SMEs as well as large companies, and is recognised by economists as having saved as many as one million jobs. He also said that it is important to invest during times of crisis in order to remain competitive in the market once the crisis has passed.
Ferraz commented that development banks’ ability to finance infrastructure such as roads, as well as “new contemporary public goods” and the “public goods challenges that we have nowadays” such as environmental protection, have led even “suspicious” countries like the US and UK to discuss the feasibility of setting up development banks. He admitted that development banks are not a panacea that will solve all problems, and they must remain profitable year after year while balancing their role as a protagonist in the society and economy. Development banks must co-evolve with the country, and be flexible to adapt over time to the changing needs of society.Jayati Ghosh, professor at the Centre for Economic Studies and Planning in the School of Social Sciences at Jawaharlal Nehru University, said that development banks can afford to take a long-term view, and can provide investment in the development of technology and knowledge, even in small countries and markets. She noted that some countries at Unctad have said that technology transfer from developed to less-developed countries should not even be discussed, although it is possibly one of the most significant ways to address issues such as healthcare, equality and climate change. For Ghosh, resistance to such ideas emphasises the need for developing technology and capacity locally, which has benefits throughout the economy and society and is a worthwhile investment for any development agency.Development banks are becoming more popular because they have been incredibly successful at filling gaps in the market that the private sector will not cater to. German development bank KfW had a total balance sheet of €494.8bn at the end of 2011. KfW supports SMEs, business founders and startups, as well as more traditional development bank objectives of financing infrastructure and other public goods. KfW has also supported export and has financed development projects in other countries in support of trade, as well as aid. KfW also has an overarching responsibility for the promotion of environmental and climate protection, and has provided private banking options for people and firms wishing to build or modernise housing with incentives of better interest rates. Its environmental standard ratings have become an industry standard for housing projects. The German development bank also provides funding for retrofitting houses for the elderly or those with disabilities.Like many public sector banks it uses existing banking networks to provide credit, and so it does not directly compete with private banks.José Carrera, vice president of social and environmental development at Corporación Andina de Fomento (CAF), a regional development bank in Latin America, said that CAF focuses on projects that tackle some of the key issues facing the region including inequality, urbanisation and youth development. Latin America’s challenges are similar to those of the Middle East, as 21% of Latin Americans under 30 do not work or study, and youth unemployment is at 15%, with women especially affected. Carrera said that the youth population will peak between 2020 and 2025, representing a substantial opportunity for the region but only if proper investments are made in time.Four out of five people in Latin America are urbanised, and 25% of them live in slums, so clean water and safe and affordable housing are yet further problems in need of public financing. CAF has 18 member countries with 10 full member countries, having expanded recently to strengthen the regional nature of the bank.Roy Culpeper, senior fellow at the School of International Development and Global Studies at University of Ottawa, said that the lack of inclusiveness in financing reinforces poverty and the structures of poverty in the less-developed and developing parts of the world. According to Culpeper, finance liberalisation is one of the key problems that has led to this lack of inclusiveness in credit access in developing countries, even though it has possibly expanded inclusiveness as well as contributing to the financial crisis in the developed world. Culpeper said that while micro-financing has had a positive effect in developing countries, reaching as much as 15% of the population in countries like Bangladesh, it is not on the whole all that significant. He said that SMEs struggle without access to credit, and can be best served by upscaling micro-credit and downscaling commercial banking, as well as by strong support from public-sector banking. While there have been many failures in development bank projects in impoverished regions like sub-Saharan Africa, Culpeper sees their successes as commendable and failures as an opportunity for research.Ghosh also emphasised that the public-private partnership (PPP) model is no substitute for public financial institutions such as development banks. She said that India has been trying to develop a nationwide road network, connecting major and minor cities and towns through a PPP model, but has struggled to find the necessary investment. The public sector provided 2% of the required investment, while the private sector has only provided 20%, although it was hoped that the private sector would bear the brunt of the funding need.