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Tuesday, 10 December 2019

Forget the stock markets and securities; public and development banks are the solution

Mahmoud ElKhafif , Monday 4 Nov 2019
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In late September 2019, the United Nations Conference on Trade and Development (UNCTAD) launched its annual Trade and Development Report, entitled “Financing a Global Green New Deal”. This UN report discusses the global economy and the recent economic challenges facing the developing World and proposes policy recommendations to meet these challenges and those of today's hyper-globalized world, shaped by the philosophy and policies of the wild, untamed neo-liberalism.

This year's report discusses the role of public finance, and development and other public banks in achieving the sustainable development goals (SDGs); in balance with the role played by private finance. In today’s globalized financial world, public funds are usually injected into the economies and the private sector through giant banking institutions or shadow banking systems. However, this is more costly and less capable of creating jobs than financing investments directly, through public and development banks, for job creation, development and cleaner energy. By their nature, public banks seek to invest in productive sectors (agriculture and industry) and are supposed to be designed to contribute to achieving public interest and the SDGs, including poverty reduction and environmental protection.

Therefore, the rules of the game of the banking sector that have been established in the last four decades must be changed. The hyper-financialization that transforms everything with utility to humanity into a financial instrument, must be controlled and regulated.

Public and development banks are different in nature from private banks. They focus on long-term projects whose social and development benefits exceed the narrow commercial returns. They target sectors of strategic importance that are usually ignored by private finance. Public banks bear the heaviest burden of development and should therefore receive the greatest attention from developing countries to allow them to contribute meaningfully towards achieving the SDGs.

Despite the dominance of the neoliberal ideology, public development banks in many developing countries have been able to assume their role by injecting hundreds of billions of dollars in development loans. In the case of the China Development Bank, its current outstanding loans are estimated at more than 13% of China's GDP (nearly seven times the size of the Egyptian economy). The value of the outstanding loans of the Korean Development Bank represents 10.5% of Korea’s GDP’s. But on the other hand, there are public banks in countries such as Russia, South Africa, Mexico and India that have been less active, with outstanding loans not exceeding 1% to 2% of their respective GDP. In other countries, where the neo-liberal policies are followed with no questions asked, not only that development and public banks have been curtailed, but privatized as a condition of an IMF or World Bank loan/program.

UNCTAD analysis indicates that in many developing countries, public banks, especially development banks, lack the capital needed for them to play their developmental role and to finance projects of strategic importance to the state and society. Furthermore, the policy space available to governments in developing countries is limited and does not allow policy makers to design and implement effective economic policies, be they fiscal, monetary, agricultural, industrial or commercial policies. Without additional capital and a wide range of policy instruments, it is not possible to take advantage of the positive opportunities that public and development banks could create.

UNCTAD report proposes a number of recommendations for policies that may help decisionmakers in the third world to deal with these problems:

  • Central banks should be freed from the narrow focus on inflation and targeting exchange rates. They should be allowed to regain their historical role for development support, creating jobs and driving investments into the productive sectors, developing credit instruments targeting industries of strategic importance, and playing active role in financing a “Global Green New Deal”;
  • Development and public banks should be provided with additional, adequate capital to expand their base of productive lending. These banks should be supported by appropriate legal and policy frameworks and assigned a clear role and objectives; with a set of performance indicators and accountability mechanisms that fight corruption while focusing on social and long-term economic returns, not only short-term financial return.
  • There is a need to reform banking systems to strengthen the role of public banks and granting them special treatment commensurate with their role in development;
  • Public banks should stay focused on their purpose. There is a concern with what is being promoted as reforms of the banking system and presented as part of a package of conditions associated with World Bank loans, including privatization of public banks.  


*The writer is senior Economist at the United Nations

**This article expresses the opinion of the writer and not necessarily the position of the United Nations.

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