State Development and Investment Banks

State development and investment banks have often been viewed in terms of their role in economic development through their abilities to channel funds into industrialization. There are now a range of state development and investment banks around the world; some notable examples are the German KfW, Brazilian development bank, and recent proposals such as the BRICs Development Bank (Griffith-Jones 2014), and the European Investment Bank (EIB); and recently established but relatively small-scale ones such as the UK Green Investment Bank. United Nations Department of Economic and Social Affairs (2005) provides a history of national development banks. The report also illustrates the different institutional forms which development banks can take and different objectives which have been assigned to development banks.

Povel and Heidebrecht (2015) point to a wide range of financial instruments, which development banks (DBs) have at their disposal. They argue that “by adjusting the financing terms to the particular need, DBs optimize promotional efficiency (i.e. reach the promotional purpose with minimal public funds) and distributional justice (i.e. poorer recipients get higher concessional funding)”. As they indicate, development banks can be condemned as instruments of state intervention which are prone to political capture and mission creep. It is important, however, that state development banks operate in ways which do not merely replicate private banks, and that their decisions over allocation of loans and funding are linked with the political objectives of the government.

Griffith-Jones (2015) argues that “Well run development banks can provide the vision- and part of the resources, to do those things that at present are not done at all. This requires good development banks with the expertise and the strategic vision to fund new sectors and technologies. The fact that development banks can provide long-term loans, have a long-term development perspective, as well as require lower returns further facilitates this financing.” She postulates four functions which it is important for development banks to play. These are the provision of counter-cyclical finance, “funding a dynamic vision and strategy of growth and structural transformation”, the mobilization of financial resources and the funding of public goods. Development banks, as with the other types of financial institutions which have been reviewed in this section, provide benefits of diversity with a more diversified financial system leading to less systemic risk, and different types of financial institutions having different strengths (and weaknesses).

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