Rationale - why we need regional integration and development banks
In recent years, this argument has not needed to be made as much as in the past because the potential catalytical role ofbanks with a long-term and more socially oriented mandate — especially public banks - has become widely appreciated once again. There is also an appreciation of the role ofbanks in terms of creating credit, as well as guiding it to the desired purposed (see Eurodad 2017; Macfar-lane and Mazzucato 2018; UNCTAD 2019 among many others). As described in the chapter by Studart and Ramos, this reflects the rejection (once again) of the mistaken idea that banks can be nothing more than an intermediary between savers and investors. Even if some still believe that loans must be predicated by savings first — an idea that misunderstands the essential credit-creating role of banks — in developing countries this would be highly unlikely to happen because savers are for various reasons especially unwilling to lock their capital into long-term projects. A second reason this canard has been abandoned is that in developing countries, banks are too weak and fragile to bear the burden of the liquidity and maturity mismatches - which is already difficult in the most advanced and deep financial markets. Alternatively, perhaps the re-found fashion for development banking rather reflects the acceptance of the evidence — in both the north but particularly the South — of the positive contribution made by public banking in development now and in the past.
The volume opens with the experience of Latin America as a region, in part because it has strongly promoted regional integration in recent decades and also because it experienced all the ups and downs of the fashion (or some would say ideology) with respect to development banking. In the first half of their chapter, Studart and Kamos set up the case for why development banking is needed in the first place, before heading into the details of the Latin American development banking experience. The authors show that during a period of history while new development banks were being created around the world, in Latin America banking was rather in decline. Ideological pressure meant that many national development banks privatized or overhauled, to the extent that the number of banking institutions virtually halved between the years 1988—2013. Those that remained had a narrower mandate. They did appear to improve efficiency, and the new expectations following the crisis of 2007-2008 that banks should play a counter-cyclical role meant that some banks were re-capitalized or profits reinvested, meaning they could increase lending with their own resources. However, the question remains whether this expansion is sufficiently useful to address the enormous infrastructure financing gaps in the region.
The authors compare the models operating in Chile, Mexico, and Brazil, before turning their attention to the new possibilities that opened up with the emergence of big new multilateral banks from the South, in particular the AIIB and NDB. Although these big new contributors can help significantly by scaling up the financial resources available, other obstacles remain just as important, in particular, the need to create a pipeline of projects, for which particular technical and technological capacities are needed at both public and private sectors. This is lacking in most parts of the developing world. This lack could to an extent be resolved through the creation of special “origination platforms” dedicated to identifying potential projects and mitigating uncertainties associated with their early stages.
It is particularly difficult in Latin America because the systematic reduction of national development banks has created a vacuum in terms of many of the much-needed capacities. The new South-South institutions such as the AIIB and NDB could play an important role in this regard, over and above the provision simply of finance. At the same time, however, the authors warn, this can only happen if the new multilateral banks do not fall into the old prejudices and modus operandi of the historical multilateral banks. These solutions are not technical, but rather depend on the appropriate mindsets and the always needed political will.