Southern-Led Development Finance – Rationale, Innovations and Implications
Solidarity and The South: The New Landscape of Long-Term Development Finance and How to Support It
The many innovations in Southern-led development finance appear as one of the most significant trends of the new century. Trillions of dollars’ worth of Southern-owned currency reserves, Sovereign Wealth Funds, Development Banks credit swaps and bond issuances have transformed the development finance landscape. Existing banks and investment funds boosted their scale, scope, and mandates and entirely new ones came from nothing to become operational within a surprisingly short time. Moreover, Southern solidarity seems more than just a mantra; it is a mandate with real meaning for its members and practical implications that could promise qualitative differences in terms of governance and lending decisions, compared to those offered elsewhere. This chapter sketches briefly the most significant ways in which the landscape has changed, before addressing the important question of how to ensure these new or enhanced institutions can meet the immense investment expectations.
If they live up to their promise, they could massively increase the capital available for the long-term investment needs expressed in the Sustainable Development Goals (see Table 1.1). They could bring qualitative differences too — if they prove to be more willing to invest in productive activities, more “green” and responsive to local needs, more streamlined in administrative requirements and less conditional. For such advantages, developing countries appear willing to pay the higher cost of capital compared to loans from the World Bank or other Northern-led sources.
However, there are no inherent guarantees they can or will do this. First, these new Southern-led sources of finance may look so large compared to traditional lenders in part because the latter were always under-financed compared to the magnitude of the task. It is possible that even the best-capitalized of the new Southern institutions will find themselves constrained by the same challenges besetting traditional Northern-based ones. Moreover, the euphoria generated by the new opportunities should not erase lessons learned about why some development banks stumbled in the past. Finally, the new landscape is still far from complete — despite the addition of new players and the expansion of existing ones, it is somewhat ad hoc and many gaps remain, especially in the poorest countries and regions. In short, support from national and international policymakers remains essential if the new South-South sources of finance are to grasp the opportunities created by a scaling up of investment finance and to fulfill their development potential.
Charting a new, Southern-led landscape
The many southern initiatives to boost long-term finance for development have changed the map of development finance significantly. It is true the map remains somewhat incomplete and ad hoc — reflecting the fact the initiatives emerged on a piecemeal basis and are not a coordinated southern effort to break with the old order. Nonetheless, the new institutions are doing things in a different way. Also, each new institution is slightly different in what it offers and how it operates. Together, they have the potential to help fill important institutional and financing gaps in a system that otherwise failed to reform despite the crisis of 2007—2008 and its fallout (Grabel, 2015) and potentially can provide real benefits to a financial architecture that has long been under stress.
In terms of individual initiatives, there are too many to mention by name here. This section classifies them broadly into two categories - national and multinational activities. These categories are chosen because of their implications for governance and decision-making, rather than the scale or ambition of operations. Multilateral institutions have attracted most of the media and political interest; however, national ones are also extremely important, and together, their collaboration through linked-up networks whereby regional systems engage actively with national banks and national financial systems may prove to be one of the most transformative opportunities created by this new landscape. Table 1.1 summarizes some of the funds currently and potentially available for development. Some figures such as those from new southern banks and funds are still modest in face of the long-term financing needs of developing countries, but, as argued further below, the potential for significant expansion exists, provided southern governments further enhance their support to these institutions in the coming years. On the other hand, it also needs to be remembered that some finances are “borrowed” and cannot necessarily be relied upon - such as the foreign reserves based on short-term capital inflows that owe more to global capital markets than physical trade. These can abruptly reverse as global financial conditions change.