What does it take for a Development Bank to succeed?

DEV-IN-TRANS-BANNER

By João Carlos Ferraz, Instituto de Economia, Universidade Federal do Rio de Janeiro, Brazil


This blog is part of an ongoing series evaluating various facets
of
Development in Transition. The 2019 “Perspectives on Global Development” on “Rethinking Development Strategies” will add to this discussion


bank-finance-growth-financePublic finance institutions, or development banks, have “development DNA”. But, can they effectively engage in financing “development in transition” or the call to rethink international co-operation to help countries at all levels of income sustain their development gains? What would it take for such institutions to succeed? How can they anticipate and effectively respond to societal and market needs and aspirations?

Political space for this does exist. A consensus exists that development banks must have at least four priorities: infrastructure, innovation, sustainable environment and firms of smaller size. That’s the easy part! No policy maker or analyst in their right mind would be against these priorities. But, consider the nature of these priorities: each one is time- and place-specific but evolving permanently; they are moving targets. More importantly, they are risk-intensive, given the duration and unpredictability of associated projects and/or the potentially low credit worthiness of economic agents pursuing these priorities.
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Development Finance 2.0: From Billions to Trillions

By Harald Hirschhofer, Senior Advisor, TCX [1] 

development-financeAchieving the Sustainable Development Goals (SDGs) will require an enormous increase in external financing flows to developing countries. Development Finance Institutions (DFIs) have gradually started to shift their business model towards de-risking services to crowd in long-term, low-risk private capital. However, the targeted scaling up of private investment from billions to trillions to realise the SDGs contains massive risks for stability. And good macro-policies are needed, in turn, to address such underlying risks. Countries that need the greatest amount of development finance are often those that have domestic financial resource constraints and underdeveloped markets. Financing their growth and investment opportunities makes the management of exchange rate risks, which are inherent in development finance, a critical challenge.
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Wanted: mechanism for additionality

By Paddy Carter, Research Fellow, Overseas Development Institute

development-financeAdditionality is the thorn in the side of Development Finance Institutions (DFIs). It means: making an investment happen that would not have otherwise. Of course, everybody in development wants to make things happen that would not otherwise, and the possibility that aid substitutes for domestic efforts is a concern in other contexts. But additionality torments DFIs because of the constant suspicion that they crowd out private financiers by investing in products that would have been viable without public support.

DFIs are regularly called upon to provide rigorous evidence that their investments are additional. Rigorous quantitative evidence, in the eyes of academics, requires some credible method of estimating the counterfactual (what would have happened otherwise). And that requires something like a randomised control trial or a natural experiment or a valid instrumental variable. Yet, none of these is feasible in the world of DFIs. And without that, we are unable to distinguish correlation from causation.
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Maximising bang for the buck: Risks, returns, and what it really means to use ODA to leverage private funds

By Paddy Carter, Research Fellow, Overseas Development Institute

shutterstock_249974521The idea of using official development assistance (ODA) to leverage private finance is a staple of the financing for development circuit and features heavily in most donors’ strategies. Experienced financiers both from official sector development finance institutions (DFIs) and private investors are, however, still feeling their way into this field’s unfamiliar territory. DFIs for the most part emphasise the importance of providing finance on non-concessional terms to avoid distorting markets and crowding-out other sources of finance. Though some standard elements of their business could fall under the rubric of blended finance, such as grant-funded technical assistance, for the most part DFIs and development banks have treated explicit subsidies to private enterprises as dangerous medicine to be prescribed rarely. Now the pressure is mounting to find more creative ways to leverage private finance using ODA. But how?

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