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Despite all naysayers, BNDES (Brazilian Development Bank) is a powerful instrument for reducing poverty and disparities, argues a senior economic advisor to the Western hemisphere’s most significant lender
Emerging economies have abundant investment opportunities, but they often fail to reach their growth potential. There are country-specific explanations ranging from institutions, to the size of the domestic market, to geography, to governance, and so on. But there are common explanations too, and they are related to the challenge of successfully tackling structural transformation (ST), the defining characteristic of development, and both the cause and effect of economic growth.
Two major hurdles for development are lack of savings and the substantial limitation to or even inexistence of long-term capital markets. In these settings, there is scope for policies that aim at accelerating and strengthening the pathway for development, and national development banks can play an important, and sometimes a defining role, by providing long-term loans within a long-term policy framework.
National development banks can provide to critical areas where market failures often pervade emerging economies such as infrastructure, environment, innovation, research and development, regional development, and sustainable development initiatives. To the extent that national development banks can contribute to the undertaking of ST, they are powerful instruments for reducing poverty and regional disparities.
Besides being often the main source of long-term financing, national development banks are an insurance against downturns. One of the lessons learned from the recent global financial crisis was that a country cannot rely on international and national private banks as their only source of finance. Indeed, public banks in emerging economies performed quite a critical role in the crisis by quickly providing liquidity to firms and supporting anti-cyclical activities, thus helping these economies to recover from the crisis in a V-shaped manner.
It has often been argued that national development banks frequently fail to reach their policy objectives because of rent-seeking and regulatory capture, and, therefore, they should not be supported. However, because these institutions have such a vital role to play, the challenge should, in fact, be how to make them work in a way that they serve society as a whole.
Strong checks and balances are needed to shield them against abuse and regulatory capture. They should apply and follow rules cautiously, while their support and incentives need to be carried out in a transparent and accountable manner. These should be based on performance, i.e., they should have monitoring and evaluation systems in place. In other words, national development banks should employ practices that would enable their efforts to produce the largest possible positive impact on economic growth and to reduce poverty with a minimum cost.
The arguments above, popular in the development literature, fit well the mission and roles of BNDES, the Brazilian Development Bank, one of the largest national development banks in the world. The BNDES is the main source of long-term financing in Brazil – about 76 per cent of the total – and makes financing available with interest rates that are comparable to those practiced in international markets, thus leveling the playing field for domestic firms. A distinguishing aspect is that the BNDES makes credit available on a horizontal basis, i.e., firms regularly established in the country from almost any sector can seek credit regardless of capital ownership.
BNDES still important
But the BNDES has been criticized for its size and accused of crowding out the private sector and impeding the local capital market to develop. This would be especially harmful, say critics, when capital is more abundant and is becoming cheaper, as is the case of Brazil more recently, although interest cost is still well above international standards. On the basis of similar arguments the Financial Times, in a recent report on development banks, claims that it is time for BNDES to step aside, questioning the creation by BNDES of “national champions” and crowding out the private sector.
I believe that BNDES still has an important role to play in Brazil. Despite the recent successes in tackling poverty and resuming growth, Brazil still has major basic development problems and challenges that are highly unlikely to be solved by the markets alone anytime soon. These problems, ranging from huge infrastructure bottlenecks, to public services provision, to regional and urban development, to human capital formation, to innovation, to environment, to SMEs development, seriously constrain long term growth.
The BNDES can be useful there not only by providing resources, but also by creating incentives for investments in those areas. Besides that, the long-standing track record of partnership with the private sector, as well as its unique knowledge of the Brazilian production sector, makes the institution especially well-suited to contribute to ST in Brazil.
Many agree that BNDES should focus more on areas that attract little attention from markets and leave the business of long term financing to the banking industry. Actually, the BNDES operates partly through second-tier banks and more than 60% of disbursements are channeled this way.
But much more is needed. Indeed, government authorities and the BNDES are working hard with Febraban, the Brazilian Banks Federation, the Bovespa Stock Exchange, and other private sector entities to reform, develop and strengthen the long term capital markets. This is a critical reform for Brazil. By engaging private banks more directly into long term financing the BNDES will be allowed to shift its focus and agenda.
The path and pace of BNDES’ transition to the new development agenda will rely on the regulatory framework of the reform, the engagement of private banks, and willingness of savers to pour their money in long term maturity financial assets.