Emerging market development banks – towards neo-developmentalism?



"What a difference a decade makes", Prof. Kevin Gallager from Boston University said at the beginning of a panel on the political economy of emerging market development banks at this year's convention of the International Studies Association (ISA) in San Francisco. In 2003, many panels dealt with the World Bank - in 2013, on the other hand, a multitude of panels deal with regional development banks, in particular on development banks from emerging powers. The World Bank, it seems, is losing its relevance for the academic community.

Indeed, over the past years, banks such as Brazil's National Development Bank (BNDES) have begun to lend more money than the World Bank, including outside of Brazil, raising important questions about the role of emerging power developing banks in the global economy. The current crisis certainly did its part, Prof. Ilene Grabel from the University of Denver pointed out - leading to an unprecedented degree of innovation in development financing. Yet very little is known about the paradigms and principles that guide such new banks - particularly because several of them have received considerable bad press before even coming into existence - such as the Bank of the South, pushed by Venezuela's former President Hugo Chavez.

Prof. Debroah Brautigam from Johns Hopkins University-SAIS argued that Chinese loans and credits were largely villified - e.g. as "toxic aid" by Moses Naim - yet little difference is made between all the different actors from China, which often operate according to different principles - such as the China Development Bank, the Chinese Eximbank, or Chinese commercial banks. China Exmbank, for example, provides concessional loans, while MOFCOM provides zero-interest loans. Eximbank also provides export buyer's credits (which go to developing countries' governments) - each with very different systemic implications.

The database Brautigam is putting together with Prof. Gallagher is increasingly complete, even though China remains reluctant to publish data. In Africa, China gave 58 billion US-dollars of credit lines in 2010, while it provided Latin America with 86 billion US-dollars. In addition, it provided large amounts of commodity-backed loans (28 bn in Africa, 40 bn in Latin America). Interestingly enough, most of the loans goes to 'disstressed countries' such as Sudan or the DRC, which have no acccess to World Bank credit. For example, often credits are put into an escrow account, and are subsequently released as commodities are being shipped to China - a genuine innovation, Brautigam says.

In Latin America, the situation is somewhat different - Brazil, for example, is not in distress, so it could obtain loans elsewhere - but the types of projects financed by the Chinese are usually riskier, so the same logic applies that China occupies a niche - either in risky countries (Africa) or in risky projects (Latin America). These loans thus do not constitute aid (contrary to many media reports) and they are free of policy conditions and require Chinese suppliers. Yet, again contrary to general wisdom, according to Brautigam, they are not tilted towards China's interest, but generally fair.

Prof. Kathy Hochstetler then gave a presentation on BNDES and spoke about how it fits into Brazil's development model, and argued that the bank has provided much fewer loans outside of Brazil than generally thought. BNDES did grow and internationalize, she concedes, but the majority of loan still occurred within Brazil. BNDES, according to her, spends lots of money on elecricity and gas, thus mostly focusing on infrastructure development. Important recipients are Petrobras, Eletronuclear, JBS and Norte Energia. JBS, one of the largest meatpacking companies in the world, is the only truly large international project financed by BNDES. Yet critics who argue that most money is spent on national champions overlook that BNDES also provides smaller loans to medium-sized actors who seek to internationalize.

Interestingly, Hochstetler pointed to a "very large gap" between policy annoucements (e.g." 10 bn to Venezuela to build a subway") and reality - in fact, in 2009, BNDES financed a mere 2.27 bn US-dollars of contracts with foreign governments - out of a total of 94 bn. The perception, hence, that BNDES provides large amounts of money to other countries' goverments is plainly wrong. Particularly under Lula, a presidential announcement about a new credit line - often made during his stump speeches - rarely led to an actual loan. Once again rebutting common criticism, she argued that BNDES also makes no concessional loans - only subsidized ones - and all loans must meet profitability targets.

BNDES, however, can now finance Brazilian companies' FDI (the example of JBS comes to mind, again) - in a logic that tells the observer more about the way the bank operates. In the mind of the bank, the only way for Brazilian companies to become gloablly competitive , is to buy up competitors and to remain profitable.

Prof. Gregory Chi from York University presented gave an interesting overview of the China Development Bank - many of its loans, surprisingly, are continuously nominated in US-dollars. This, according to Chi, shows that China still feels relatively vulnerable, and that the yuan is still far from replacing the US-dollar as the world's leading currency. Still, China Development Bank is a pionier in currency internationalization of the yuan, for example by launching the first floating renminbi bonds outside of mainland China. It is, according to Chi, the perfect vehicle for driving this process - as it enjoys the backing of the triple A rating of the Chinese government. The China Development Bank thus plays a key role - also in providing massive loans in other countries such as Venezuela. Half of the loan to Venezuela, for example, is already nominated in renmimbi. China can now sell its debt in its own currency at low interest rates - something that, for a while, only the United States has been able to do. CDB is thus helping China move beyond the so-called "dollar dependency".

Emerging market development banks are destined to play a more important role in international affairs - and the number of academic panels on the topic during next year's ISA convention is set to further increase.

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