Southern-Led Development Finance

Solutions from the Global South

Diana Barrowclough, Kevin P. Gallagher, Richard Kozul-Wright, Diana Barrowclough, Kevin P. Gallagher, Richard Kozul-Wright

• Publisher: Routledge
• Year: 2020
• ISBN:
  9780429750120
• Edition: 1
• Topic: Commerce
• Subtopic: Comptabilité internationale

Southern-Led Development Finance examines some of the innovative new south-south financial arrangements and institutions that have emerged in recent years, as countries from the Global South seek to transform their economies and to shield themselves from global economic turbulence.

Even before the Covid-19 crisis, it was clear to many that the global economy needed a reset and a massive increase in public investment. In the last decade southern-owned development banks, infrastructure funds, foreign exchange reserve funds and Sovereign Wealth Funds have doubled the amount of long-term finance available to developing countries. Now, as the world considers what a post-Covid-19 future will look like, it is clear that Southern-led institutions will do much of the heavy lifting.

This book brings together insights from theory and practice, incorporating the voices of bankers, policymakers and practitioners alongside international academics. It covers the most significant new initiatives stemming from Asia, tried and tested examples in Latin America and in Africa, and the contribution of advanced economies. Whilst the book highlights the potential for Southern-led initiatives to change the global financial landscape profoundly, it also shows their varied impacts and concludes that more is needed for development than just the technical availability of funds.

As governments and businesses become frustrated by the traditional North-dominated mechanisms and international financial system, this book argues that southern-led development finance will play an important role in the search for more inclusive, equitable and sustainable patterns of investment, trade and growth in the post-Covid landscape. It will be of interest to practitioners, policy makers, researchers and students working on development and finance everywhere.

PART 1

Southern-led development finance – rationale, innovations and implications

1

Solidarity and the South

The new landscape of long-term development finance and how to support it

Diana Barrowclough and Ricardo Gottschalk

1. Introduction

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.

TABLE 1.1 A significant change in scale and scope – the new Southern-led landscape

	Mechanisms and institutions	$ value potentially available
Southern national	Foreign reserves^1	$6.7 trillion
	National development Banks^2	$400 billion
	Sovereign wealth funds^3	$6.3 trillion
Southern multilateral	Development banks and investment funds^4	$302 billion
Global multilateral (WBG)	World Bank Group, MIGA^5	$300 billion
	AfDB, ADB, IADB^5	$197 billion

Source: Development Banks’ annual reports, World Bank Development Indicators and SWF Rankings, the latter accessed on 12/02/2018. Available at: https://www.swfinstitute.org/sovereign-wealth-fund-rankings/.

Note:

1 Foreign reserves (minus gold) of 111 developing countries in 2016.

2 Corresponds to total foreign loan portfolios of CDB, China Exim and BNDES in 2016.

3 Total includes all SWFs listed on SWF Rankings minus those funds from Australia, Canada, Ireland, New Zealand and United States.

4 Potential lending capacity of AIIB, NDB and CAF, based on banks’ total equities and a loan-equity gearing ratio of 5, plus China’s backed investment funds, as reported in Gottschalk and Poon (2018).

5 Banks’ total assets, 2015.

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.

2. 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.

a. National initiatives are looking outwards

One of the major themes of the last decade has been the way that national public lenders and investors have enhanced their role to go beyond their territorial boundaries and become providers of development finance at the regional and even global south level. For example, there are now more than 250 national development banks in the developing world alone (UNCTAD TDR, 2015, 2019) and some of these are now immense, dwarfing long-standing multilateral institutions such as the World Bank and becoming major lenders for their regions and beyond.

Brazil and China have been among the most pro-active developing countries to use their national banks to support southern investments, and their banks are now significant international players, providing external financing as part of their standard operations. (Admittedly, this may be motivated more for the purpose of supporting national companies than to support South–South solidarity per se, but the trend remains). The China Development Bank (CBD), Export and Import Bank of China (China EXIM) and Brazil’s BNDES have increased their assets and loan portfolios very rapidly in the ten years between 2006 and 2016.

For example, the stock of international loans held by China’s banks for the years 2006–2016 at just less than $400 billion was already larger than the global total of loans by the World Bank ($300 billion), and the total portfolio of China’s banks would obviously be larger still if one included their domestic loans. The BNDES’s stock of loans at $187 billion, of which 13% was in foreign currency, is not too far behind, if compared to those of the larger regional development banks (Figure 1.1). What is particularly impressive is that the larger multilateral development banks have been around for over 50 years or more, as compared to these national banks that only started to become actively engaged in outward operations from the early 2000s onwards. The impacts from the perspective of recipient countries are potentially very considerable. As described by Bertelsmann-Scott and Prinsloo (2018), Chinese financing of investment in African infrastructure alone accounted for almost $21 billion in 2015 and dwarfed the total investments to the region made by at least nine other countries combined (France, United Kingdom, Japan, Germany, India, Brazil, United States, Canada and South Korea). Together, these nine countries invested just over one-third of that total amount.

FIGURE 1.1 International loans by Southern-led national banks already dwarf the total loans of multilateral development banks (Year 2016, $US billion).

Source: Authors’ estimates, based on banks’ annual and financial reports.

Note: WB: Sum of net outstanding loans of the IBRD and of the IDA, 2016 financial year; IADB: Outstanding loans of ordinary capital, fund for special operations and other funds; ADB: Outstanding loans of ordinary capital resources and ADF, as of 1 January 2017; AfDB: Net loans of AfDB only; China Exim bank: International cooperation lo...