Public External Financing of Development Banks in Developing Countries

By Robert W. Adler; Raymond F. Mikesell | Go to book overview

CHAPTER II
Characteristics of Industrial Development Banks and Their Role in Economic Development

THE EMERGENCE OF INDUSTRIAL DEVELOPMENT BANKS

Although many of the basic elements of development banking can be traced to institutions in the older industrialized countries dating from the early part of the 19th century, their employment in developing countries appears to have originated with the organization of corporaciones de fomento in several Latin American countries before and during World War II. The sharp decline in the prices of primary commodities during the 1930's led the governments of a number of Latin American countries to adopt policies deliberately designed to promote industrialization. Efforts to encourage domestic industry by means of restrictions on imports were only partially successful. Domestic industrial capital formation was adversely affected by the interruption of foreign capital inflow and the reduced earnings from exports of primary commodities. Private capital formation in domestic industrial activities was also limited by the shortage of domestic entrepreneurs with capital available for investment in industry and by the shortage of foreign exchange required for the importation of capital equipment and raw materials. Although World War II was accompanied by an increased demand for at least some primary products, the need for industrialization was enhanced by the unavailability of industrial commodity imports from the developed nations of North America and Western Europe. Latin American governments were therefore led to the creation of institutions designed both to establish publicly owned or mixed industrial enterprises and to provide financing for private industry. Thus, Mexico's Nacional Financiera was established in 1934; Chile's CORFO (Corporacion de Fomento de la Produccion), in 1939; Colombia's Instituto de Fomento Industrial, in 1940; Argentina's Banco Industrial de la Republica Argentina, in 1943; and Venezuela's Corporacion Venezolana de Fomento, in 1946.

Most of the industrial development banks in existence today, both in Latin America and elsewhere in the underdeveloped world, have been established since 1950. This surge in the creation of development financing institutions has paralleled the growing national interest in rapid industrialization and the rapid rise in the number of new independent nations. Governments have established or promoted the formation of industrial development banks as a means of channeling government capital and private domestic savings into industry and of attracting external

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