Public External Financing of Development Banks in Developing Countries

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

CHAPTER V
Some Special Problems and Concluding Observations

Without denying that external loans to industrial development banks in developing countries have made an important contribution to industrial progress in recent years, it must be recognized that there are severe limitations both on the channeling of external aid through such institutions and upon their ability to mobilize domestic capital and otherwise promote private industrial activity in the developing countries. In spite of the vigorous efforts made by the major public external lending institutions to promote and finance industrial development banks, over the past five years foreign exchange loans to industrial development banks have been averaging less than $100 million a year (and disbursements have been substantially lower) as compared with a rate of total lending by the major public external lending agencies of several billion dollars per year. It is recognized, of course, that the volume of external loans is not an adequate measure of the contribution of external financing agencies to the promotion of private investment in a developing country. In fact, external loans and equity participations should perform the role of a catalyst for the mobilization of far larger amounts of domestic and foreign private capital. On the other hand, with few exceptions, we have seen that industrial development banks have not been outstandingly successful in mobilizing private savings and in expanding private capital markets in the developing countries. Nor is a shortage of finance the only or even the principal barrier to private industrial growth in most developing countries. Moreover, most development banks are severely limited by reason of both personnel and funds in carrying on promotional activities, pre-investment surveys, technical assistance, and other nonfinancial services for stimulating industrial progress.

In spite of a number of limitations and the lack of flexibility on the part of external public lending agencies in supplying capital to industrial development banks, and in spite of even greater limitations arising from a lack of trained personnel and the shortage of local currency funds and equity capital available to the industrial development banks themselves, there is considerable evidence that the major limitation on the number and volume of sub-loans made to private enterprise in developing countries arises from the demand side rather than from the supply of loanable funds. The relatively low level of effective demand for loans for productive projects reflects the basic economic and social conditions that characterize underdeveloped societies. Nevertheless, much more can and should be done both by external agencies and by governmental and

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