Academic journal article World Review of Political Economy

The Role of Development Banks in the Process of Economic Development-Two Latin American Experiences: Mexico and Brazil

Academic journal article World Review of Political Economy

The Role of Development Banks in the Process of Economic Development-Two Latin American Experiences: Mexico and Brazil

Article excerpt

1. Introduction

Historically, Latin American countries, since formal independence, have lacked the resources to finance economic development. They have tried to import such resources from abroad via foreign direct investment (FDI) or foreign loans. However, FDI came in small quantities, and loans provoked heavy burdens in debt payments that led to disastrous crises.

From 2003 to 2007, several Latin American countries had current account surpluses and a notable increase in foreign-exchange reserves, which gave rise to the idea of the Banco del Sur (Bank of the South). This bank has the potential to (1) finance infrastructure (for instance, a gas or oil pipeline or railroads), (2) develop financial markets issuing debt (Bono del Sur), (3) provide a place for pooling surpluses or foreign-exchange reserves of Latin American countries (Monetary Fund of the South), and (4) eventually establish a new currency in the south (peso del sur, sucre, etc.). Following a meeting in Quito, Ecuador, in May 2007, at which it was announced that the Banco del Sur would be created on September 26, 2009, the presidents of Brazil, Argentina, Venezuela, Ecuador, Bolivia, Uruguay, and Paraguay signed an agreement establishing the bank with initial capital of US$20 billion. The bank was intended to replace the International Monetary Fund (IMF) and the World Bank as a source of borrowed capital for countries in Latin America, in particular for infrastructure and social projects. Then, of the four possibilities for the Banco del Sur mentioned above, only number one-financing infrastructure-was chosen. This situation immediately suggests a historically important question for Latin America and the motivation for this article: what is necessary for this bank to succeed in its mission? What sort of structure and what sort of policies would be best suited for the development of such a bank, in the context of Latin America?

Brazil and Mexico are the two largest economies in Latin America. Both countries have had a development bank that was extremely successful during particular periods in their country's history and not so successful in other periods. These experiences, then, provide us with two natural experiments, two case studies, of development banks in Latin America. The economic question that will be addressed by this article is, what conclusions can be supported by a detailed study of these two development banks?

This article is divided into five sections, including this "Introduction." In Section 2, we define what a development bank is; Section 3 constitutes the core of this article, where we analyze the experience of a Mexican development bank, Nacional Financiera (NAFINSA), and describe the performance of a Brazilian development bank, Banco Nacional de Desenvolvimento Econômico e Social (BNDES); in Section 4, we study the similarities and differences between Mexico and Brazil with respect to the political economy of development banks, and in Section 5, we present concluding remarks.

2. Defining a Development Bank

Material reproduction of a society implies to achieve economic growth. For growing, a certain amount of capital is needed to ignite or to continue a production process. It has been suggested by Itoh and Lapavistas (1999) that Marx pointed out two kinds of capital which can bear interest. However, there is not an extended analysis of how growth has been financed in underdeveloped countries. The typical way some poor countries have tried to foster development in the 20th century has been through development banks. This section discusses four issues concerning development banks: first, what a development bank is; second, what sectors development banks can foster; third, what type of ownership can be possible; and finally, what kinds of enterprises, public or private, can receive resources. Our intention is to show how the present day development banks work.

A first step in constructing a definition of a development bank is to look for commonalities in the structures of institutions that are called development banks. …

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