Capital changeA revolutionin how thedeveloping worldis financedPage 2

Inside »

Double-edgedswordWhy does Chinaborrow when it canafford to lend?Page 2

Top dollarPresident Obama’srequest for fundingwins bipartisansupportPage 3

MissionstatementThe World Bankleader sets outhis visionPage 4

Andean ventureHow mutual aid isputting LatinAmerica in aposition of strengthPage 4

FT SPECIAL REPORT

The Future of Development BanksMonday 24 September 2012 www.ft.com/development-banks-2012 | twitter.com/ftreports

Bob Zoellick summed up the“new age of globalisation”faced by public policy stu-dents after they left the Par-dee RAND Graduate school

in Santa Monica, California, in June.He said the balance of power in the

world economy had shifted, withdeveloping countries now the“engines of global growth” and desir-ing to be “stewards of their ownfutures”.

Meanwhile, said Mr Zoellick, whowas about to hand over the reins ofthe World Bank presidency, “policymakers will need to break free of oldconstraints to connect the private sec-tor to public policies” – amid a new“pragmatism” in emerging marketsregarding involving private busi-nesses in development finance andprojects.

That section of Mr Zoellick’s speech– delivered shortly before he passedthe mantle to Jim Kim, his successoras World Bank chief – offers a concisesummary of the huge changes the glo-bal development banks have beengrappling with over the past fewyears, and will continue to face overthe coming decade.

First, they are adapting to the newglobal economic order. The old notionof rich countries funding developmentin poor countries is no longer appro-priate, as emerging markets rise ineconomic clout and are as muchsources of development cash as theyare recipients.

“If you think of the old world, itwas the OECD [wealthy] countriesbequeathing funding to the rest of theworld, and that’s no longer the case,”says Todd Moss, vice-president for

programmes and senior fellow at theCenter for Global Development, aWashington think-tank.

Caroline Anstey, managing directorof the World Bank, says that while“the North no longer offers the modelfor development, it’s much moreabout South to South”. It is also thecase that: “It’s still a volatile worldand it’s a world in which we have tolive with expectations of volatility.”

Ms Anstey adds: “It’s not as if the

needs are any less. For an institutionlike us, there’s still a need to focus onprosperity and poverty reduction.”

But even if the principal raisond'être for the global developmentbanks has not been diminished,emerging market countries aredemanding big shifts in governance –and a much bigger say in how devel-opment finance is carried out.

For instance, although Mr Kim – anAmerican – ultimately prevailed inthe race for the World Bank presi-dency, he faced stiffer competitionthan has been the case in the past,from Ngozi Okonjo-Iweala, the Nige-rian finance minister, and José Anto-nio Ocampo, the former Colombianfinance minister.

And at the staff level, there hasbeen some movement.

For instance, the World Bank this

month appointed Kaushik Basu ofIndia as its chief economist, replacingJustin Lin, the first Chinese to servein that role, which had previouslybeen reserved for candidates fromEurope and the US.

“I think the hold on the institutionsby developed western economies isgoing to diminish over the next dec-ade or two,” says Tony Fratto, aformer senior official in the GeorgeW Bush administration, who hasworked extensively on internationaldevelopment policy.

Dr Lael Brainard, undersecretary ofthe Treasury for international affairs,adds: “There has been quite asubstantial evolution in governancestructure, and we have been outin front in terms of supportingthe demand for larger responsibilities,

Continued on Page 2

New worldorder sets adouble goal

The idea of rich countries fundingdevelopment in poor countries is becominga thing of the past, explains James Politi Global challenge: Jim Kim, president of the World Bank, visits a training initiative on the Ivory Coast Getty

Emerging markets areas much sources ofdevelopment cash asthey are recipients

2 ★ FINANCIAL TIMES MONDAY SEPTEMBER 24 2012

assumed “bureaucrats knew best”. Inthe 1980s and 1990s, the “market knewbest”. Now, after the global financialcrisis, they are both seen as playingsupporting roles.

A good example of the change isMexican development bank Nafin,which has set up an open electronicplatform that allows hundreds of localWalmart suppliers to sell on theirreceivable accounts to privateinvestors. Now, instead of being paidin 180 days, as per WalMart’s usualpayment system, they can collectmoney immediately.

But philosophical redefinition isalso required of who is lending towhom. This has been most visible inthe emerging world’s demands for agreater say in running the IMF, WorldBank and IDB, and the willingness ofcountries such as China and Brazil topay more into their capital increases.

If both have largely been refused,however, it is because industrialisedcountries have been reluctant to cedepower or, in the World Bank’s case,stump up the extra matching capitalthat would allow the bank to expandlending with all the traditional safe-guards this entails.

The effectiveness of this approach ismoot. As China’s increased financialpresence in Latin America shows, theworld’s emerging powers are dilutingthe west anyway.

billion” in this environmentcould have a huge impacton the legitimacy of thebanks, they argue.

In the meantime, how-ever, the twin imperativesof coping with the rebalanc-ing of global economicpower – and the inflowof private sector moneyinto the developing world –will continue to dominate –and somewhat ironicallyfor the emerging economies,says Mr Fratto.

“They will become moreimportant members of insti-tutions at the same point asthe importance of theseinstitutions is going todiminish – probably all forgood reasons.”

in 2008, the global develop-ment banks played criticalroles by stepping up theirlending, and providing asafety net for the poorestcountries.

And while many of thelowest-income countries areexpected to graduate tothe “middle-income” cate-gory in the coming years,some development policyanalysts say the big ques-tion for the multilateralbanks is how to addressuneven development inthose countries that aregrowing strongly, but notmeeting crucial milestonesin terms of education,healthcare and institutions.

The fate of the “bottom

ments, the global develop-ment banks also have aduty to – and have been –helping countries to createthe conditions necessaryto foster as much privatesector involvement aspossible.

This can be awkward – inthat it plays into one of thearguments that the globaldevelopment banks aresometimes loath to hear:that their goal should ulti-mately be their own demise,as poor countries growricher and private capitalflows from around theworld supplant their own.

But that scenario remainsvery distant – and in fact,when the financial crisis hit

The Diamer-Bhasha Dam,in a region of Pakistanformerly known as theNorthern Areas, near theborder with Indian-adminis-tered Jammu and Kashmir,is a planned $12bn, 4,500MWhydropower and reservoirproject.

It would help signifi-cantly with both water andpower shortages, accordingto the government.

But as the project strug-gles to secure funding fromforeign governments andmultilateral donors, it isproviding a fascinatinginsight into the strange,double-edged relationshipbetween the Asian Develop-ment Bank and China.

The two are in effect com-petitors in the Pakistanproject and, if China wins,the concern of internationalgroups would be that it may

undermine the kind ofstandards the ADB wouldlook to guarantee.

The multilateral bank hasbeen criticised in Pakistanfor dragging its feet overthe deal and even facedclaims it had walked away.

But its country head toldlocal press that it needed toensure that backing fromother lenders is also inplace before it can commitpartial funds and that theproject complies with safe-guards relating to environ-ment, resettlement and pro-curement, as well as meet-ing transparency standards.

China is deeply interestedin Pakistan as an overlandsupply route for energyfrom the Gulf and lookslikely to become moreinvolved in projects such asthe deepwater port at Gwa-dar on the Arabian Sea.

With Diamer-Bhasha, aswith other projects outsideChina historically, Beijingis expected to overlooksome of the more costly andawkward aspects of higherstandards if it is handed thework through an uncom-petitive tender. Russia,incidentally, is pitching forthe same arrangement.

The great irony of this is

that one of the mainreasons why the ADB stilllends money to China is tobring higher governanceand safety standards to thecountry – and thereby legit-imise some of its own infra-structure projects.

Rajat Nag, managingdirector-general of the ADB,says: “Why does China bor-row from us? It is an impor-tant question which ourshareholders, includingChina, constantly discuss.”

China certainly does notneed the money these days.It is the bank’s third largestshareholder and the onlyother country alongside theUS and Japan to have itsown full-time seat on theboard. Moreover, it has heldthat position since 1986.

Where things have beenchanging as China hasgrown rapidly over the pastdecade are in its borrowing.

For a long time it was thelargest single borrower, butin the past two years it hasbegun to drift down therankings, to second in 2010and third in 2011. It stillpulls down about $1.3bn ayear from the bank, but hasalso become a donor, help-ing the bank increase itscapital base by $110bn in

2009. Mr Nag says: “Overtime it will become a majordonor.”

China nowadays is morelikely to borrow from theADB to support investmentin environmental technol-ogy and green measures,which accounts for two-thirds of the ADB money itgets, says Mr Nag.

The rest goes to poorerregions such as the farwestern Xinjiang province –which by coincidence iswhere any oil pipeline fromPakistan would arrive inChina. Mr Nag says thereare three important reasonswhy China still borrowsfrom the ADB.

Firstly, the bank’s pres-ence in environmentalprojects and technologyhelps the country gainaccess to “best practice”and equipment.

The second reason – andthis, he says is the one thatthe Chinese governmentitself most talks about – isthat ADB guidelines willapply to the whole of aproject in which it isinvolved. These includestandards on environmen-tal, social and economicsafety and sustainability.

“This fact and our

involvement make it easierfor the government toimpose those standardswithin its own country,”hesays.

The final reason for lend-ing to China is that it givesthe country access to infor-mation and knowledgeabout how pension fundsand other forms of institu-tional social savings work.

Mr Nag says, in spite ofChina’s growing economic

might on the world stage,the thing to remember isthat it still a poor country.

“Per capita income is stillonly about $3,700 and ourcut-off is at about $7,000,”he says. “Graduation fromADB assistance usuallyoccurs within five years ofreaching that cut-off incomelevel.”

As China’s economicpower continues to grow,

and so its donations to thebank, what about its influ-ence over the direction ofthe ADB?

Mr Nag plays down thisaspect, particularly in lightof the big reworking of howthe bank functions anddecides projects that wasundertaken in 2008 andgiven the title of Strategy2020.

This, he says, has limitedthe bank’s focus to fiveproject types: infrastruc-ture, education, environ-ment, financial sector devel-opment and regional co-op-eration and integration.

Individual countries arealso handed multiyearbudgets and the ADB teamsthen work with local gov-ernments to find suitableprojects on which to spendthe money.

As third-biggest share-holder China still holdsonly about a 6.5 per centstake, significantly lessthan the US and Japan.

If China poses any threatto the ADB’s mission, thenit will do so as a competitorfrom the outside on projectslike Diamer-Bhasha ratherthan from the inside as amember with growingeconomic clout.

This August, Erika Sylva tooka long flight around theworld. The reason? Ecuador’shealth minister was travel-ling to Beijing to buy $50m

worth of Chinese medical equipmentfor Ecuador’s health system. Herspending came out of a $2bn creditChina made available to Ecuador theyear before.

Separately, but at the same time,the Washington-based Inter-AmericanDevelopment Bank (IDB) approved a$5m equity investment in a Mexicangovernment sponsored venture capitalfund that will provide seed capitaland strategic advice to small- andmedium-size Mexican companies.

Although the sums are small, thesecontrasting examples – one a govern-ment-to-government loan tied to pur-chases of Chinese goods, the other amultilateral initiative to foster privateMexican enterprise – show how devel-opment banking is changing globally,especially in Latin America.

“There is a revolution [in develop-ment finance], it is happening, andLatin America is one of the regionswhere that redefinition is mostprofound,” says Augusto de la Torre,lead Latin America economist at theWorld Bank.

This “revolution” manifests itself inmany ways, but is largely down toone factor.

Multilateral development finance isnow “only a small drop in globalfinancial flows,” says Mr de la Torre.

One reason for that is the globalisa-tion of financial markets.

“The original theory for develop-ment banks was that they helpedclosed countries’ financing gaps. Thattheory no longer holds as most gov-ernments can raise money on interna-tional markets,” Mr de la Torre adds.

In 2010, for example, total privatecapital inflows to Latin Americatopped $280bn, according to theInstitute for International Finance.This was nearly 10 times thecombined amount that the WorldBank and the IDB loaned that year.

Another reason for the revolution isChina, as it seeks to secure resourcesand influence in Latin America bydeploying some of its massive foreignreserves.

In 2010, for example, China loanedsome $37bn to Latin America, esti-mates Kevin Gallagher at Boston Uni-versity, more than the World Bankand the IDB disbursed to the regionthat year.

That Chinese money does not comecheap, though. “By and large, borrow-ers have to pay a premium,” says MrGallagher. It has also largely beenloaned to only three countries – Vene-zuela, Ecuador and Argentina.

“So far, China is only really

financing countries which lack accessto capital markets, essentially becausepolitical risk creates a highpremium,” comments José AntonioOcampo of Columbia University, aformer Colombian Finance Ministerand one of this year’s candidates tohead the World Bank.

The third reason for the revolutionis the rise of regional developmentbanks, such as Brazil’s BNDES (whichhas a balance sheet larger than theWorld Bank’s) and the Venezuela-based but pan-Latin American lender,CAF. As their shareholders are alsolocal governments, their loans areoften also quick to disburse as theylack the same conditionality thatwestern civil society places on Wash-ington-based multilaterals. “Twentyyears ago, it seemed regional develop-ment banks were doomed,” adds MrOcampo. “Now it seems everyonewants them, even Europe.”

The effects of this revolution –which has refocused thinking awayfrom “shortages of finance” towardshow to best harness available finance– are ongoing. On the one hand, multi-laterals still have a valuable role toplay as providers of counter-cyclicalfunds. During the 2008-9 global finan-cial crisis, for example, the WorldBank and IADB ramped up disburse-ments as private markets shut down.

“Our clients still want maximum

exposure to us as they know capitalmarkets open and close,” says KaldoEchebarría, head of strategic planningat the IDB. “They also value ouradvisory services,” he adds, notingthe IDB faces annual loan demand of$18bn, versus its $12bn capacity.

In more normal times, however, aprofound redefinition is required.

It is no longer enough for develop-ment banks to ply their traditionalrole of financial intermediaries, usingtheir AAA rating to borrow cheapfrom international markets then lend-ing on to countries at a narrowspread. It also requires a philosophi-cal redefinition.

Until the 1970s, it was generally

Blowing in thewind: Mexicanrenewable energyprojects havereceived IDB help

Reuters

Globalisationchanged themovement ofcapital funds

Loans A change in financing the developingworld is under way, says John Paul Rathbone

ADB and China still in partnership

Capital flow: the Diamer-Bhasha Dam in Pakistan

Funding

Paul J Davies askswhy China borrowswhen it is in aposition to makeloans of its own

The Future of Development Banks

selves are often facing atough balancing act, “tryingto meet shareholderdemands and also trying tobe competitive in this envi-ronment”, he says.

At the same time as theyare figuring out howto position themselves inrelation to private invest-

in giving the “good house-keeping seal of approval” toa project as well as provid-ing much needed technicalexpertise, he adds.

But it is often inevitablethat funding from the glo-bal development banks willhave more strings attachedthan if derived from the pri-vate sector – such as morestringent social and envi-ronmental standards thatcould mean longer approvaltimes for projects.

“The World Bank comeswith other things bolted on– some are positive andsome are not so positive,”says Mr Moss of the CGD.

This means the globaldevelopment banks them-

will be supplanted by theprivate sector, developmentbanks are having to becomemore creative and innova-tive in the kinds of servicesthey provide, as well as intheir ability to collaboratewith business in public-pri-vate partnerships.

Mr Fratto says thatalthough this has “dimin-ished the importance of offi-cial flows, they are stillimportant”, especially whenit comes to financingprojects that are notattracting private-sectorattention – from primaryeducation to healthcare tolarge infrastructure.

And the global develop-ment banks can be crucial

but it’s a slow process.”The second big trend con-

fronting the global develop-ment banks is how theyshould cope with the mas-sive expansion of privatecapital in emerging mar-kets, which has reduced thedirect role of those banksas providers of developmentfinance.

“No development agencycan any more be in thebusiness of plain vanilladevelopment, or plainvanilla financial flows, orplain vanilla projects,” saysMs Anstey.

Faced with more competi-tion – and the possibility,and threat, that their role

Continued from Page 1Newworldordersetsgoal

Funding fromthe globaldevelopmentbanks often hasstrings attached

In spite of China’sgrowing economicmight on the worldstage, it is still apoor country

$280bnTotal capital inflows toLatin America in 2010

$18bnLoan demand faced by theInter-American Development Bank

FINANCIAL TIMES MONDAY SEPTEMBER 24 2012 ★ † 3

James PolitiUS Economics and TradeCorrespondent

John Paul RathboneLatin America Editor

Robin HardingUS Economics Editor

Paul J DaviesAsia FinancialCorrespondent

Samantha PearsonBrazil Reporter

Benedict ManderVenezuela & CaribbeanCorrespondent

Simon RabinovitchBeijing Correspondent

Henry ManceBrazilConfidential

Ian MossCommissioning Editor

Andy MearsPicture Editor

For commercial informationregarding Latin America:John Moncure, +1 212 6426362, john.moncure@ft.comorAlejandra Mejia, +1 212 6412466, alejandra.mejia@ft.com

All FT Reports are availableon FT.com at ft.com/reports

Follow us on Twitter attwitter.com/ft.reports

All editorial content in thissupplement is produced bythe FT.Our advertisers have noinfluence over, or prior sightof the articles or onlinematerial.

Contributors »

In early June, the US Treasurydepartment hosted a bigcelebration of the role playedby multilateral developmentbanks. Tim Geithner, the treas-

ury secretary, said their projects“often go unrecognised despitetheir importance” – as his agencyhanded out, for the first time, fourawards to the best projects chosenafter a lengthy competition.

But the party was not just aboutrewarding the best work of the globaldevelopment banks. It was also aboutmarking the successful conclusion –six months earlier – of a capitalincrease for the banks of which theObama administration was able tosecure nearly 100 per cent of the fund-ing it was asking for from Congress.

It had not been an easy ride.With the US running annual budget

deficits in excess of $1tn and Republi-cans and Democrats at loggerheadsover many aspects of fiscal policy, itwas a bigger struggle than usual tosecure the required monies.

“It was a major accomplishment,”says Lael Brainard, under secretary ofthe Treasury for international affairs.“What is remarkable is the bipartisansupport we got in Congress.”

Todd Moss, vice-president for pro-grammes at the Center for GlobalDevelopment in Washington, says itwas not just in the US that the desireto fund the banks was harder to mus-ter, but across the developed world.“It was a very big lift because every-one was facing their own financialcrisis,” Mr Moss says.

Ultimately, however, the funds fromthe US were approved just beforeChristmas last year. The Obamaadministration’s determination mayhave played a role in ensuring asuccessful outcome, suggests MsBrainard: “The president made a veryfundamental commitment to theseinstitutions because he could see theirvalue from his first days in office.”

Ms Brainard says Mr Obama noticed– as early as the G20 in Pittsburgh inearly 2009 – that the multilateraldevelopment banks (MDBs) had really“stepped up” in the face of the globaldownturn. “They deployed their bal-ance sheets in a massive way duringthe financial crisis, amid shrinking

and volatile private capital flows. Forinstance, they were central to theprovision of trade finance – and inallowing poor countries to build theirsocial safety nets”, she says.

This same argument was put toCongress – but lawmakers were alsopersuaded that US spending on multi-lateral development banks deliveredgood “bang for your buck”, since itcould be leveraged very effectively.

At the June event, Mr Geithnersaid: “Even though we provide only 5per cent of our international affairsbudget to the MDBs, our fundingsupports many times that amount inprogram assistance. For example, wecontributed $2.6bn to the MDBs thisyear, but the MDBs will make nearly$80bn in commitments”. In addition,

members on Capitol Hill were con-vinced that the multilateral develop-ment banks helped America’s “secu-rity agenda” by fostering strongerdemocratic institutions.

And, according to one developmentanalyst in Washington, there was alsoa fear that – if the US did not step in– China and other emerging marketcountries were more than willing tofill the gap, eroding US influence. Theglobal development banks are alsohaving to adapt to the changingtrends in their funding.

Caroline Anstey, managing directorof the World Bank, says she and hercolleagues are not seeing “any sign”of less appetite for funding.

But Ms Anstey does acknowledge:“What it means is that we have to

show the impact of development andvalue for money and we embrace thatenthusiastically, and it means greaterfocus on accountability, which issomething we welcome.”

The next test for the World Bank iswhether it can secure a new round ofcommitments for its InternationalDevelopment Association, supportinganti-poverty programmes in the poor-est countries with zero-interest loans.

A number of rapidly growing econo-mies are expected to “graduate” out ofIDA in the coming years, which iscausing much debate about its futureand could lead to a decrease in itsfunding compared to earlier cycles.

Also looming on the horizon is thepossibility that US funding to globaldevelopment banks could be sharply

An internationalroad projectlinked Mali toSenegal, helpingto cut transporttimes foragriculturalproducts Getty

How to get more bangs for your buckAid funding The role of multilateral development banks in supporting poor countries receivedbipartisan support in Congress when President Obama went looking for funds, writes James Politi

curtailed if Congress does not reach abudget deal by the end of the year.Last week, the White House outlinedwhich spending programmes would besubject to “sequestration” – $109bn inautomatic across-the-board reductionsin 2013 that will occur if the US tum-bles off the “fiscal cliff”. Among themwere the development banks – whichwould take an 8.2 per cent cut –including $122m for IDA, $17m for theInter-American Development Bank,and $17m for the African DevelopmentBank. But most political analysts inWashington still believe a deal afterthe election will be released.

Back at the Treasury event in June,all the talk was about the four MDBprojects that had won awards. In noparticular order, an African Develop-ment Bank international road projectlinked Mali to Senegal, helping toshrink transport times for agricul-tural products and cutting shippingcosts. The second was an Asian Devel-opment Bank plan for loans and guar-

antees to the private sector for invest-ments in mobile phone operationsacross Afghanistan. Third was anInter-American Development Bankplan to counter anaemia and malnu-trition among poor infants and tod-dlers, offering them an iron supple-ment and a food coupon. A fourthaward was given to a programme bythe World Bank and the Global Envi-ronment Facility to curb deforestationin the Amazon.

The Treasury’s Mr Geithner said.“We hope that by singling out theseprojects and the teams behind them,we can help promote the higheststandards for design and implementa-tion of development programs, raiseawareness about this work, and rein-force support for the MDBs.”

There was a fear that ifthe US did not step in,China and othercountries were more thanwilling to fill the gap

When it emerged thatBrazil’s development bankBNDES was helping tofinance a controversialmerger between the coun-try’s biggest supermarketchain and Carrefour’s localoperations last year, manywere outraged.

Abilio Diniz, the well-con-nected billionaire who con-trolled the Pão de Açúcarchain, was already facingcriticism for having set upthe deal behind the back ofhis partner, and Carrefour’sarch-rival, the Frenchsupermarket group Casino.

The idea that Braziliantaxpayers’ money would beused to finance the 74-year-old’s daring plan, whichCasino claimed was“illegal” under their share-holding agreement, was onestep too far for BNDES’scritics.

BNDES promptly with-drew its support for thedeal, which it said had beenconditional on an agree-ment between all parties.

The episode added tounease in the country aboutthe influence of the bank,which has amassed a loanbook nearly four times thesize of the World Bank’s.

Aside from covertly creat-ing national champions,BNDES has been accused ofcrowding out the privatesector and hampering thedevelopment of the local

financial industry. Its fund-ing of projects such as avast highway to Peru hasalso raised suspicions.

In 2011, BNDES disbursedR$139.7bn ($69.5bn) and hadallocated another R$67.9bnby July this year. Since thebeginning of 2007, it hasallocated more thanR$670bn – over a quarter ofthe country’s current GDP.

As well as lending tobusinesses – both directlyand via commercial banks –BNDES also invests in com-panies through its share-holding arm, financesexport activities and evenlends to foreign govern-ments, mostly in Africa.

As of the end of last year,BNDES was responsible for72.4 per cent of all loans tocompanies with maturitieslonger than three years.

However, for João CarlosFerraz, BNDES’s vice-presi-dent, neither the size northe ambitions of the bankshould be anything to fear.

“We’re so big becauseBrazil is a big place,” hesays, adding that compari-sons with the World Bankmake little sense. “It’s a dif-ferent type of bank. We’restill smaller than the Euro-pean Investment Bank,smaller than China’s devel-opment bank, and smallerthan Germany’s develop-ment bank,” he says.

On the question of creat-ing national champions, heis also far from apologetic.

“I don’t want to createnational champions; I wantto create internationalchampions,” he says.

For example, BNDES nowcontrols 30 per cent of theBrazilian company JBS, theworld’s biggest exporter ofmeat by sales, havinginvested more than R$8bn

in the group since 2007.With the cash, JBS went

on an acquisition spree,which included buyingPilgrim’s Pride in the US.

Mr Ferraz says BNDESinvests only in companieswith a viable business planand avoids getting involvedat the management level orbuying majority stakes.

“We see ourselves as afacilitator: that’s to say thatwe back the winners, wedon’t pick the winners.”

For some, BNDES’s strat-egy of lending to alreadylarge and well-connectedcompanies could be doingmore harm than good.

Professor Sérgio Lazzariniof Insper business school inSão Paulo says: “When it

was founded in 1952 BNDESwas very important becauseit was a time when therewas little capital availablefor companies and this wastrue right up until thebeginning of this century.”

“After this we saw hugegrowth in the emergingmarkets and big Braziliancompanies were able to cap-italise themselves [in themarkets]. At this pointBNDES should havereduced its emphasis onthese big groups, but it didexactly the opposite.”

Prof Lazzarini says 60 percent of BNDES’s portfolio islarge companies. He adds

the best strategy forBNDES would be to investin smaller, higher-risk com-panies such as technologystart-ups, and back infra-structure projects unattrac-tive to private investors.

The real test is likely tocome in the next few years,as the country adapts towhat some economistsbelieve could be the begin-ning of a new low-interestrate environment.

Over the past year, thegovernment has takenmeasures – from cuttingsavings rates to slashingenergy tariffs – to give thecentral bank room to bringdown traditionally highinterest rates. The bench-mark Selic rate stands at anall-time low of 7.5 per cent –high by international stand-ards but down 5 percentagepoints from its peak inAugust last year.

If the government cankeep rates low, commercialbanks will be able to takeover more of BNDES’sactivities, increasing lend-ing to companies and offer-ing loans with longer matu-rities. In theory, BNDESseems ready to step aside.

“We have never beenagainst the market: we alsowant to see strong capitalmarkets in Brazil,” says MrFerraz, adding that thebank has always sought toact counter-cyclically.

However, those who arehoping BNDES will becomea shadow of its former selfover the next few decades,may be disappointed.

“Is there a trend for thebank to become smaller inabsolute terms? No,” saysMr Ferraz. “But is there atendency for the bank tobecome smaller in relativeterms? Yes.”

A bank too big to be beautiful

‘The best strategyfor BNDES nowwould be to investin smaller, higher-risk companies’

Brazil

Critics say BNDESspends too muchon companiesdoing well, writesSamantha Pearson

The Future of Development Banks

4 ★ FINANCIAL TIMES MONDAY SEPTEMBER 24 2012

The Future of Development Banks

Brics summit next year.“It’s going to be at least twoyears before the bank isestablished,” says Panda.

In the meantime, itremains to be seen whatimpact the embryonicdevelopment bank has onthe Brics’ commitment toexisting international insti-tutions.

The five countries are sig-nificant borrowers from theWorld Bank, with newloans of over $7bn approvedin 2011 alone. They are alsogrowing contributors to theIMF. But all have expressedfrustration at their mar-ginal role in those bodies’decision-making.

In that context, starting anew development bank pro-vides a bargaining chip.“By entertaining the idea ofa Brics bank, they have bet-ter negotiating power overvoting rights in the IMFand World Bank, as theycan always threaten to walkaway,” says Mr Lombardi.

ened the countries in thefirst place.

“Since the financial crisis,it’s become clear that youdon’t need to have a tri-ple-A credit rating to raisemoney. That is the triggerfor the bank,” says Mr Lom-bardi.

A ballpark proposal isthat each country wouldcontribute $10bn in initialcapital and guarantees.

Equalising contributionswould give the institutionan equal voting structure,in sharp contrast to theWorld Bank. Yet it mayalso limit the eventual sizeof the bank – given thatSouth Africa’s pockets arenot as deep as China’s.

Negotiations between theBrics, which are usuallyconducted in English, arelikely to continue on thefringes of the IMF andWorld Bank annual meet-ings in Toyko in October.Final feasibility studies aredue to be presented at the

would lend to companies aswell as governments.

Domenico Lombardi, aformer board member of theWorld Bank Group, andnow a senior fellow of theBrookings Institution, says:“The question is: do theseBrics countries haveenough in common to makethe bank instrumental totheir objectives?

“They all have a hugeneed for infrastructure[investment] and share adissatisfaction with thelending policies of theWorld Bank, so there’s abase on which they couldbuild.”

There are some signs ofmodest progress. At prepar-atory meetings in Rio deJaneiro in August, the fivecountries agreed that thebank should raise moneyfrom the market, instead ofacting merely as a fund.

Indeed, investors’ willing-ness to lend to emergingmarkets may have embold-

make up its membership,with the remainder fromSpain and Portugal.

Although Mr García sayshe would be interested insetting up trust funds withEuropean and Asian coun-tries, he plans to keep thebulk of the bank’s borrow-ing within Latin America.

Ms Rojas Suarez describesthe CAF as a “model of effi-ciency”, which is one of thefactors that has enabled itto attain an investmentgrade credit rating – despitebeing composed of membercountries that are notinvestment grade –although having 14 privatebanks among its membershas injected an element ofmarket discipline.

This allows the CAF toprovide quicker and easieranswers for its borrowersthan other lenders. MsRojas Suarez says: “Wheredo you go if you want to getthe job done quickly? Yougo to the CAF.”

possible by governments’sound macroeconomic man-agement – has created hugedemand for power stations,roads, ports and railways.

Regional governmentshave preferred to borrowfrom the CAF, over half ofwhose lending is directed toinfrastructure projects,rather than relativelyunwieldy organisationssuch as the World Bank,which is slowed down bycomplex bureaucratic proce-dures and subject to intensescrutiny from rich-nationshareholders and environ-mentalists.

Indeed, one of the CAF’sbiggest strengths is that,unlike the rest of the multi-lateral lenders in theregion, it is the only onefinanced almost entirely bythe same countries to whichit lends.

That is, 97 per cent of itsassets are provided by the16 Latin American andCaribbean countries that

focus on supportingregional integration andinfrastructure.

But the success of the 18-nation institution, whichfunds more Latin Americaninfrastructure than theWorld Bank and the Inter-American DevelopmentBank combined, is notsimply explained by the factthat the region’s economiesare flourishing and becom-ing more integrated.

Liliana Rojas Suarez, is asenior fellow at the Centrefor Global Development,where she heads its LatinAmerica initiative.

She says: “The answer issimple: they have incredi-bly high standards ofgovernance and minimisetransaction costs.”

The growth of LatinAmerican economies overthe past decade – spurredon thanks to the growth indemand for their commod-ity exports in Asia, espe-cially China, but also made

As Latin America’s econo-mies have recovered sincethe so-called “lost decade”of the 1980s when hyperin-flation and financial criseswere the norm, so theregion’s development bank,the Corporación Andina deFomento (Andean Develop-ment Corporation, or CAF),has gone from strength tostrength.

The CAF’s lending opera-tions have doubled in thepast five years to $15bn, andthe bank’s president,Enrique García, told the FTin an interview this yearthat he expected them todouble again over the nextfive years, with a particular

It is still early days for Jim YongKim, the public health expert whobecame head of the World Bank inJuly, but he has begun to give afew small hints about his con-

cerns and priorities.Three months into his term as head

of the world’s most important devel-opment bank, Mr Kim has taken stepsto consolidate his authority, but as heheads to his first annual meeting ofthe bank’s shareholders in Tokyo thisOctober the big decisions about wherehe wants to lead the bank still lieahead.

Mr Kim, the US candidate for a posi-tion that by convention always goesto the US, won the job after a conten-tious selection process in which devel-oping countries put up two strongcandidates of their own. NgoziOkonjo-Iweala, the finance minister ofNigeria, stayed in the fight until theend. Her supporters included all threeAfrican directors on the bank’s execu-tive board.

Mr Kim seems to be working hardto smooth over any lingering ill feel-ings. The destinations for his first offi-cial overseas trip, which he made atthe start of September, were SouthAfrica and the Ivory Coast.

“I have worked in Africa, and it isone of my absolute top priorities,”said Mr Kim on his visit. “So you canrest assured that on every level, I amdeeply committed to the growth andthe success of Africa.”

Pravin Gordhan, South Africa’sfinance minister, made clear that anybitterness about the selection was inthe past. “We know that democratisa-tion processes are long processes gen-erally,” he said.

“We are very happy with, andimpressed with, the vision thatDr Kim has for the World Bank.”

The other concrete move thatMr Kim has made so far is the

appointment of Kaushik Basu, a pro-fessor at Cornell University and anadviser to the Indian finance ministry,as the bank’s chief economist.

Mr Basu follows on from Justin YifuLin of China. His selection means thatthe top research job at the WorldBank has again gone to one of thelargest developing economies andMr Basu’s background in mainstreamdevelopment economics backs upMr Kim’s less conventional CV.

So far, however, Mr Kim has notgiven his answers to the deep ques-tions about the bank’s future thatarose during his leadership campaign.As countries such as China and Indiarise in power and wealth, and becomethemselves lenders to other develop-ing nations, the bank needs to find anew role and mandate.

In a speech to the Brookings Institu-tion in July, Mr Kim set out four mainchallenges: to protect developmentgains from global economic risks; tobroaden development to countriesincluding fragile and conflict states;to ensure growth is sustainable; andto ensure that it is inclusive.

All of that is worthy – it is hard toimagine a World Bank president whowanted the opposite – but does notdefine a role for the Bank. InMr Kim’s response to questions, how-ever, it was possible to see wheresome of his own interests lie.

Mr Kim showed his enthusiasm forrandomised trials and a scientificapproach to using the bank’sresources. “We really want to turn thefocus of the bank more toward whatare the specific outcomes and resultsthat we’re achieving on the groundand how can we set up a system sothat that is what you’re rewarded for,actually delivering the results on theground,” he said.

He showed his passion for improv-ing the health of the world’s poorest

people. “The real problems are settingup the delivery systems that cannotonly protect people from the diseasesof today but from the diseases oftomorrow, and there’s enough moneyout there in the world that we canbegin moving in that direction. That’show I would like to see the WorldBank engage,” he said.

Mr Kim also voiced clear concernabout climate change. “I have to tellyou that the data that I’m seeingabout changes that are happeningtoday that we didn’t think would hap-pen for three or four years . . . this isextremely disturbing to me, and Ithink we have to put the science ofclimate change in front of all of ourmember countries,” he said.

“And I guarantee you that I will dothat.”

Now Mr Kim will have to take hisideas and turn them into a mission forthe World Bank: deciding whether toconcentrate on low or middle incomecountries; whether to seek more capi-tal in order to meet the developingworld’s need for infrastructure orfocus on technical advice; andwhether to tackle the global perils ofclimate change and infectious diseaseor the individual problems of theworld’s poorest regions.

The choices that Mr Kim makes inthe coming months may determinewhether the World Bank remains theworld’s dominant development insti-tution in the years to come.

Ideas man: Kaushik Basu, adviser to the Indian finance ministry, is the bank’s chief economist Reuters

Africa is highon a packedpriority list

Mission statement The World Bank headhas passionate ambition, says Robin Harding

‘I think wehave to putthe scienceof climatechange infront of allof ourmembercountries’

Growth industry: the CAF’s lending operations have doubled

Multinational lending

CAF is a model ofself-help in financingdevelopment, saysBenedict Mander

serve Chinese mines in for-eign countries – Eximbankhas become a huge presencein the developing world.

Fitch Ratings calculatedEximbank lent $67.2bn tosub-Saharan Africa from2001 to 2010, $12.5bn morethan the $54.7bn lent by theWorld Bank. Eximbank isalso the main conduit forconcessional loans fromChina, while CDB oftenlends more at market rates.

A good window on to howEximbank – and China –operate came through itsestablishment of a co-donorstructure with the WorldBank in the past few years.

Other bilateral donorshad lined up behind theWorld Bank, but China hasbeen unwilling to do so,according to Greg Chin,China research chair at theCentre for InternationalGovernance Innovation.

“China still self-identifiesas part of the global south.

“The World Bank has abad reputation in the southfor its history of conditionalloans. China is not going tosubordinate itself to theWorld Bank,” Mr Chin says.

And yet, in providingfunding alongside theWorld Bank, China is sup-porting the bank’s efforts,providing it with additionallending firepower and ulti-mately making it a morerepresentative institution.

There have been exam-ples of countries such asAngola and Chad opting forChinese loans, with weakerconditions than the Interna-tional Monetary Fund orthe World Bank apply.

But in a study of Chinesefinance in Latin America,researchers at Tufts Univer-sity in Boston highlightedhow CDB extended credit toArgentina at much higherrates than the World Bank’sin 2010. Moreover, theyshowed Chinese loans oftencomplement, rather thandisplace, loans from theWorld Bank and the IMF.

The Tufts researcherswrote: “They give differentsize loans to different sec-tors in different countries.Chinese banks have largelyfocused on loans to naturalresource-based and infra-structure sectors.”

China has been active inteaming up with regionaldevelopment banks. Ithas greatly increased itsfunding for the AsianDevelopment Bank, espe-cially since the global finan-cial crisis.

In 2007 it hosted theannual meeting of the Afri-can Development Bank inShanghai. In 2009 it joinedthe Inter-American Develop-ment Bank. It alsoincreased its contributionsto the Caribbean Develop-ment Bank.

“It is clear that China ispursuing way more bilat-eral deals than it is goingthrough any internationalbanks,” Mr Chin says. “Butthis doesn’t mean it’sundermining the estab-lished order. You could saythat China is trying toreform the existing order byshifting to a regional,decentralised system.”

In 2010 China DevelopmentBank lent $20bn toVenezuela, money that theLatin American countryagreed to pay back with oilshipments to China.

CDB had been issuingmore and more of this kindof loan: huge in scale; to aborrower largely cut offfrom international finance;and with few policy condi-tions mentioned in public.

This largesse was stirringconcerns the loans were lit-tle more than blankcheques to badly run states,assistance that wouldundermine the efforts of theWorld Bank and Interna-tional Monetary Fund.

But behind the scenes,China was working over-time to make sure that themoney would be well used.

In her study of CDB’s rolein cross-border finance,Erica Downs, a scholar atthe Brookings Institution,told how China sent 30 con-sultants, led by a formervice governor of CDB, toVenezuela for 18 days.

Their mission had twoobjectives. First, theywanted to check Venezuelawould be able to deliver thenatural resources it hadpromised. Second, theymade proposals for how toreform its economy, fromreining in inflation to creat-ing a more open environ-ment for foreign investors.

China’s actions werehardly altruistic – it wantedto get its money back. Butthe fact that it was devotingso much attention to howVenezuela was managingits economy addressed thebiggest concern about Chi-nese lending: that it careslittle about the governanceof recipient countries.

“As CDB and other Chi-nese banks continue to pro-vide large loans to foreigncountries, they will proba-bly become more involvedin trying to shape economicdecision-making in borrow-ing countries to ensurerepayment of their loansand to protect investmentsmade by Chinese companiesin conjunction with theloans,” Downs said in herstudy, “Inside China, Inc.”

The question of whetherChina is playing by interna-tional norms for develop-ment banks is hugelyimportant. China is not justany country. In 2009and 2010, it agreed to lendabout $110bn to developingcountries, $10bn more thanthe World Bank in thatperiod.

CDB often attracts mostof the attention, thanks inpart to its high-profile chief,Chen Yuan, son of a revolu-tionary leader. But it origi-nally focused on providingcredit to domestic infra-structure projects and onlygot into international devel-opment in recent years.

Export-Import Bank ofChina was the lender at theforefront of China’s interna-tional assistance efforts,with a mandate to providetrade finance. Interpretingthat in the broadest way –for example, funding theconstruction of roads to

A new wayof lending

Chinese loansoften complementloans by the WorldBank and IMF

China

Beijing’s assistanceto nations isnothing to beafraid of, writesSimon Rabinovitch

so they will have clout onthat continent. India wouldstill like to have the head-quarters in India.”

Wherever they arelocated, the bank’s officesare unlikely to rival theWorld Bank’s imposingpresence in Washington.

Brazilian officials suggestthe Brics bank should havea lean structure, like theAndean Development Cor-poration (CAF).

Other issues yet to beresolved include whetherthe bank would lend out-side of the Brics countries –Brazil’s foreign ministerhas suggested it focus onAfrica – and whether it

financing niches that itcould fill. Those couldinclude green technologiesto counter climate change,as proposed by leadingeconomists Nicholas Sternand Joseph Stiglitz.

Conversely, the bankcould finance projects –such as biofuels, large damsand nuclear power plants –that do not meet the WorldBank’s environmental andsocial standards.

Nonetheless, reaction tothe proposal has beenmixed. Sceptics havepointed out the differinginterests of China andIndia.

Jagannath Panda of theInstitute for Defence Stud-ies and Analyses, a NewDelhi think-tank says:“India sees the Brics as aneconomic proposition, whilethe Chinese see it as morepolitical.

“The Chinese are support-ing heavily that the bankshould be in South Africa,

discussed at a meeting ofthe five countries in March.

If it becomes a reality, theinstitution would be thefirst major multilaterallender to emerge since theEuropean Bank for Recon-struction and Developmentin 1991.

While the EBRD symbol-ised the post-Cold Warorder, the Brics bank couldshowcase the 21st centuryrise of emerging states.

Amrita Narlikar, directorof Cambridge university’sCentre for Rising Powerssays: “This could be thefirst step towards moreproactive agenda-setting bythe Brics.

“It’s one of the fewinstances we have whenthey have gone beyond tell-ing us what they do notwant, and offered an idea ofhow they could be responsi-ble players contributing tothe system.”

Supporters of the bankhave suggested various

A case of life imitating artor a seminal shift in globalpower? The idea of a Bricsdevelopment bank may beboth. Few can haveexpected the Bric acronym– initially put forward in2001 as an investmentconcept – to have inspiredreal-world alliances.

But Brazil, Russia, Indiaand China, recently joinedby South Africa, areincreasingly adding diplo-matic ambitions to theireconomic assertiveness.

Once an outlandish possi-bility, the proposed Bricsdevelopment bank was first

A bankof andfor theBricsis inthe air

$10bnMember countries’ capitaland guarantees deposit

Mutual aid works for Latin America

Global shift

Henry Mance asks ifBrazil, Russia, India,China and SouthAfrica could found abank together