Investments in public infrastructure is a key component of economic growth strategy among emerging economies, and a particular focus of the Modi government. In general, policymakers and financial economist assume that financing will follow once the roads are built, and thus, facilitate the best use of new productive opportunities created by new road connectivity. However, many rural and agrarian economies suffer from chronic problems of financing, characterized by the absence of formal financial institutions and reliance on informal moneylenders who often are unreliable and charge usurious interest rates. Therefore, a key question remains: if you build it (roads), will they (financing) come?
Strong regional and global integration have been central to countries’ rapid growth and reduced poverty. Few economic sectors can better illustrate integration’s potential benefits — and its significant risks — than the banking sector.
The period prior to the 2008 global financial crisis was characterized by a significant increase in financial globalization, which coincided with dramatic increases in bank sizes. This was manifested both in a rise in cross-border lending and in the growing participation of foreign banks around the world, especially in developing countries. These trends resulted in: additional capital and liquidity; efficiency improvements through technological advancements and competition; and, eventually, greater financial development.
However, when the crisis hit, it also vividly demonstrated how international banks can transmit shocks across the globe. It became clear that systems in place to manage the risks associated with financial globalization were seriously flawed. The results were devastating to economies and to people, halting progress in the fight against poverty, affecting their incomes, health, and prospects for years to come.
- SDGs and Beyond
State-owned financial institutions (SOFIs) are back in vogue. Although the theoretical and empirical debate on state ownership in finance may continue to sway back and forth, the 2007–08 global financial crisis renewed policy makers’ interest in SOFIs as a policy instrument.
This interest is particularly visible in countries in Europe and Central Asia (ECA), where policy makers have turned to SOFIs for countercyclical interventions, as quantitative easing appears to have little impact on economic growth; the cost of bailing out privately-owned financial institutions has mounted; and many countries face significant fiscal constraints. From the publicly-owned British Business Bank (established to assist smaller businesses), to the Investment Plan for Europe (the “Juncker Plan,” which relies on “National Promotional Banks” to intermediate resources from the European Fund for Strategic Investments), SOFIs have been used to fill perceived gaps or complement the public policy toolkit.
Global banks had rapidly expanded their lending activities abroad before the global financial crisis, during the 1990s and early 2000s. Between 1991 and 2007, the volume of syndicated loan issuances a year by nonfinancial corporations increased more than seven times in high-income countries and more than eight times in developing ones (figure 1). However, the global financial crisis (GFC) hit global banks in the developed world especially hard, which reacted by reducing their cross-border lending activities worldwide.
Figure 1. Issuance Activity in Syndicated Loan Markets, 1991–2014
Source: SDC Platinum.