Research Paves the Way to a New Era for Development Banks

published on 13 November 2020
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the "Visible Hand" conference, on Development banks in transition
Faced with the Covid-19 crisis, how can we ensure that short-term stimulus packages won’t compromise long-term trajectories toward a low-carbon, inclusive, and sustainable economy? And what role can development banks play in contributing to a fair and sustainable recovery? Researchers, economists and representatives of development banks gathered for an online conference organized in Paris on November 9 and 10. Together, they shared their analyses and recommendations on the challenges ahead.

Agence Française de Développement (AFD) held its 14th international development research conference entitled “The Visible Hand: Development Banks in Transition” on November 9 and 10, prior to the first summit of the world’s development banks. The event—organized with the support of the Institute of New Structural Economics (INSE) in China, IDDRI and FERDI—brought together more than 700 online participants from all over the world. Its purpose was to make use of research to draw up concrete proposals for public development banks (PDBs) ahead of the Finance in Common Summit on November 11 and 12.

AFD Chief Executive Officer Rémy Rioux opened the conference by stressing the role of PDBs as drivers of transitions toward a fairer and more sustainable world. Indeed, we have witnessed the failures of market self-regulation, which was famously referred to as “the invisible hand” by the economist Adam Smith. In response, PDBs can act as “visible hands, to reconcile short-term imperatives with those of the long term, and encourage transitions”—an idea strongly advocated by economist and Nobel Prize winner Joseph Stiglitz. 


What are public development banks?

“It’s absolutely crucial to know who we are as a community,” said Rémy Rioux. This is why AFD and Peking University’s INSE launched the first database on PDBs, which was unveiled by Régis Marodon (AFD) and Jiajun Xu (INSE) at the start of the conference. After months of research, this unique open-source database has identified more than 450 PDBs worldwide and can be used to see how they are positioned with regard to the Sustainable Development Goals (SDGs). 


Going beyond the crisis, and Putting SDGs at the center of PDB Action

“When private capital withdraws, official (bilateral or multilateral) capital comes in,” said World Bank Chief Economist Carmen Reinhart. PDBs play a vital counter-cyclical role by providing capital in areas whose lack of a track record cause private investors to shy away. And yet in times of crisis, such sectors need capital. By stepping in, PDBs can limit the economic impacts of the crisis and support a sustainable recovery. 

“The SDGs are there so we can imagine the world we want to live in, not to fix a flaw. We must use these goals to truly transform our system,” said Mariana Mazzucato, professor of economics at University College London (UCL). PDBs should design their strategies and governance so that they can contribute to putting the SDGs into action. But this first of all means understanding the interconnected and cross-cutting nature of the Agenda 2030. 

“Tailor-made” instruments and regulations

To achieve this, development banks need to design instruments tailored to their specific nature. They need to manage risks, with an aim to creating a positive impact—such as those related to technological innovation in the case of green energy—without compromising financial stability.

The same applies to the regulatory framework: “The current Basel III frameworks are designed for commercial banks, and it is of utmost importance to design tailor-made frameworks” for PDBs, said Jiajun Xu, Executive Deputy Dean of INSE at Peking University and one of the coordinators of the research program on PDBs. 


An urgent change in scale

Another crucial point unanimously raised by the speakers was that PDBs must have the capacity to act on a larger scale. Several ways to achieve this were mentioned: “We need private-sector financing to reach the development goals,” said Alexia Latortue, Managing Director for Corporate Strategy at EBRD. This can be done especially with blending of resources, “which helps us push back the boundaries of what markets can do.”

Recapitalization of PDBs is also essential, especially for regional and sub-regional development banks in the current Covid-19 period, said Stephany Griffith-Jones, Financial Markets Director at the Initiative for Policy Dialogue at Columbia University.

This idea was also put forward by Masood Ahmed, President of the Center for Global Development: “If we want these institutions to be fully aligned with the Paris Agenda, their shareholders must give them the means to do so. And also make them accountable.” 


Towards a PDB coalition?

Global challenges call for global and coordinated responses, and PDBs must work together in complementary ways to better coordinate their practices. LSE economist Lord Nicholas Stern, who is also Chair of the Centre for Climate Change Economics and Policy, suggested that they should “sometimes pool their resources.” 

It’s also important that they share their experience and develop common standards to measure their impact and increase the transparency of their actions. In short, “PDBs must operate as a system,” said José Antonio Ocampo, Professor and Co-President of the Initiative for Policy Dialogue at Columbia University. 

It’s the global architecture of development finance as a whole that needs to be questioned, and in which PDBs must take on their full role. “What we need is committed funding, funding that makes itself heard, funding that’s transparent. This is a call to action!” concluded Thomas Melonio, Executive Director of Innovation, Research and Knowledge at AFD.  Indeed, this call to action served as a starting point for the discussions at the Finance in Common Summit.


Watch the videos of the Open Discussion Days of the 14th International Development Research Conference:

Further reading