Peer Financing Development

A proposal from Stephany Griffith-Jones , Jose Antonio Ocampo and Pietro Calice via Project Syndicate:

Multilateral financial institutions must maintain their central function in the international development architecture, and in particular in financing infrastructure investment. But regional and sub-regional financial institutions owned by developing countries can and should play an important and valuable complementary role. These institutions give a greater voice and sense of ownership to developing countries, are more likely to rely on moral suasion rather than conditionality, and tend to benefit from smaller information asymmetries.

Moreover, regional and sub-regional development banks are particularly suited to provide regional public goods. The growing importance of trade integration and regional trade flows makes the provision of regional infrastructure urgent. The European experience offers valuable lessons in this regard. Trade integration was initially supported by massive investments in regional infrastructure, financed to an important extent by a large, specifically created institution, the European Investment Bank.

If developing countries allocate only 1% of their foreign exchange reserves to the paid-in capital of regional and sub-regional institutions, this would amount to $50 billion at current levels of reserves. Assuming a ratio of loans-to-capital of 2.4 times – an estimate based on the ratio of the successful and financially sound Andean Development Corporation – the expanded regional and sub-regional development banks or new ones could generate additional lending of approximately $120 billion.

With time, they could leverage retained earnings, increasing their lending potential without additional paid-in capital. This would imply the ability to finance an important proportion of unmet needs for infrastructure financing.

Based on these initial calculations, the additional lending capacity generated would be significantly larger than total disbursements currently made by existing multilateral development banks. Obviously, more detailed calculations and analyses are required, along with discussions with governments, existing institutions, rating agencies, and other stakeholders.

By expanding or creating new regional and sub-regional financial institutions, developing countries could lay the basis for their own current and future lending capacity, which would eventually help them meet their development goals. Given their large foreign-exchange reserves, we believe the time to begin such an initiative is now.”

Stephany Griffith-Jones is Executive Director, Initiative for Policy Dialogue (IPD), Columbia University; José Antonio Ocampo, former Under-Secretary General of the UN, is Co-President of the IPD; Pietro Calice is Senior Policy Advisor, Christian Aid.