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Matías Vernengo

Over the last thirty years there has been a significant change in the role of public banks.  Neoliberal policies suggested that central banks should be independent of the Treasury, and should concentrate their efforts on inflation targeting.  Further, development banks, where they existed, were discouraged as tools for industrial policy, that is, they were precluded from providing subsidized credit for specific economic sectors.  On the other hand, the tendency was to use development banks as instruments of the process of privatization, providing credit for mergers and acquisitions.  Finally, the international financial institutions (e.g. IMF, World Bank, etc.) were used to spearhead the process of liberalization, and credit was only available to those that adopted the neoliberal policies.

It is important to emphasize that central banks were established in Europe (e.g. the Bank of England) primarily to raise loans for the government, and that the role as fiscal agent of the Treasury still was one of the main purposes for their existence until very recently.  For example, the Federal Reserve during the Great Depression agreed to maintain the interest rate on long-term treasury bonds at 2.5%.  That allowed the fiscal expansion (with deficits that eventually were larger than 20% of GDP, double their current size in the US now) of the New Deal and War effort to be sustainable.  Low rates of interest imply that government debt grows at low rates, and as the economy grows and government revenues increase the Treasury can repay its loans without difficulty.

Almost as important as the low interest rate policy was the foreign exchange policy.  Central banks could, by intervening in the foreign exchange market, buying and selling foreign currencies and using exchange controls, maintain a depreciated currency, favoring domestic production over imported goods.  In reverse, high interest rates and appreciated currencies sometimes were used to favor the financial sector and importers, in order to weaken domestic industrial production and employment and to reduce the bargaining power of workers.

In addition, public banks have been not only important lenders to the state, but also they were heavily involved in lending directly to industry.  Central banks in the developed world provided subsidized credit for industrial activities.  In developing countries the role of development banks was more important, and the incredible rates of growth in South Korea and Brazil (until the 1980s) cannot be understood without the Korea Development Bank (KDB) and the Economic and Social Development National Bank (BNDES in Portuguese).

In South America, within the context of the rise of left of center governments over the last decade, there has been a significant change in the role played by public banks harking back to their role as promoters of development of the pre-neoliberal era.  At least three examples of institutional innovation that have changed the role of public banks in the region are worth noting.

In Brazil, BNDES received R$ 100 billion (approximately US $ 55 billion) loaned by the federal government in 2009 for its operations.  This loan allowed the Bank to increase significantly its funding capabilities to support long-term investment projects and made relevant anti-cyclical efforts feasible in the context of the crisis.  It must be noted that total investment in 2009 corresponded to 16.8% of GDP and of that about half corresponded to the purchase of new machinery.  Since, the BNDES total lending was about 4.5% of GDP in 2009, one may conclude that about half of all purchases of equipment were financed by the BNDES, which explains why the Brazilian economy will continue to have vigorous growth in the midst of the crisis, in spite of having the highest real rate of interest in the world.

Second, it has been recently announced that the Central Bank of Argentina will start to make subsidized loans to stimulate local production and reduce the dependency of imported inputs.  This follows the decision to use the central bank reserves to pay for external debt commitments, after the defenestration of the neoliberal head of the bank.

Finally, the region has moved ahead with the plans for the new Bank of the South, an alternative to the current financial architecture, that involves reduced dependence on external funds, with increasing use of the currencies of the region rather than the dollar, greater degree of cooperation in the region and a move towards a common monetary system underpinned by policies to promote full employment and poverty reduction.

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