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113The Phenomenon of National Development Bank: Theoretical Foundation and Effectiveness*
Elizaveta SELYAVINA, Ph.D. candidate
Financial University, Moscow; London School of Economics and Political Science; Department for Strategic Analysis and Research, Vnesheconombank, Russia selyavinaliza@gmail. com
Abstract. Virtually every country has at Least one institution regarded as a development bank. However, there is a marked gap in studies of development banks on national scale. Following this demand, the current paper aims to shed light on a phenomenon of national development banks. This article identifies theoretical roots of development bank's existence and investigates its effectiveness. Based on the substantial amount of data observed we suggest an umbrella definition of a development bank. Further, we suggest relevant taxonomy to avoid potential misleading benchmarks. Descriptive statistics on macro-Level of analysis demonstrates idiosyncratic nature of national development banks and its extreme heterogeneity. Constructed empirical model identifies general positive association between development bank's foundation and national economic growth.
Аннотация. Актуальность темы статьи обусловлена объективной необходимостью дальнейшего изучения феномена национального банка развития. В данной работе изучены теоретические аспекты существования банков развития и существующие подходы к оценке их эффективности. Основываясь на проведенном анализе, мы предлагаем «зонтичное» определение национального банка развития, а также подход к классификации банков развития, необходимый для проведения корректного внешнего бенчмаркинга. Представленная автором эмпирическая модель эффективности деятельности национальных банков развития документирует общую позитивную связь между их присутствием и экономическим ростом на национальном уровне. По результатам исследования сформулированы рекомендации по повышению эффективности деятельности национальных банков развития.
Key words: Development bank, development theory, political theory, effectiveness, economic growth.
Virtually every country has at least one institution regarded as a development bank (DB). Its potential role in boosting economic growth and complementary domains of development is highlighted by the experts in development economics. At the same time, while the performance of global DBs, such as the World Bank Group's institutions, European Investment Bank, African DB, Inter-American DB, is discussed in the literature (e.g. Alacevich, 2009; Massa, 2011), there is a marked gap in studies of DBs on national and regional scales.
Yet, national DBs seem to perform highly successfully in last decades (Sanderson and Forsythe, 2013; Lazzarini et al., 2011) and therefore become a widely employed tool of policymakers in promotion development. Thus, after the global financial crisis there have been "calls to create a develop-
ment bank even in the United States" (Musac-chio and Lazzarini, 2012: 15), while the new DB of BRICS countries1 was established just recently2.
However, national DBs' strategies and operational plans are often not upgraded in line with growth theory evolution, as well as DBs' management is not aware of challenges, opportunities and progress, experienced by other DBs. In this vein, in the latest survey, experts of the World Bank underline that "despite its size and importance, little is known about DBs", and acknowledge "an
1 Although the New DB is not national per se, its mandate is grounded on cooperation of national DBs of the BRICS states.
2 The Economist (2014) The BRICS bank: An acronym with capital. Available at http://www.economist.com/news/finance-and-economics/21607851-setting-up-rivals-imf-and-world-bank-easi-er-running-them-acronym [Accessed 25 July 2014].
* Феномен национального банка развития: теоретические аспекты и эффективность деятельности.
increasing number of requests for data and new studies about DBs' (De Luna-Martinez and Vicente, 2012: 2). Following this demand, the current paper aims to shed light on a phenomenon of national DBs and their effectiveness in providing economic growth.
1. THEORETICAL FOUNDATION
Obviously, DBs reflect "their environment and their times" (Diamond, 1957: viii), particularly the fundamental attitude towards government presence in the economy. The latter always determines the rationale behind development banking. In this vein, theoretical roots of DB's creation as well as of its critique could be found in two competing theories — "development" and "political" theory respectively. The concept of sustainable development and agency theory also provide valuable insights into the question.
According to the development view, government's participation is vital for economic growth, while one of its hybrid forms is DBs' investments (Musacchio and Lazzarini, 2012). Indeed, economic theory provides a series of reasons that support the continuing need for DBs such as market failures, economies of scale, difference between economic and social benefits and risk aversion of the private sector. Thus, DBs aim at facilitating economic growth by investing in strategic long-term projects and balancing market failures by supporting underserved, infant industries, which often lead to social benefits (Gerschenkron, 1962; Stiglitz, 1994; Andrianova et al., 2009; Levy-Yeyati et al., 2004). In a similar spirit, social view is often identified as a supportive concept to the state presence in the economy (e.g. Körner and Schnabel, 2010). In fact, it seems to be part of the development approach, since lack of the socially desirable investments, in essence, is a market failure.
Essential role of DBs is also underlined by proponents of sustainable development concept (e.g. Pezzey, 1992), according to which apart from conventional economic there are also social and environmental pillars of development. This triple bottom line approach highlights distinctive ability of DBs to address the sustainability challenge. Thus, Mazzucato (2013) points out that "wind, solar and biomass technologies have been the largest benefactors of development bank funding in recent years"3 (ibid.: 139). Indeed, DBs' contribution to
3 For instance, "approximately $40 billion has been provided be development banks between 2007 and 2010 in support of a variety of renewable energy projects" (Mazzucato, 2013: 139).
"environmental, social, cultural or sport domains" of development (Schmit et al., 2011: 80) leads to the large positive externalities.
However, there is an alternative approach — political view (Shleifer and Vishny, 1994; La Porta et al., 2002; Schleifer, 1998), according to which government intervention in the economy seeks political gains "in terms of electoral voting shares, political support" (Körner and Schnabel, 2010: 5) or opportunistic advantages of wealth accumulation, and can produce unintended distortions, limit intermediation, financial innovation and competition (Hart et al., 1997). In addition, "public banks are more prone to bureaucratisation, agency issues and poorer governance than their private counterparts" (Schmit et al., 2011: 33). Therefore, DBs, being one of the government instruments, are supposed to be biased in their investment decisions dictated by redistributive politics, and therefore be both inefficient and ineffective in allocation of resources, sometimes even harmful for economic growth.
In this vein, agency theory should be stressed. As Körner and Schnabel (2010: 4) put it, "public banks may suffer from two principal-agent problems: first, between the politician and the bank manager, and second, between society (the taxpayer) and the politician". While the former type of conflict is accelerated by soft budget constraints and might lead to the misguided and limited managerial incentives to be efficient, the latter is of special interest for the purpose of the current research. Thus, an effective DB allocates resources in consistence with its mission and interests of society (taxpayer), which can be in conflict with political interests and connections leading to the resource misallocation. In essence, this is the point made by the proponents of the political view.
Finally, to avoid the binary thinking, in the literature there is an attempt to suggest synergetic and symbiotic forms of market and government coexistence (Stiglitz, 2013), since "the classical paradigms of social and economic development seem to have exhausted themselves" (Morgan, 1997: 491). It might seem that compilation of development and political views in integrated approach is hardly achievable since their different policy implications. However, in practice "in attempting to address the central problem from the perspective of one paradigm, they [government] made the problems under the others worse" (De la Torre and Ize, 2010: 110). From this eclectic perspective, a DB can be justified as an organizational innovation (Kane, 1975), an underestimated vehicle for com-
CKi ON
i— Variations of Legal Status
I- Pivotal DFI ■
Development
Financial
Institutions
[Development Agencie
Development
Corporations
Strategic Imperatives
• Development Banks —i
1— Complimentary DFI ^
Comme re tal banks Savings banks Housing finance providers Credit guarantee finds Investment funds Leasing firms Insurance companies
— Expert-Import Banks
— SMEDevelopment Banks
— Credit Guarantee Corporations
— Mortgage and Land Banks
— Miciofinance Development Funds
— Investmait Banks for Industrial Development Banks for Agriculture and Rural Development
I— Scope of Mandate
Ownership Structure
Territorial Scale
p Economic growth Job creation
— Environmental suslainability
— SME support
— Export support
— Sectoral assignments —
r— Broad-based development support
l— Traditional lending —
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- Individuals -Mutual
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- Subregiona! -National
- Subnatmnal
- Regional -Local
— Infrastructure
— High technology
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Figure l.The taxonomy of DFI with the focus on DBs. Source: Author's compilation based on data described in the text.
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munication between government and private sector, an effective tool of coordination between top-down and bottom-up approaches of national and regional development.
To shed light on this potential provider of development, we design a conceptual taxonomy for development institutions and highlight the role of DBs with its further stratification, which is essential for generating the research population.
2. TAXONOMY DESIGN
As Diamond (1957: ix) put it, "development banks cannot be fruitfully discussed in isolation from the many other institutions and factors related to economic development". However, for the best of our knowledge, no studies on development financial institutions (DFI) have brought them together in the conceptual paradigm. Consequently, in the relevant literature one can find controversial treatment of DBs: for instance, World Bank's economists (De Luna-Martinez and Vicente, 2012: 7) refer to the study on Fannie Mae and Freddie Mac (Acharya, 2011) as an example of DB's failure. Fragile boundaries between pivotal and complementary DFI lead to the complaints about public ownership structure: "the privatization of profits (for the shareholders and executives) in good times but the socialization of downside risk (for the taxpayer)" (ibid.: 5). However, while this argument is applicable to the complementary DFI such as housing finance providers, it is not consistent with DBs' fundamental nature, according to which profits go to the special development funds rather than privatized by executives. In this vein, it is essential to distinguish pivotal DFI from complementary ones (Figure 1).
At the same time, complementary DFI are present in our taxonomy, since they can provide innovative solutions to development issues. For instance, in case of insurance companies "use of catastrophe insurance might be able to diversify the weather related risk towards other investors and facilitate the interest of commercial banks in lending to farmers" (Rudolph, 2009: 5).
Based on empirical observations, we suggest to classify DBs according to their legal status, strategic priorities, scope of mandate, ownership structure and territorial scale. Besides, DBs use dissimilar financial instruments in their operational activities: long-term and short-term loans, syndicated loans, bonds or other securities, stakes (shares, stock), guarantees, public-private partnerships, etc. Technically, a DB may invest in projects
directly or, being a second-tier institution, provide target-oriented resources to the first-tier banks. Worth noting, that the rationale behind their establishment also varies: from the post-war economic restructuring via infrastructure investment to financing the most innovative high-risk firms and activities (Bruck, 1998).
We think that careful taxonomy of DFI, particularly DBs, is essential for accurate assessment of their effectiveness. Otherwise, benchmarking of different DBs and further generalization of research findings are prone to misleading conclusions.
3. WHAT IS A DEVELOPMENT BANK?4
In essence, previous literature on DBs is thin and mostly limited to descriptive reports. To our knowledge, there is no one clear-cut definition of a DB. Thus, the Latin American Association of Development Financial Institutions for the purpose of identification a DB as its member uses the self-definition selection principle, since "it is difficult to define whether an institution is a development bank or not" (Levy-Yeyati et al., 2004: 17). Based on the reviewed literature, we suggest the following umbrella definition of a DB (Appendix 1): a financial institution often controlled by the public sector and operated under special legal mandate, offering long-term lending to the bankable economic development projects5 in line with broad-based development support aimed at achieving socioeconomic goals in a country, region, sector or particular market segment.
It should be borne in mind that strategic vision of DBs is to be complementary to private banks meaning not to create market distortions (Rudolph, 2009). In addition, one should be careful in description of DB's functions. For instance, during recent global financial crisis, most DBs successfully participated in the federal governments' anti-cyclical efforts (De Luna-Martinez and Vicente, 2012). However, this function is supportive and can be treated just as an additional rationale for DBs' existence (Levy-Yeyati et al., 2004), since monetary policy is generally the object of central banks' mandate. As we noticed, in relation to DBs economists determine two main functional directions: investment in long-term costly projects,
4 Thereafter, we mean national DB.
5 Bankable development projects both have a positive development impact (first developmental criteria) and are expected to be fully repaid according to a pre-determined schedule (second banking criteria) (Kane, 1975).
which bring economic growth under condition of underfinance by market, and bridging the gaps of market failures. While the former function is well understandable — "investment is essential to the process of development" (Diamond, 1957: 7), the latter requires additional discussion.
De la Torre and Ize (2010) link market failures to several types of frictions. Thus, the asymmetric information and control gap — principal-agent issue — includes market failures of adverse selection of a contract, moral hazard and shirking during the contract implementation and false reporting afterwards, while interaction between the individual and the group may suffer from externalities, free riding and coordination failures. However, mentioned market failures are not idiosyncratic features of market. Instead, in practice it is highly feasible to diagnose them in DB's activity as well6. In this vein, Rudolph (2009) finds typical market failures that a DB is supposed to offset in high-risk segment of SME, while Levy-Yeyati et al., (2004: 12) underline "agriculture (plagued by asymmetric information and aggregated shocks), R&D-inten-sive sectors like the pharmaceutical industry (with a large share of intangible assets and potentially large spillovers), or capital-intensive industries with long start-up periods involving negative cash flow (such as the aerospace industry)".
Therefore, in the discussion of market failures, which a DB is supposed to mitigate, one should think about strategic sectors rather than traditional market failures cited in economic literature. Moreover, in accordance with such approach market failures become dynamic and time- and context-dependent.
In addition, if a DB targets non-profitable sector, it becomes "an institution that only leverages the subsidies from the government" (Rudolph, 2009: 6). Since such situation is common for DBs, issue of their effectiveness receives a central place not "to end up with losses and frequent recapitalizations" (ibid.: 6) or, at least, to justify them.
4. EFFECTIVENESS OF DEVELOPMENT BANKS: DIFFERENT APPROACHES
Since DB is a state-owned bank, most papers on the effectiveness of government presence in the banking sector include DBs in the object of research. We believe that for the purpose of current thesis this approach is relevant due to the same
6 The extensive discussion of market failures one can find in Stiglitz (1994).
fundamental arguments applied to the effectiveness (and efficiency) of public banks in general and DBs in particular. Based on that, we divide literature related to the DB's effectiveness into three grand categories.
The first strand of the literature fundamentally supports political view in line with its agency theory implications. Generally, scholars create empirical models to compare private banks with public banks, including DBs, and demonstrate that the latter are detrimental to economic growth in terms of growth-promoting ineffectiveness on the macro-level or their internal inefficiency on the micro-level.
Thus, La Porta et al. (2002) in their influential paper run ordinary least squares regressions on a large cross-country sample and find that the share of government ownership of banks in 1970 is negatively correlated with annual growth rate of GDP per capita for 1960 to 1995, controlling for standard determinants of growth. Authors document ineffectiveness of public banks on the macro-level. Following these findings, the World Bank's economist Hanson (2004) suggests that less growth at the macroeconomic level reflects the lower efficiency of state-owned banks on the micro-level. Indeed, the latter are often characterized by large non-performing loans (Hanson, 2004), overhead costs to bank assets and high spread between the lending and the borrowing rates (La Porta et al., 2002), negative operating income (Dinc, 2005), and low level of financial development (Barth et al., 2000). The main explanations of public banks' low efficiency are grounded on political considerations. Thus, Dinc (2005) complements findings of La Porta et al. (2002) by examining individual bank data with different ownership structure in 22 emerging countries of the 1990s and providing empirical evidence that government-owned banks increase their lending in election years relative to the private banks. Sapienza (2004) analyses the panel data on credit relations of over than 37 000 Italian firms with state- and privately-owned banks and finds out that "party affiliation of state-owned banks' chairpersons does have a positive impact on the interest rate discount given by state-owned banks in the provinces where the associated party is stronger" (ibid.: 24). In a similar spirit, Khawaja and Mian (2005) document that in Pakistan politically connected firms get the preferential corporate lending form the state-owned banks. In essence, above-discussed papers, directly or indirectly, support political view's arguments and advocate for the state-owned banks' privatization.
Table 1. DBs sample, by income group and region*.
Income group DBs Region DBs
High income: non-OECD 9 East Asia & Pacific 22
High income: OECD 9 Europe & Central Asia 20
Low income 11 Latin America & Caribbean 26
Lower middle income 29 Middle East & North Africa 4
Upper middle income 38 North America 1
I 96 South Asia 9
Sub-Saharan Africa 14
I 96
Source: Author's analysis based on data described in the text. * Classification according to the World Bank.
The second set of studies is more careful in generalizations. Thus, Andrianova et al. (2009) challenge findings of La Porta et al. (2002) by running the same regression but extending the set of conditioning variables to include omitted ones — institutional growth determinants (e. g. Hall and Jones, 1999). At this stage, "the coefficient of government ownership of banks becomes insignificant as soon as one such variable is introduced" (Andrianova et al., 2009: 2). Further, they test crosscountry regression based on more recent datasets and document that during 1995-2007 government ownership of banks has been associated with faster long-run growth. Most importantly, authors pointed out the necessity to interpret such results with caution, since found relationship might be heterogeneous across countries. In this vein, Körner and Schnabel (2010) analyse the nexus between public ownership in the banking sector and economic growth and find heterogeneity pattern: in countries with high level of financial development and high-quality political institutions they document public banks' positive effects on economic growth. Beck and Levine (2002) in their analysis of cross-country industry-level data for 39 countries also do not find clear-cut support for either development or political views: in their model financial structure does not help to explain "industrial growth patterns or the efficiency of capital allocation" (ibid.: 32). Rather, high level of financial development in line with efficient legal system determines the coherence of investment flows across industries, which is again in support of the heterogeneity hypothesis.
The heterogeneous results have been also obtained in the micro-level studies aimed at banking efficiency evaluation. Thus, Micco et al. (2007) analyse bank-level annual financial information for 179 countries during 1995-2002 and conclude that state-owned banks are not necessarily less profitable than private ones: this is the case only in developing countries, while in industrial countries
such correlation is not present. In this vein, Altun-bas et al. (2001: 950) estimate relative cost-profit efficiency of German banks with different ownership structure and find that "public and mutual banks have slight cost and profit advantages over their private commercial banking counterparts".
In fact, after considering results of above-discussed papers from the first category of the literature before their concluding generalizations, it becomes evident that they are in line with obtained heterogeneous results for developing and developed countries (e.g. La Porta et al., 2002: 291, Table VIII). In this vein, we find heterogeneous hypothesis to be plausible, since principal-agent problems are significantly limited in the developed countries, "where the politicians' actions are controlled by the public and their exercise of power is constrained to their political mandate" (Körner and Schnabel, 2010: 5).
Taking into account the heterogeneity of DBs, the third stream of the literature investigates their performance and effectiveness by means of case studies on individual DBs, which often represent best practice in development banking. For instance, performance of Canada's Business DB, Chile's Ban-coEstado, South Africa's DB of Southern Africa, Finland's Finnvera plc. (Rudolph, 2009), Brazil's DB BNDES7 (Lazzarini et al., 2011), and China's DB (Sanderson and Forsythe, 2013) for different reasons is regarded as effective. Based on good practices, scholars justify DB's presence and demonstrate its great potential in solving market failures, supporting strategic sectors, and providing economic growth at different scale and scope. According to this approach, above-mentioned issues of public banks' underperformance can be solved under certain conditions: clearly defined mission (Schmit et al., 2011; Levy-Yeyati et al., 2004), sus-
7 Interestingly, in case of BNDES Lazzarini et al. (2011) document an increasing lending for politically connected firms. However, they argue that this pattern is not detrimental for the bank's effectiveness, since these firms bring "good" projects.
Table 2. Descriptive statistics of efficiency indicators for 88 DBs, 2006-2009. Variable Obs Mean Std. Dev. Min Max
ROAO6 77 1.067623 5.279757 -29.31 18.48
ROA07 79 .9266683 7.360992 -60.09 14.22225
ROAO8 81 1.388473 2.69748 -6.9564 13.56793
ROA09 79 1.034896 3.12639 -17 11
ROEO6 82 5.927629 13.35411 -42.35 47.85
ROE07 82 7.341995 10.06996 -19.9 39.29335
ROEO8 82 5.888734 16.92058 -85.165 50.45663
ROE09 82 5.464588 16.41031 -65.02 63.45
NPL06 74 14.43685 24.04769 0 100
NPL07 75 13.16465 22.1068 0 100
NPL08 75 14.33244 21.8702 0 99
NPL09 75 14.8164 23.79413 0 120.61
Source: Author's analysis based on data described in the text.
Vietnam Uruguay India Hungary Germany Bulgaria
□ Development Bank(s) ■ Financial Sector (deposit takers)
Figure 2. ROA in DBs and private banks, 2008. Source: Author's analysis based on IMF data.
tainable self-financed mandate with target sectors, and clear-cut minimum criteria of efficiency, high quality management, sound institutional environment and transparent ownership policy (Scott, 2007).
To sum up, there is no a clear-cut DB's effectiveness valuation system. However, one essential thing to acknowledge is that DBs endeavour to achieve effectiveness rather than efficiency. Effectiveness demonstrates how well a DB fulfils its mandate with less weight to comparison its profits with costs. Interestingly, Levy-Yeyati et al. (2004)
consider a profitable DB as ineffective, since cost-saving actions aimed at increasing operational efficiency in some cases reduce long-term development impact of a DB leading to the decreasing of its effectiveness. In a similar spirit, Tirole (1994: 1) points out that "incentives based on measurable goals must be limited to not completely jeopardize the non-measurable dimensions of social welfare". To address that potential trade-off between internal efficiency and effectiveness, DBs are generally required to support so-called "bankable development projects" and at least to break even, "allow-
Figure 3. ROE in DBs and private banks, 2008. Source: Author's analysis based on IMF data.
Figure 4. NPL in DBs and private banks, 2008. Source: Author's analysis based on IMF data.
ing that bad-debt losses on some projects will be offset by higher returns from others" (Kane, 1975: 18). Yet, "only few institutions [...] are in the process of developing a number of indicators/proxies to measure their special contribution dictated by their mandate", while currently in most cases DB's effectiveness is measured by comparing its "achievements against predetermined (but arbitrary) targets"(Rudolph, 2009: 20). Such a proxy of effectiveness seems to be questionable, since self-determination of key performance indicators is prone to unfair target setting. In addition, these
indicators do not offer insights whether there is any value added from DB's existence. Therefore, an empirical examination of national DB's effectiveness is required.
5. RESEARCH DESIGN
First, we analyse the collected quantitative primary and secondary data on more than 90 national DBs by means of descriptive statistics. Further, following the methodology of Wacziarg and Welch (2007) in their study of trade liberalization effect
Percent
Annual growth ■ Average pre-
.......Growth, 2-year moving average
— — — Average post-
6 -
• 5
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• t '.............
r------ • l.l • • •
• 2 -
1 -
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-8
-4
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Figure 5. Sample means for growth before and after DB' foundation.
Source: Author's analysis based on data described in the text.
on growth, we compare the sample means of economic growth on macro-level for 50 DBs in pre-and post-DB periods.
Data. Our analysis is based on the unique dataset on 96 national DBs of 65 countries (Appendix 2) from different income group and regions (Table 1). The data on 88 DBs is based on the survey conducted by De Luna-Martínez and Vicente (2012) on behalf of the World Bank, results of which was kindly shared with me. In section 6.2 we add in the model additional independently collected data on 8 national DBs.
Assumptions. One should notice an assumption that referred to the conceptual framework used in the paper. Thus, GDP, being a quantitative measure, only partly reflects the level of development. As we noticed in section 1, sustainable development concept in line with economic growth incorporates environmental and social outcomes in an integrated system of DBs' effectiveness, which quantification is a tricky task (Slaper and Hall, 2011). Although we recognize the importance of these perspectives, in the current paper we restrict our discussion of sustainable development concept and focus on analytically rigorous economic growth as a proxy of development. In the following section, we investigate empirically existing approaches to the effectiveness of national DBs.
6. EMPIRICAL FINDINGS ON NATIONAL SCALE
6.1. LOW EFFICIENCY OF DEVELOPMENT BANKS: EVIDENCE?
Banking efficiency is measured, among others, by profitability indicators of return on assets (ROA), return on equity (ROE), and non-performing loans (NPL) ratio (e.g. Lin and Zhang, 2009). The descriptive statistics of panel dataset of 88 national DBs (Table 2) shows comparable with private banks average earnings power of DBs (ROA), while ROE and NPL ratio are lower than those of private banks (IMF data)8. These results are consistent with theoretical mission of a DB to trigger socioeconomic development rather than generate profit, as well as with previous empirical studies on dichotomy between public and private banks.
However, average results may mask significant deviations of indicators, wherefore we need to look at DBs' efficiency more specifically. In this vein, we identify countries, for which data on efficiency is available for both national DBs and private banks for the same time period9. A brief
8 IMF (2014). Financial Soundness Indicators. Available at http:// elibrary-data.imf.org [Accessed 20 August 2014].
9 There are several national DBs from India and Germany that participated in the survey: indicators for these two countries are averaged.
Figure 6. DBs' asset size, 2009. Source: Author's analysis based on data described in the text.
Figure 7. ROA in Indian national DBs. Source: Author's analysis based on data described in the text.
snapshot of six countries' banking sectors demonstrates that DBs' efficiency is somewhat irrelevant to generalization.
It is clear from Figures 2-4 that under similar macroeconomic conditions DBs can be either more or less efficient than national private banking sector. Therefore, our analysis of DBs' efficiency does not provide evidence on their clear-cut lower efficiency in comparison with private banks.
We find lack of any systematic relationship between DBs and private banks to be indicative of the fundamental difference between these financial institutions. Consequently, comparison between
them tends to be misleading. In essence, it seems that DBs to a greater extent are about development, rather than banking. Hence, as discussed above, criterion for their effectiveness evaluation should be linked with its mission of promoting economic growth.
6.2. EFFECTIVENESS AT A GLANCE
In this vein, we aim to identify the changes in national growth rate associated with foundation of a national DB. For that purpose, a panel data is constructed, which shows foundation years for the sample of 50 DBs in line with corresponding national
GDP growth for 8-year period before and after the year of each DB's creation10 (Appendix 3). Further, simple means of growth rates are taken for each year in period T — 8 to T + 8. Figure 5 displays the results.
Firstly, before DB's creation some downward trends are documented. This can be explained by the fact that DBs are often created in time of economic crises or other depressing factors. Secondly and most importantly, one can observe an increase of average growth rate from 3.6 percent in pre-DB period to 4.4 percent in post-DB span. Notice that there results are obtained without controlling for any fixed effects.
Evidently, generalization about the factors that may explain this slight increase of growth rates is difficult to draw. Although this exercise sheds some light on the effectiveness of DBs on national scale, the growth difference does not seem to be sustained. In addition, foundation of a DB is often complemented by a set of reforms, which effect on growth is difficult to disentangle. Besides, as we already mentioned, different macroeconomic and institutional environment is likely to cause significant deviations from average DB's effectiveness.
6.3. IT'S HETEROGENEITY, STUPID!
Difficulties in assignment of national growth purely to the DB's activity also proved by the findings that DBs is an extremely heterogeneous family.
Thus, although DBs are relatively congruent in ownership structure — mostly state-owned, they demonstrate extreme diversity in terms of size, resources of funding, business products provided, strategic sectors and market segments served. For instance, Figure 6 illustrates deviation of assets level from the sample average.
Interestingly, many indicators vary significantly even if compared DBs are located in the same country — for instance, Figure 7 highlights heterogeneity of Indian DBs.
Further visual elaboration on heterogeneous characteristics of national DBs can be found in Appendix 4.
7. CONCLUDING REMARKS AND POLICY RECOMMENDATIONS
To sum up, we demonstrate the existence of reasonable arguments — both pros and cons DB's
10 Since the World Bank data on annual GDP growth rates is available only for the post-1960 period, the time span is reduced to 8 years before and after DB's foundation, while research sample of DBs diminishes to 50 DBs, which are founded, consequently, after 1968.
foundation. However, it seems that such binary judgement overlooks non-linear character of development process. Hence, we find eclectic approach based on synergetic state-market collaboration to be the most fruitful. In this vein, we do not expect markets to promote sustainable development themselves and treat a DB as a by-product of cross-fertilisation between development and political views, which is able to be an effective tool of intelligent government intervention aimed at providing economic growth and mitigating market failures. Further, reflecting diagnosed fundamental heterogeneity of national DBs, we suggest the taxonomy to avoid potential misleading benchmarks.
Our analysis puts forward several considerations.
• Efficiency evaluation of a DB (financial and operational performance) should be explicitly recognized as a discrete exercise from effectiveness measurement (development impact).
• General positive association between DB's foundation and national economic growth is documented on the sample of 50 DBs.
• Descriptive statistics on macro-level of analysis demonstrates idiosyncratic nature of national DBs: substantial variation among national DBs in our sample indicates that effectiveness of a DB is also a diverse category conditioned by individual DB's and territory-specific characteristics. Therefore, it is essential to allow for the heterogeneity between and within countries. Ex-ante diagnosis of the territorial pattern and specific market gaps is crucial to "understand the main obstacles to productive investment" (Diamond, 1957: 18). A model of national DB therefore is expected to be flexible in order to tailor the specific requirements.
Based on that, we think that an increase of DBs' effectiveness requires improvements in traditional approach to its valuation system, since there are a number of alternative substitutes for the national DB and therefore its foundation has a certain opportunity cost. As we noted above, there is a possibility that economic growth evaluation cannot capture the contribution of a national DB in a development process. In this vein, design of special indicators to quantify environmental and social outcomes might be a gainful recommendation. The experience of global DFI in implementation of cost-benefit analysis is likely to be a sound basis for such improvements (e.g. Asian Development Bank, 2013).
However, to get a more complete picture a further research on the topic is required. To avoid misleading generalizations and not to conclude with insufficient "one-size-fits-all" recommendations (Barca, 2009), it might be fruitful to con-
duct additional qualitative bottom-up analysis of meso-level "untraded interdependences" (Storper, 1995), putting the region at the centre of development efforts (Morgan, 1997). It might be a valuable contribution to the debate on national DB's effectiveness.
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Appendix 1: Review of "Development Bank" definitions.
Development Bank is...
Appendices
Reference
A financial institution devoted primarily to stimulating the private sector of the economy.
A financial intermediary supplying long-term funds to bankable economic development projects and providing related services.
A specialized financial institution with functions and operations that can be defined with regard to its hybrid financial development character.
An institutional instrument of public policy whose performance is measured mote in terms of social benefits [...]
A financial institution that is primarily concerned with offering long-term capital finance to projects that are deemed to generate positive externalities and hence would be underfinanced by private creditors.
A financial institutions set up to foster economic development, often taking into account objectives of social development and regional integration, mainly by providing long-term financing to, or facilitating the financing of, projects generating positive externalities.
A non-monetary financial institution controlled by the public sector that is primarily active in equity participations and bond issue subscriptions and awards long-term loans (that are beyond other financial institutions' capability or willingness to provide) in a bid to further national and regional development.
A bank or financial institution with at least 30 percent state-owned equity that has been given an explicit legal mandate to reach socioeconomic goals in a region, sector or particular market segment.
Diamond, 1957: 4
Kane, 1975: 14
Bruck, 1998: 62
Levy-Yeyati et al., 2004:16
United Nations, 2005:10
Schmit, 2011: 38
(based on the OECD and IMF definition)
De Luna-Martinez and Vicente, 2012: 4
Appendix 2: List of observed national development banks.
Region Country Name of institution
East Asia & Pacific Cambodia 1 Rural Development Bank
China 2 China Development Bank
Fiji 3 Fiji Development Bank
Malaysia 4 Bank Pembangunan Malaysia Berhad
Malaysia 5 Bank Perusahaan Kecil & Sederhana Malaysia Berhad
Malaysia 6 Credit Guarantee Corporation Malaysia Berhad
Malaysia 7 Sabah Credit Corporation
Micronesia, Fed. Sts. 8 FSM Development Bank
Mongolia 9 The Microfinance Development Fund
Palau 10 National Development Bank of Palau
Philippines 11 Al-Amanah Islamic Investment Bank of the Philippines
Philippines 12 Development Bank of the Philippines
Philippines 13 Philippine Postal Savings Bank, Inc.
Philippines 14 Philippine Export-Import Credit Agency
Philippines 15 Land Bank of the Philippines
Samoa 16 Development Bank of Samoa
Samoa 17 Samoa Housing Corporation
Thailand 18 Small and Medium Enterprise Development Bank of Thailand
Tonga 19 Tonga Development Bank
Vanuatu 20 Vanuatu Agriculture Development Bank
Vietnam 21 Vietnam Bank for Social Policies (VBSP)
Europe & Bulgaria 22 Bulgarian Development Bank AD
Central Asia Croatia 23 Croatian Bank for Reconstruction and Development (HBOR)
Cyprus 24 TRNC Development Bank
Finland 25 Finnvera plc
Germany 26 Thüringer Aufbaubank (TAB)
Germany 27 North Rhine-Westphalia (NRW Bank)
Germany 28 Kreditanstalt für Wiederaufbau (KfW) Development Bank
Hungary 29 Hungarian Export Import Bank Private Company Limited
Latvia 30 Mortgage and Land Bank of Latvia
Norway 31 KBN Kommunalbanken Norway
Poland 32 Bank Gospodarstwa Krajowego (BGK)
Slovak Republic 33 Slovak Guarantee and Development Bank
Slovenia 34 Slovene Export and Development Bank
Turkey 35 Export Credit Bank of Turkey (Türk Eximbank)
Turkey 36 T.C. Ziraat Bankasi A.§.
Turkey 37 Development Bank of TURKEY
Region Country Name of institution
Latin America & Antigua and Barbuda 38 Antigua & Barbuda Development Bank
Caribbean Bolivia 39 Banco de Desarrollo Productivo (BDP)
Brazil 40 Banco Nacional de Desenvolvimiento Económico e Social (BNDES)
Brazil 41 Banco Da Amazonia (BASA)
Brazil 42 Banco Do Nordeste DO Brasil
Colombia 43 Banco De Comercio Exterior de Colombia
Colombia 44 Fondo Para El Financiamiento del Sector Agropecuario (FINAGRO)
Costa Rica 45 Banco Nacional de Costa Rica (Bncr)
Curacao 46 Curacao Development Corporation (Korpodeko)
Dominican Republic 47 Banco De Reservas De La Republica Dominicana
Ecuador 48 Banco del Estado (BEDE)
Ecuador 49 Banco Ecuatoriano de la Vivienda (BEV)
Ecuador 50 Corporacion Financiera Nacional del Ecuador (CFN)
Guatemala 51 El Crédito Hipotecario Nacional de Guatemala
Mexico 52 Banco Nacional de Obras y Servicios Públicos, S.N.C. (BANOBRAS)
Mexico 53 Nacional Financiera (NAFIN)
Mexico 54 Financiera Rural
Mexico 55 Fideicomisos Instituidos en Relación con la Agricultura (FIRA)
Paraguay 56 Credito Agricola de Habilitacion (CAH)
Paraguay 57 Agencia Financiera de Desarrollo (AFD)
Paraguay 58 Banco Nacional de Fomento de Paraguay (BNF)
Peru 59 Banco Agropecuario (Agrobanco)
Peru 60 Corporación Financieras de Desarrollo S.A. (Cofide)
Peru 61 Banco de la Nacion (BN)
Uruguay 62 Banco de la Republica Oriental del Uruguay (BROU)
Venezuela, RB 63 Banco de Dearrollo Economico y Social de Venezuela (BANDES)
Middle East & Egypt, Arab Rep. 64 Industrial Development and Workers Bank of Egypt
North Africa Oman 65 Export Credit Guarantee Agency of Oman
North America & South Asia Canada 66 Business Development Bank of Canada (BDC)
Bangladesh 67 Saudi Bangladesh Industrial and Agricultural Investment Co. Ltd.
Bhutan 68 Bhutan Development Finance Corporation Limited
India 69 National Bank for Agriculture and Rural Development
India 70 Export-Import Bank of India (Exim Bank)
India 71 Small Industries Development Bank of India
Nepal 72 Nepal Industrial Development Corporation Ltd.
Pakistan 73 First Credit & Investment Bank Limited
Pakistan 74 Pak Oman Investment Company Limited
Sri Lanka 75 DFCC Bank
Region Country Name of institution
Sub-Saharan Angola 76 BANCO DE POUPANÇA E CRÉDITO S.A.R.L
Africa Congo, Dem. Rep. 77 FPI - Industrial Promotion Fund
Côte d'Ivoire 78 Banque de l'Habitat de Côte d'Ivoire (BHCI)
Ghana 79 National Investment Bank Limited
Kenya 80 Industrial and Commercial Development Corporation (ICDC)
Kenya 81 Kenya Tourist Development Corporation (KTDC)
Kenya 82 IDB Capital Ltd
Nigeria 83 Nigerian Export-Import Bank (NEXIM)
Rwanda 84 Rwanda Development Bank (BRD)
South Africa 85 Development Bank of Southern Africa
Sudan 86 The Agricultural Bank of Sudan
Tanzania 87 TANZANIA INVESTMENT BANK LIMITED
Uganda 88 Uganda Development Bank Limited
Middle East & North Africa Bahrain 89 Bahrain Development Bank (BDB)
East Asia & Pacific Indonesia 92 Bank Mandiri
Europe & Central Asia Bulgaria 90 Bulgarian Development Bank (BDB)
Hungary 91 Hungarian Development Bank
Kazakhstan 93 Development Bank of Kazakhstan
Macedonia, FYR 94 Macedonian Bank for Development Promotion
Middle East & North Africa United Arab Emirates 95 Mubadala Development Company
Sub-Saharan Africa Zimbabwe 96 Infrastructure Development Bank of Zimbabwe (IDBZ)
Appendix 3: Sample of national development banks.
Country Name of institution Year of foundation
Angola BANCO DE POUPANÇA E CRÉDITO S.A.R.L 1991
Bahrain Bahrain Development Bank (BDB) 1992
Bangladesh Saudi Bangladesh Industrial and Agricultural Investment Co. Ltd. 1984
Bhutan Bhutan Development Finance Corporation Limited 1988
Bolivia Banco de Desarrollo Productivo (BDP) 2007
Bulgaria Bulgarian Development Bank AD 1999
Bulgaria Bulgarian Development Bank (BDB) 1999
China China Development Bank 1994
Colombia Banco De Comercio Exterior de Colombia 1991
Colombia Fondo Para El Financiamiento del Sector Agropecuario (FINAGRO) 1990
Congo, Dem. Rep. FPI - Industrial Promotion Fund 1989
Côte d'Ivoire Banque de l'Habitat de Côte d'Ivoire (BHCI) 1994
Ecuador Banco del Estado (BEDE) 1992
Country Name of institution Year of foundation
Egypt, Arab Rep. Industrial Development and Workers Bank of Egypt 1976
Finland Finnvera plc 1998
Germany Thüringer Aufbaubank (TAB) 1992
Germany North Rhine-Westphalia (NRW Bank) 2004
Hungary Hungarian Export Import Bank Private Company Limited 1994
Hungary Hungarian Development Bank 2001
India National Bank for Agriculture and Rural Development 1982
India Export-Import Bank of India (Exim Bank) 1982
India Small Industries Development Bank of India 1990
Indonesia Bank Mandiri 1998
Kazakhstan Development Bank of Kazakhstan 2000
Kenya IDB Capital Ltd 1973
Malaysia Bank Pembangunan Malaysia Berhad 1973
Malaysia Credit Guarantee Corporation Malaysia Berhad 1972
Malaysia Sabah Credit Corporation 1995
Mexico Financiera Rural 2002
Mongolia The Microfinance Development Fund 2002
Nigeria Nigerian Export-Import Bank (NEXIM) 1991
Oman Export Credit Guarantee Agency of Oman 1991
Pakistan First Credit & Investment Bank Limited 1989
Pakistan Pak Oman Investment Company Limited 2001
Paraguay Agencia Financiera de Desarrollo (AFD) 2005
Peru Banco Agropecuario (Agrobanco) 2002
Peru Corporación Financieras de Desarrollo S.A. (Cofide) 1971
Philippines Al-Amanah Islamic Investment Bank of the Philippines 1973
Philippines Philippine Postal Savings Bank, Inc. 2006
Philippines Philippine Export-Import Credit Agency 1977
Republic of Macedonia Macedonian Bank for Development Promotion 1998
Slovak Republic Slovak Guarantee and Development Bank 1991
South Africa Development Bank of Southern Africa 1983
Thailand Small and Medium Enterprise Development Bank of Thailand 2002
Turkey Export Credit Bank of Turkey (Türk Eximbank) 1987
Turkey Development Bank of TURKEY 1975
United Arab Emirates Mubadala Development Company 2002
Venezuela, RB Banco de Dearrollo Economico y Social de Venezuela (BANDES) 2001
Vietnam Vietnam Bank for Social Policies (VBSP) 1996
Zimbabwe Infrastructure Development Bank of Zimbabwe (IDBZ) 2005
Appendix 4: Heterogeneity of national development banks in the sample1
The only instance of congruence in the sample - ownership structure, 2009
Source: Author's analysis based on data described in the text
Government
□ Max ■ Mid
92,92%
Equity, US$ million, 2009
Source: Author's analysis based on data described in the text
35 000
30 000
25 000
20 000
15 000
10 000
5 000
0
>20000 I <20000 I <5000 <1000 <100 <10 I <1 I 0
10 20 30 DBs grouped by equity size
40
_^aAAAJ
Equity size across the sample
1 Based on the dataset for 88 DBs from Appendix 2.
Assets, US$ million, 2009
Source: Author's analysis based on data described in the text
>600000 I <600000 I <250000 ■ <100000 <10000 < 1000 < 100 < 10 ■ 0
10 20 DBs grouped by assets size
30
600 000 500 000 400 000 300 000 200 000 100 000 0
\SL
Assets size across the sample
Loans, US$ million, 2009
Source: Author's analysis based on data described in the text
>500000 I <500000 I <250000 I <100000 I <10000 < 1000 < 100 < 10 0
10
20
30
40
DBs grouped by loan amount
600 000 500 000 400 000 300 000 200 000 100 000 0
• aaAAAJ
lA_
Loan amount across the sample
Number of branches, 2009
Source: Author's analysis based on data described in the text
>1000 <1000 <200 <90 <60 <30 < 10 <5 1
> 1
0 10 20 DBs grouped by number of branches
1400 1200 1000 800 600 400 200
0
—JOT
Number of branches across the sample
Number of subsidiaries, 2009
Source: Author's analysis based on data described in the text
■15 |
15 I
< 10
<5
> 1
0 10 20 30 40 50 60 DBs grouped by number of subsidiaries
60
50
40
30
20
10
_JL.
Number of subsidiaries across the sample
Staff, 2009
Source: Author's analysis based on data described in the text
25000
20000
15000
10000
5000
10 20 DBs grouped by staff number
Staff number across the sample
Funding options
Source: Author's analysis based on data described in the text
Government Guarantees
Direct Budget Transfers
Financial Instituions Loans, Issuing Debt Secutities
Public Deposits
0 10 20 30 40 50 60 70 80
Number of DBs in the sample ■No 1=1 Yes
Sectoral assignment
Source: Author's analysis based on data described in the text
Other Health Education Energy Infrastructure Mining Services Indus try/Manufacturing Construction Agribusiness
10 20 30 40 50 60 70 80 Number of DBs in the sample
i No DYes
Targeted market segments
Source: Author's analysis based on data described in the text
Other
Other state-owned enterprises Other financial institutions Large private corporations Micro, small and medium enterprises
Start-ups
Individuals and households
20 30 40 50 60 70 Number of DBs in the sample
80
90
i No DYes
Lending products
Source: Author's analysis based on data described in the text
Other lending products Syndicated loans Long-term loans Unsecured loans (for intangible assets) Loans for new product launch activities Bridge or short-term loans Loans for working capital Loans for start-up activities
10 20 30 40 50
Number of DBs in the sample
I No DYes
60
Products and services provided
Source: Author's analysis based on data described in the text
Other Training
Networking / business matching Consulting Deposit accounts Savings Accounts Microinsurance Money Transfers Trust Services Loan Guarantees
10 20 30 40 50 Number of DBs in the sample
■No □ Yes
60
70
