Development banks are the basis for building a better world after the COVID


Juan E. Notaro
Executive President of FONPLATA – Development Bank

The main role of development banks is to fund programs and projects that may not be convenient or profitable for commercial banks. Development, in the broad sense, is everything that contributes to improve people’s well-being and quality of life.

Therefore, the mandate of development banks encompasses almost every aspect of life in society. From schools and aqueducts, to roads, ports, electrical facilities, as well as education and health, among many others.

These needs and the way to meet them pose two major challenges. One, obvious and immediate, is the crisis generated by the COVID-19 pandemic, and its enormous economic impact.

With regard just to the economic effects of COVID, the International Monetary Fund estimates that the global economic contraction was close to 4.4%, the worst drop since the Great Depression of 1930.

Even if there are already positive signs, especially for the second half of the year, the IMF's chief economist, Gita Gopinath, warned that the upswing will be “long, uneven, and uncertain” for many countries.

To travel this road is an effort that demands large amounts of investment; a flow of funds that must come from all sectors but to which development banks can contribute with advantage.

The other challenge has been with us for longer time, nevertheless, it is no less pressing. I mean, of course, the climate change and its effects on all areas of human activity, also as a potential trigger for new pandemics in the future.

Although the challenge is huge and time is not on our side, there is some good news. One of them is that the cost of mitigating climate change and its effects, although high, is much lower than the cost of doing nothing.

I refer again to IMF figures. The institution estimates that “between 2037 and 2050, the mitigation strategy (of the effects of climate change) would cost an approximate average of 0.7% of global GDP per year, and of 1.1% in 2050”.

However, the same document points out that “these costs seem reasonable if we consider that the projected growth of world gross product between now and 2050 is of 120%”.

Funding from development banks, under favorable conditions and with a clear focus on people's well-being and quality of life, must fuel this effort.

Besides being a key part of this reconstruction, development banks have decided to join efforts and put all their resources and expertise at the service of the (better) world to come, by means of a major global partnership.

This alliance was born in Paris at the end of last year but, unlike other major global events, the outcome of this summit are specific commitments, clearly established deadlines, clear objectives, all focusing on the fight against climate change.

One of these objectives is that, in each region of the world, development banks should build strategic alliances, join forces, funding power, and talents, and put them at the service of people to meet the most important needs in their area of influence.

Thus, a few weeks ago, the Latin American Alliance of Subnational Development Banks was born, as a result of the collaboration of the French Development Agency, the Development Bank of Minas Gerais, the Global Fund for the Development of Cities (FMDV), and the Institute for Sustainable Development and International Relations (IDDRI).

The term subnational applies to entities operating at the state, departmental or provincial level. Therefore, subnational development banks are closer to the specific needs of the people in each region and have first-hand knowledge of their problems and the best ways to solve them.

This pool of resources of all kinds consolidates these subnational banks, raises their profile in the regional financial outlook and highlight their importance to institutions such as the Inter-American Development Bank, CAF – Development Bank, and FONPLATA – Development Bank, among others.

The alliance is good news, as well as the commitment of more than 450 development banks to face our common problems together.  Especially when the focus is on mitigating the effects of climate change.

The agreement of the subnational banks has the same motivation. I am sure many of the resources and good ideas we need to build a better world will come from these efforts.

Text originally published in the monthly column of Huffington Post.