Stephany Griffith-Jones

A Countercyclical Framework for a Development-Friendly IFA

The last three decades have seen developing countries, and particularly those more integrated into world financial markets, swing to the rhythm of highly procyclical external financing. Financial volatility has a direct effect on the balance of payments and domestic financial markets, and through them, on domestic economic activity and other macroeconomic variables. In the face of strong swings of private capital markets, developing countries lost ‘policy space’ to adopt autonomous countercyclical macroeconomic policies, and faced difficult challenges in creating deep financial markets. A vicious circle involving procyclical financing, incomplete financial markets and institutions, and constraints on macroeconomic policy emerged. Imperfect financial markets have been a source of volatility, but deep financial markets, improved financial governance structures and countercyclical macroeconomic policies have been difficult to develop in a highly volatile financial environment (Fanelli, 2006). The unfortunate outcome of this dynamic is that ‘twin’ external and domestic financial crises have become far more frequent since the breakdown of Bretton Woods exchange rate arrangements (IMF, 1998; Bordo et al., 2001).

5. The Roles of Development Banks: How They Can Promote Investment in Europe and Globally

The financial sector should help support the real economy. To achieve this key positive role the financial sector needs to encourage and mobilize savings, intermediate these savings at low cost, ensure savings are channelled into efficient investment (including in innovation and structural change) as well as helping manage the risks for individuals and enterprises. In the context of industrial policy, it should help fund new sectors and deepen existing ones, to support national and regional development strategies. Ideally, the financial sector could help societies acquire and accumulate learning, valuable for increasing productivity, especially in a dynamic sense (Stiglitz and Greenwald, 2014).