The New Era of Development Finance: Panel Discusses Rise of South-South Lending

By Luma Ramos

Worldwide, nations face challenges to finance stable, inclusive, and green structural transformation. Even before the COVID-19 crisis, economies had to create strategies and mobilize resources to fill the existing investment gap. Over the past decade, financial institutions in the Global South have pushed to channel their resources to meet their own needs.

On Thursday, February 25, the Global Development Policy (GDP) Center, in partnership with the United Nations Conference on Trade and Development (UNCTAD) launched Southern-Led Development Finance: Solutions from the Global South, a new volume edited by the GDP Center’s Director, Kevin P. Gallagher, and UNCTAD’s Diana Barrowclough and Richard Kozul-Wright. Gallagher, Barrowclough and Kozul-Wright spoke at the webinar, along with chapter authors Mah Hui Lim and Luma Ramos.

The book has been published in a strategic moment, as global economies, especially developing ones, face daunting challenges to overcome the COVID-19 crisis. The authors argue that public banks, development banks, and regional financial institutions, those from the Global South in particular, have been “by far the outstanding source of long-term, patient, and catalytic finance, and in the magnitudes required,” making them key institutions in global governance.

Kozul-Wright,  Director of the Globalisation and Development Strategies Division at UNCTAD and book editor, moderated the panel and stressed some of the regional development financial options, while also highlighting an implicit critique in the volume regarding the current financial architecture. He argued South-South cooperation is not a substitute for a multilateral financial system, but a way to propose reforms and improve it.

Next, Barrowclough, Senior Economist at UNCTAD and book editor, presented the book’s main findings and takeaways. She discussed how new multilateral institutions have changed the landscape of the global financial architecture and offer an alternative to developing countries looking to diversify from traditional financial institutions in the Global North. As she argued, South-South institutions are not a panacea for all multilateral institutional problems, but they have been a powerful resource and very important in providing for developing country needs. Barrowclough added that this wave of initiatives and the booming scale of available finance is gradually shifting the center of financial gravity south.

Luma Ramos, a researcher at GDP Center and chapter author, analyzed the Latin America and the Caribbean (LAC) case. She highlighted the region’s needs for a South-South alliance and how it would ideally work in practice. LAC is characterized by structural imbalances and long-term financing bottlenecks, and is also dealing with exacerbated inequalities and millions thrown into poverty as a result of the COVID-19 pandemic. Development banks are the main lenders in the region, and working in partnership with other southern institutions could lead to a green and inclusive recovery. But to achieve this, LAC must have self-sustaining organizations offering  demand-led financial instruments, with innovative conditionalities and requirements fit for project specificities.

Next, Mah Hui Lim, Chairman of the Third World Network and an expert in East Asia finance, discussed his case study chapter on East Asia. He began by noting that the Asian experience  in South-South lending was born out of the international financial architecture failure that led to the 1997 Asian Financial Crisis. Lim also addressed the twin pillars of regional financial architecture: defensive and developmental. The defensive pillar includes crisis prevention, management, and resolution mechanisms, while the developmental column provides long-term financing.

In this context, Lim explained that international financial institutions and the Asian Development Bank pushed for a local currency bond market, to avoid currency risk. As a result, in 20 years, the local currency bond market in East Asia jumped from $836 billion to $16.1 trillion, led by government issuance. However, as Lim underscored, the foreign investors hold a significant amount of government bonds (30-40 percent in some countries), which in times of stress could represent a source of financial instability. For many countries, this risk is the trade-off between liquidity and financial stability. He concluded by suggesting development banks adopt a broader mandate to include environmental and inclusive objectives.

Following Lim, Gallagher presented his chapter on Chinese development finance in the Americas. He discussed the LAC presence of China’s two main development banks, China Development Bank and China Export-Import Bank, noting that China has provided a large amount of development finance to LAC over the years. Investments have in particular poured into the infrastructure sector, which is critically important to filling the existing financing gap and spurring regional growth.

However, according to Gallagher, Chinese development finance can also accentuate risks in the LAC region related to debt distress, biodiversity loss, climate change, and social conflicts. He advised China and host countries to seek strategies to maximize the benefits and minimize the risks associated with large infrastructure and development projects.

The panelists all agreed that the discussion of South-South financial cooperation is just beginning and highlighted that a fresh approach is needed to address the challenges and lessons learned from the past few decades of development finance. By doing so, international financial institutions in both the Global North and South can help fund development that is inclusive and sustainable in the post-COVID-19 world.

The book, ‘Southern-Led Development Finance: Solutions from the Global South’ is available through Routledge Publishing.