Why Multilateral Development Banks should provide Finance in Domestic Currencies: A Growth and Financial Stability Proposal Luiz Carlos Bresser-Pereira

National banks are supposed to offer finance or capital to private and stateowned enterprises, which allows them to invest and to innovate. From this we would conclude that multilateral banks should play the same role, with the difference that its loans are usually disbursed in a reserve currency. This paper rejects that developing countries need foreign capital but acknowledges that major projects often require finance. Thus, it distinguishes, on the macroeconomic level, finance from capital. The assumption is that, to execute large investment projects, developing countries need finance, not capital; countries should not be interested in incurring in current account deficits (the so called “foreign savings”) to develop; they should grow with their own savings. The growth with foreign indebtedness policy is self-defeating in so far that the financing of account deficits leads to the appreciation of the national currency and, so, encourages consumption instead of investment. Thus, it is not on the interest of developing countries to incur in current account deficits. Nevertheless, multilateral banks may have an important role in fostering growth in developing countries if they provide finance, either if they make loans in the domestic currency of the country, or if they contribute to fund major investment projects in infrastructure and renewables.

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(This paper was presented in the round table, “The role of multilateral development banks post 2008 crisis”, Shanghai Forum, Fudan University, May 26-28, 2018.)