Development Banks as an Arm of Economic Policy – Promoting Sustainable Structural Change

Abstract

Since the 2007/2008 financial crisis, State-owned financial institutions (SFIs) have reinforced their essentiality for countercyclical actions. This article argues that SFIs are vital for the development process of peripheral countries not only because they correct market failures and have the prerogative to act countercyclically but they have the ability to be instruments of public policy. SFIs, specifically development banks, are essential to promote peripheral countries' catching up since they can operate as part of the State toolkit. To do so, they must act in line with other government policies—fiscal, monetary, foreign exchange, and industrial. Credit policy through development banks can be seen as a permanent device for managing aggregate demand.