What is development bank and does Ukraine need it?

Author : Pavlo Vernivsky

Source : 112 Ukraine

Despite the fact that international organizations finance many projects in Ukraine, their presence is not enough to revive our economy
22:48, 27 March 2019

Open source

Once Ukrainian Prime Minister Volodymyr Groysman was asked about launching the development bank. Groysman looked surprised and replied: "Ukraine does not need a development bank."

So do we need or don’t we need the development bank? 

Ukraine has a fairly short history of capitalist development. Many of our politicians have not reached the idea of the need to create such organizations.

Despite the fact that we live in a world with access to any information, for some reason, we approach the search for this information very selectively and take just what we like, and often believe different external advisers.

However, we should be interested in history. Not only in reading books about abstract institutions, but studying a practical history of creating certain structures, like a development bank, for example.

The first development banks began to appear a long time ago. In France, such a bank was established in 1816 under Louis XVIII. It was named La Caisse des depots et consignations (CDC). The creation of this bank was rather random, due to certain historical events.

The king was in dire need of money but did not trust the Bank of France, which was created under Bonaparte in 1800 and previously performed the functions of meeting the needs of the state. And with the help of this new bank, he wanted to provide financing for the state.

In general, it wasn’t considered a development bank, but I’m talking about it, since this bank has become an organization that is now called a development bank, and this organization still exists.

At that time, France was a relatively poor agrarian country. In addition, after the Napoleonic wars, the economy was depressed, so the private sector was in dire need of financial resources to stimulate activity.

And as often happens, the high risks and memories of the recent past did not inspire optimism among bankers and they were not in a hurry to finance the private sector. Therefore, the CDC took over this function.

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Its first project was the reconstruction of the port of Dunkirk in 1822, which was badly damaged during the French Revolution.

In 1840, the bank became a major public investor and began to finance the construction of railways. In 1889, it launched a business of laying telephone networks.

The formation of a full-fledged development bank as in other European countries took place in the post-war world. At that time the bank launched a full-scale financial activity, providing financing to French companies, while the private sector was not very eager to finance them.

It is necessary to understand the peculiarities of the work of banks with risks. Private capital is very cautious. This is especially evident in periods of economic stagnation.

Bankers say: a bank is an organization that will happily provide you with an umbrella in sunny weather but will demand it back if it rains. This behavior of bankers is very predictable and they should not be blamed for it. Banking is a business.

And like any business, banks expect to make a profit. It is clear that no one likes to lose money in questionable transactions, especially bankers.

If banks are not willing to lend, then who should do this? As I have already said, many countries have a very long history of capitalism and in the process of development went through different stages.

However, as history shows and then economists have confirmed that during periods of economic stagnation, financing is the best way out for the state, even if it is associated with higher risks. This is done for one simple reason. Stagnation can last a very long time.

And often this has social consequences. As history has shown, states more quickly climb out of the depression, if they act as investors instead of the private sectors. And one of these investors is the State Development Bank.

In France, the development bank is already 200 years old. Now it is one of the largest banks in France, which owns more than 10 subsidiaries, each of which deals with a certain direction.

There are state strategic funds that own shares in the private business, where the bank is a strategic (long-term) investor. There are international investment companies helping the international development of French business.

There are programs to support and finance innovations, programs of financing and development of the small and medium business.

This is just an example of one country. Such banks exist in France, Italy, Germany, Japan, Poland, Brazil, Korea, and China.

In addition, there are international organizations that play the role of a development bank: European Bank for Reconstruction and Development, European Investment Bank, International Bank for Reconstruction and Development (World Bank).

However, despite the fact that these international organizations finance many projects in Ukraine, their presence is not enough to revive our economy.

Therefore, it is strange for me to hear the talks that we need a land market and the lack of talks about the need for a development bank.

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