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Notes on Development Banks and the Investment Decision: finance and coordination1 Ana Rosa Ribeiro de Mendonca2 Abstract The ongoing international financial crisis started in 2008 and the policies adopted by different countries for coping with its consequences shed light to mechanisms and institutions utilized for this purpose and, among them, development banks. These experiences turned out to stimulate some countries, even with no tradition and historical presence of this kind of institution, such as US and UK, to discuss the creation of development banks, motivated, it is important to note, by different concerns and goals. The fact that the creation of development banks is marked by historical conditionalities and specific institutionalities places boundaries for attempts of the conceptualization of such institutions. Conscious of those limitations, this paper aims to present how the literature on the subject has been addressing the role of development banks. And departing from the acceptance of: i. the historical role of these institutions in facilitating investment decisions; and ii. the contributions of Keynes that highlight the centrality of investment as well as the instability that permeates the investment decisions, the paper considers the role that the development banks can take not only on financing, but also on organizing the environment in which such decisions are taken. For this, the article is organized as follows. After the introduction, section 2 discusses some peculiarities of the decisions of financing investment. Section 3 presents how the literature deals with development banks. In section 4, the discussion of investment in Keynes, its centrality in the process of employment and income creation, the instability around the investment decision and the proposal of the socialization of investment is presented. Finally, concluding remarks are delineated. Key words: Development banks, investment decision and socialisation of investment JEL code: B25 e O11 1. Introduction The ongoing international financial crisis started in 2008 and the policies adopted by different countries for coping with its consequences shed light to mechanisms and institutions utilized for this purpose and, among them, development banks. These experiences turned out to stimulate some countries, even with no tradition and historical presence of this kind of institution, such as US and UK, to discuss the creation of development banks, motivated, it is important to note, by different concerns and goals. Development banks are present in a wide range of countries. In the vast majority of the cases, these institutions were created in the 1950s and 1960s, as a part of industrialization efforts, and starting from the diagnosis of the centrality of industrialization for the economic development. This diagnosis was pointed by the then dominant development theories, and the consequent need of mechanisms for financing 1 2 I thank Pedro Duarte Evangelista, assistant professor at Federal University of Goias, for all his help. Assistant professor, Institute of Economics, Unicamp. industrial development, especially for financing investment was highlighted. Therefore, it seems possible to associate the creation of development banks to the perception of the need to face situations of underdeveloped economies and/or underdeveloped financial systems. According to Torres (2007), development banks mean forms of directing credit to specific purposes and are the result of mechanisms created after the Second World War to rebuild destroyed large economies, including European countries and Japan, as well as to promote industrialization and development, especially in Latin America and Asia. Figure 1 elucidates some of the issues raised above, pointing out to the period and motives with which different development banks were created. Figure 1: Development banks: objectives, assets, origin of capital and funding Institution Korea Development Bank (KDB) Foundation Founded in 1945. In 1950 was established as The Korean Reconstructi on Bank. Nowadays is part of the KDB Financial Group Objectives Supplying and managing major industrial capital to help develop Korean industries and the national economy. Since 1950, the bank aims to support the nation’s economic rehabilitation, restoring industrial facilities destroyed during the Korean War and prior support to the base industries. Total Assets US$ 116,500 million (2011) Capital Origin Governmentowned bank. Business Development Bank of Canada Founded in 1944 as The Industrial Developmen t Bank. Succeeded by The Federal Business Developmen t Bank in 1975. Founded in 1955 as The Japan Developmen t Bank. Succeeded Financing and management consulting for industrial small business, as well as financing for trade and commerce services. US$ 17,180 million Governmentowned bank. Facilitate the development of power supply and the rationalization, modernization and cultivation of its major industries. The bank also focused on support for industrial system improvements, independent US$ 187 million. Governmentowned bank until 2008, when it was privatized. Development Bank of Japan Funding Domestic funding: bonds – industrial finance bonds exclusively issued by KDB borrowing public funds deposits : savings, time deposits, certificate of deposits, money market deposit accounts and repurchase agreements overseas funding (global markets). All the capital is funded by the government of Japan. KfW Bankengrupp e African Development Bank Group Brazilian Development Bank (BNDES) 3 4 by Developmen t Bank of Japan Inc. in 2008. Founded in 1948 as Reconstructi on Credit Institute. Succeeded by KfW Bankegrupp e in 2002. technological development, social and regional development, and logistic modernization. Finance the reconstruction of the economy and integration of refugees after Second World War, especially to the new federal states in the eastern Germany. The bank has three fronts – domestic promotion, export finance and development finance – focusing in development cooperation and commercial project financing, and a domestic SME promotion. US$ 623,400 million (2011) Governmentowned bank. Founded in 1963. Adds three banks: African Developmen t Bank – founded in 194, African Developmen t Fund – founded in 1972, and Nigeria Trust Fund – founded in 1976. Spur sustainable economic development and social progress in its regional member countries, contributing to poverty reduction by mobilizing and allocating resources for investments in regional member countries and providing policy advice and technical assistance to support development efforts. African Development Bank: US$ 102,84 billion (2011) Owned by member governments. Founded in 1952, as BNDE. Stimulate the expansion of industry and infrastructure in the country. Its operations have evolved in accordance with the Brazilian socio-economic challenges and includes support for exports, technological innovation, sustainable socioenvironmental development and the modernization of public administration. Marshall Plan and the European Recovery Programme Special Funds, which came from the counterpart funds. Capital market funds Money market fund subordinated liabilities Capital markets. African Development Group: US$ 9.3 billion3 Nigeria Trust Fund: US$ 200 million4 Fund’s activities for 2011-2013. In the end of 2010. US$ 319,800 million (2011) Governmentowned bank. FAT/PIS-PA SEP National treasury and other governmental sources committed operation bond issuance fundraising abroad China Development Bank (CDB) Founded in 1994 as a policy bank named China Developmen t Bank. In 2008, transformed in a Developmen t Bank Corporation, a joint stock commercial bank. • Mission: strengthening the competitiveness of China and improving the living standards of its people • promote the development of the market support the State's policies of development : infrastructure, regional development, urbanisation, SME, agriculture, rural communities and farmers, education, low-income housing, medical and health care and environmental protection. US$ 990,700 million (2011) Established jointly by the Ministry of Finance (the "MOF") and Central Huijin Investment Ltd. ("Huijin"). Debt securities Borrowings from government Demand and term deposits Sources: KDB Annual Report 2011; KfW Annual Report 2011; CDB Annual Report 2012; BNDES Annual Report 2011; Valor; Banks websites. 1. Fund’s activities for 2011-2013. 2. In the end of 2010 The creation of development banks, marked by historical conditionalities and specific institutionalities places boundaries for attempts of conceptualization of such institutions. Conscious of those limitations, this paper aims to present how the literature on the subject has been addressing the role of development banks. And departing from the acceptance of the: i. historical role of these institutions in facilitating investment decisions; and ii. contributions of Keynes that highlight the centrality of investment as well as the instability that permeates the investment decisions, this article considers the role that the development banks can take not only on financing, but also on organizing the environment in which such decisions are taken. In order to pursue that goal, the current article is presented as follows. After this introduction, section 2 discusses some conceptual reasons and peculiarities of the decisions of financing investment. Section 3 presents how the literature deals with development banks, highlighting their historical phases, which are attached to the understanding of their role, and the diversity of concepts of what should be and how should act these institutions. Section 4, in its turn, set forth the discussion of investment in Keynes, its centrality in the process of employment and income creation, the instability around the investment decision and the proposal of the socialization of investment, as a result of the perception of the environment in which the investment is decided. It is important to highlight that is from the theoretical background that an enlarged view of development banks is proposed. Finally, concluding remarks are delineated. 2. Financing Investment Decisions: conceptual reasons and peculiarities Based on relations supported by different authors, such as the role played by industrial development in economic development, and the centrality of investment for the former, it is worth noting the importance of the presence of mechanisms for financing investment. When developing the theory of the determination of investment in his masterpiece, “The General Theory of Employment, Interest and Income (GT), Keynes did not stand out, except for a few rare moments, the role assumed by the financing on the investment decision. According to Wray (2008, p.8), “There seems to be an implicit assumption in the General Theory that the investment project will get funded.” However, in writings published after the GT, the author highlighted the importance of finance, which allows the investment decision as well as the importance of the funding, created in the process of growth of income derived from investment decisions. Minsky, in another way, added and advanced on Keynes’ discussion, as he placed, in the center of the discussion, the importance assumed by the liability positions, including and especially, the importance assumed by the financing conditions of investment decisions. Still in Wray’s words (2008, p.8), “Minsky believed that Keynes’s investment theory of the cycle is incomplete because it does not really analyze how investment is financed when the marginal efficiency of some capital asset exceeds the marginal efficiency of money .“ And, according to the model developed by Minsky, considering the relevance of the use of external funds for the feasibility of investment and, thus, the incorporation of borrower’s and lender’s risk when assessing the investment decision, such decisions are affected, one can even say conditioned, by the environment in which funding is established. “Investment can proceed only if the demand price (adjusted for borrower’s risk) exceeds the supply price (adjusted for lender’s risk) of capital assets. Because these prices include margins of safety, they are affected by expectations concerning unknowable outcomes.” (Wray, 2008, p. 11) Therefore, based on the contributions of Keynes and Minsky, it is possible to point out the significance of the conditions whereby investment is financed. The financing of the investment requests not only adequate volumes of resources but also, and above all, resources in appropriate format. Concerning the volumes, investments in long term projects require large amounts of resources and, in general, cannot be divided into smaller projects. As regards the format, emphasis should be provided to the risks and especially to the time limits, since investment projects generally have long-term maturity, which raises limits on financing through short-term funds, such as the usually negotiated by commercial banks. According to Mantega (2005, p. 4), “Ideally, the terms and conditions of the funding should be consistent with the cash flow of the project in question, which presupposes the existence of institutions capable of providing an adequate funding, that is, institutions that absorb long-term bonds at an interest rate that does not hinder the project to be funded. " So, what one can gather from this discussion is: the presence of appropriate mechanisms of financing is a critical issue for both, investors, i.e. borrowers of funds, and lenders, in general, financial institutions. 3. Development Banks: Historical phases and a diversity of concepts As already stated, the large institutional diversity and broad historical background branded different experiences of DBs. It is possible to highlight some ways to differentiate development banks, according to different aspects such as their structure, ownership and mandate. Regard the structure, they can be organized as first tier or second tier banks; as local, regional or multilateral banks; as depositary or non depositary institutions; as linked to specific economic sectors or country regions, global or import-export banks. Related to their ownership, they can be public, private or even combination of both. Concerning to their strategies or mission, these institutions can be branded by the presence of developing or social mandates. Among all these large range of possibilities, the reviewed literature points out as the mostly observed development banks the ones with the following characteristics: local and public banks and, in general, non depository with social and/or development mandates. 5 And this typology will be followed in this paper. In this regard, the different definitions of development banks found in the literature are grounded primarily on what are or should be its functions and objectives, but also on its structure. In a broad way, which is coherent with the observation of different experiences of development banks, observed in different countries, the United Nations 5 Important part of the articles and discussion papers produced by the Intermerican Development Bank (IDB), institution widely embedded in the discussion of development banks, focuses on non-depositary public financial institutions, marked by social and development mandates, with public funding, access to capital markets or through loans from multilateral or regional institutions. compendium defines development banks, essentially domestic development banks, as a: “Financial institution primarily concerned with offering long- term capital finance projects generating positive externalities and hence underfinanced by private creditors.” (UN, 2005, p.iii). According to Amyx and Toyoda (2006), development banks are among the possible types of government financial institutions, in their great majority laid down in early stages of industrial development to ensure long-term funding for industries perceived as relevant for development. Besides the public funding, they can also rely on private funding and among the projects supported by them may be those related to government policies. Amyx and Toyoda (2006) pointed out that as economic development took place in many countries, liberalization and deregulation of the financial markets and the emergence of long term securities markets happed, these institutions became less important, and some of them were dismantled or privatized. Two definitions of DB are presented by Pena (2001), one related to their goals and other to their function, but both founded on the purpose of ensuring a higher level of development. The first one is, "Development banking is a form of financial intermediation designed to help the country reach the higher level of sustainable development and (...) includes development of the whole spectrum of socio-economic progress." (P. 9). And the second one, DB can be understood: "... as a form of intermediary providing financing to high priority projects Investment in Developing Economy." (P.10). The concepts of DB highlighted above indicate the needs for financing mechanisms that ensure economic and social development, particularly by means of financing investment. As underlying elements, made explicit or not, show up the State as an important agent in confronting the fragilities of the economic and social development, and the lack or inoperativeness of private financing arrangements. Both of these elements, the State intervention and the level of development of private financial markets, have labeled the discussion not only of the role, but further, the needs for such institutions. Such a discussion, which started in the 1950s and 1960s, can be organized in three phases, and can be associated with changes in prevailing economic development theory for each time: development or interventionist view, laissez-faire view and pro-market activism view (Smallridge & Olloqui, 2011).6 The development or interventionist view took place in the 1950s and 1960s, period in which a large part of the DB were created, as already presented. At that time, the theory of economic development considered the capital investment as catalyst for economic growth. And the public development banks were understood as State instruments to face the deficiencies of private financing – as markets mismatches were perceived, especially in developing countries - and, in a more specific way, of the financing of investment. Thus, DB should mitigate the lack of long-term funding in fundamental areas, such as infrastructure and industrial projects. And besides, also supply rural and housing credit, and loans to small and medium enterprises. Starting in late 1980’s, as a part of a broader liberalization process, the state's participation in the credit allocation was questioned, especially when credit was conceived by public banks. World Bank (WB) and Interamerican Development Bank (IDB) views of on public banks, presented in a sort of documents in early 2000s, put into question the functionality of these institutions. According to the WB, the government property of a bank tends to restrict financial development, which can even affect the economy’s growth. The IDB, despite criticizing the role of such institutions, found no solid evidence that these financial institutions limit development and growth (Torres Filho, 2007). This environment branded the laissez-faire view. In accordance with Smallridge & Olloqui (2011), this environment rested on the broad perception that public banks were not complying with their mandates and were presenting inadequate financial performances. This phase was marked by privatization, restructuring and even closure of public financial institutions. It is worth noting that the critical arguments were much more on the government ownership of banks than on the concept or functions of development banks. Besides, Amyx and Toyoda (2006) pointed out that as economic development took place in many countries, liberalization and deregulation of the financial markets and the emergence of long term securities markets happed, these institutions became less important, and some of them were dismantled or privatized. 6 It is important to highlight that laissez-faire and the pro-activism views are more closely, but nor uniquely, related to the evolution of public banks and among them development banks in Latin America. In the 2000s, a new vision of public banks was launched, which might be defined as intermediate, when one has in mind the earlier discussed views, development and laissez-faire views. The intervention was once again understood as constructive, based on the analysis of market failure and its major causes. In this regard, government intervention could be used to complement private sector activities and to ease the development of the markets. However, it should be short in time and include an exit strategy. Such ideas were behind to what Smallridge & Olloqui (2011) come to name the pro-market activism view. In this context, it was observed, in Latin America, a renewed interest in public development banks as tools to address the private market failures and to promote the financial deepening.7 The following quotations clearly states these observations, “ […] the objectives of PDBs are increasingly not just access to finance, but promotion of public policy objectives. Thus, in recent years they have expanded their role and been used for designing, financing and implementing climate change related infrastructure projects, and for delivering non financial services such as business development.” (BID, 2011, p.10.) ” (Smallridge & Olloqui, 2011 p.10) “As such, the fundamental role of the PDB is to contribute to economic and/or social development by supporting economic agents and segments that are underserved by the private sector, but are nevertheless deemed to be of critical importance to the government’s economic policy. In other words, PDBs should address market failures and play a complementary role to commercial banks and other sources of finance and risk capital, instead of crowding them out.” (Smallridge & Olloqui, 2011, p. 21) "The most relevant and up to date rationale for Intervention by PDBs is to address the existence of market gaps “ . (Smallridge & Olloqui, 2011, p. 21) These so highlighted market gaps could be understood as difficulties that emerge from the fears of private sector to accept risks or even transaction costs perceived as too high. As a result, strategically important companies or sectors, such as small and medium enterprises (SME) or rural activities, would not be well served by private credit. Anyway, the mere presence of these gaps would not justify the intervention, as actions based on incorrect or incomplete diagnosis could be ineffective or even harmful. So, interventions could take place based in solid analysis of costs and benefits. 7 There was a diagnosis that credit to socially important sectors had become elusive. This "new view" redeems the defense of more active public institutions, even when one considers the expected restrictions on this “activeness”, as proposes actions to promote public policy objectives and to address the market failures. As a matter of fact, this “new view” does not establish a new, but reinforces the already established central function or role to these institutions: to fill the private role market gaps. (Smallridge & Olloqui, 2011, p. 11) "The most relevant and up to date rationale for Intervention by PDBs is to address the Existence of market gaps “ . This more proactive view was enlarged by the role assumed by public banks in some countries, among which development banks, in facing the international financial crisis generated by the spillover of the U.S. subprime market. Their behavior and performance ended in a extension of their functions and, thereby, their concept, as can be inferred from the ALIDE’s position, “In this context, the action of development banking takes on a greater relevance in fulfilling its counter cyclical role, without losing sight of the long term and a permanent income distribution policy. In this sense, financial institutions have provided new credit facilities with their own resources or funds provided by the State for the industrial, agricultural and housing sectors, SMEs, international trade, infrastructure, etc.” (ALIDE, 2009, p.5). And, according to Statement of Curaçao, it was established by the development banks associated to ALIDE the necessity of: “[…] intervention of the government on situations of crisis, like the current one, to stabilize the markets; […] the quick action of development banking and the renewed importance they have attained in the current situation.”(p.10) In the same sense, Smallridge & Olloqui (2011) highlights the importance of development public banks as anti-cyclical actors in crises, situations in which private banks in general get more conservative and paralyze or at least decrease the transactions with financial and especially non financial institutions. In this sense, public development banks could act in order to catalyze the supply of funding of others financial institutions and investors.8 And PDB could also stimulate the demand for financing in order to promote economic development. 8 The PDB goal could be to mobilize other agents through the use its financial resources, setting standards the knowledge of market conditions. These authors also propose a broader role the PDB: to be part of the financial regulation framework, in order to ensure "the safety and soundness of the banking system", and to counter “the substantial economic and political power of large private banks" (p.8). In this sense, the PDB should act not only as back up and counter cyclical sources of liquidity, but also as instruments through which monetary policy is transmitted. And also act in order to regulate the market interest rates, preventing oligopolistic behavior, i.e., keeping interest rates within appropriate boundaries. According to Torres Filho (2007), development banks can be understood as part of the instrumental tools through which governments can act in credit markets, beside financial regulation and monetary policy. It is worth to note that, unlike the other instruments, development banks behavior do not the focus the market as a whole, but may lead to a directing of financial resources for what is understood as priority, which can be especial sectors, regions, type of borrower and / or terms of the loans. What can be gathered from the discussion above is that, in the last decades other functions and roles have come to be proposed for and implemented by development banks, beyond their original functions and roles as fundamental agents for the feasibility of investment decisions, which were perceived as crucial to economic development. This could be understood based on two major vectors: the consolidation of the industrialization in some countries, including Germany, Japan and Korea, and the liberalization movement of the 1980s and 1990's, which has put into question the very existence of public financial institutions, including development banks, especially affecting BD Latin America. Regarding their role on the allocation of credit, no longer restricted to the financing of investment, emphasis continued to be given to the role of BDs in filling the gaps of private markets, now guided by the perception of market failures. A broader course of development banks actions can certainly be relevant, especially considering they can be genuine arms of economic policy, not only through its role in the credit allocation, i.e., credit policy, but also implementing financial policies in a broader sense such as regulating the interest rates and, in that sense, regulating the banking competition environment, stimulating the democratization of the access to the financial system, implementing sectorial policy and regional policy, among others. It should be noted, however, that such functions might be carried out not only by development banks, but also by other public financial institutions, when it is feasible. This paper aims to aggregate and advance in the discussion of the role originally associated with those institutions: the course of acting to ensure investments as understood their centrality to the economic development and, related to that, to the determination of employment and income. In this sense, it aims to reflect on the role to be played by development banks in enabling investment, in addition to the fundamental function of finance them. And for this we will resume the discussion of the centrality of Investment and the specifics surrounding investment decisions present in the conceptual model presented by Keynes in the 1930s. 4. Keynes: Investimento and Investimento decisions In the conceptual framework developed by Keynes in his General Theory, investment is crucial for the employment and income determination in capitalist economies. While building his model, concerned about the understanding of how the levels of employment and income are determined and float, Keynes emphasizes the central role played by private and domestic spending decisions, consumption and investment. In this regard, the author explains the centrality of investment and highlights the complexity of the environment in which the investment decisions are taken, marked by uncertainty regarding the expected returns and the interest rates. The author explicits in different moments of the GT that investment decisions are based on the confrontation of marginal efficiency of capital and the interest rate, and will be taken whenever the first is greater than the second. “[…] the inducement to invest depends partly on the investment demandschedule and partly on the rate of interest. […] neither the knowledge of an asset’s prospective yield nor the knowledge of the marginal efficiency of the asset enables us to deduce either the rate of interest or the present value of the asset. (p. 137)” “[…] the scale of investment depends on the relation between the rate of interest and the schedule of the marginal efficiency of capital corresponding to different scales of current investment, […] .(p. 147)” The marginal efficiency of capital is the discount rate that brings to the present the values of the proceeds expected from the sale of production to be carried out by the capital goods, which purchase are to be decided. It is important to note that the expected flow of proceeds to be considered regards the whole lifetime of such capital goods. That being said, the major issue which arises is how to estimate the prospective yields, especially for being the results of the investment decisions only stated in the long term. The state of long-term expectation are based on the most probable forecast the agents can make, and also in the confidence on the this forecast, once the future is marked by uncertainty and “Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible.” (p.149) The interest rate, for its turn, is a monetary phenomenon, a result from the confrontation of the liquidity preference and its availability. The money, understood by economic actor as such, is the asset that carries the liquidity, a key attribute in a world marked by the presence of uncertainty. Liquidity signifies a safe refuge to the unknown future. Therefore, the interest rate is defined as the premium for giving up liquidity, i.e., the reward that agents charge for giving up the control over their resources, “[...]the rate of interest at any time, being the reward for parting with liquidity, is a measure of the unwillingness of those who possess money to part with their liquid control over it.” (p.167) While discussing the determination of the interest rate, Keynes attempts to establish a causal relation between the availability of liquidity, expressed in money supply, given the liquidity preference, and interest rate. And so to understand the role, in fact, the ability of the monetary authority to determine the interest rate by implementing the monetary policy. The author stands out that it is not the level of interest rate that matters, but to what extent this level differs from the rate understood as safe by the economic agents. What leads to the conclusion that an expansionary monetary policy should induce a fall in the interest rate, depending on how the agents understand this movement and to what extent this movement does not imply a higher remoteness of the potentially resulting interest rate from the considered as the “normal one”. What leads to the conclusion that the interest rate is a psychological or even a conventional phenomenon. “ It follows that a given M2 will not have a definite quantitative relation to a given rate of interest of r; — what matters is not the absolute level of r but the degree of its divergence from what is considered a fairly safe level of r, […]. It is evident, then, that the rate of interest is a highly psychological phenomenon.” (p. 202) And go further and as states that more than psychological, the interest rate is a conventional phenomenon, since “the long-term market-rate of interest will depend, not only on the current policy of the monetary authority, but also on market expectations concerning its future policy, [… ] . The long-term rate may be more recalcitrant when once it has fallen to a level which, on the basis of past experience and present expectations of future monetary policy, is considered “unsafe” by representative opinion” (p. 202/203). That makes investment decisions complex and problematic since deriving from the contrast between largely stable, conventional and highly resistant to decreases interest rates - given the peculiarities of money9 - and the marginal efficiency of capital, fickle and highly unstable. These findings have important implications to the author's model, once investment plays a fundamental role, being central to the determination of employment and income. And, from the nature of the determination of the interest rate, the author points out limitations to the role the to be played by monetary policy as a tool for enabling, through the interest rate, the determination of appropriate levels of investment, which could guarantee full employment, central concern of the GT model. Actually, in a world in which crucial decisions are taken by wealth owners in their lasting pursuit of enhancement of wealth, being the investment one among different possibilities of wealth application, the author presents the idea that interest rates low enough to ensure full employment may not prove proper to those agents, the wealth owners. Given the perception of constraints to ensure, through the management of interest rate, adequate levels of investment, the author argues that the State could act on the marginal efficiency of capital-goods, moving towards the organization of investment decisions. This proposal can be deduced from the following quotation, “For my own part I am now somewhat skeptical of the success of a merely monetary policy directed towards influencing the rate of interest. I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organising investment; since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles I have described above, will be too great to be offset by any practicable changes in the rate of interest.” (p.165) 9 These specificities would be lower elasticities of production and substitution. Since money is not subject to private production from market conditions, conditions which are revealed by pricing mechanisms, the monetary interest rate would be more resistant to decreases and, as such, would be reference to the decisions of capital application, including investment. It is important to note that, given the role of money as an asset, as liquidity per se, and in that sense part of the wealth owners’ asset portfolio, attached to the fact that Money is not produced by hiring workers, explains the presence of involuntary unemployment as a result natural of normal running of capitalist economies. As concerned about the understanding of how the levels of employment and income are determined and float, Keynes emphasizes the central role of private and domestic spending decisions, especially investment decisions, taken, as already discussed, in an environment marked by uncertainty regarding the expected returns and the interest rates. And, as investment and production decisions are among several possibilities of wealth application faced by the wealth owners, in their relentless pursuit of the wealth valuation. The normal functioning of economies of that nature leads to the constant presence of involuntary unemployment and to an unequal income distribution. In the author's words, The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes. (p. 372). The observation of these flaws, inherent to the normal functioning of capitalist economies - understood as monetary economies – led the author to provide proposals for State action: tax policy in order to promote income distribution, euthanasia of the rentier and the socialization of the investment. In a certain sense, these proposals can be understood as the author's view on the promotion of economic development. The last proposal can be understood as a recovery of the proposal of investment organization. To explain what would be “a somewhat comprehensive socialisation of the investment”, Keynes defends the State can act in order to ensure the necessary resources to raise the instruments of production and to guarantee a minimum profitability for the instrument of production’s owners. Concerning to the first, the amount of resources, the author does not seem to be restricted to the concept of resources to finance the instruments of production. And regarding to the second, the idea seems to be, in some sense, the increase of the Marginal efficiency of capital. And it appears that the author refers to, primarily, but not exclusively, to private owners, as defends initiatives of public-private partnerships. The author stands out the concept of socialisation of investment very shortly following, once again, the emphasis on the boundaries of the State action in the levels of investment by means of the interest rate, as can be seen in the following quotation, which is all the author presents on the concept under discussion, “Furthermore, it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative. But beyond this no obvious case is made out for a system of State Socialism which would embrace most of the economic life of the community. It is not the ownership of the instruments of production which it is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary. Moreover, the necessary measures of socialisation can be introduced gradually and without a break in the general traditions of society.”(p.378) Both of these proposals, organizing and socialising the investments - which we defend as presenting the same meaning - are quite large and provide more a sense than an explicit format of action. This amplitude can be observed by how different authors take up this issue. Pollin (1996) argues that, having in mind the institutional framework of the U.S. financial system, “important steps can be taken toward the Keynesian goals of a ‘somewhat comprehensive socialization of investment’ and ‘the euthanasia of the rentier’”(p.61). The combination of using the institutional framework to direct resources and thus stimulate investments - especially those with high social returns -, public investments and expansionary monetary and fiscal policies could be successful in addressing unemployment. The proposal of socialization of investment presented by this author is closed linked to a design of credit allocation policies, considering the financial system institucionalities, in order to stimulate productive investments and to prevent speculative assets transactions. In fact, it means the proposal for directing credit, mainly attached to three different instruments. First, the enforcement of application of the Community Reinvestment Act, which “obligates banks to lend for projects among unserved areas of the communities in which they are located. […] it would have significant impact on the composition of both lending and investment […]” (p. 60). Second, the pension funds, which are “heavily subsidized by government policies” should be required to take into account the social rate of return of their investments. And third, the Fed could use the discount window and capital requirements on financial institutions to stimulate lending to high social rates of return and to discourage speculative ones. So, as already said, the idea of socialization of investment is closely attached to the directing of funds to socially relevant investments, given the institutionality. One could say that, if the institutional environment allows, this type of role to be played by development banks. The proposal of socialization of investment shows up in Dostaler (2007) in a discussion of what would be possible interpretations for Keynes’s contribution concerning policies to fight unemployment, actually “instruments of economic ‘fine tuning’” (p.201). Therefore, according to the author, it is understood from Keynes that capitalists economies, although not highly unstable” (p. 201), are normally marked by the absence of full or even almost full employment. These economic instruments of ‘fine tuning’ could emerge from different perspectives: a moderate and a more radical Keynesianism.10 The later was presented by Keynes in his discussion of the euthanasia of the rentier and the socialization of investment. Dostaler highlights that the idea of the socialization of investment aims to face the capital development problems that emerge from casino, very speculative, highly attached to short term results, economic activities. “The socialization of investment aims to solve the problem raised by the societies in which ‘the capital development of a country becomes a by-product of the activities of a casino’ (ibid., p. 159) […] led by the lure of short-term financial gain. The struggle against the instability of the marginal efficiency of capital and thus the investment, must involve the structural intervention of the State […].” (p. 202) It is important to note, from this discussion presented by Dostaler around the socialization of investment, emerges the proposal that the action of the State to face the instability of the investment should be structural, one could say even permanent. By revisiting the discussion of Keynes on conventions and the role of these in the determination of investment, Davis (1997) relates the proposal of socialisation of investment to the establishment of an institutional framework that contributes to the creation of more conducive and appropriate environment for making such decisions. And this shape of the socialization of investment proposal, strongly associated with the institutionality, is closed related to the proposal defended in this article, since development banks are or may be an important part of the institutional framework in different economies. The author understands that, on Keynes’ view, conventions depend on the economic agent’s perception that individual judgments are interdependent, and that confidence is a central element in the establishment of those judgments. The state of confidence derives from the success or the non-success with which the agents access each other's opinions about the market. And, given the complexity involved in the formation of the individual 10 Dostaler highlighs that the moderate Keynesianism, largely associated to instruments such as the ISLM model, has marked the economic policy in different countries. judgments, the explanation of different states of confidence is quite difficult. Thus, it would be incorrect to infer that Keynes believed or hoped that a convergence of individual judgments in any markets would take place, even considering that he would defend that a less unstable environment would be more conducive to investment. It is in this sense that the author translates or understands Keynes's proposal of socialisation of investment, i.e., in the sphere of long-term policies that would mainly contribute to raising the level of confidence and thereby to the establishment of more stable rates of investment. ‘A somewhat comprehensive socialisation of investment’ could be generated by public or semi-public institutions that would be in charge of an important part of the investment. And that institutionality could guarantee a better communication and a higher comprehension among the involved agents, as also an increased state of confidence and, therefore, would allow more stable investment rates. In the author’s own words, “Thus, as long-term policy proposal, Keynes recommended ‘a somewhat comprehensive socialisation of investment’ (CW VII: 378); whereby public and semi-public boards and agencies such as universities, port authorities, redevelopment corporations, and son on, would direct a larger share of total investment expenditure. This institutionalizations of investment would un his view create conditions for better communication and understanding among individuals within organizations having shared purposes, and, on the grounds that like minds would conceivably exhibit higher states of confidence, lead to more stable investment rates in part of the economy. The investment community at large, Keynes believed, was simply too atomistic to avoid the regular swings in confidence that lend the convention surrounding investment in periodic instability, and accordingly a long-term policy sensitive to the conditions of confidence was in order.” (Davis, p.217) 4. Concluding Remarks As already said, both of these proposals, organizing or socializing investments, are quite large, guiding more a sense of acting than explicit formats of actions. This amplitude can be observed by how different authors take up this issue and also allows the consideration of different forms of implementation, conditioned by specific characteristics such as institutional environment and historicity. Thus, it is possible to reflect on expanding the role to be played by development banks, in addition to those observed in the literature, especially the filling the gap left by the private sector, the proposal of the present article. Without ignoring or not giving the necessary attention to the fundamental role to be played by the financing of investment, especially when its peculiarities are conceived, such as long-term horizon towards outcomes and/or the higher risks involved, from relations one can stand out from Keynes’ conceptual framework, one could say that it would not be enough to guarantee the adequate investment rate. And we mean by adequate investment rate the one which could imply low or even no unemployment rate. The proposal of socialization of investment, somehow, embodies the role of development banks in the financing of the investment decision, in what we could understand as their “classic function”. What we propose here is that development banks could be instruments under the State’s umbrella, as we are referring specially to public development banks, for the action of organizing investments, which could have reflects, for instance, in the marginal efficiency of investment. Development banks could go beyond the financing of investment, assuming a role in the organization of individual investment decisions, guiding the individual action of investors in the pursuit of individual results for wealth11, making the environment in which those decisions are taken more prone to them, and creating a better communication among the agents, increasing, in that sense, the state of confidence. References ALIDE. ALIDE Annual Report, 2009. Amyx, J and Toyoda, M. The Evolving Role of National Development Banks in East Asia. International Centre for the Study of East Asian Development, Kitakyushu Working Paper Series Vol. 2006-26 (December 2006). Boyer, Robert. The four fallacies of contemporary austerity policies: the lost Keynesian legacy Camb. J. Econ. (2012) 36(1): 283-312 Davis, John B. J.M. Keynes on History and Convention. In: Harcourt, G. C. and Riach, P.A. A ‘Second Edition’ of The General Theory, vol. 2. New York: Routeledge, 1997. Dostaler, Gilles. 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