Financial systems, financial governance and economic development

Abstract

The idea that seems to be spreading in response to this crisis to promote the substitution of development financing via private sector institutions in place of government development banks means restoring the inequitable sharing of risk of development finance, promoting instability and protecting finance at the expense of labour, and the inevitable worsening of the distribution of income. Private sector financial markets do not have a good record of providing finance to development investments at levels and rates that would ensure expanding employment, and there is no reason to believe that this will change if the role of development banks is minimized. As liquidity preference becomes the dominant decision variable for investment, Brazil will be back to the problems that Keynes originally analysed in the General Theory, with the addition of the prudential requirements that will aggravate the instability of the growth process, even in the presence of a fully developed domestic financial system, and tilt social support in favour of finance at the expense of labour.