Trade, Global Value Chains and Development: What Role for National Development Banks?

In this article we discuss the need for industrial policy and role of development banks for economic development. The catching-up of countries in the Global South to productivity levels and living standards of the Global North is the exception. There are two main economic explanations for this observation. First, developing countries are pushed to low-tech and labor-intensive productions and tasks in global value chains. This offers the advantage of easier industrialisation, but it does not automatically lead to productivity levels comparable with the Global North. Foreign direct investments only partially help to overcome this problem. Second, low trust in national currencies in the Global South leads to distorted financial markets which do not provide sufficient credit for investment. National development banks play a key role in facilitating the economic catching-up of the Global South as part of needed industrial policies. They can alleviate distortions in the financial system and at the same time support the transformation of the economy towards higher productivity and ecological transformation. We explain development bank policies by using the KfW as an example of an effective industrial policy.