Sourcing Patient Capital: Lessons from Brazil, India, Pakistan, and Argentina

• In Event: The New Era of Economic Statecraft in Asia and Latin America

Abstract

Where can patient capital for economic development come from? While much recent literature has focused on the problem of stimulating private actors to become patient investors, this study flips the question. Political leaders and senior economic policymakers in middle-income emerging economies (EEs) want to access long-term sources of finance to support rapid, ambitious industrial and infrastructure development in order to boost economic growth and improve citizen welfare. The paper first theorizes the typical governance problems, both economic and political, that policymakers in EEs with mixed capitalist economies encounter in managing each of four broad sources (ideal-types) of long-term finance. Unlike the traditional bank credit versus capital markets distinction, the principal analytical fault lines employed in this paper’s model are national versus foreign, and public versus private, sources of finance. National public finance, delivered through development banks, is associated with the economic challenges of inefficiency and fiscal deficits, and the political knots of politicized allocation and government corruption. National private finance, intermediated via private institutions operating in decentralized capital markets, brings the typical economic problems of under-provision of public goods, booms and busts, and maturity mismatches, and the characteristic political challenges of insider dealing and pressure to socialize investor losses. Foreign public finance (whether from Western governments and the traditional multilateral lenders or the new, Southern lenders such as China) implies host country economic vulnerability to currency mismatches as well as political vulnerability to foreign policy pressure from creditor governments. Finally, foreign private finance originating in global capital markets throws up the economic problem of foreign exchange liabilities and the political challenge of satisfying the preferences of skittish international private investors for rigidly-orthodox domestic economic policies.

The experiences of four significant EEs, two neighbors in South America and two in South Asia, since the early 1990s illustrate the analysis. Brazil’s ambitious but largely failed attempts to use its much-admired industrial development bank, the BNDES, to promote export-oriented national champions demonstrates the classic pitfalls of national public finance. India’s concerted efforts at expanding national private finance through equity markets promotion and bank privatization, although a partial success, have led to major scandals, including the recent blowup of the high-profile private infrastructure financing conglomerate, IL&FS. Pakistan, chafing under repeated painful economic conditionality from IMF bailouts, began in the early 2000s to accept foreign public finance from a new patron: China. Although the China-Pakistan Economic Corridor is the crown jewel (allusion intentional) of the Belt and Road Initiative, the costs to Pakistan include the likelihood of a 13th IMF bailout and enhanced political vulnerability to China. Finally, Argentina, which relied on foreign private capital inflows from the 1991 inauguration of its currency board until the arrangement’s spectacular failure in 2001-02, subsequently had the dubious distinction of becoming everyone’s favorite illustration of the need for a global sovereign bankruptcy mechanism. The paper closes with the obvious comparative lesson—there is no easy solution, as all modes of long-term finance delivery in EEs are problematic, just in different ways—followed by the author’s tentative judgments on possible ways forward.

Author

• Leslie Elliott Armijo, Simon Fraser University