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– by Fernando J. Cardim de Carvalho
© Atossa Soltani/Amazon Watch/Spectral Q/picture-alliance/dpa
“Pare Belo Monte”– “Stop Belo Monte (dam project)”: members of an indigenous community demonstrating against a major infrastructure project.
Brazil’s southeast is the hub of the economy: Sao Paulo’s commuter train station Luz.
“The pursuit of growth also results in regional concentration. Most of BNDES’ loans serve the country’s southeast and south, the most developed regions, where most of manufacturing activity is concentrated.”
Brazil’s National Economic Development Bank (BNDE), which was later renamed National Economic and Social Development Bank (BNDES), was created in 1952 by President Getulio Vargas. It was expected to act as a powerful lever to promote domestic industrialisation. At the time, the country was in transition from the first, spontaneous phase of import substitution, which began in the early 20th century, to the policy-supported phase, when import substitution became an explicit goal of economic policy. Together with Petrobras, the state-owned oil producer that was established just one year later, BNDES became an important engine of economic growth.
BNDES is an unusual state institution. It has survived major changes both in political orientation and economic strategy. Created amid heavy political turbulence – President Vargas was led to commit suicide only two years after the bank’s inauguration – it served the purposes of democratically elected leaders, such as President Juscelino Kubitschek in the mid-fifties, as well as the authoritarian regime that followed the 1964 military coup. In the 1980s, the bank survived the transition back to civilian democracy. In the 1990s, the orthodox market-liberal ideology that abated many other government-run entities did not subdue it.
When the bank was created, it was widely believed that economic development and domestic industrialisation were synonyms. Accordingly, BNDES’ most important mission was to provide long-term finance to fund industrial investments. It channelled lots of money into infrastructure. Indeed, Brazil did not have deep enough domestic financial markets, where funds for that purpose might have been raised from the private sector.
In the 1990s, new meanings were given to the term “development” and new political sensitivities emerged. Accordingly, the bank’s mission was changed. It no longer emphasises only support for industrial initiatives, but also responds to new concerns, such as the preservation of the environment and protection of special communities, including Brazil’s indigenous communities.
Currently, BNDES’ main role is to make up for two important market failures:
- Brazil’s financial markets are still underdeveloped and neither mobilise enough capital nor do they allocate long-term funds properly. In fact, private-sector banks and other financial institutions basically serve as intermediaries between BNDES and borrowers.
- The Bank is particularly interested in investment opportunities that have significant positive external
- effects. The idea is to achieve benefits beyond what is seen on balance sheets, including, for instance, educational opportunities and environmental protection as well as positive impacts on other industries. In other words, social benefits matter too and should even exceed private profits.
Private-sector banks obviously focus on profits. After all, they are in business to make money. Public lenders can, in contrast, consider the big picture, so it may make sense to finance projects with a low expected profitability if there are relevant returns in terms of social benefits. Typically, this is the case with investments in infrastructure, because better roads or more effective power supply allow businesses to flourish and generate employment, for instance.
Public sector institution
The bank is not actually a “bank” in the traditional meaning of the term. It does not accept deposits. In fact, it does not depend on private funds at all, even though it does borrow, especially in international markets from time to time.
The bank is entirely owned by Brazil’s Federal Government, with no private shareholders whatsoever. The bank has some capital of its own, but besides its own capital it mostly relies on special compulsory savings funds (see box). The fact that BNDES funds its activities either with its own capital or with publicly managed resources means that the bank is not subject to financial fragility, even if its leverage ratio rises (that is the ratio between total assets held by the bank and its own net worth, a measure of indebtedness), as was the case in the past three to four years. The Federal Government directed the Treasury to increase the bank’s available resources in order to respond to the international crisis. The government wanted BNDES to counteract crisis impacts by stimulating growth. The policy actually proved quite successful, though the economy now seems to be losing steam.
The volume of resources currently lent by the bank is staggering. According to its most recent balance sheet, BNDES’ total assets amounted to the equivalent of € 233 billion in September 2012. Of that sum, € 196 billion were loans. In the 12 months before September 2012, the bank had disbursed loans worth about € 52 billion.
Most other development banks in the world are confined to providing credit to small and medium enterprises (SMEs). That makes sense in places where there are private sources of long-term funding for big corporations, but SMEs still tend to be excluded from conventional private-sector financial services. BNDES, however, concentrates most of its loans on large firms. In September 2012, not quite two thirds of its credit money was directed to large firms. This ratio reflects the bank’s mandate to promote growth above all other objectives.
The pursuit of growth also results in regional concentration. Most of BNDES’ loans serve the country’s southeast and south, the most developed regions, where most of manufacturing activity is concentrated. The southeast and south absorbed 50 % and 20 % of loans respectively in 2012. The impoverished but populous northeast only got 14 %.
As the bank enters its sixth decade, it faces political and business challenges:
- BNDES’ political relevance is great because it has such a huge bearing on Brazil’s economy. The sheer volume of the resources it controls (own-resources, funds coming from compulsory savings and from the Treasury) attracts political attention. Parties compete to have members on BNDES’ board of directors, or at least in leading positions at its main divisions. The power to appoint directors is held by the nation’s president, however, and the current president, Dilma Rousseff, and her predecessors have mostly used it prudently. Though BNDES probably wields more power than most federal ministries, the bank’s leadership is relatively insulated from political parties’ usual shenanigans.
- Just like political parties, financial institutions have their eyes on BNDES. They are keen to share access to the compulsory savings funds, and they argue that the bank’s monopoly on these resources is preventing the emergence of private-sector financial markets that might serve long-term investors’ purposes.
- BNDES is quite popular, however, and thus has managed to stay relatively unharmed in such skirmishes. The bank’s focus on growth, however, has been more and more intensely criticised by domestic and international non-governmental organisations (NGOs) in recent years. They speak on behalf of new political constituencies, such as environmentalists and human rights activists, and many of them take particular interest in small and traditional communities who are perversely affected by economic growth.
BNDES is currently financing the construction of new dams, for instance, which inevitably causes dislocation of local communities. Some of these projects have been very controversial and generated strong political opposition. Obviously, the bank is toeing the federal government’s line that these projects are needed to keep the economy growing. The real issue is not the unconditional right of these groups to stay in their ancestral homes, but rather how to compensate them properly for their losses. Such issues have affected the bank’s reputation somewhat. Generally speaking, however, measures designed to keep the country on a sustained growth path still enjoy lots of popular support.
Of course, there are also intense debates on the adequacy of the bank’s strategic choices at each moment, which is only natural when one is dealing with such a large and influential institution. An object of recent criticism is the support BNDES gives large domestic private firms to internationalise their activities, for instance when they build production plants in other countries. This policy was adopted at the end of former President Lula da Silva’s second term in office.
Debates of this kind, however, do not really question the existence or the performance of BNDES. They are mostly directed at specific policies that may or may not change when governments change. Ultimately, they are not about whether BNDES should serve the common good, but rather about how exactly to define the common good.