Myths of the West: Lessons from Developed Countries for Development Finance

Over the years, World Bank missions recommended establishing development finance companies (DFCs) to provide long term financing for worthwile (primarily industrial) projects. The author reviews the DFCs performance and states that in general, it has been disappointing. Few are self supporting; a third are in serious difficulty, and by 1983 half of the banks had arrears on a quarter of their loans. By the early 1980s, the Bank's wisdom in establishing DFCs was being questioned. From the recent experience of a group of developed countries, the author concludes that: 1) an efficient banking system is central to the promotion of economic growth, 2) the performance of financial markets is not necessarily furthered by artificially lengthening the maturity of bank lending, 3) economic growth is not promoted through the financing of projects, 4) corporate organization, not project activity, is what distinguishes developed from developing countries. Economic growth relies on the structure and quality of financial institutions., and 5) financial assistance is only part of what is needed to create an appropriate institutional structure. Monitoring and rewarding individuals may often be more pertinent.