Financing Innovation and Development: The Role of Public Banks and Non-Banking Public Institutions. The Cases of Brazil, India and China.
The main goal of this project is to understand the structure of the financial systems and especially of public financial systems as tools for providing financial stability and long term funding for development and innovation (productivity-enhancing activities embedded in risk and uncertainty). The project will pursue that goal by providing a comparative approach among Brazil, India and China. Through the analysis of those cases, it will seek to produce both institutional reform proposals and policy advice, which would feed the ongoing policy dialogues and help policy makers and regulators to enrich their policy toolkits.
Over the past years – mainly over the past three years – MINDS has advanced the discussion on the financing for development and innovation emphasizing the concept of functionality of the financial system and the role played by public financial institutions, with a special focus on development banks.
MINDS’ current research is grounded in the Post-Keynesian and Schumpeterian theoretical approaches, and seeks to demonstrate that the presence of a public financial sector that is apt and willing to work towards economic stability and development, helps to smooth the Minskyian cycle of expansion of investment in which increased financial fragility and/or external vulnerability tends to bring the whole economic expansion to a halt. Thus, the functionality of the institutional structure embedding the financial system is not a detail. It is a key feature in helping to build up a more robust path of economic change in which faster growth produces less financial instability and economic vulnerabilities.
Financial Governance, Banking and Financial Instability in Brazil: Analysis and Policy Recommendations
This project aims at investigating the structure of the Brazilian financial system and its regulatory framework, highlighting their recent changes in order to identify the – old and new – sources of stability and instability and to suggest policies for reforming Brazil’s financial architecture to increase systemic stability as well as the ability to provide funding for development.
The research effort will map the changes in the global financial landscape after the crisis, but will focus on the domestic transformation of Brazil’s financial system towards nonbank liquidity-creating structures and its implications for designing regulatory policy proposals to address them. In particular, building on Minsky’s approach, the project will emphasize the implications of the development of alternative sources of liquidity, such as the growth of the asset-backed securities and mortgage-backed securities markets, and the interaction between new liquidity creators and traditional banking institutions for the creation of opportunities for regulatory arbitrage and the transmission of instability within the economy.
The resilience and stability of Brazil’s financial system has received attention as it navigated relatively smoothly through the 2007-2008 global financial crisis and the collapse of the shadow banking system. Both policy-makers and regulators have pointed to the robustness of Brazil’s financial system and its resilience to the global financial crisis by contrasting it with the conditions that existed in the U.S. financial system prior to the “subprime” crisis. Brazil’s economy experienced a period of relative economic stability and rapid growth of domestic bank lending in the last 10 years. Nonetheless, a striking feature of periods before financial crises is that they validate riskier practices. In this sense, periods of growth and tranquility validate expectations and existing financial structures, which change the dynamics of human behavior leading to endogenous instability.