Role and Importance of Bank to the Economic Development

Topics: Investment, Finance, Capital accumulation Pages: 9 (2472 words) Published: May 19, 2013
Development Banks: Their role an
d importance for development
C.P. Chandrasekhar
Among the institutions whose role in the develo
pment of the less developed regions is well
recognised but inadequately emphasised are the development banks. Playing multiple roles, these institutions have helped promote, nurtu
re, support and monitor a range of activities,
though their most important function has been as drivers of industrial development. All underdeveloped countries launching on national development strategies, often in the aftermath of decolonisation, were keen on accel

erating the pace of growth of productivity and
per capita GDP. This was the obvious require
ment for alleviating poverty and reducing the
developmental gap that separated them from the developed countries. To realise this goal, they considered industrialisation to be an important prerequisite. This stemmed from the perspective that modern economic growth was a process characterised by an increase in the share of employment in the non-agricultural sector, and within the latter by a change in the scale of productive units, the growth of f

actory production and a shift from personal
enterprise to the impersonal organisation of economic firms. Besides the apparent universality of this trajectory across countries, a range of arguments were advanced to justify the centrality afforded to modern factory industry. First was the conclusion derived from trends in consumption styles across the globe and embodied in rudimentary form in Engels' Law that the demand for non-food commodities in general and manufactures in particular grows and diversifie

s as incomes increase. Growth must therefore
be accompanied by a process of diversification of economic activity in favour of manufactures. Second was the belief that, gi
ven the barriers to productivity increase
characteristic of predominantly agrarian economi
es, the diversification in favour of industrial
production is an inevitable prerequisite for a rapid increase in per capita income. Third was the view that beyond a point even agricultural growth is predicated on the availability of a range of manufactured inputs, particularly, chemi

cal fertilisers. Fourth was the evidence that
dependence on primary production places a nation at the losing end of the shifting terms of exchange in international trade, necessitating industrialisation as a device aimed at garnering additional benefits from trade and overcoming external vulnerability. And, finally, the idea that given the 'learning by doing' characteristic

s of industrial capability, delaying entry into
the spectrum of industrialisers makes en
try more difficult as time goes by.
Industrialisation recommended itself also because of the benefits associated with late entry. There already existed a range of productive tec
hniques in the form of a shelf of blueprints
that can in principle be accessed. Late industriali
sers, as the cliché goes, need not reinvent the
wheel. Nor are they excessively burdened by outmoded capital stock that is yet to be written off, which is the penalty paid by the early starter. This makes the prospect of exploiting the benefits of the productivity increases associated with factory production even more encouraging. It was this set of factors that appeared to justify a strategy of development based on the rapid growth of factory production.

Capital requirements
The difficulty, of course, was that the take-o
ff led by factory-based industrialisation required
substantial investment. On the one hand, given the advances in technology between the period when current day developed countries had launched on industrialisation and the point in time when less developed countries had the option to launch on a trajectory of industrial development, the investment required to establis

h or expand particular activities was greater
than what would have been required earlier. Moreover, catching-up requires not merely 2...
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