Development banks

Arriving at a concrete definition of development banks is surprisingly tricky, as they have existed in many parts of the world in different forms for centuries. Yet development banks can be broadly defined by their ownership, how they source their funding, and how funding is distributed. Development banks in almost all cases are owned by the State. Unlike private banks, which are created in order to generate profit, development banks are created as macroeconomic policy institutions. This dynamic is not limited to develop- ing countries, or even to central governments. The socialization of finance through devel- opment banks has occurred in many forms under governments of different size, location, historical period, and political leaning.

While the criterion of ownership is a necessary element in defining development banks, it can also create confusion. Many State-owned financial entities that were not created to be development banks have in diverse times and places assumed roles typically assigned to development banks: central banks and State-owned commercial banks have in many instances channelled government funds to specific economic activities gener- ally considered to be part of economic development. Yet the ownership criteria can also make things clear. Institutions that are officially dedicated to economic development, such as the Asian Development Bank, the Inter-African Development Bank, and the Inter-American Development Bank, are not owned by the States in whose territory they operate. These banks were originally created in the post-war period to support foreign currency financing for developing countries, yet their institutional operations have since changed considerably.

Deleveraging

Deleveraging is the process by which either economic units (taken individually) or the economy as a whole get rid of their debts. The most obvious way of carrying this out is by repaying existing debt, which should result in the aggregate stock of debt decreasing. However, while debt may fall in nominal terms, the attempt to deleverage - that is, to repay debts accumulated in the past - can increase the burden of debt in real terms.

According to Fisher (1933), repaying the debt implies a decrease in the means of payment in circulation and therefore a fall in the price level. This logic is based on the quantity theory of money. As a result, this fall would increase the debt in real terms; during a crisis, therefore, the attempt to repay debt would result in a larger debt. This means that if all units simultaneously try to deleverage, a debt deflation could occur, resulting in a self-defeating exercise.

Draghi, Mario

Mario Draghi (1947-) is an Italian economist who has held and holds important politi- cal offices. At the time of writing, he is the President of the European Central Bank (ECB).

Draghi's vision of economic policy is partially, but significantly, influenced by Keynes's theory, although he explicitly affirmed that monetary policy "can become an effective, stabilising factor and contribute to collective prosperity in an independent and active way" only if monetary policy decisions are built "into a systematic and predictable strategy, based on price stability, which drives expectations and guides the economy but doesn't shock it" (Draghi, 2012a).

After receiving a Jesuit secondary education, Draghi graduated in 1970 from the University "La Sapienza" in Rome, under the supervision of the Keynesian economist Federico Caffé - the revolutionary reformist who suddenly disappeared in 1987 - and with a dissertation entitledEconomic Integration and Variation of the Exchange Rates, in which he criticized the project of the single European currency (see Draghi, 2012a, minutes 25:00-25:22). He received a PhD from the Massachusetts Institute of Technology in 1976 under the supervision of Franco Modigliani and Stanley Fisher. During the 1980s, Draghi taught economics at the University of Florence and worked for the Inter-American Development Bank and the World Bank in Washington, DC. In 1990, he was hired as economic advisor at the Bank of Italy.

Deutsche Bundesbank

The international fame of Germany's central bank, the Deutsche Bundesbank, rests on West Germany's low inflation record in the post-Second-World-War era, which, including the high-inflation 1970s, averaged 3 per cent over the 50-year history of the deutschmark from 1948 to 1998. "Buba", as the bank is called in the markets, has a reputation as an inflation hawk. Held in awe in some international political and financial circles, but scorned in others, the Bundesbank has established a firm backing in German public opinion and has generally enjoyed respect and support from across the political spectrum, too. Despite becoming part of the Eurosystem and surrendering its de facto monetary reign over Europe to the European Central Bank (ECB) with the euro change- over in 1999, the Bundesbank continues to wield disproportionate political power in policy debates both in Germany and at the European level today.

Debt crisis

A debt crisis occurs when a nation-state is unable to meet its sovereign debt service obligations. A variety of operational definitions in the empirical literature relate in one way or another to indicators of debt-servicing difficulties: missed interest payments, missed principal payments, widening sovereign debt interest rate spreads and the like (see Pescatori and Sy, 2004). Notably, the label of a "debt crisis" is often affixed before any outright debt default occurs, and, as such, the crisis represents as much a crisis of confidence as any threat of actual default.

Although debt crises have a long history (see Eichengreen and Lindert, 1989), it was the experience of several global South countries in the 1980s that captured the attention of the contemporary international financial community. Informed by neoclassical eco- nomic theory, analyses of these crises assumed macroeconomic imbalances were due to inadequate market discipline creating fiscal deficits that caused the crises. The con- sensus opinion on a resolution saw country after country forced to "liberalize", "pri- vatize", "deregulate", and generally cut public spending as conditions of the bailout packages. The result was "a dramatic global episode that had profound and lasting effects on international financial flow patterns [. . .] and developing country economic policy" (Barrett, 1999, p. 185). The considerable human costs, social dislocation and rising income inequality resulting from the forced structural adjustments compounded the considerable resource costs of the crises to people and nations least able to pay (see George, 1989).

Debt deflation

First identified by Fisher (1933) as the cause of the Great Depression in the 1930s, debt deflation is a cumulative process of declining output and prices set in train by an excessive level of private debt coinciding with low rates of inflation.

Fisher (ibid., p. 339) emphasized the importance of disequilibrium in this process, noting that even if we assume that economic variables tend towards equilibrium, "[n]ew disturbances are, humanly speaking, sure to occur, so that, in actual fact, any variable is almost always above or below the ideal equilibrium".

Given the starting positions of a higher than equilibrium level of debt and a lower than equilibrium inflation rate, debtors are forced to undertake distress sales at reduced prices, which causes both deflation and a fall in the amount of money in circulation as debts are paid off. The reduction in debt is less than the fall in nominal GDP, leading to an increase in the real debt burden even though nominal debt levels fall - a situation that Fisher (ibid., p. 344, italics in original) described as "the great paradox which, I submit, is the chief secret of most, if not all, great depressions: The more the debtors pay, the more they owe."

Dollarization

Dollarization is a monetary regime where a country adopts a foreign currency, usually the US dollar, as a means of payment for its residents' transactions, instead of its own domestic currency. Dollarization can be full or partial and, in most cases, it is imple- mented as a preferred choice for countries looking for monetary stability and protection from exchange rate volatility. Most countries that have dollarized their economy have done so during periods of economic instability. They also tend to have major economic links with the US economy whether through tourism, trade or as the recipient of significant US aid.

Full dollarization arises when a country completely abandons its own currency and adopts a foreign currency (very often the US dollar) in all its residents' financial transac- tions and dischargement of debt. All assets and liabilities are thereby denominated in that foreign currency; the national central bank stops issuing local currency. Ecuador is a noteworthy example, as it officially dollarized its economy in January 2000; El Salvador followed in 2001, while Panama dollarized in 1904.

Dollar hegemony

Today, the world economy operates under the artifice of US hegemony, fortified by the US dollar as an international reserve and vehicle currency. How did the United States arrive at achieving such pre-eminence?

From 1944 to 1973, the financial architecture of the world economy centred on a US- engineered Keynesian accumulation agenda as a response to the devastation wrought by the Great Depression. The capitalist institutional structure, or social structure of accu- mulation (see Kotz et al., 1994), rested on finance being subservient to the promotion of industrial enterprise.

With socially-engineered capital-labour compromises in developed countries, neo- colonial governing institutions in the Third World, active State regulation in decisions with respect to capacity utilization, and a co-respective form of competition among large corporations set by regulations that brought together monetary authorities and large banks as well as large industrial capitalists, the post-World-War-II system was the era of "regulated capitalism". Altogether, the world system was underpinned by the Bretton Woods arrangement, which called for globally fixed exchange rates against the US dollar tied to the price of gold and capital controls.

Debasement

Debasement refers to the practice of lowering the purchasing power of money. The notion of debasement is much easier to understand in the case of commodity money; that is, when the means of payment has its own intrinsic value such as silver or gold coins. History is replete with examples of various kinds of debasement. The first, and the most natural and innocent of all, takes place when coins lose part of their weight, and therefore value, during their circulation just from frictions. There are also less natural and therefore less innocent "frictions" such as those described as "sweating"; that is, putting many coins together in the same (usually leather) bag and shaking them so that the dust worn off could be used as metal.