INTERVI EW
Objection, your honor! By Angus Downie, Principal Economist, OPEC Fund
financial systems must play a central role. Banks can create credit, so the issue is not purely one of funding availability. Strengthening domestic financial institutions, including public development banks, is critical. In the short to medium term, however, countries still face balance-of-payments constraints. They need foreign capital to finance imports required for industrialization and climate action. That capital does not have to be in US dollars, but it must be available. This is where international lenders remain essential: providing financing and helping reduce currency risk, which in turn supports domestic financial development. Take Uganda, for example. The central bank’s policy rate is about 10 percent, but borrowing costs are much higher because rates must remain attractive to foreign capital. This supports demand for the domestic currency and helps guard against financial outflows. As a result, exchange rate risk and the foreign currency composition of sovereign debt keep upward pressure on interest rates. Here the macro environment feeds directly into the micro: systemic risk translates into high borrowing costs across the economy. The outcome is lending rates over 22 percent, which are simply not sustainable for development finance. OFQ : You emphasize domestic financial systems, but many are small. Does regional integration offer a solution? AK: Yes, absolutely. Regional integration is likely necessary in the medium to long term as many countries are too small From a mainstream liberal perspective, Kaltenbrunner’s analysis may overstate structural constraints and underplay the benefits of developing countries’ integration into global markets. Economic liberalism – from Adam Smith’s emphasis on market self-regulation to modern neoclassical theory – argues that open capital markets, trade and price signals (including exchange rates) allocate resources efficiently and promote growth. Excessive focus
to support the use of their currencies and build deep financial systems on their own. There are already promising initiatives, particularly in Africa and Asia, such as regional local-currency payment systems and proposals for reserve funds. But these efforts need to be supported by mechanisms that provide financing, ideally in local currencies. Regional development banks are therefore crucial. That said, they face challenges, especially concentration risk. Unlike global institutions, they cannot diversify across as many currencies and markets, which makes taking on foreign exchange risk more difficult. OFQ : Are we seeing the end of global- ization or more of a transformation? AK: It depends on how we define globalization. What we are likely seeing is fragmentation rather than an end per se . The rise of China and its growing trade and financial ties with many developing countries are reshaping the system. A recent Bank for International Settlements report shows that renminbi internationalization is happening through banking networks rather than trade networks. So, we may move toward a more dual structure, with the USA remaining important, but with China continuing to rise. There are also increasing regional initiatives, although their success varies. For international financial subordination, this may not change much. Whether finance is denominated in US dollars or renminbi does not fundamentally alter the structural challenges for many developing countries. Unless regional on “subordination” risks neglecting domestic policy weaknesses (such as fiscal mismanagement, weak institutions and poor-quality policies) that many economists see as key drivers of instability and inequality. Centrist, more orthodox economists, typically support pragmatic economic openness. While acknowledging volatility, they stress that foreign capital and currency competition can discipline domestic policy and deepen local financial markets,
thereby helping to support development. Policies such as capital controls or heavily
blocs become significantly stronger, structural subordination is likely to persist. Will that change the playing field for MDBs? Not really. New institutions and alternative sources of finance, such as the New Development Bank and Asian Infrastructure Investment Bank, have made their mark in the last few years. But given the scale of global financing needs, especially for climate and development, these are unlikely to replace existing MDBs. There is room for multiple actors. I see the system evolving into two layers. The US dollar will remain dominant in a market‑based global system, largely driven by asset managers, global banks and capital markets. Alongside that, a more China‑centered system is emerging via bank‑based, relational and quite closed lending, especially across the Global South. Many developing countries are already becoming more integrated into the latter system, reflected in the expansion of Chinese banking networks. In countries like Brazil, for example, we are seeing growing use of renminbi settlement and increased participation in Chinese payment systems. interventionist MDB strategies may reduce efficiency, deter investment and create moral hazard. From this view, MDBs should focus less on reshaping the global financial system and more on improving governance, transparency, and market‑friendly reforms – leveraging, rather than constraining, global finance to support long‑term growth.
OFQ : Finally, what concerns you most today?
AK: Inequality is what upsets me the most. We live in a system where a small number of people have enormous wealth while many have very little. If we could change that, we could probably solve many of the world’s biggest problems.
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