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Jobs – Growth – Productivity – Prosperity
The Formula for National Prosperity is very simple: EVERYBODY WORKING – EVERYBODY WORKING PRODUCTIVELY.
If 5% of the working population is unemployed, 5% of productive capacity is wasted. Even if everybody is working, but many are working inefficiently and unproductively due to inadequate investment, then again overall production, and thus output and potential prosperity, will be reduced. We become prosperous, not just by working, but by maximizing productivity.
In today’s economically inter-connected world of competition for excellence in product design using hi-tech machinery and well-equipped modern premises, job-creation requires capital – in sufficient quantity to ensure a business is properly set up, and with guaranteed longterm financial reliability. Adequate, reliable capital becomes even more important when the highest international standards in design, production and marketing must be consistently maintained.
That western banks gambled themselves into massive debts, which in turn required equally massive taxpayer rescue packages plunging governments even deeper in debt, has become a significant episode in banking history. But if we regard the financial and banking system as an element – the most important indeed – of a nation’s infrastructure, it becomes immediately apparent that our current systems fall far short of the needs of a properly functioning economy.
This is a longterm structural problem which goes to the basic, fundamental nature of banks and banking.
The fact is simply stated: banks are private institutions whose function is to make money for their directors and shareholders. Serving the needs of the nation’s economy is not their prime concern. In fact quite the contrary. Bankers tend to shrink from involvement in an economy suffering downturn or recession. As bank loans are reduced or refused many a business has found bitter truth in the old saying that “banks lend you an umbrella when it’s sunny, and take it away when it rains”.
A dedicated Development Banking sector can spread growth across the nation, creating jobs and providing the wherewithal for existing companies to increase their competitiveness, as well as for infrastructural improvements. Investment targeted regionally can bring industry and growth to traditionally backward areas.
DEVELOPMENT BANKING – Project Secured Investment
Traditional banking practice requires pre-existing assets as security, and loans carry no long-term commitment. Development Banking avoids these two limitations of traditional banking by securing the loan on the industrial or commercial project itself, thoroughly researched and costed, rather than outside assets alone, and by making a long-term commitment based on an intimate involvement with the business or project in which it is invested. This facilitates the creation of new business and new jobs, as well as providing secure finance with which existing business can maximize quality and productivity.
Indeed, by conditionally requiring the highest standards of product and service quality, Development Banking can increase competitiveness, and the high level of productivity which creates real and lasting prosperity. Unlike government grants and incentives, development through repayable investment does not swell the deficits of indebted governments.
By setting up multiple Development Banks to operate at regional level, focusing on regional and local needs, the benefits can be spread widely and uniformly, avoiding the usual geographical pockets of non- or under-development. Local infrastructure can also be financed.
Many of today’s successful businesses grew over many years and a long hard climb, starting with minimal capital, operating on a shoestring, and reinvesting every penny of profit. Industrial Investment Banking can provide sufficient capital for a good business venture to start at full operation, properly equipped for maximum productivity.
The Industrial Development Banks (IDBs) would require minimal initial capitalization, since each project, thoroughly vetted from design to production, management and sales, continuously monitored, together with its fixed assets, becomes the loan collateral.
The IDBs rely for their security on thorough research of loan projects in which they are invested, on expert advice and assistance where necessary, and on a close working and constructive follow-up partnership with the loan recipient, backed by an ongoing flow of performance data.
Thus the business itself, its assets and its ongoing performance, becomes the security. Asset and investment are in balance. Security becomes “equity plus” – equity with the additional security of on-going monitoring.
Is this “sound banking practice”? Traditional banking practice relies on secure assets to cover its liabilities, but experience in 2008-9 has shown that the “liabilities” involved in complex hi-tech trading cannot accurately be estimated; and as for banks’ assets, government bonds, once considered as “gold-plated” are now in many cases being downgraded. In these changed circumstances a solid, thoroughly researched and continuously monitored business may be seen as considerably more secure.
Investment in Infrastructure
Development Banking can also finance infrastructure improvements, creating jobs without adding to the overall deficit, as several examples and studies have indicated.
Industrial Development Banking operates in exactly the same way as the already-established Tax Increment Financing (TIF), an effective investment tool for a city to create jobs and promote economic development. Finance is provided in the form of an investment loan to be repaid through an uplift in taxes resulting from infrastructure improvements. The City of Chicago estimates that the creation and utilization of TIF funds has created and generated more than $12 billion increase in property values throughout the City since its inception in 1984. Chicago now has 158 such zones, covering 29% of its land and 13% of its property by value.
The Core Cities Group is a network of eight of England’s major regional cities. They form the economic and urban cores of wider surrounding territories, the city regions. In 2008 the Core Cities Group published a report with international accountants PricewaterhouseCoopers, Unlocking City Growth. In it they look at a similar model also based on tax increment financing – investing to provide major infrastructure, repayable from an uplift in business taxes. Applying the model to four live case studies from the cities, the report demonstrates that by using this approach, increases of between 50% and 80% can be achieved in housing, jobs and economic output.
Britain's Regional Development Agencies (RDAs) have a distinguished history of investments and grants promoting economic development based on their own thorough research and analysis of project details, costs and anticipated returns.
Some historical and current examples.
On becoming President of France in 1852, Napoleon III foresaw that the next half-century would be a period of growth in industrialization and scientific discovery. He established Crédit Foncier and Crédit Mobilier which financed and promoted investment in the textile, chemical, steel and metallurgy industries, and the modernization of agriculture. The rail network was increased sixfold from 3,000km in 1852 to 18,000km in 1870, and the complete renovation of Paris was undertaken by Baron Haussmann.
In 1818 the Swedish government offered 160,000 Taler to Westphalia as reparation for damages incurred during the Napoleonic Wars. This money was decreed the property of all Westphalia by its President, and the Westphalian Hilfskasse, or “Assistance Bank” was established to develop the region’s economy and pay for public-works projects. The king of Prussia ordered that a similar bank be created in the Rhineland in 1847. Both banks later became Landesbanken (Regional Banks), and were instrumental in making the Rhine-Westphalia region one of the most productive industrial areas in Europe.
In the post-WW2 years, the Landesbanken again played a major role in the creation of Germany’s “Economic Miracle”, in particular through the provision of secure on-going finance to the German “Mittelstand” (small and medium-sized companies) in their respective regions. With 3 million mid-sized businesses the Mittelstand industries employ more than 70% of German workers and contribute roughly half the country’s GDP.
Founded in Basque Spain in 1956, the Mondragon Cooperative group clearly illustrates an ongoing relationship between investment banking and recipient business. The Workers’ Bank provides investment as a local development bank, offers technical and financial advice for business startup, then monitors production, quality, and financial performance in a process of ongoing cooperation and partnership. This also assumes longterm commitment, ensuring finance for secure long-range planning and productivity investment, research and development into new-generation products and services, in conjunction with apprenticeships and higher education which are also sponsored by the Cooperative. The group now employs 85,000 workers with a turnover of 15 billion Euros.
In the USA, the Bank of North Dakota (BND) is a state-owned bank dedicated to promoting commerce, industry and agriculture. BND offers numerous low-interest loan programs in collaboration with a lead lender to meet the financing needs of any qualifying new or expanding business. The Bank provides financing to stimulate economic development in the State for both business and agriculture.
It is the responsibility of government to ensure the proper functioning of the nation’s infrastructure services, among which banking is arguably the most signigifant. Our current banking system is unstable, irresponsible, and serves the interests of its shareholders, not those of the nation. We need to change it, and urgently.
Everybody working, everybody working productively. This requires serious, longterm financial commitment. During the Great Depression years following 1929, Lord Melchett was one of several prominent proponents of financial reform. He stressed that banking should be at the service of industry, rather than industry at the mercy of the banking system. His words are equally true today:
“It is upon industry, not banking, that England has grown great. While banks take a short-term view for reasons of security and liquidity, business is conducted on a long view. We are embarked on an industrial age, and we must alter our banking and economic system to suit the necessities of industry”.
Growth without Inflation |
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