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Direct support to private firms in developing countries constitutes a large and growing share of multilateral development banks’ financial activities. This trend contrasts with the advice MDBs gave developing countries until a decade ago to privatize or liquidate the development banks supporting private firms, or to transform them into nonbanking development agencies.
This report by non-resident fellow Guillermo Perry examines the development-related rationale of these renewed actions and provides a preliminary discussion of the following questions: Should international official funds be allocated in direct support of private sector activities in developing countries? If so, who should receive assistance and how? And, finally, how can the MDB community exploit synergies and strive for a productive balance in support of public and private activities in developing countries?
Perry finds that MDBs are only partially living up to priorities in line with the arguments in favor of MDB direct support. His recommendations include deepening MDB support to small and medium enterprises, reducing the procyclicality of MDB lending, increasing the share of MDB loans and guarantees to private firms that are made in domestic currencies, and paying more attention to firms in infrastructure and social sectors and to those introducing new products, exports, or technologies.