Development Bank And The Social Welfare Analysis

Development bank refers to the financial institution that facilitates governmental long-term loan to various economic entities. Its purpose is to make up the shortage of construction fund through fund intervention by the government. Therefore, it has long been generally acknowledged in the academic circle that development bank can promote economic development and increase social welfare. However, in the past few years, some serious problems, such as continuing climb up of debt ratio and drastic drop of cost-profit ratio, have occurred in some development banks in developing countries. Its existence has exerted some restraining effect on the economic development. So whether development bank can promote economic development and increase social welfare under the restrained domestic situation becomes the topic of this paper. In this paper, the financial restrained economic system is divided into 2 types: centralization of power and division of power. The author analyzed the reason for setting up development bank and its effect on social welfare. Then a case study on Japan development bank is provided and a brief answer to this question is given. The paper consists of 5 chapters: Chapter One expounds basic characteristics of national capital supply and demand under financial restraint. In power centralization system, since direct financing cost is rather high due to low-interest rate policy, bank loan becomes the major source for enterprises external capital, and there is rent during the course of bank loan. In power division system, there is less direct governmental intervention. Interesting rates gradually unify and there occurs more financing channels. The bank begins to pursue the profit maximum. Chapter Two gives a theoretical elaboration on the state of capital supply and demand under financial restraint. In power centralization system, the implementation of low interest rate leads to the breach of supply and demand, which leads to the lower ration of capital and corruption occurs. In power division system, with the loosing of govearienial control, the bank Will adOPt credit contfol and co-financingunder the imperes to pursue llAnost profits. HoweveF. due to the exiStCnce of moralrisk and backward selection, the bank's loan will be less than that in Pareto state, i.e.there is still a credit breach in the economyChaPter three focuses on the reason fOr the illtervention of governmental caPitaland conduCts a systematic Study on social welfare after the establishment ofdevelopment bank. Through the fixed quanity analysis of the 4 socialfactor(govemmeni, development bank, commercial bank and residenis),the authorpoinis ollt that developmellt bank can promote economic deve1opment in certainhistorical stages. Wth the development of economy, its negative effects become moreobvious and it is high time that development bank should leave the historica1 stage.ChaPter Four is a case stUdy on JaPanese society. A thorough analysis of effect onsocial welfare of JaPan's develoPttient bank fiJrther proves the above theoryChaPter Five is a conclusion of above analysis; in the end the author gives someadvice on the China's developmeni bank constfuction.