Yves here. After the great job American financiers did in almost destroying the financial system and nearly taking down the global economy with it, one has to wonder why making the world safe for Big Finance is such a priority. One of the reasons I am skeptical is I had a ringside seat upon what happened in Japan when the US forced Japan to embrace extremely rapid bank deregulation in the 1980s. Similarly, the World Bank’s International Finance Corporation has been working since the 1980s (if not earlier) to promote the creation of capital markets in emerging economies.
Yet the last thing developing economies need is highly liquid markets. They need sticky investments, like foreign direct investment. Hot money inflows and outflows are destabilizing. And on a higher level, the model of mobile capital that the World Bank keenly promotes is a lousy idea. Carmen Reinhart’s and Ken Rogoff’s work on financial crises found that high levels of international capital flows are strongly correlated with frequent and severe financial crises.
By Jomo Kwame Sundaram, a former economics professor, was Assistant Director-General for Economic and Social Development, Food and Agriculture Organization, who received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007. and Anis Chowdhury, Adjunct Professor at Western Sydney University & University of New South Wales (Australia), who held senior United Nations positions in New York and Bangkok. Originally published by Inter Press Service
The World Bank has successfully legitimized the notion that private finance is the solution to pressing development and welfare concerns, including achieving the Sustainable Development Goals (SDGs) through Agenda 2030.
A recent McKinsey report estimates that the world needs to invest about US$3.3 trillion, or 3.8 per cent of world output yearly, in economic infrastructure, with about three-fifths in emerging market and other developing economies, to maintain current growth.
The world financing gap is about US$350 billion yearly. If new commitments, such as the SDGs, are considered, the gap would be about thrice the currently estimated gap as available public resources alone are not enough. Thus, for the Bank, the success of Agenda 2030 depends on massive private sector participation.
Maximizing Finance
The Bank’s ‘Maximizing Finance for Development’ (MFD) strategy marks a new stage. It presumes that most developing countries cannot achieve the SDGs with their own limited fiscal resources and increasingly scarce donor overseas development assistance (ODA).
Bank prioritization of financial inclusion presumes that fintech-powered digital financial inclusion would increase growth, create jobs and promote entrepreneurship in developing countries.
The MFD purports to respond to the G20’s April 2017 Principles of MDBs’ strategy for Crowding-in Private Sector Finance for growth and sustainable development. The G20 has offered the Roadmap to Infrastructure as an Asset Class for energy, transport and water inter alia.
The 2017 MFD strategy recycled the Bank’s 2015 Billions to Trillions: Transforming Development Finance, arguing that MDBs should increase financial leverage via securitization to catalyse private investment, thus promoting capital markets by transforming bankable projects into liquid securities.
The MFD presumes that public money should mainly be used to leverage private finance, particularly institutional investments, to finance the purported US$5 trillion SDG funding gap.
Financialization Coalition
The MFD strategy seeks to enable financialization and transition to securities-based financial systems in developing countries, complementing other initiatives by the Bank, IMF and G20. Such initiatives are expected to encourage investors to use environmental, social and governance criteria to attract, mobilize and sustain needed financing.
The MFD presumes that public money should mainly be used to leverage private finance, particularly institutional investments to finance the funding gap. Government guarantees are deemed necessary to ‘de-risk’ projects, especially for public-private partnerships (PPPs).
Meanwhile, the International Finance Corporation (IFC), a Bank subsidiary, is helping subsidize capital market involvement in infrastructure development; the MFD strategy envisages capital markets in ‘green bonds’, ‘social impact bonds’, infrastructure bonds and so on.
Securities markets are supposed to enable institutional investors to make desirable social and environmental impacts. MFD advocates claim that capital markets provide new solutions to development challenges such as inadequate infrastructure, and poor access to schooling, clean water, sanitation and housing.
The Financial Stability Board has also proposed measures to transform ‘shadow banking’ into securities-based finance, while the European Commission’s Sustainable Finance initiative seeks to similarly reorient institutional investors and asset managers.
Cascading Financialization
The Bank’s ‘Cascade’ approach seeks to institutionalize this bias for private financing. It seeks to facilitate securities lending by enabling ‘repo’ market financing and hedging, and ‘rehypothecation’, i.e., allowing securities to be used repeatedly for new lending.
The Cascade approach seeks to accelerate financialization with measures to accommodate new asset classes, enable banks to engage in securities and derivatives markets with minimal regulation, deregulate financial institutions creating tradable assets from PPP projects, and facilitate capital flows ostensibly for development.
It presumes market imperfections and missing markets deter the private sector from financing sustainable development projects, and proposes to address such bottlenecks by ‘internalizing externalities’ and providing subsidies and guarantees to de-risk investments.
Tito Cordella notes that it prioritizes private finance even when a project is likely to be profitable if undertaken with public funds. He notes the tensions between maximizing private financing and optimizing financing for development, and some implications. Public options are only to be considered after all private options are exhausted or fail.
Thus, the Cascade approach presumes that the private sector is always more efficient, despite actual experiences. Clearly, it not only reflects an ideological preference for private finance, but also seeks to promote securities and derivatives markets, as market liquidity is among the core G20 Principles of MDBs’ strategy for crowding-in Private Sector Finance.
Hijacking Development Finance
The strategy would thus commit scarce public resources to ‘de-risking’ such financing arrangements to transform ‘bankable’ development projects into tradable assets. This means that governments will bear more of the likely costs of greater financial fragility and crises.
Such government measures will inadvertently undermine needed financial institutions such as development banks. There is no reason to believe that MFD will somehow create the capital market infrastructure to improve finance for SMEs or needed development transformations.
Once a project’s future revenue streams are securitized, the multilateral development banks’ environmental and social safeguards no longer apply. Contracts to repay securitized debt held by investors would be disconnected from the underlying project financed and its consequences.
Holders of these securities have no incentives to prioritize social or environmental goals. Private equity and hedge funds that have short-term incentives for profit-taking, including by asset-stripping, are not concerned with social, environmental or other public interests.
Not surprisingly, considerable doubt exists as to whether private capital markets and institutional investors can be incentivized to finance long-term public goods as these mechanisms serve the profit motive, not public welfare.
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This is a thinly disguised capitulation and last-ditch attempt to resurrect private capital. It could work, sovereign largesse and all, except for one thing – the PPPs and other private institutional investors have no incentive to do anything but take their profits and leave their social and environmental obligations twisting in the wind. That part seems to not even be an acknowledged problem – even though it is glaring. Sovereign money can do all the green and social and infra bonding without the parasites. But the parasites have concocted an illusion of some massive shortfall of financial resources that only sovereign money can solve by leveraging private finance. What baloney. Just rehypothecate all the securities and etc. You know the routine.
MFD (Maximizing Finance for Development)???
Sounds more like MDF (Maximizing Development for Finance).
The financial jargon throws up all kinds of red flags:
**”Sustainable Finance initiative” rather than Sustainable Development initiative.
**”internalizing externalities’ and providing subsidies and guarantees to de-risk investments.” aka “Heads I win, tails you lose.
The last 2 paragraphs of the article say it all.
Contracts to repay securitized debt held by investors would be disconnected from the underlying project financed and its consequences.
puerto rico comes to mind here…
So they are talking about bridges and stuff. What better then a literal road to infrastructure as an asset class…
https://www.nytimes.com/2019/03/05/world/europe/genoa-bridge-italy-autostrade-benetton.html
Keynes, in the last chapter of the General Theory, did talk about the socialization of finance, and it seemed to be the guiding philosophy of the leaders in the west in the social democratic period to control finance and to slowly move towards a free trade environment internationally. Seems that they realized that you can’t try to get people to invest in things like factories, long term investments in the productive economy, if you allow financial capital to take money in and out of economies quickly, which causes instability. But that was largely among developed countries, as developing countries were basically excluded from really participating in the Bretton Woods conference and helping to draw up the international economic system. I like a lot of what Keynes wrote about, but he was pretty dismissive of many of the leaders of poorer countries at the time.
Instead of trying to appeal to private financial capital, seems obvious that a mass debt write-down among developing and underdeveloped countries would be better, as would a technological transfer and radically different trade policies. But, a debt write down would reduce the surplus of the creditors, and things like TRIPS at the WTO is explicitly protectionist in regards to intellectual property for a reason. The actual policies that have led to development for the now developed countries are radically different than the policies often forced on weaker and poorer countries now. Recently developing countries like China have radically violated the typical neoliberal development rules. Of course, allowing actual endogenous economic development could displace the exports from the developed countries, and it could lessen the need for foreign private capital for investment within developing countries, so not likely unless the developing and underdeveloped countries band together and come up with a radically different set of ideas. The ideas in the New International Economic Order would be better, I think, than the ideas that the IMF has promoted and forced on countries.
I wonder too how there is a continued emphasis on economic growth, while at the same time we are to believe that developed countries are serious about guiding and supporting sustainable development. When people talk about maintaining economic growth, growth in what? Growth in the production of real things and growth in the extraction of natural resources, or growth in the FIRE sector? The real economy is up against the limits of growth in throughput and pollution generation, the FIRE sector doesn’t face those constraints. If we are up against the limits of growth in the real economy, and if the consumption of natural resources and the generation of pollutants is highly inequitable, what would be required of developed countries if we want the economies in developing and underdeveloped countries to grow?
Seems that there is no coherent plan or logic to any of it, other than to profit as much as possible regardless of the social costs and until it all comes down.
Like locust swarms, leave nothing.
A while back, I recall reading a book Confessions of an Economic Hitman, which exposed the World Bank and many similar institutions.
They exist to enforce the neoliberal order and to keep the developing world down, so to speak.
If anything we need to shrink the size of the financial sector.
Maximizing Financialization of Development (MFD)
Hi Yves,
Do you know of any good books on the Japanese banking reform of the 1980s? I’d love to get more information on this.
Thank you!
Carolyn
‘Princes of the Yen’ (2003) by Prof. Richard Werner may be a good recommendation, but there are likely others.
His site – https://professorwerner.org/
I forget Gene Dattel’s book’s name. A bit overwrought writing style, but Dattel headed Salomon’s Tokyo operation for 7 or 8 years, starting shortly before Japan took off.
The Sun that Never Rose
Thank you both for the recommendations!
It’s long past time for a return to credit guidance and capital controls.
It matters because it matters to The People Who Matter.