The World Bank’s new Maximizing Finance for Development agenda brings shadow banking into international development – open letter

Last month, central bankers and politicians around the world remembered the global financial crisis and the lessons learnt in its wake. The consensus goes at follows: we have done a great deal to reform banks and protect tax payers from their aggressive risk taking but we haven’t done enough on shadow banking. At this point, the consensus fragments. Central banks claim that they need more power to deal with systemic risks stemming from the shadows, whereas politicians worry about the moral hazards involved in future rescues of shadow banks like Lehman.

We are all the more concerned that the same authorities have been actively promoting shadow banking in the Global South. Under headings such as Billions to Trillions and the World Bank’s new Maximizing Finance for Development (MFD) agenda, the new strategy for achieving the Sustainable Development Goals is to use shadow banking to create ‘investable’ opportunities in infrastructure, water, health or education and thus attract the trillions in global institutional investment.

Bringing shadow banking into development doesn’t just promote the privatization of public services, but may usher in permanent austerity along the lines of ‘privatizing gains, socializing losses’. More fundamentally, it seeks to re-engineer poor countries’ financial systems around capital markets that can attract global investors. This deliberate re-engineering of financial systems threatens progress on the SDGs. We call on governments and international institutions gathering in Bali for the WB/IMF, G20 meetings and the Global Infrastructure Forum to take a step back and assess carefully the developmental impact of the MFD agenda.

The MFD agenda will be tested in infrastructure, with plans spelled out in the “Roadmap to Infrastructure as an Asset Class”, under Argentina’s G20 presidency. These plans promote shadow banking in two ways.

First, the World Bank plans to use securitization to mobilize private finance. The WB would bundle infrastructure loans, its own or across the portfolios of multilateral development banks, issue senior and junior tranches to be sold to institutional investors with different risk appetites. Securitization, we learnt from Lehman’s collapse, is a shadow market easily prone to mis-incentives, aggressive leverage, aggressive promotion of underlying loans onto customers that cannot afford them. It generates systemic interconnectedness and fragility. Yet none of these issues have been addressed in the MFD plans. Instead, the MFD, through the so-called Cascade Approach, asks poor countries to use scarce fiscal resources and/or official aid to ‘de-risk’ bankable projects, by for instance providing guarantees/subsidies for demand risk or political risk. Since the WB will retain a share of the junior tranche, poor countries may easily be pressured to keep up de-risking payments or guarantees, even if it means cutting essential social spending.

Second, the MFD agenda doesn’t just express an ideological preference for private provision of public goods. It also purports to change poor countries’ financial systems around liquid capital markets that can attract global institutional investors. But the WB’s recipe for engineering liquidity in local securities market requires the promotion of the same shadow markets (the repo and derivative markets) that turned Lehman’s collapse into a global financial crisis. It is also a recipe for reduced policy autonomy. As the IMF recognizes, encouraging poor countries to join the global supply of securities exposes them to the rhythms of the global financial cycle over which they have little control, as shown by recent events in Argentina.

We call on the World Bank Group to recognize that the preference for the private sector should not be automatic, but rather chosen only when it can demonstrably serve the public good. When it meets this test, we call for the WBG to develop an analytical framework that clearly sets out the costs of de-risking and subsidies embedded in the MFD agenda in a way that allows a broad range of stakeholders, including civil society organizations and other public interest actors, to closely monitor results as well as fiscal costs in order to ensure transparency and accountability.

Should the MDBs adopt the proposals for securitization of development-related loans, it should first develop a credible framework that protects the SDG goals from the systemic fragilities of shadow banking. But this will not be enough. To ensure that it does not shrink developmental spaces and that is advances sustainable development, the MFD agenda should only be adopted in conjunction with (a) a well-designed framework for project selection that is aligned with the global sustainable development goals and the Paris Agreement; (b) a careful framework for managing volatile portfolio flows into local securities markets and (c) a resilient global safety net.

List of signatories

Daniela Gabor, Professor of Economics and Macrofinance, UWE Bristol

Ewald Engelen, Professor of Financial Geography, University of Amsterdam

Daniela Magalhães Prates, Professor of Economics, University of Campinas, Brazil

Gunther Capelle-Blancard, Professor of Economics, University of Paris 1 Pantheon-Sorbonne

Pablo Bortz, Professor of Macroeconomics, IDAES-National University of San Martín, Argentina

Kevin Gallagher, Professor of Economics, Boston University

Alicia Puyana, Professor of Economics, FLACSO Mexico

Laurence Scialom, Professor of Economics, University of Paris Nanterre

Jayati Ghosh, Professor of Economics, Jawaharlal Nehru University, India

P. Chansrasekhar, Professor of Economics, Jawaharlal Nehru University

Ilene Grabel, Professor of International Political Economy, University of Denver

Cornel Ban, Reader in International Political Economy, City University

Carolina Alves, Girton College and Faculty of Economics, University of Cambridge.

Jérôme Creel, Associate Professor of Economics, Sciences Po, Paris.

Kai Koddenbrock, Interim Professor of International Political Studies, University of Witten-Herdecke, Germany

Nuno Teles, Professor of Economics, Federal University of Bahia, Brazil

Marco Veronese Passarella, lecturer in Economics, University of Leeds

Jesus Ferreiro, Professor of Economics, University of the Basque Country UPV/EHU

 Elisa Van Waeyenberge, Senior Lecturer in Economics, School of Oriental and African Studies, UK

Phil Mader, Research Fellow, Institute of Development Studies, Sussex.

Manuel B. Aalbers, Professor of Economic Geography, KU Leuven/University of Leuven, Belgium

Cédric Durand, Associate Professor of Economics, Université Paris 13

Sandy Hager, Senior Lecturer in International Political Economy, City University London

Ben Fine, Professor of Economics, School of Oriental and African Studies, UK

Galip Yalman, Assoc. Prof. Dr. (EM), METU

Hansjörg Herr, Professor of Economics, Berlin School of Economics and Law

Vincenzo Bavoso, Lecturer in Commercial Law, University of Manchester

Kate Bayliss, Senior Research Fellow, University of Leeds

Melissa García-Lamarca, Postdoctoral researcher, Universitat Autònoma de

Barcelona, Spain

Andreas Nölke, Professor of International Political Economy, Goethe University

Duncan Lindo, Research Fellow, University of Leeds

Brigitte Young, Professor of International Political Economy, University of Muenster, Germany.

Christoph Scherrer, Director, International Center for Development and Decent Work, University of Kassel

Hans-Jürgen Bieling, Professor of   Political Economy, University of Tübingen

Eve Chiapello, Professor of Economic Sociology, EHESS Paris

Dr Caroline Metz, University of Manchester

Birgit Mahnkopf, Prof. Em. of International Political Economy, Berlin School of Economics and Law

Alessandro Vercelli, Professor of Economics, University of Siena

Susanne Soederberg, Professor of Global Development Studies, Queen’s University

Ipek Eren Vural, Associate Professor, Department of Political Science and Public Administration, Middle East Technical University, Ankara

Yamina Tadjeddine, Professor of Economics,  Université de Lorraine

Thomas Wainwright, Reader, School of Management, Royal Holloway, University of London.

Anders Lund Hansen, Associate Professor Department of Human Geography, Lund University

Malcolm Sawyer, Emeritus Professor of Economics, University of Leeds, UK

Jeff Powells, Senior lecturer in economics. University of Greenwich

Raquel Rolnik, University of São Paulo – Brasil.

Jo Michell, Associate Professor, University of the West of England

Jan Kregel, Professor of Economics, Levy Economics Institute

Irene von Staveren, Professor of Pluralist Development Economics, International Institute of Social Studies, Erasmus University Rotterdam

Stavros D. Mavroudeas, Professor (Political Economy), University of Macedonia

Ray Bush, Professor of African Studies and. Development Politics, University of Leeds

Lucia Shimbo, Professor of Architecture and Urban Planning, University of São Paulo.

Sérgio Miguel Lagoa, Assistant Professor, ISCTE- Instituto Universitário de Lisboa, Lisboa

Carlos Rodríguez González , Professor, University of the Basque Country (UPV/EHU)

Ingrid Harvold Kvangraven, Lecturer in Politics, University of York.

Ewa Karwowski, Senior Lecturer in Economics, Hertfordshire Business School, University of Hertfordshire

Anamitra Roychowdhury, Assistant Professor in Economics, Jawaharlal Nehru University

Hannah Bargawi, Senior Lecturer in Economics, SOAS University of London

Natalya Naqvi, Assistant Professor in International Political Economy, London School of Economics and Political Science

Firat Demir, Professor of Economics, University of Oklahoma, USA

Gilad Isaacs, University of the Witwatersrand, South Africa

Rohan Grey, Cornell University

Yannis Dafermos, Senior Lecturer, UWE Bristol

Kamal Mitra Chenoy, Professor, Jawaharlal Nehru University

Anuradha Chenoy, Professors, formerly Jawaharlal Nehru University

Kathleen McAfee, Professor, International Relations, San Francisco State University

Jan Priewe, Prof. Em. Economics, HTW Berlin, Germany

Piotr Lis, Associate Professor in Economics, Poznan University

Yavuz Yasar, University of Denver

Joscha Wullweber, Professor of International Politics, University of Vienna

Paula Freire, Santoro, Urban Planning Professor, São Paulo University

Manfred Nitsch, Professor emeritus of Economics, Freie Universität Berlin

Bunu Goso Umara, Borno State Public Service, Nigeria

Barbara Fritz, Professor, Institute for Latin American Studies, Freie Universität Berlin

Sally Brooks, Research Fellow, University of York

Danielle Guizzo Archela, Senior Lecturer in Economics, UWE Bristol

Feyzi Ismail, SOAS University of London

Florence Dafe,
 Fellow in International Political Economy, Department of International Relations, London School of Economics and Political Science

Alan B. Cibils, Professor of Political Economy, Universidad Nacional de General Sarmiento, Buenos Aires, Argentina

Rama Vasudevan, Associate Professor of Economics, Colorado State University

José Caraballo-Cueto, Associate Professor, University of Puerto Rico at Cayey

Debarshi Das, Associate Professor, Economics, IIT Guwahati, India

Genarro Zezza, Associate Professor of Economics, University of Cassino, Italy

Sara Stevano, Senior Lecturer in Economics, UWE Bristol

Dirk Bezemer, Professor of Economics of International Financial Development, University of Groningen, Holland

Barry Herman, Visiting Scholar, The New School for Public Engagement

Bruno Bonizzi, Lecturer in Political Economy, University of Winchester

Servaas Storm,  Senior Lecturer, Delft University of Technology, The Netherlands

Mona Ali, Associate Professor of Economics, State University of New York at New Paltz

Ajit Zacharias, Senior Scholar and Director, Distribution of Income and Wealth Program, Levy Economics Institute of Bard College

Vincent Guermond, Queen Mary University of London

Susan Engel, Senior Lecturer, Politics & International Studies, University of Wollongong
Australia\
Erdogan Bakir, Associate Professor of Economics, Bucknell University, USA

 

Shalu Nigam, Freelance researcher, activist and and advocate, India

Jo Walton, Research Fellow, University of Sussex

Redge Nkosi, Exec Director and Research Head at Firstsource Money (Researchers in Money, Banking & Macroeconomics),  South Africa

Sabri Öncü, Chief Economist, Centre for Social Research and Original Thinking

Fulya Apaydin, Assistant Professor, Institut Barcelona d’Estudis Internacionals

Daniele Tori, Lecturer in Finance,  The Open University

Erkan Erdil, Professor of Economics, Middle East Technical University

Robin Broad, Professor of International Development, American University, Washington DC USA

Giulia Zacchia, Sapienza University of Rome
Carolyn Sissoko, PhD, JD
Siobhán Airey, Marie Skłodowska-Curie Research Fellow, University College Dublin, Ireland
Radha Upadhyaya, Research Fellow, IDS, University of Nairobi
Maria Dyveke Styve, University of Bergen, Norway
Mange Ram Adhana President, Association For Promotion Sustainable Development, India
Carolyn Prouse, Assistant Professor of Geography, Queen’s University

Lorena Lombardozzi, Lecturer in Economics, The Open University

Andrea Lagna, Lecturer in International Management and Innovation, Loughborough University

Nick Bernards, Assistant Professor, University of Warwick

Ismail Lagardien, The University of Witwatersrand School of Governance

Nicolas Pons-Vignon, Senior Researcher, School of Economics and Business Sciences, University of the Witwatersrand

Bonn Juego, Postdoctoral Researcher in Development & International Cooperation, University of Jyväskylä, Finland

If you wish your name to be added, please email your institutional affiliation to daniela.gabor@uwe.ac.uk, we will continue to update the list of signatories.

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One comment

  1. I’m a natural systems scientist. We seem to overlook where this problem of finance taking control of everything it touches comes from. It comes from our whole economy being built from the start around maximizing growing returns and minimizing costs, promoted by governments and enforced by investors moving their money always to maximize their own growing returns. That is now highly systematized and embedded in our culture as a way to manage the earth, also running into trouble.

    What I’m saying is the financial system structurally acts as if that is the only proper way to use money. To make an exception for PPPs we need a more effective kind of systemic intervention than we have had so far. We might propose a practical way for investors to calculate their externalities, for example, and by publicizing it influence the decisions of investors, institutions, governments, organizations and individuals. That would be one way to start redefining how finance makes decisions, to respond to all the externalities we care about.

    I published a deep dive into the nature of PPPs and how to define a “true”PPP variety recently, fyi – http://www.synapse9.com/pub/2018_CultureAndPPPs.pdf

    Like

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