The World Bank’s new Maximizing Finance for Development agenda brings shadow banking into international development
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
Ewald Engelen, Professor of Financial Geography, University of Amsterdam
Daniela Gabor, Professor of Economics and Macrofinance, UWE Bristol
Gunther Capelle-Blancard, Professor of Economics, University of Paris 1 Pantheon-Sorbonne
Pablo Bortz, Professor of Macroeconomics, IDAES-National University of San Martín, Argentina
Laurence Scialom, Professor of Economics, University of Paris Nanterre
Cornel Ban, Reader in International Political Economy, City University
Carolina Alves, Girton College and Faculty of Economics, University of Cambridge.
Jérôme Creel, Associate Professor, 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
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
Prof. Dr. Hansjörg Herr, 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
Prof. Dr. Brigitte Young, 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, the University of Manchester
Prof. em. Dr. Birgit Mahnkopf IPE Berlin (Institute of International Political Economy Berlin) at Berlin School of Economics and Law
Alessandro Vercelli, Professor of Economics, University of Siena
Susanne Soederberg, Professor of Global Development Studies, Queen’s University
Assoc. Prof. Dr. Ipek Eren Vural, Department of Political Science and Public Administration, Middle East Technical University, Ankara
Yamina Tadjeddine, Professor of Economics, Université de Lorraine
Dr 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