World Bank Financialization Strategy Serves Big Finance

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 built a coalition to effectively advance its ‘Maximizing Finance for Development’ (MFD) agenda. The October 2018 G20 Eminent Persons Group’s (EPG) report includes proposals to better coordinate various international financial institutions (IFIs) in promoting financialization.

MDB Midwives of Financialization

The MFD approach wants multilateral development banks (MDBs) to actively re-shape developing countries’ financial systems to better ‘complement’ global finance. MDBs have already urged developing countries to encourage local institutional investors by redesigning pension systems along lines inspired by US private pensions. Thus, MDBs have been: 

  • • determining how developing countries supply securities preferred by transnational banks and institutional investors.
      • persuading developing country governments to finance subsidies and other ‘de-risking’ measures designed by MDBs to guarantee private financial profits.
      • enabling securitization to transform bankable projects into tradable securities, generating more revenues and strengthening global finance.
      • influencing what projects are deemed ‘bankable’, probably prioritizing large infrastructure over smaller projects.

G20 Financialization Proposals

The main G20 EPG proposals for collaboration to promote financialization include:

    • • IFIs working together to increase the supply of bankable projects and to share data and information to support infrastructure data platforms needed to securitize MDB loans.
  •  • IFIs should provide risk insurance to increase the number of bankable projects stuck due to high political risk. This requires government guarantees against ‘political risks’ to be more attractive to re-insurers.

As securitization of MDB loans involves tradable assets with different credit ratings for investors with diverse ‘risk appetites’, MDBs are being urged to securitize both private and sovereign loans, and to retain stakes in junior tranches to induce private investments.

MDBs No Longer Development Banks?

While MDBs should follow recent advice for issuers to remain stakeholders by retaining shares of securitized tranches on their balance sheets, the implications are quite different when MDBs, and not private banks, securitize loans.

As originators, MDBs may politically pressure low- and middle-income country governments to provide de-risking instruments, including guaranteed income from securitized public-private partnership (PPP) infrastructure projects.

World Bank Guidance on PPP Contractual Provisions can burden states and citizens more than any trade or investment agreement or international law. States take on inordinate risk while its right to regulate in the public interest is fettered.

New Washington Consensus?

The Washington-based Center for Global Development (CGD) has similarly discouraged borrowing in its paper for the G20 EPG, ‘More mobilizing, less lending’. Instead, it proposes augmenting MDB private sector windows with special purpose vehicles (SPVs).

The CDG also calls on MDBs to use sovereign lending to promote reforms to make projects financially viable and to help finance the public share of PPPs. Hence, MDBs are pressuring governments to support the MFD with their own fiscal resources.

The recommendations will also make it more difficult to manage systemic vulnerabilities arising from the envisaged securities, repo and derivative markets to be officially promoted.

Various options promoted by the CDG thus involve high risk, high leverage, financialized investors as partners in international development, exposing the MDBs themselves to the vulnerabilities of the MFD approach.

Checks and Balances?

The tendency towards concentration in asset management (with economies of scale and scope) is likely to result in US-based asset managers allocating finance globally using considerable institutional investments from developing countries.

The G20 EPG is not unaware that its proposal — to transform developing country financial systems to contribute to the global supply of securities — involves significant systemic risks. Nevertheless, it claims to be seeking to secure the benefits of open financial markets while mitigating systemic vulnerabilities.

Thus, it has called on the IMF to: develop and manage a framework for managing volatile capital flows; create a resilient global ‘safety net’ that can effectively mobilize resources to address financial fragilities; and integrate financial surveillance with an effective early warning system.

However, the EPG paper does not make the shift to securitization conditional on mitigating systemic risks. As its proposed safeguards are largely unrealizable or ineffective, its financial instability concerns do not mean much.

Although recognizing the dangers and vulnerabilities involved at both national and international levels, including the loss of effective sovereign control over financing conditions, the IMF supports the EPG proposals.

Despite the experience of recent financial crises, the IMF continues to preach that freely floating exchange rates can effectively buffer capital flow volatility, while capital controls should only be used after exhausting all monetary and fiscal policy instruments.

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10 comments

  1. John A

    “persuading developing country governments to finance subsidies and other ‘de-risking’ measures designed by MDBs to guarantee private financial profits.”

    More socialism for the rich?

    Reply
    1. hemeantwell

      Yeah. This sounds like it would set up a blurry public-private “governance” structure wherein financial institutions of whatever ilk could place investment bets in a country, lets call it GreeceMkII, and then if those fail, as they did in Greece, a cabal of international entities straitjackets GreeceMkII in debt bondage. “Responsible” local elites get absorbed into the governanceborg, and one more country is lost as a possible staging area for a demonstration of an alternative developmental economics.

      Reply
  2. JEHR

    Re: ” MDBs have already urged developing countries to encourage local institutional investors by redesigning pension systems along lines inspired by US private pensions.”

    In Canada, our Finance Minister, Bill Morneau, whose father owns “an actuarial and benefit consulting firm” brought in Bill C-27 to change the government defined benefit pension plans. He was found not guilty of conflict of interest but nevertheless the law is still there as an option.

    The Canadian Labour Congress wrote a letter to the Minister that says in part:

    C-27 was introduced without notice or consultation with Canadians, pensioners, or unions and proposes measures that directly contradict election promises to improve retirement security for Canadians. If enacted, it will have negative implications for private and public-sector DB plans in every jurisdiction in Canada.

    A principal value and strength of DB pension plans is the security and predictability they provide to plan members, allowing them to budget for their daily lives in retirement. DB pensions operate under a legal covenant obliging employers to fund employees’ earned benefits, guaranteeing retirement security regardless of market volatility. Already-earned (or “accrued”) benefits are legally protected, and may not be retroactively reduced.

    Bill C-27 would remove that legal obligation and encourage the proliferation of Target Benefit (TB) pension plans instead, lowering benefits for both current and future retirees. Employers would also be allowed to persuade individual active and retired plan members to surrender their earned DB benefits in exchange for less secure, less stable TB plan benefits.

    The attacks never stop.

    Reply
    1. flora

      by redesigning pension systems along lines inspired by US private pensions.

      Good lawd, is that what happened to CalPERS. /not exactly a snark

      Reply
  3. Susan the other`

    Didn’t big finance do a trial run of this in 2008? Sounds like they have acknowledged the dangers of private finance ponzi and now want to add some sovereign insurance instruments to prevent private finance from losing any money. This is so blatant. The World Bank and the IMF just put all their cards on the table and are trying to pretend like they aren’t marked. All they want to do is survive as a private finance consortium dependent on sovereign protection and guaranteed returns. Isn’t that a monster contradiction in terms? The World Bank/IMF effectively wants to be the sovereign, to control and become the sovereign itself. Are these guys nuts? This is the mother of all monopolies. The exact opposite of the direction we should be going. We should be making institutions smaller and demand better service to the nation from them. End the IMF and the World Bank.

    Reply
  4. The Rev Kev

    This article is freaking me out as it is dripping with something that is pure evil. “Re-shape developing countries’ financial systems to better ‘complement’ global finance'”? Because that is such a winning model? And “enabling securitization to transform bankable projects into tradable securities” is just a catastrophe fore small countries waiting to happen. And where it says “As securitization of MDB loans involves tradable assets with different credit ratings for investors with diverse ‘risk appetites” well they did that about a decade ago. I think that they were called CDOs and they were rock solid until they blew up the economy.
    There are so many bad and wrong ideas on display here that I went looking for the authors of this report,. Out of that long list I only recognized the name Jean-Claude Trichet and not in a good way either. I think that the real authors of this report are Wall Street and the City of London. In Oz, if there are big investors coming into the country to buy stuff, it has to be approved by a Government Board to make sure that it actually benefits the country and does not have vital assets being sold off. I imagine other countries have the same. From what I read, this whole thing would bypass that and make sure that foreign creditors get any money (or assets) in case a project goes south.
    For the development of a country, private finance is definitely not your friend. For any interested, there is another article by the same authors at-

    http://www.ipsnews.net/2019/03/world-bank-financializing-development/

    Reply
  5. Irrational

    Speaking as someone who works in “not-quite an MDB”, the EPG report in my personal view basically picks up a number of ideas that have been floated in the past by countries that donate to MDB trust funds, by MDB working groups and by the OECD. These ideas are a bit broader than just financialisation.
    In practice, there is enough dynamic between the MDBs to prevent most of these proposals from moving ahead.

    Reply

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