Coping With World Bank-Led Financialization

Jerri-Lynn here. Readers might find this post from earlier this month by the same authors helpful, as it provides history and context: 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. Anis Chowdhury, Adjunct Professor at Western Sydney University & University of New South Wales (Australia), held senior United Nations positions in New York and Bangkok. Originally published by Inter Press Service

The World Bank has successfully promoted its ‘Maximizing Finance for Development’ (MFD) strategy by embracing the United Nations’ Sustainable Development Goals, internationally endorsed in September 2015.

It has also secured support from the G20 of twenty biggest economies, and effectively pre-empted alternative approaches at the third UN Financing for Development summit in Addis Ababa in mid-2015.

As the main ‘show in town’, developing countries will need to address the MFD’s implications by responding pro-actively and collectively to address the new challenges it poses.

Managing New Macro-Financial Challenges

As the MFD agenda privileges foreign investors and portfolio inflows, multilateral development banks (MDBs) should be obliged to clearly show how developing countries will benefit.

Greater vulnerability and other adverse implications of being more closely integrated into fickle global financial markets, which detract from the ostensible advantages of such integration, are now widely acknowledged.

The IMF and other international financial institutions (IFIs) should also advise on the efficacy of various policy instruments, such as macroprudential measures, including capital controls, to ensure central bank control of domestic credit conditions.

Although portfolio flows are generally recognized as pro-cyclical, IFIs reluctantly recommend capital controls, and even then, only after governments have exhausted all other monetary and fiscal policy options.

After experiencing repeated boom-bust cycles in capital flows, many emerging markets have learnt that they must manage such flows if they are to reap some benefits of financial globalization while trying to minimize risks.

Addressing Systemic Risks

In fact, many concerned economists believe that monetary and fiscal policies cannot adequately address such systemic fragilities, but may inadvertently exacerbate them, e.g., raising interest rates may attract more capital inflows, instead of just stemming outflows.

After effectively eschewing capital controls for decades despite its Article VI provisions, recent IMF advice has been inherently contractionary by raising interest rates and tightening fiscal policy instead of judiciously using ‘smart’ capital controls.

Development-oriented governments must include those familiar with changing securities and derivatives markets, who will have to work with central banks on regulating cross-border flows and managing systemic vulnerabilities.

It is difficult for development-oriented governments to be pragmatic and agile when they are subject to the dictates of private finance, especially when these appear to be rules-based, anonymous and foreign.

Financial systems are increasingly being reorganized around securities markets dominated by transnational institutional investors who have transformed financial incentives and banking business models.

Many banks have reorganized themselves around securities and derivative markets where short-term profit opportunities are significantly higher than traditional alternatives requiring costly nurturing of long-term, ‘information-intensive’ relations.

Stopping Capital Outflows from Developing Countries

International financial liberalization has enabled further capital outflows from most developing countries, depriving them of much needed resources to develop their economies.

The economic fiction that open capital accounts would result in needed net financial flows from ‘capital-rich’ developed economies in the North to ‘capital-poor’ developing countries in the South has been disproved.

Thus, a significant share of the money flowing into global shadow banking (institutional investors, asset managers) comes from developing countries. Such capital outflows are typically due to tax arbitrage and avoidance practices by transnational corporations and wealthy individuals.

There is also considerable capital flight by those who have accumulated wealth by corrupt and other dubious means. The illicit sources of such riches encourage storing such wealth abroad.

Effective cooperation to check and return such ill-gotten gains — often syphoned out using illicit means, such as trade mispricing and other forms of money laundering — can go a long way.

Equitable international tax cooperation would increase financial resources available all round, especially to developing country governments.

Instead, the IMF and others should enable developing country authorities to effectively implement policies to more successfully mobilize domestic financial resources for investment in developing economies.

Ensuring Transparent Government Guarantees and Subsidies

The MFD approach seeks to commit fiscal resources to ‘de-risking’ securities and other financial instruments to attract foreign institutional investments.

It is thus re-orienting governments to effectively guarantee profits for private investors from financing ‘development’ projects, effectively reducing public financial resources available for development projects.

To minimize abuses and to protect the public interest, MDBs should instead ensure the transparency and accountability of the framework by making clear the likely fiscal and other, including opportunity costs of de-risking projects.

Public interest agencies, civil society organizations and the media should help governments closely monitor such costs and make the public fully aware of the costs and risks involved.

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13 comments

  1. Nicholas Shaxson

    An expert in African private finance recently told me that investors (eg private equity) won’t get out of bed for returns less than 25pc annually, but that finance ministers said ‘nobody else is willing to put the money down’ so they take it. Add in shadow banking, debt leverage, and all that nonsense, and it’s a modern recipe for the age-old story of the looting of poor countries by transnational plunder networks.

    Daniela Gabor has done some really interesting work in this area too
    https://developingeconomics.org/author/danielagabor/

    Reply
    1. Colonel Smithers

      Thank you.

      I have heard similar from someone who has made the journey from project finance at ABSA and Barclays Capital to “special situations” at a Mayfair hedge fund, the British government and, now, “impact investment” at the Omidyar foundation.

      A tightening of capital and financial crime rules since 2008 has led to “financial exclusion” at a state level, thus driving many countries into the arms of these parasites. Having been a lobbyist for banks, but also argued for some flexibility with regard to trade finance, I suspect that it was partly intended.

      The phrase “transnational plunder networks” is sooo spot on. It’s a veritable eco-system of the usual suspects and aided and abetted by the MSM, third way fanatics et al, including Chelsea Clinton, the BBC’s go to expert on development and public health, and the Clooneys, now colonising the UK.

      Clinton(‘s doctorate and public appearances) causes much amusement at Oxford and in development circles, but then she’s not the only rich kid who was bought her qualifications.

      I would take issue with Sundaram’s final paragraph. Public interest agencies are politicised and vehicles for personal advancement. Civil society organisations are often fronts for neo liberals and neo cons, vide the Omidyar / Illuminate gang hard at it in the South African elections. The less said about the media, the better.

      One hopes Thuto chimes in with regard to SA. Omidyar / Illuminate is acting on behalf of the Democratic Alliance.

      Reply
      1. Colonel Smithers

        I forgot to add that a fair amount of the British aid budget is given to the Gates foundation, apparently the world’s top experts n such matters, for disposal as they see fit and a similar percentage is given for management, but under a mandate.

        Omidyar’s Illuminate unit, tasked with supporting civil society and, at first, making impact investments with a view to eventual commercial returns, has recruited many British aid professional and former government officials. Although Omidyar keeps a low profile here, it is thought that they wish to get some of the British government funding.

        The Gates and Omidyar people I have come across in London, not many, are an odd bunch of third wayers / triangulation types, but the authoritarian, preachy and right wing stuff is never far from the surface. Just get them drinking and it’s amazing what one learns. One regularly takes me to task for working a particular bank and facilitating the malign activities of POTUS. According to said do gooder, Putin often tries to sabotage their IT to protect his puppet.

        Reply
        1. The Rev Kev

          ‘a fair amount of the British aid budget is given to the Gates foundation’

          Wait, saywhat? I have to confess to finding myself amazed with some of the stuff that you come up with Colonel. The UK outsourcing British taxpayer’s money to an American billionaire is one that I would never have see coming.

          Reply
          1. Colonel Smithers

            Thank you, Kev.

            That’s not a secret.

            However, the % and footprint are. When I asked a journalist friend to investigate and put a Freedom of Information Act request, he said he had a family to house and feed.

            Gates is lionised by the UK MSM and deluded progressives.

            Reply
      2. Thuto

        Thank you Colonel Smithers. I was also looking at the author’s last paragraph and thinking the same as you that his belief that the hopes of nations lie in the institutions he mentions is troublesome at best, and naive at worst.

        You’re also spot on about the DA and Illuminate, it’s been interesting watching and listening to these rabble-rousers ramping up their electioneering ahead of the elections next week. The rhetorical smokescreens employed in their theatrics-over-substance brand of politicking betrays the moral and ideological identity of their bed mates/masters. The semantic contortions emerging out of their election campaign, and the agenda being served by said contortions, have removed the final veil from the faces of their backers and Illuminate is at the head of the table. Omidyar and his philanthro-capitalist/impact-investor pals have their tentacles into the so-called official opposition and I suspect SA, given its geopolitical demographics, is being primed to be a testing ground/socio-political sand box for the fine tuning and rapid iteration of the mechanics behind executing a neocolonial agenda by stealth.

        Reply
        1. Colonel Smithers

          Thank you, Thuto.

          I am glad that you have piped up.

          I have not seen the Iluminate do gooders, some of whom are (reactionaries) from SA, in the couple of months, but get the odd message that they are ramping up in SA. It does feel as you say that SA is the testing ground.

          It’s interesting to hear the do gooders explain how they use the recipients of their money to be citizen journalists, really act as propagandists on the cheap. One wonders how long before their useful idiots become cannon fodder.

          Reply
          1. Synoia

            I’m surprised that Argentina is not mentioned. It appears to be the test bed for Neo Liberal 0.1% enrichment.

            Send out the Capital, crash the local curencty, repatriate the Capital and buy up the local assets.

            Ad nausiam.

            Reply
  2. tegnost

    “Instead, the IMF and others should enable developing country authorities to effectively implement policies to more successfully mobilize domestic financial resources for investment in developing economies.”
    Alas, I suppose if the developing countries were the ones the IMF is working for that might happen but it’s more likely they will serve their more mercenary masters at the usual suspect finance corporations

    Reply
  3. Templar555510

    So what is it that we think all these people – Gates, Clinton, Blair, Soros , Omidyar et al – see themselves as ? My take is that they see themselves like Plato’s Guardians, philosopher kings on a global scale , or if you will with global reach . Like the Guardians they are separate from the ranks of the rest of the populace and recent political movements they perceive as pandering to the populace they brand negatively as ‘ populist ‘ ( whether of the Left or the Right ) are to be treated with suspicion at the very least, and outright hostility at worst . Money as such is not their goal, but some degree of control, or at least influence over national treasures is. Power is simply assumed by virtue of their connectivity to one another and the paranoia that always accompanies it inevitably follows.

    Reply
  4. Susan the other`

    When denial and distraction are the only tactics used and information is virtually withheld, the broad populace cannot make informed decisions. This is the goal. Keep people uninformed and then make an alliance with governments (taxing authorities) to back guarantees for private money. It is monetary welfare, and warfare. Instead of appropriating large swathes of land and various assets, these privateers will do the same by controlling money with express, unilateral contracts. The reason they have done this latest trick is because the world is on to their extractive games, and most people are talking about solutions to our pressing social problems and climate change that keep economies in balance. The World Bank and the IMF are not stupid. They know that private money has always been subsidized, until now, by government and if that diminishes these guys have no place left to make their obscene profits. Not to put too fine a point on all of this maneuvering.;-)

    Reply

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