Coping with World Bank-led financialization

Jomo Kwame Sundaram and Anis Chowdhury flag the challenges posed to developing economies by a World Bank development blueprint that unduly privileges private finance.

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 Group of Twenty (G20) biggest economies, and effectively preempted alternative approaches at the third UN Financing for Development summit in Addis Ababa in mid-2015.

As the main show in town, the MFD’s implications will need to be addressed by developing countries, which have to respond proactively and collectively to tackle the new challenges it poses.

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

Although portfolio flows are generally recognized as pro-cyclical, IFIs recommend capital controls reluctantly, 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.

In fact, many concerned economists believe that monetary and fiscal policies cannot adequately address such systemic fragilities but may inadvertently exacerbate them. For example, 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, calling for 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 derivatives markets where short-term profit opportunities are seen as significantly more attractive than traditional alternatives requiring costly nurturing of long-term, “information-intensive” relations.

Meanwhile 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 siphoned 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.

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 reorienting governments to effectively guaranteeing 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 costs, 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. (IPS)                

Jomo Kwame Sundaram, a former economics professor, was Assistant Director-General for Economic and Social Development at the UN Food and Agriculture Organization (FAO), and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007. Anis Chowdhury, Adjunct Professor at Western Sydney University and the University of New South Wales (Australia), held senior United Nations positions in New York and Bangkok.

Third World Economics, Issue No. 680/681, 1-31 January 2019, p27