If it still looks like a duck, swims like a duck, and quacks like a duck – then it probably still is a duck.
Recent years have witnessed a notable re-embrace of the state’s role in the economy, leading some to declare that the set of free market economic policy reforms widely known as the Washington Consensus has come to an end.
First popularized by U.S. President Ronald Reagan and U.K. Prime Minister Margaret Thatcher in the 1980s, the Washington Consensus policies offered a set of policy guidelines for developing countries, many of which were struggling with high debt and high inflation at the time. These free market reforms included trade and financial liberalization, privatization, deregulation, the removal of capital controls, fiscal austerity (cutting public spending) in order to achieve strict targets for maintaining low inflation and low fiscal deficits, the adoption of independent central banks, and deregulating restrictions on foreign investment, among others. Broadly speaking, the policies sought to roll back the role of the state in the economy and unshackle the animal spirits of the free market. In the 1980s, adopting the policies became binding conditions for developing countries to receive debt relief and new lending by the International Monetary Fund (IMF) and World Bank, in the 1990s, the policies served as the basis for World Trade Organization (WTO) membership rules – and ever since then, the policies have become a cornerstone of the curricula in economics departments at universities across the world.
A new report published by the Washington DC office of the Heinrich Böll Foundation reviews the recent initiative being led by the G20countries and their respectivedevelopment finance institutions, including the major multilateral development banks, for the financialization of development lending that is based on the stepped-up use of securitization markets.
The report details how the initiative goes beyond the Washington Consensus reforms of the last few decades by calling on developing countries to adopt even farther-reaching degrees of financial liberalization on a new order of magnitude. In what Prof. Daniela Gabor of the University of West England, Bristol, calls“the Wall Street Consensus,” such reforms would involve a wholesale reorganizationof the financial sectors and the creation of new financial markets in developing countries in order to accommodate the investment practices of global institutional investors.
The new report, “From the Washington Consensus to the Wall Street Consensus” describes the key elements of the new initiative – specifically how securitization markets work and how the effort is designed to greatly increase the amount financing available for projects in developing countries by attracting new streams of private investment from private capital markets. The paper introduces the basic logic underpinning the initiative: to leverage the MDBs’ current USD 150 billion in annual public development lending into literally USD trillions for new development finance. In fact, the World Bank had initially called the initiative “From Billions to Trillions,” before finally calling it, “Maximizing Finance for Development.”
While securitization can be useful for individual investors and borrowers under certain circumstances, the proposal to use securitization markets to finance international development projects in developing countries raises a set of major concerns. The report lists 7 important ways in which the G20-DFI initiative introduces a wide range of new risks to the financial systems in developing countries while undermining autonomous efforts at national economic development.
The key risks of securitization are:
The inherent risk because securitization relies on the use of the “shadow banking” system that is based on over-leveraged, high-risk investments that are largely unregulated and not backed by governments during financial crises;
The extensive use of public-private partnerships, despite the poor track record ofPPPs, many of which have ended up costing taxpayers as much if not more than if theinvestments had been undertaken with traditional public financing;
The degree of proposed deregulation reforms in the domestic financial sector required of developing countries would undermine the ability of “developmental states” to regulatefinance in favor of national economic development;
The degree of financial deregulation required would also undermine sovereignty by makingthe national economy increasingly dependent on short–term flows from global private capitalmarkets and thereby undermine the sovereign power of governments and their autonomouscontrol of the domestic economy;
The uncertainty relating to governance and accountability for the environmental, social andgovernance standards associated with development projects. Such accountabilityhas been fixed to traditional forms of public MDB financing for development project loans,but as future ownership of assets is commercialized and financialized, fiduciary obligationsto investors may override obligations to enforce ESG implementation;
The deepening of the domestic financial sectors in developing countries, as required by theinitiative, can create vulnerability as the size of the financial sector grows relative to that ofthe real sector within economies; and
The privatization and commercialization of public services, including infrastructure services,as called for by the initiative, has faced a growing backlash as reflected by the global trendof remunicipalizations. The fact that the securitization initiative is being promoted in such ahigh profile way by the G20 and leading DFIs despite all of these risks reflects an intensifiedcontest between those supporting the public interest and those supporting the private interest.
The report also documents the relatively minor degree of interest expressed so far by global financial markets in the initiative, suggesting it is not likely to galvanize the trillions of dollars claimed by its proponents.
It concludes by reviewing the arguments for the scaled up use of traditional public financing mechanisms and several of the important ways in which this can be done, including steps that could be taken by G20 countries, DFIs and governments.
Rick Rowden recently completed his PhD in Economic Studies and Planning from Jawaharlal Nehru University (JNU) in New Delhi.
More expansionary fiscal and monetary policies are needed to meet the Sustainable Development Goals
This month, the international community will gather at the United Nations in New York to review progress on the implementation of the 17 Sustainable Development Goals (SDGs) that are intended to reduce poverty, hunger and economic inequality and promote development, particularly in developing countries. But only one of the SDGs, #17, says anything about how to finance all the efforts. While SDG 17 calls for more international cooperation and foreign aid, it only suggests that developing countries strengthen domestic resource mobilization (DRM) by improving their tax collection and curtailing illicit financial flows, etc.
While important, this approach neglects much bigger problems with the prevailing set of macroeconomic policies that hamper the ability of developing countries to increase public investment, employment and scale-up the long-term investments in the underlying health and education infrastructure needed to achieve the SDGs. The policy framework used in many developing countries is characterized by an overly restrictive low-inflation target achieved by using high interest rates and backed up by strict inflation targeting regimes at independent central banks.Read More »
In the fall of 2017, SPERI’s Matthew Bishop and Anthony Payne gathered essays from a group of nine development economists who produced essays on ‘Revisiting the developmental state’ (SPERI Paper No. 43). They drew upon a body of work published on the SPERI Comment blog and in other publications about the state’s appropriate role in development and the nature of a modern industrial strategy. The essays examined the current status of the notion of a ‘developmental state’ in today’s contemporary context of globalization. This article reviews the series, highlights some key takeaways, and considers some other elements that were not addressed by the essays.Read More »