Finance Damages Democracy – and Brexit Will Make it Worse!

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The ‘do or die’ Brexit deadline this Halloween has come and gone without bringing much certainty about the policy and political landscape going forward. UK voters who hoped for a clear-cut end of the Brexit saga were disappointed as big questions remain unanswered while new ones have been added: What will the December election bring? Will there be a second referendum? A different deal? A further extension? 

There seems, however, one definite outcome of the Brexit process: UK democratic institutions have been hollowed out permanently. Individual politicians have certainly contributed to this outcome. However, it would be too easy to blame the disintegration of democracy in rich countries entirely and exclusively on Johnson, Trump, and the like. Rather more systematic and structural trends are at play, which raise the old question of whether capitalism and democracy are compatible or rather contradictory systems. The claim that capitalism will usher in democracy, since free markets rely on an open societal order, or at least fundamentally weaken authoritarian regimes, has been proven untenable. This is particularly clear as the Chinese Communist Party tightens its grip over social media, using information technology to survey ever-growing parts of Chinese people’s lives.   

It is striking though that among rich countries the crassest examples of democratic disintegration are unravelling in the two Anglo-Saxon economies which have been hailed as economic success stories during the 1990s and early 2000s: the UK and US. Much of their growth spurts over this period was fuelled by the increasing size and influence of their finance industries and so is the current hollowing-out of their democratic institutions. In brief, we are currently experiencing the effects that financialisation has on democracy. Of course, capitalism and democracy are generally difficult to reconcile as convincingly argued by Polanyi. The fact that a democratic order calls for equality of all citizens before the law and provides all of us with the same vote, while our economic order simultaneously introduces a strict hierarchy based on ownership is possibly the clearest illustration of the conflict between democracy and economic order. But it is further stoked under financialisation. This blog post unpacks how financialization affects democracy in a variety of ways, through three examples, namely social provisioning, the Euro crisis, and the Brexit saga.Read More »

From the Washington Consensus to the Wall Street Consensus

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Photo: Jpellgen

A new report published by the Washington DC office of the Heinrich Böll Foundation reviews the recent initiative being led by the G20 countries and their respective development 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 reorganization of 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 of PPPs, many of which have ended up costing taxpayers as much if not more than if the investments 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 regulate finance in favor of national economic development;
  • The degree of financial deregulation required would also undermine sovereignty by making the national economy increasingly dependent on shortterm flows from global private capital markets and thereby undermine the sovereign power of governments and their autonomous control of the domestic economy;
  • The uncertainty relating to governance and accountability for the environmental, social and governance standards associated with development projects. Such accountability has been fixed to traditional forms of public MDB financing for development project loans, but as future ownership of assets is commercialized and financialized, fiduciary obligations to investors may override obligations to enforce ESG implementation;
  • The deepening of the domestic financial sectors in developing countries, as required by the initiative, can create vulnerability as the size of the financial sector grows relative to that of the 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 trend of remunicipalizations. The fact that the securitization initiative is being promoted in such a high profile way by the G20 and leading DFIs despite all of these risks reflects an intensified contest 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.

 

Mexico: Between Financial Exclusion and the Predominance of Banks too Big to Fail 

 

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Photo: Max Pixel.

In his acclaimed poem “America” from 1956, Allen Ginsberg warned about the new vices of American society. Beyond the clear demonization of communist ideals, the star of the beat generation warned about the growing influence of the media on the thinking of individuals.

With globalization, the commodity fetishism disguised as the American dream entered not only the minds of the citizens of the United States but the rest of the globe. In addition, with the financialization of the economy, the debt culture also surpassed the American borders, reaching the countries of the Global South.

There is no day when the media does not bombard us with advertisements that promote a consumer culture, inciting us to acquire goods that we cannot afford with our income. This is where credit plays the role of a “savior entity” through which we can satisfy our deepest desires. However, unlike the developed countries, which have high levels of access to financial services, the underdeveloped countries are subject to a subordinated financialization that limits the possibilities of households and non-financial companies of acquiring a loan and, consequently, complicates the satisfaction of our consumerist spirit and the development of the productive sphere. The notion of subordinated financialization was first proposed by Jeff Powell (2013) to designate the specific way in which financialization manifests itself in underdeveloped economies. The level of access to financial services that a country has is known as financial inclusion, however, in the case of Mexico, this level is so low that we are facing financial exclusion.Read More »

Advocates of the SDGs have a monetarism problem

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UN Secretariat Headquarters, New York. UN Photo.

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 »

Misunderstanding the average impact of microcredit?

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Photo: Peter Haden. Microfinance center leaders tally the week’s loan payments in India.

By Milford Bateman and Maren Duvendack

A recent article on the “average impact of microcredit” by Dr. Rachel Meager (LSE) has received much praise over the past few weeks. Meager deploys Bayesian hierarchical modelling to provide a new take on the argument in favour of a reformed system of microcredit. Her work builds on the data provided by six randomized control trials (RCTs) conducted by Abhijit Banerjee and colleagues (see Banerjee, Karlan and Zinman, 2015). Meager makes an attempt to exculpate the microcredit model from the awkward fact that its impact on the poor has been very much less than originally envisaged. She also claims to show that the critics have overstated the negative impact of microcredit. Microcredit should therefore continue to be a policy intervention, she goes on to say, but there need to be changes in the operating methodology for a more meaningful development impact to be possible in the future.

While seemingly a well-meaning attempt to explore the impact of microcredit, we were struck by the way that her overall argument appears to seriously misunderstand, and it definitely misrepresents, the existing research on microcredit as a development instrument. Read More »

Philanthrocapitalism: How to Legitimize the Hegemony of the Rich with a “Good Vibes” Discourse

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Melinda Gates speaking at DFID. Photo: DFID.

Is philanthrocapitalism a vehicle for so-called “development”? In an article recently released in Globalizations (here), Juanjo Mediavilla (University of Valladolid, Spain) and I analysed the phenomenon of philanthrocapitalism as a financing for development (FfD) instrument from the perspective of Critical Development Studies and Discourse Theory. We argue that we are witnessing the deepening of a neoliberal development agenda, where philanthrocapitalism and the elites play a key role. Read More »

The Curious Case of M-Pesa’s Miraculous Poverty Reduction Powers

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M-PESA kiosk outside Kibera centre in Nairobi. Picture credit: Fiona Graham / WorldRemit

By Milford Bateman, Maren Duvendack and Nicholas Loubere

Over the past decade the expansion of digital-financial inclusion through innovations in financial technology (fin-tech) has been identified by the World Bank, the G20, USAID, the Bill & Melinda Gates Foundation, and other major international institutions, as a key way to promote development and alleviate poverty in the Global South (GPFI, 2016; Häring 2017; World Bank, 2014). Perhaps the most influential and widely reported publication pushing forward this narrative is an article examining M-Pesa written by US-based economists Tavneet Suri and William Jackand published in the prestigious journal Scienceentitled ‘The Long-run Poverty and Gender Impacts of Mobile Money’. M-Pesa is a mobile phone, agent-assisted platform for transferring money from one person to another. It was originally developed with funding from DFID and has quickly become a darling of the digital-financial inclusion movement. In this particular article, the authors make the far-reaching claim that ‘access to the Kenyan mobile money system M-PESA increased per capita consumption levels and lifted 194,000 households, or 2% of Kenyan households, out of poverty’ (Suri and Jack, 2016: 1288).

Suri and Jack’s article in Science has sent ripples through the global development community and has servedas perhaps was intendedto solidify support for upping the promotion of digital-financial inclusion initiatives across the Global South. Importantly, the article’s claims of unprecedented poverty reduction have been uncritically picked up by all of the international development agencies and microcredit advocacy organisations, as well as by many mainstream economists, so-called ‘social entrepreneurs’, tech investors, and media outlets. Much like microcredit in the 1980s, fin-tech and digital-financial inclusion is now very widely seen as a key—if not the keyto reducing global poverty and promoting local development.

In this post we summarise our recent article entitled ‘Is Fin-tech the New Panacea for Poverty Alleviation and Local Development?’ (Bateman, Duvendack, and Loubere, 2019), which challenges Suri and Jack’s findings, and urges the global development community to take a second, more critical look at their study. We argue that the article contains a worrying number of omissions, errors, inconsistencies, and that it also employs flawed methodologies. Unfortunately, their inevitably flawed conclusions have served to legitimise and strengthen a false narrative of the role that fin-tech can play in poverty alleviation and development, with potentially devastating consequences for the global poor.Read More »

Does one size fit all when it comes to financial inclusion? Scrutinising the effects of class, race, gender, and age

524195139_1c8a3ec97c_b.jpgIn recent decades, market-based solutions such as financial inclusion have become more popular in developed countries to reduce inequalities and boost wealth and incomes of the poor. There is no better example of this than the recent thrust of low-income families, women, ethnic minorities, and the young into the subprime mortgage lending expansion in the USA since the early 2000s. Higher access to formal loans for these households was argued to enable them to climb the magical ladder of homeownership and achieve their American Dream. But as we know, the picture didn’t turn out to be quite so rosy.

10 years since the Great Recession, many families are not seeing recovery as the impact of the crisis was substantially harsher for the subprime borrowers (Young 2010; Henry, Reese, and Torres 2013). Financial inclusion in the subprime period turned out to be predatory. In this post, I explore how things went wrong when policy makers failed to account for the institutional conditions in the US economy, which led to dramatically different experiences of financial inclusion across social classes, gender, race, and generations.Read More »