Commercial finance for development: a back door for financialisation

SUMMARY

The global Covid-19 pandemic has accelerated a trend under way for the last decade: the enlistment of private-sector commercial finance for development. This finance can be brought in through (1) regular cross-border flows, (2) blended finance and (3) impact bonds. This briefing argues that intensified foreign financial inflows are likely to draw African economies further into financialisation, which increases financial instability and can undermine the democratic process, jeopardising just socio-economic development. Specifically, the short-termism of portfolio flows requires costly reserve accumulation, foreign direct investment exposes firms to demands for shareholder value generation, and external debt introduces exchange rate risk for domestic borrowers.

KEYWORDS:

• Finance for development
• financialisation
• impact bonds
• blended finance
• foreign financial inflows

Acknowledgements

I would like to thank SOMO (the Centre for Research on Multinational Corporations) for asking me to think about financialisation in an accessible but systematic way for the Crash Course in Economics series (https://www.somo.nl/crash-course/). Further thanks go to three anonymous reviewers and the ROAPE editorial team. All remaining errors are my own.

Disclosure statement

No potential conflict of interest was reported by the author.

Correction Statement

This article has been republished with minor changes. These changes do not affect the academic content of the article.

Notes

1 For instance, the UK halved its budget for aid to Yemen in March 2021 (Wintour 2021).

2 There is a range of definitions for blended finance. However, the term is increasingly employed to describe financial instruments that use public resources to bring in private commercial funds (Attridge and Engen 2019).

3 On the role of banks, and finance more broadly, in the global financial crisis and the subsequence sovereign debt crisis in the Eurozone see Tooze (2018).

4 Microfinance institutions (MFIs) are major beneficiaries of blended finance and would deserve a more in-depth discussion in this context. Unfortunately, there is very limited information of how these usually play out or what share of banking sector projects involve MFIs. The OECD mentions MFIs, alongside commercial banks, as major beneficiaries of blended finance. There is also some data generated by private-sector investors (usually financial companies that specialise in promoting blended finance tools). Given the commercial character of these companies and their interest in portraying blended finance as success, the figures seem rather unreliable. Hence, further research is required in this area.

5 Author’s calculations based on Lane and Milesi-Ferretti (2017).

6 Research (and especially the concept of subordinated financialisation) sometimes downplays the importance of domestic finance and other interest groups in the promotion of financialisation. However, the growing literature on variegated financialisation stresses the role of domestic agents and institutions, including the state, in the process (see, for instance, Karas 2021).

7 Averaging 9% during the 2000s.

8 The SARB holds part of reserves in liquid instruments and part in higher yielding (up to 3% in 2019) long-term investment (US Department of the Treasury 2020).

9 In early 2021, Germany and France could issue 10-year government bonds at negative interest rates while the equivalent UK gilts rate stood at 0.37% (OECD 2021).

10 Average value for 2000–2015.

Additional information

Notes on contributors

Ewa Karwowski

Ewa Karwowski is a senior lecturer in economics at Hertfordshire Business School, University of Hertfordshire, Hatfield, UK, and a senior research associate at the University of Johannesburg, Johannesburg, South Africa. She works on firm finance, financialisation, and development. Recent publications include ‘Towards (de-)financialisation: the role of the state’ (Cambridge Journal of Economics, 43 (3): 1001–1027), and ‘Financialisation: dimensions and determinants: a cross-country study’ (New Political Economy, 25 (6): 957–977).