The Wall Street Consensus - Daniela Gabor (UWE Bristol) - OSF
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The Wall Street Consensus
Daniela Gabor (UWE Bristol)
Abstract: The Wall Street Consensus (WSC) is an elaborate effort to reorganize
development interventions around selling development finance to the market. The
Billions to Trillions agenda, the World Bank’s Maximizing Finance for Development
or the G20’s Infrastructure as an Asset Class all call on international development
institutions and governments of poor countries to ‘escort capital’ – the trillions of
institutional investors – into ‘investable development bonds’, preferably in local
currency. For this, the 10 WSC commandments aim to simultaneously reorganize
local financial systems around bond market-based finance and forge the de-risking
state. The state derisks bond finance for institutional investors by extending
guarantees and subsidies to cover (i) demand risks attached to user-fees for (PPP)
infrastructure, (ii) political risk attached to policies such as nationalization, higher
minimum wages and climate regulation, (iii) climate risks that may become part of
regulatory frameworks as material credit risks and (iv) bond market (liquidity) risks
that complicate foreign investors’ exit from development assets. The WSC narrows
the scope for a green developmental state that could design a just transition to low-
carbon economies.
1
INTRODUCTION
‘….we have to start by asking routinely whether private capital,
rather than government funding or donor aid, can finance a
project. If the conditions are not right for private investment,
we need to work with our partners to de-risk projects, sectors,
and entire countries’.
Jim Yong Kim, World Bank Group President (2017)
The international development literature made two notable predictions over the past
twenty years. It announced the (overdue) death of the Washington Consensus
paradigm (Gore, 2000; Rodrik 2006). The Washington Consensus, anchored in the
work of John Williamson (1990, 1993), outlined ten policy areas that would set poor
countries’ economies on firm market foundations, under a ‘holly Trinity’ of
macroeconomic stabilization through lower inflation and fiscal discipline;
liberalization of trade and capital flows, of domestic product and factor markets; and
privatization of state companies. After the East Asian crisis, the poor performance of
countries closely wedded to the Washington Consensus prescriptions (Rodrik, 2006;
Fischer, 2019) and the revolt of notable insiders such as Joseph Stiglitz, Gore (2000)
predicted that the holy Trinity would make room for an Asian developmental model,
updated to the ‘age of global money’ (Yanagihara and Sambommatsu, 1996). The
collapse of Lehman Brothers brought the second notable prediction: the end of the age
of global money and its ‘foreign finance fetish’ (Birsdall and Fukuyama, 2011).
Both predictions turned out wrong. Financial globalization is alive and well, and sets
the particular context in which ‘international development’ is pursued in the
21st century. As Lord Stern, of the influential G20 Eminent Persons Group, put it: ‘the
challenge of achieving the SDG is in large measure that challenge, of fostering the
right kind of sustainable infrastructure’, for which, ‘you have to have good finance,
2
the right kind of finance, at the right scale, at the right time’1. The ambition is spelled
out in the Billions to Trillions agenda, the World Bank’s new Maximising Finance for
Development (MFD) agenda, or the G20 Infrastructure as an Asset Class agenda,
which aim to create investable opportunities in poor countries that can attract the
trillions of global institutional investors and orient them to the SDG ambitions. For
instance, the MFD promises global institutional investors $12 trillion in market
opportunities that include “transportation, infrastructure, health, welfare, education’,
to be minted into investable securities via Public-Private Partnerships2.
This shift in the development agenda is here conceptualized as the Wall Street
Consensus, an emerging policy paradigm that reframes the (Post) Washington
Consensus (Öniş and Senses, 2005) in the language of the Sustainable Development
Goals, and identifies global finance as the actor critical to achieving the SDG. To
explore its contours, the article draws on previous scholarly accounts of the
financialisation of development, understood as strategies to ‘escort’ (speculative)
capital to poor countries into derisked asset classes (Carroll and Jarvis, 2014; Baker
2015; Mawdlsey, 2018). While these micro-level accounts emphasize the role that
MDBs or donor agencies play in derisking, the role of the state and its macro-
financial policies is largely ignored. To fill in this gap, the article draws on a critical
macrofinance (CMF) approach concerned with the co-evolution of global finance and
the macro-institutions of the state (Gabor, 2020). This co-evolution reflects deeply
political processes through which private finance seeks protection from systemic risks
and accommodation for new asset classes (Dafermos et al, 2020). CMF takes as
analytical starting point the transformation of global finance, and fleshes out its
consequences for our understanding of credit creation, macroeconomic policies, and
of development strategies in the age of financial capitalism.
Through this lens, the WSC is an attempt to re-orient the institutional mechanisms of
the state towards protecting the political order of financial capitalism against climate
justice movements and Green New Deal initiatives (Wainwright and Mann, 2018). It
1 http://live.worldbank.org/implenting-SDGs-changing-
world?CID=ECR_TT_worldbank_EN_EXT_AM2018-sdgs
2
The World Bank’s first Head for Maximising Finance for Development was previously Practice
Manager for PPPs at the World Bank https://www.worldbank.org/en/about/people/c/clive-harris.
3is an organized attempt to forge what conceptually can be conceived as the de-risking
state that ‘escorts’ global finance to investible assets in the Global South.
The creation of investable assets requires a two-pronged strategy: (a) enlist the ‘de-
risking’ state into de-risking new ‘SDG’ bond classes created via Public-Private
Partnerships in infrastructure projects, and (b) re-engineer local financial systems in
the image of US market-based finance to allow global investors’ easy entry into, and
exit from, new SDG bonds (see also Mawdlsey, 2018). This is what lies behind the
World Bank’s ambitions to crowd in private investors and create new markets, coded
into what institutional investors describe as ‘a cultural shift to a broader de-risking
philosophy’ (Deau, 2019: 259). Thus, Wall Street Consensus marks a new moment in
capitalist accumulation, from what David Harvey (2003) termed ‘accumulation by
dispossession’ to accumulation by de-risking.
The de-risking state does not break with the (Post-)Washington Consensus state, a
state complicit in pushing the holy trinity since Margaret Thatcher (Bruff, 2014).
Rather, it builds on the Post-Washington Consensus acceptance that the state is
necessary to correct market failures, through regulation and poverty alleviation (Öniş
and Senses, 2005). The WSC asks the state to compensate global finance confronted
with complex risk landscapes in SDG assets: (i) demand risks attached to user-fees for
PPP infrastructure, (ii) political risk attached to policies that would threaten profits
such as nationalization, higher minimum wages and climate regulation, (iii) climate
risks that may become part of regulatory frameworks as material credit risks and (iv)
bond market and currency risks that complicate foreign investors’ exit.
The practice of de-risking goes back to the developmental state, but its politics
changed. The developmental state de-risked for domestic manufacturing companies in
priority, mainly export, sectors (Wade, 2018). It was successful where it had the
capacity to discipline local capital (Öniş, 1991), to govern market failures through
evolving institutional structures (Haggard 1990, 2018) and to generate elite support
for the developmental state as a political project (Mkandawire, 2001). In contrast, the
WSC state de-risks for global institutional investors without the embedded autonomy
of the developmental state (Evans, 1991). It lacks an autonomous strategic vision,
4unless ‘more infrastructure’ can be described as such, and has fewer tools to
discipline the global captains of finance industry.
The content of structural transformation also changes through subtle norm
substitution processes à la Washington Consensus (Kentikelenis and Babb, 2019).
WSC proponents, from MDBs to states in the Global North and South, seek to
normalize the appropriateness of a market-based financial structure in technocratic
forums away from public scrutiny. Structural policies shift from the manufacturing
sector, as in the traditional developmental states (Wade, 2018), to the local financial
system. The WSC consolidates several global initiatives to restructure financial
systems in developing and emerging economies (DEE) towards securities market-
based finance or shadow banking (IMF and World Bank, 2020; also Gabor, 2018),
where global and domestic institutional investors can easily purchase local bonds
(securities), including infrastructure-backed securities, and finance as well as hedge
their securities positions via repos and derivative markets. In pushing for financial
structure change, institutional investors seek to preserve their ability to divest from
local (SDG) securities, an implicit recognition of the limits of the de-risking state. De-
risking capacity can be quickly eroded by shocks such as climatic or pandemic events.
For this, the WSC aims to re-orient the central bank into tackling bond market risks
and currency markets.
The emerging WSC is a template, but not a straightjacket. It requires local political
coalitions to consolidate around the de-risking state, to deliver on its demands or to
diffuse political contestation. Indeed, the WSC downplays the costs and risks of the
macro-financial order it seeks to impose. It engineers financial globalization that
comes with increasing vulnerability to volatile capital flows (Rey, 2015) and also
threatens developmental policy space, by narrowing the scope for a green
developmental state that could design a just transition to low-carbon economies,
where the burden of structural change does not disproportionately fall on the poor.
To trace these reconfigurations, the paper explores the policy documents produced by
WSC institutions (World Bank, other MDBs, the IMF) and private finance. The WB
intends to mainstream the MFD/Cascade approach across its operations, using as pilot
the infrastructure sector, broadly understood. By 2020, it had introduced a new tool
5for the MFD approach, entitled Infrastructure Sector Assessment Programs
(InfraSAP) and produced InfraSAPs for several MFD pilot countries: Egypt, Nepal
Sri Lanka and Vietnam (for the energy sector in the last two)3. The paper finally
provides a short reflection on the possible trajectories of the Wall Street Consensus
during and after the COVID19 pandemic.
THE WALL STREET CONSENSUS: A BRIEF TIMELINE
The Wall Street Consensus has its origins in the 1980s, when donor governments
turned to ‘de-risking’ seeking to realign policies with the Washington Consensus. One
such pioneer, the German development bank Kreditanstalt für Wiederaufbau (KfW),
persuaded German politicians that traditional lending to recipient governments should
be repurposed to finance high-risk tranches of new financial instruments. This would
circumvent local institutions vulnerable to capture, increase KfW’s ability to closely
control development interventions and eventually involve private finance more
systematically (Volberding, 2018). This logic remains dominant, as for instance in
Germany’s Compact with Africa (see Banse, 2019).
In parallel, Germany pushed the local bond markets agenda within the G8 (Gabor,
2018), recommending the elimination of capital controls that hamstrung portfolio
inflows into local bond markets, and promoting local resource mobilization. The latter
measure called for privatizing segments of the welfare state to create a domestic
institutional investor base, including private pension funds, mutual funds and
insurance companies, later conceptualized as shadow banking or market-based
finance (Pozsar, 2013; Storm, 2018).
At first, the global financial crisis stopped the Wall Street Consensus it its tracks.
Rich and poor countries alike abandoned the celebratory narrative of free capital
flows for a new vocabulary of shadow banking, global financial cycles, carry-trade
speculation, interconnectedness on the balance sheet of global banks (Rey, 2014;
3
The publication of InfraSAP for Indonesia, one of the keenest supporters of the MFD approach,
initially expected in January 2019, was delayed after public outcry over a leaked draft.
6Gallagher 2015; Bortz and Kaltenbrunner, 2018). As the IMF dropped its notorious
opposition, scholars celebrated the normalization of capital controls as the ‘the single
most important way in which policy space for development has widened in several
decades’ (Grabel, 2011:806). One after another, DEEs imposed controls on portfolio
flows into local securities markets, upending an international development discourse
focused on selling development finance to institutional investors via portfolio inflows.
However by 2015, the WSC was back on track. The crisis narrative became gradually
sensationalized along ‘greedy bankers’ lines, downplaying the structural roots that
would have required significant reform, particularly of shadow banking (Gabor,
2019). Indeed, shadow banks – global asset managers, hedge funds and other
institutional investors – are crucial actors in the political alliances backing the WSC,
alongside MDBs, global regulators, elite technocrats (see the Eminent Persons Group
2018) and governments of high-income countries. The world largest financial
institution, Blackrock, relied on ‘ferocious lobbying’ to successfully fight the
Financial Stablity Board’s (FSB) attempts to regulate asset managers as systemic
shadow banks in 2014-2015. As a result, the FSB announced that it would shift its
approach to transforming shadow banking into resilient market-based finance.
The resilience of market-based finance reflects the limited institutional incentives that
either central banks or politicians have to pursue deep structural reforms. Post 2008,
central banks protected their powerful position in the macrofinancial architecture by
unconventional monetary policies such that stabilized market-based finance without
reforming it (Hannoun, 2012; Gabor, 2016). Equally important is that central banks
buried one important political aspect in technocratic discussions: market-based
finance entangles monetary, fiscal, and financial stability policies. Sovereign debt is
“vital to the functioning of the financial system, analogous to the function of money
in the real economy,” stressed the ECB’s Benoît Cœuré (2016:3). But if sovereign
debt is core to market-based finance, then central banks’ financial stability mandates
structurally require them to protect governments from volatility in sovereign bond
markets (Gelpern and Gerding, 2016). Paradoxically, it hardwires austerity into policy
frameworks: caught between ‘independent’ central banks reluctant to intervene and
‘bond vigilantes’ threatening higher financing costs should structural reforms of
finance be enacted, elected politicians embrace ‘fiscal discipline’. Austerity reinforces
7market-based finance: hesitant taxation of big capital, asset-based welfare and passive
index investment all feed into institutional investment in the age of asset management
(Haldane, 2014).
The Wall Street, rather than the Frankfurt or London, Consensus reflects the structural
importance of US-based institutional investors and their asset managers, the ‘new
powerbrokers of modern capital markets (Fisch et al, 2018). The ‘hidden power’ of
the new ‘captains of finance industry’ extends from their influence over corporations
as majority shareholders (Fichtner et al. 2017), to partnerships in global development
initiatives such as the G20 Infrastructure as an Asset Class initiative 4 , and their
growing involvement in national infrastructure, such as Blackrock in Mexico, for
some a case of corporate colonialism5.
THE TEN COMMANDMENTS OF THE WALL STREET CONSENSUS
The Washington Consensus proposed 10 policy lines guided by the holy trinity of
stabilization, privatization, and liberalization. These reimagined development for the
international liberal order, attributing policy failures to domestic factors rather than
global structures, and shifting the overarching ambition from long-run structural
transformations to a more efficient distribution of resources (Gore, 2000). A similar
set of policies can be traced into the emerging WSC (see Table 1).
4 See Blackrock (2015).
5 Between 2012 and 2018, Blackrock was a prime beneficiary of president Pena Nieto’s PPP-
driven infrastructural projects, acquiring infrastructure assets through revolving door
relationships. In his campaign, the left-wing Lopez Obrador denounced Blackrock as white-
collar financial mafia, but gave up the campaign promise to review Blackrock PPP contracts
once he won the presidency in 2019 (Blackrock Transparency Project, 2019).
8Table 1: The 10 commandments of the Wall Street Consensus
Washington Consensus Wall Street Consensus
1. Fiscal discipline, Central bank 1. Fiscal discipline, central bank independence
independence
2. Public spending: primary education, 2. Public spending: de-risk new asset classes in
primary health, public infrastructure education, health, transport, energy
‘Infrastructure as an asset class’
3. Tax reform: lower marginal rate, broader 3. Sustainability reform: ESG criteria
base
4. Macro-finance policy: replace 4. Sustainable local currency bond finance: engineer
developmental banking with market-based market-based finance, prioritize securitization, support
interest rates securities prices (market-maker of last resort)
5. Exchange rate: either market-determined 5. Hedger/swapper of last resort to de-risk currencies for
or ‘competitive’ according to equilibrium (institutional) investors
theories, capital account liberalization
6. Trade liberalization 6. Financial globalization (no capital controls)
7. FDI promotion 7. Portfolio flows promotion
8. Privatization 8. Privatization of pension funds for domestic resource
mobilization
(Privatization) PPPs for ‘infrastructure as an asset class’
9. Competitiveness-enhancing deregulation 9. Removal of regulatory barriers to foreign-financed
PPPs
10. Property rights 10. Surveillance capitalism/Screen New Deal
The WSC revives the old developmental concerns with long-run structural
transformation, now framed through questions of ‘how to grow in an age of global
money’ that cannot move large pools of capital into small projects. This is no longer
the world of vulgar ‘efficiency gains will deliver growth’ neoliberalism (Rodrik,
2006), but neither is it a return to developmental states (Haggard, 2018). Rather,
structural transformation means policy-engineering SDG assets and a new market-
based local financial system that can attract global money, i.e. the money of global
9institutional investors, with specific mandates and practices of investment that need to
be accommodated.
The fiscal-monetary architecture
The WSC preserves the basic institutional macro-architecture of the Washington
Consensus: an independent central bank targeting inflation and a fiscally disciplined
Ministry of Finance. The separation matters in two ways. First, this macro-
architecture confers ‘infrastructural power’ to finance, since central banks rely on the
financial system to implement inflation targeting (Braun and Gabor, 2019). The
transmission mechanism of monetary policy becomes a stick to discipline advocates
of ‘shrinking to size’ financial regulation. Reforming (shadow) banks, it is argued,
will disrupt inflation targeting regimes.
Second, the ‘game of chicken’ between an independent central bank and the treasury
keeps at bay a developmentalist model that requires the central bank to work closely
with the developmentalist technocracy in charge of strategic industrial policy (Öniş,
1991). Such a developmentalist model further requires the central bank to impose
extensive capital controls in order to insulate the strategic industries, and the banking
sector financing them, from financial instability (Wade, 2018).
The focus on fiscal rectitude dictates the mechanisms for creating SDG asset classes:
user-pay/concession Public-Private Partnerships are framed as a strategic necessity
(Bull and Milkian 2019, also Foster 2017, World Bank 2018a, p13). PPPs are
functional to the de-risking state because their coding into law and public finances
allows a clandestine reorienting of public resources to private investors while
maintaining the ideological commitment to ‘fiscal responsibility’. PPPs are more
expensive than traditional public investment, but the illusion of fiscal effectiveness is
useful for governments and MDBs because it allows them to circumvent budgetary
restrictions and spend off-balance (Bayliss and van Waeyenberge, 2018), often in the
guise of progressive infrastructure policies, as ‘affordable housing’ PPP projects in
Brazil and Colombia suggest (Santoro, 2019). The state’s PPP commitments are
recorded as contingent liabilities, and do not count as public debt. PPPs become a ‘get
10out of jail’ card for politicians who can promise large infrastructure projects financed
by foreign institutional investors without increasing debt/GDP levels – at least in the
beginning.
Infrastructure is the hook for orienting institutional investors towards SDGs. While
institutional investors have long treated infrastructure as an asset class, they often
argue that large-scale infrastructure investments face significant hurdles. Around 60%
of infrastructure projects in emerging countries are not investible because their risk
architecture does not create the cash flow characteristics that institutional investors
prefer or are inscribed in their mandates6. Governments and MDBs are urged to plug
in those risk gaps through global policy initiatives such as the G20 Infrastructure as
an asset class (G20, 2018).
Behind the rhetoric of independent central banks and fiscal discipline, the Wall Street
Consensus imagines a new kind of state. The de-risking state puts its fiscal and
monetary arm in the service of de-risking bond finance for global institutional
investors.
Public spending: de-risking for institutional investors
The Washington Consensus codified what Williamson (1993) described as ‘belief in
fiscal discipline’, in direct opposition to ‘left-wing believers in Keynesian stimulation
via large budget deficits’, a perspective that became ‘almost an extinct species’ in the
1990s. Fiscal discipline meant cuts to subsidies for state-owned companies and for
basic consumption goods (e.g. gasoline, food). It prescribed spending on primary
education, primary health rather than high-tech hospitals in the capital, and on public
infrastructure investment.
6 For instance, a common rule of thumb is that pension funds need a minimum 4% return plus
inflation. See https://realassets.ipe.com/reports/infrastructure-as-asset-class-a-brief-
history/realassets.ipe.com/reports/infrastructure-as-asset-class-a-brief-
history/10026752.fullarticle
11The Wall Street Consensus similarly celebrates fiscal restraint. The MFD’s
operational tool, the Cascade Approach7, stresses that scarce fiscal resources cannot
deliver the SDGs 8 (World Bank, 2017). Instead it sets out a series of steps for
producing investible projects (see Figure 1), a theoretical armour for state
interventions in the guise of de-risking.
The Cascade Approach systematizes earlier efforts to promote renewable energy
markets in Africa through de-risking political technologies (Sweerts et al 2019;
Müller, 2020). Emerging out of a partnership between Deutsche Bank (DB, 2011) and
the UNDP, suggestively entitled ‘De-risking clean energy business models in a
developing country context’, the Global Energy Transfer Feed-in Tariffs (Get FiT)
Program proposed an innovative public-private de-risking partnership that absorbed
some of the risks faced by private renewable companies in developing countries. It
built on the UNDP’s work on regulatory barriers, including vertically integrated,
state-owned energy monopoly utilities, subsidised energy tariffs, to political risks or
lack of local financing. A better distribution of risks, DB argued, would see host
governments introduces tariffs and prioritise renewable energy in regulatory
framework, whereas the public sector in high-income countries and MDBs would
absorb counterparty credit risk (affecting agreements between state-owned wholesale
electricity purchaser and the private renewable energy suppliers) and other political
risks.
Somewhat paradoxically, the DB report did not discuss renewable energy markets
through the ‘infrastructure as an asset class’ lens, nor did it make reference to the
trillions of institutional investors. Instead, it identified the limited lending capacity of
local banking systems as a constraint, and green bonds as a mechanism for financing
MDBs. However, the UNDP (2013) report frames de-risking as the instrument for
escorting the trillions of global institutional investors to the Global South,
distinguishing between policy de-risking instruments (energy market regulations,
7 MFD complements the IFC’s strategy to “Create Markets” and MIGA’s 2020 strategy by
strengthening regulatory or policy frameworks, promoting competition, and achieving
demonstration effects, as well as a cross-WBG program to develop local capital markets (“J-
CAP”). (World Bank, 2017).
8
The World Bank’s (2018a) InfraSAP for Vietnam claims that the existing model for
financing energy infrastructure – state lending to state companies – is no longer viable
because of statutory public debt limits.
12institutional capacity etc.) and financial de-risking instruments (loan guarantees,
political risk insurance or public equity co-investments that would transfer the risks
that investors face to public actors, such as development banks).
The Cascade Approach simplifies the UNDP recommendations into a three-step
blueprint for de-risking SDG assets created via PPPs. It recommends lifting
regulatory or policy barriers to improve the risk-return profile, by for instance,
allowing user fees on highways. If reforms are insufficient to attract investors, then
subsidies and guarantees to de-risk the project might do so. Only when these
measures fail, it is suggested to opt for a fully public solution. Furthermore it has to
be ensured that SDG assets become investible, by identifying MFD-enabling projects,
i.e. those projects that support financial or capital market reform to unlock additional
sources of private financing (see IMF and World Bank, 2020).
Figure 1 The Cascade Approach in the WB’s Maximising Finance for Development
Source: Own representation of data from World Bank (2017)
13The revival of the PPPs in the age of institutional investors does little to address the
old criticisms of PPP models: extra demands on fiscal resources, concentration of PPP
activity in areas already benefiting from public investment, dubious effects on
poverty, access and inequality (Bayliss and van Waeyenberge, 2018), regulatory and
technical capacities hardly available to poor countries (Romero, 2018 9 ). But the
renewed PPP push in the Wall Street Consensus incorporates lessons drawn from the
early 2000s on how to systemically enlist the state in de-risking infrastructure assets.
In the early 2000s, infrastructure as asset class projects typically involved the
privatization of urban infrastructure in high-income countries, de-risking via complex
financial instruments, and global interlinking in the portfolio of global institutional
investors (Pryke and Allen, 2017). Yet local political contestation of contract terms
often threatened cash flows (Morag Torrance, 2008). Where new asset classes involve
uncertain flows of value, as Carruthers and Stinchcombe (1999) show for the US
mortgage market, the state can step in to generate predictability by first rendering
assets knowable and then ‘deriskable’. State agencies Fannie Mae and Freddie Mac
assembled mortgage loans for delivery to shadow banks, which in turn resorted to
securitization in order to create tranches with different risk profiles. Legal processes
code into law the new asset classes a la Pistor (2018).
The WSC takes these lessons to construct a broad range of techniques and
institutional mechanisms for de-risking. Indeed, the four InfraSAPs – for Egypt,
Nepal, Vietnam and Sri Lanka - identify PPPs as the key priority for the infrastructure
strategy and map a set of derisking avenues (World Bank 2018a,b; 2019a,b).
The WSC targets demand risk in PPP, user-fee based (social) infrastructure and
political risk that future governments might (re-)nationalize commodified
infrastructure or introduce tighter regulations, of for instance climate exposures or
labour markets.
Demand risks are a critical feature of PPP infrastructure because the WSC advises
transitioning from taxpayer funding to user fees, set above cost recovery. While this
9
https://www.devex.com/news/opinion-public-private-partnerships-don-t-work-it-s-time-for-
the-world-bank-to-take-action-92585
14remains the price liberalization agenda of the Washington Consensus, user fees do not
ensure predicable cash flows. Where the poor cannot afford the social infrastructure,
the de-risking state is expected to guarantee the cash flows that service the interest
payments on securities sold to institutional investors.
Such guarantees are written into PPP laws under the heading ‘risk distribution’. The
WB Egypt InfraSAP advises the Egyptian Electricity Holding Company (EEHC), the
national electricity utility, that PPP contracts should include Payment Security
Mechanisms that effectively guarantee payment flows against low demand. Similarly,
the Vietnam InfraSAP applauds the PPP law that commits public resources to cover
Vietnam risks, including offtake 10 and supply risks, currency convertibility and
inflation adjustment, and termination payment obligations, across social infrastructure
in ‘transportation; street lighting; water supply; waste treatment; power plants and
transmission; commercial infrastructure; social infrastructure facilities for health care,
culture, sports, industry, and agriculture’ (World Bank, 2018b: 23).
Figure 2 InfraSAPs recommendations: the Cascade Approach in practice
Source: Own representation of data from WB InfraSAPs.
10
In poor countries, the standard institutional arrangement in power infrastructure relies on a
state-owned utility as the main project counterparty responsible for purchasing the power
output produced by PPP companies, at a pre-agreed price. The offtake risks are those risks of
not getting paid for output.
15The mechanics of demand de-risking can be gleaned from Nigeria. At the World
Bank’s Maximizing finance for the development of infrastructure in Nigeria workshop
in September 2019, the Minister of Finance noted that ‘Nigeria no doubt lacks the
fiscal space to self-finance’ the estimated USD 100 billion a year infrastructure gap.
Instead, she promised to continue its collaboration with the World Bank to leverage
private investment, building on previous success stories in ‘transport, energy and
power sectors using PPP models’ 11 . Among those, the World Bank representative
identified the Azura power plant ‘as an example of how we have attracted private
sector investment in the power sector’, the first privately-financed power project in
Nigeria. While Azura was set up as the de-risking PPP template for ‘lighting up
Africa’12, it is hardly a success story. Similar to other private operators, Azura sells
power to state-owned Nigeria Bulk Electricity Trading (NBET), who would pass it to
distributors to recover costs and pay Azura. Once Azura started operating in 2018,
demand risks materialized as its installed capacity could not be absorbed by the
dilapidated Nigerian grid energy infrastructure. The PPP contract shifted demand
risks to either NBET or failing, that, to the World Bank, whose partial risk guarantee
promised to pay Azura if the Nigerian state failed to do so. Thus, MDB guarantees
trap the de-risking state into a lose-lose situation, since a triggered risk guarantee
becomes a WB loan to Nigeria (the de-risking state always pays!). Under pressure
from the World Bank, the Nigerian federal government mandated its central bank to
pay Azura from an existing USD 2.3 billion fund destined to cover NBET payment
shortfalls. In doing so, the Nigerian central bank reallocated funds destined to other
private providers, who responded with a legal case against the Nigerian government
and Azura13.
11
See https://nairametrics.com/2019/09/24/nigeria-needs-100-billion-annually-to-fix-
infrastructural-deficit-finance-minister/
12 https://www.institutionalinvestor.com/article/b14z9q8pv7zzdb/is-new-nigerian-power-
plant-a-template-for-lighting-up-africa
13 https://uk.reuters.com/article/uk-nigeria-power-exclusive/exclusive-nigerian-energy-
sectors-crippling-debts-delay-next-power-plant-idUKKCN1OK1J4. While the ensuing
scandal prompted the government to suspend other PPP initiatives, the September event
suggests continued political commitment to the Wall Street Consensus.
16While the Nigerian case is indicative of how the WSC works in practice, the range of
demand risks that the state is expected to assume varies across countries. The Sri
Lankan InfraSAP (WB and IFC, 2019) recommends a government-sponsored
currency hedging facility that protects foreign investors from currency volatility. It
also advises the state to pass the costs of de-risking to end-users via periodic
adjustments of tariffs, and in case of severe disruptive events, to absorb those costs (p.
63). The InfraSAPs for Egypt (World, Bank 2018a), Vietnam (World Bank, 2018b)
and Nepal (2019b) similarly call for the state to facilitate the development of hedging
facilities. Furthermore, the Egyptian InfraSAP targets the relics of the traditional
developmental state. Its National Investment Bank, it argues, should stop direct
lending for public projects and instead embrace a more catalytic role for commercial
financing of infrastructure, following the KfW business model (World Bank, 2018a).
Equally important, the climate crisis gives rise to a series of political and demand
risks that institutional investors need de-risking for.
Sustainability reform: the turn to ESG ratings
The 2011 DB/UNDP report on renewable energy was written at a time when green
bonds were still a niche area for impact investors. By 2020, green finance moved into
mainstream investment practice through the framework of Environmental, Social and
Governance (ESG), a private sector approach that, it is increasingly argued, could be
guided by the SDGs14.
The ESG ratings system started as a corporation-focused, equity-tailored, sustainable
impact investor system of aggregating into a rating a set of environmental, social and
governance practices, as identified by the ESG provider. Once central banks in the
Network for Greening the Financial System identified climate risks as material risks
for financial stability, global finance embraced ESG as a private taxonomy for green
finance.
14 https://www.pimco.co.uk/en-gb/insights/viewpoints/esg-investing-and-fixed-income-the-
next-new-normal/
17Initially, ESG data were used to encourage corporations to engage more
systematically in ESG disclosure. More recently, private providers have issued ESG
ratings for countries. This is another step towards the extension of ESG ratings to
securities (bonds, securitization tranches etc.), as institutional investors recognize that
ESG is no longer simply about impact investment but about credit risks to portfolios
with carbon equities and securities (Inderst and Stuart, 2018). Thus, the ESG
framework is morphing into a private taxonomy for green/dirty15 finance: high ESG
ratings are interpreted to signal a ‘green’ financial instrument, and vice-versa.
For institutional investors, ESG ratings are a strategic necessity in the Wall Street
Consensus.
First, in mapping ESG ratings against the SDGs, institutional investors strive to
become credible development partners to the de-risking state and MDBs, and more
importantly, epistemic guardians of green taxonomies. Such new partnerships around
ESG are emerging rapidly. The Asian Infrastructure Investment Bank’s Asia ESG
Enhanced Credit Managed Portfolio includes an ESG Markets Initiative in
partnership with asset managers, to demonstrate ‘an AIIB ESG Framework that is
consistent with the spirit and vision of the AIIB’s Environmental and Social
Framework’ 16 (AIIB, 2019: 3). The AIIB ESG framework would allow the asset
manager to design, monitor and enforce ESG criteria, delegating rule making and
enforcement to private finance. The World Bank’s updated Environmental and Social
Framework17 similarly embraces the ESG status-quo. Long seen as ‘gold standard in
development finance’18, the mandatory safeguards have recently been replaced with a
‘risk-based, outcome focused, tailored and proportionate approach’. The World Bank
accepts the use of borrowers’ E&S frameworks that are ‘materially’ close to the WB’s
15 the standard climate finance language distinguishes between green and ‘brown’ assets,
disregarding the racist connotations embedded in conceptualizing dirty finance as ‘brown’
(see https://www.commondreams.org/views/2020/06/26/language-brown-finance-climate-
finance-racist). In this paper, dirty finance replaces the standard ‘brown’ term.
16
https://www.aiib.org/en/projects/approved/2018/_download/regional/ESG-enhanced-credit-
managed-portfolio.pdf
17 Other MDBs use a similar framework, with varying degrees of credible commitment to the
E&S principles (see for example https://thediplomat.com/2017/08/is-the-aiib-really-lean-
clean-and-green/ for AIIB)
18 http://archive.bankinformationcenter.org/world-banks-updated-safeguards-a-missed-
opportunity-to-raise-the-bar-for-development-policy/
18own, without clearly defining either ‘materially close’ in terms of thresholds or
mechanisms for monitoring changes in borrowers’ frameworks19.
Second, the turn to ESG raises the distinct possibility of SDG/green washing. ESG
providers use bespoke screening to eliminate issuers whose business lines are
inconsistent with certain investment policies or social norms. For instance, the
financial service firm MSCI provides bespoke screening for 'Catholic values' like
anti-abortion legislation 20 . This would allow institutional investors to claim SDG
outcomes when their investment decisions actively undermine women's rights
agendas.
Beyond SDG washing, the private ESG status-quo is functional to the Wall Street
Consensus. A private ESG metric for SDG asset classes allows investors to shop
around for high ESG ratings for their ‘sustainable’ portfolios, and for asset managers
to boost their climate warrior credentials. In one instructive example, Blackrock
pioneered ESG ETFs (passive investment vehicles), while wielding its shareholder
21
power to block climate measures against high-carbon companies. Even as
institutional investors divest from coal assets, large asset managers insulate
companies from sustainability pressures through index investment, potentially
becoming holders of last resort of high-carbon, potentially stranded, assets (Jancke
2019).
Such climate hypocrisy is accommodated by private providers – such as MSCI, FTSE
or Sustainalytics - who quantify the ESG performance on a large number of criteria,
chosen and assessed on discretionary basis. Hence, ratings often conflict: Tesla’s
global auto ESG ratings vary from very good (MSCI) to very bad (FTSE) and mid-
range (Sustainalytics)22. ESG providers face similar disincentives to those of credit
rating agencies before 2008. These responded to ratings shopping by awarding high
19
https://consultations.worldbank.org/Data/hub/files/oxfam_comments_on_second_draft_wb_
environmental_and_social_framework.pdf
20
http://documents.worldbank.org/curated/en/913961524150628959/pdf/125442-REPL-
PUBLIC-Incorporating-ESG-Factors-into-Fixed-Income-Investment-Final-April26-
LowRes.pdf
21
https://bit.ly/2zzTZ5f
22 https://ftalphaville.ft.com/2018/12/06/1544076001000/Lies--damned-lies-and-ESG-rating-
methodologies/
19ratings to issuers of complex financial products without due diligence into the credit
quality of the underlying loans. In turn, weak ESG standards perpetuate the failure of
financial markets to price climate risks adequately23.
The WSC creates mechanisms to protect investors from climate-related losses. In
promising to assume demand risks via PPP contracts, the state would absorb the
physical risks of extreme climate events or global pandemics that would strand
infrastructure assets. SDG-led development thus becomes a strategy of green
financialisation through which private finance manages the environmental crisis, a
step further in the financialization of nature that once focused on risk instruments
such as catastrophe bonds (Keucheyan, 2018).
The WSC also protects investors against political risks arising from the potential
emergence of green developmental states. The green developmental state would
prioritise the reorientation of finance towards low carbon activities. This requires a
public taxonomy of ‘green’ and ‘dirty’ assets that overcomes the shortcomings of
private ESG ratings, and policies to penalize dirty assets (through capital
requirements or haircuts) 24 . Yet in the Wall Street Consensus framework, such
policies would classify as political risks to SDG assets.
In its strategy to mutate climate risks into political and demand risks, private finance
may have found an important ally. Central banks in the Network on Greening the
Financial System conceptualize the immediate impact of tighter climate rules as
transition risks25. Realigning portfolios through ESG ratings, it is often argued, would
improve their resilience to physical risks that climate events would strand high-
carbon/dirty assets (Christophers, 2019), and to transition risks, those financial
stability risks arising from climate regulation that accelerate the transition to low-
carbon economies. These are risks that the transition to a low-carbon economy would
23 Blackrock calculated that several US asset classes that do not price in extreme climate
events would experience significant losses over a long horizon. See
https://www.ft.com/content/2350de58-7236-3593-ad79-16bfa6ecea8d
24 Such initiatives already exist. The European Commission announced a public taxonomy in
June 2019 that it expects to become the benchmark for European finance.
https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance_en
25 See https://www.bankofengland.co.uk/knowledgebank/climate-change-what-are-the-risks-
to-financial-stability
20increase the cost of funding or dramatically change asset values, affecting
profitability. The faster the low-carbon transition, the higher the potential that
transition risks affect financial stability, thus binding central banks in political trade-
offs that privilege incremental green regulatory regimes, however urgent the climate
crisis.
In seeking to enlist central banks in the political coalitions against biting climate
regulation, the Wall Street Consensus would tie the hands of green developmental
states directly, by making it liable for transition risks that can be framed as political
and demand risks, and indirectly, by reducing the public resources and central bank
support for Green New Deal programs that can effectively manage transition risks.
The de-risking state and the green developmental state can hardly co-exist,
particularly within market-based financial structures.
Structural reforms: the turn to sustainable bond finance (formerly known as
shadow banking)
The turn to private finance as vehicle for sustainable development requires a change
in financial structures. Bank-dominated financial systems would transform into
market-based financial systems. This project of transforming shadow banking into
resilient market based finance accommodates the entry of global and domestic
institutional investors into local (SDG) securities and allows them to finance and
hedge their securities positions via repos and derivative markets. In this push for
structural transformation, the Wall Street Consensus assigns a de-risking role to the
central bank as market-maker of last resort that reduces liquidity and currency risks
for global investors.
The MFD agenda converges with several other global initiatives to restructure
financial systems towards market-based finance (see Figure 3). The Local Currency
Bond Market Initiative seeks to Americanise the local currency securities markets of
DEE countries by creating the ‘plumbing’ – derivatives and repo markets – necessary
for their increased liquidity (Gabor, 2018). It was originally introduced under the
leadership of the German Central Bank, the Bundesbank, in cooperation with the
21World Bank and the IMF, at the G8 meeting in Germany in 2007, as part of a broader
push for selling development finance to the market. The 2011 G20 Action Plan noted
that well-developed local securities markets would reduce dependency on external
financing and improve DEE countries’ ability to withstand volatile capital inflows.
While acknowledging capital flow volatility, the Action Plan called for carefully
phasing out capital controls, eliminating first those capital controls that hamstrung
local securities markets (such as withholding taxes on foreign investors’ bond
earnings). Domestic institutional investors were also to be encouraged, by privatizing
pension funds and ‘enabling mutual funds and insurance companies’. Similarly, the
Financial Stability Board announced in 2015 its new priority, to transform shadow
banking into resilient market-based finance, understood as the development of
securities, derivatives and repo markets that would allow the real economy to tap
credit from institutional investors.
Figure 3 The turn to securities markets/market-based finance in international development
Source: own representation.
In another illustration of the implicit WSC promotion of shadow banking, the push for
market-based finance brings back securitization as an important de-risking instrument
to crowd in private (institutional) investors and scale up sustainable assets.
Securitization features prominently in the OECD’s low-carbon infrastructure push,
22the MDBs plans to optimize balance sheets, or the G20 plans26 for Infrastructure as
an Asset Class.
Securitization – shadow banking instrument par excellence - is promoted as a de-
risking instrument that transforms non-tradable loans, extended by MDBs or private
banks, into a range of tradable securities with distinctive risk/return profiles that can
be sold to institutional investors (Gabor, 2019). The securitisation of infrastructure
loans would create both highly-rated, low-return tranches suitable for conservative
pension funds/asset managers and lower-rated, higher return tranches suitable for
investors with higher risk appetite. It would also accelerate lending to infrastructure
projects, constrained by Basel III rules for banks. As the Vietnam InfraSAP suggests,
bank energy loans could be securitized to make room for additional lending. Banks
could also sell infrastructure loans to platforms such as the AIIB’s Infrastructure
Private Capital Mobilization Platform, which in turn would package and securitize
them for distribution through capital markets to ‘build infrastructure as an asset class’
(AIIB, 2019:1).
The promotion of securitization and domestic capital markets that are deep and liquid
downplays the systemic risks characteristic to market-based finance. While reducing
dependency on foreign currency debt (Berensmann et al, 2015), the shift to market-
based finance comes with systemic, shadow banking type instabilities that turned
Lehman into a global systemic event.
The WSC template for liquid securities markets calls for importing the fragile
liquidity structures of US financial markets (Brunnermeier and Pedersen, 2009). It
asks countries to redesign repo (securities financing) markets and derivative markets
according to the US template so that foreign (institutional) investors can easily
finance and short securities. This ‘Americanization’ of local financial systems
involves liberalising repo markets to enable legal transfer of title to collateral
securities, to allow mark to market and shorting, and the development of onshore
derivative markets. Yet it was precisely this type of collateral-based financing
26 See the Eminent Persons Group proposals to the G20
https://g20.org/sites/default/files/media/epg_chairs_update_for_the_g20_fmcbgs_meeting_in
_buenos_aires_march_2018.pdf
23markets that fed, through shadow banking, cycles of liquidity and leverage before
Lehman. When the crisis came, it manifested in fire sales of securities, evaporating
market liquidity and wholesale funding runs. The FSB’s repo collateral rules and
Basel III do not go far enough to contain such dynamics (Gabor, 2018), and may be
rolled back in response to the global COVID pandemic.
The structural transformation of financial systems does not protect institutional
investors against liquidity risks in the bond markets that are used as collateral for
financing. This is why the central bank becomes an important anchor of the de-risking
state through bond market-maker of last resort (MMLR) that institutionalizes a
commitment to preserve collateral liquidity through outright purchases when market-
based finance comes under pressure (Mehrling, 2012). Such interventions, introduced
through (often clandestine) extensions of formal mandates after Lehman’s collapse,
derisk bond markets by creating an asymmetric regime where the central bank puts
floors but not ceilings on securities prices (Gabor, 2016).
Before the COVID19 pandemic, bond derisking only occurred in high-income
countries. In some polities like the Eurozone, it gave rise to significant contestation
because most interventions to stabilise the plumbing of market-based finance requires
outright purchases of government bonds, for conservative voices a revival of the
monetary financing of governments. Similarly, the notion of market maker of last
resort was taboo in emerging and poor countries, denounced as a pathological capture
of the central bank by populist governments. Instead, the WSC celebrated the growing
presence of non-resident investors in local currency bond markets as a victory of its
mantra ‘development aid is dead, long-live private finance!’. Portfolio inflows would
improve the liquidity of government bond markets, and with it, DEEs dependence on
external debt. The vulnerabilities associated with the global dollar financial cycle
were set aside (see Gevorkyan and Kvangraven, 2016), as if borrowing from foreign
investors automatically generates policy autonomy. But elsewhere, the IMF
recognized that local securities and equity markets, capital flows and credit cycles
increasingly move together, all in the shadow of the US dollar (Adrian, 2019).
Increasingly popular Exchange Traded Funds (ETFs) - that package equities or bonds
and issue ETF shares against them - sharpen this dependency: while emerging market
ETFs are traded on the exchanges of high-income countries, their issuance and
24redemption requires the purchase/sale of the underlying shares/bonds, thus generating
capital flows. As Converse et al (2020) document, ETFs amplify the global financial
cycle for DEEs. Thus, direct and indirect (via ETFs) inflows into local currency bond
markets move with dollar financing conditions, while exchange rate volatility
amplifiesof portfolio flow pro-cyclicality: currency depreciation accelerates capital
flight (Hördahl and Shim, 2020).
Indeed, currency risk has long been identified as a significant obstacle to attracting
foreign institutional investors in large-scale infrastructure assets (see Baker, 2015 for
renewable energy in South Africa). In response, the WSC outlines three currency
derisking strategies (see Hördahl and Shim, 2020). As the World Bank’s InfraSAPs
recommend, state development banks could provide hedging facilities through which
institutional investors transfer currency risk to the state. Second, central banks can
undertake regular derivative operations to derisk exchange rates for foreign holders of
local currency bonds (Macalos, 2017). Finally, central banks can become swappers of
last resort, supplying financial institutions with foreign liquidity during periods of
instability, thus reducing exchange rate volatility (Gonzales et al, 2019). Note that
these strategies are designed to minimize recourse on capital controls, further
entrenching Rey’s (2015) dilemma: free portfolio flows into local (SDG) securities
markets comes with loss of monetary policy independence and of influence over local
credit conditions.
The critical de-risking role assigned to central banks in part reflects that the journey to
infrastructure as a bond asset class is long and fraught with institutional complexity.
As Klagge and Nweke-Eze (2020) document, complex risk structures deter
institutional investors from participating in Keyna’s renewable energy projects,
leaving MDBs, governments and renewable industry investors to finance and derisk.
In other words, the derisking of PPP infrastructure and its financing via securities sold
to institutional investors may proceed at different pace, constrained by the pace of
structural transformation of local financial systems.
25Surveillance capitalism in the WSC
Finally, WSC aims to leverage the model of surveillance capitalism (Zubhoff, 2019)
already deployed via the trope of digital financial inclusion in overlapping networks
of state institutions, international development organisations and ‘philanthropic
investment’ fintech companies (Gabor and Brooks, 2017). The aim was to map,
harvest and monetize digital footprints via behavioural analytics to render the poor
‘investible’ through an ‘all data is credit data’ approach.
Surveillance capitalism increasingly overlaps with the Wall Street Consensus, as
illustrated by the turn to private/PPP healthcare in African countries. In the wake of
the Washington Consensus, African countries privatized health through different
methods, from user fees on public health services to encouraging private healthcare
and promoting insurance schemes (Baloyi, 2019). Across SubSaharan Africa, 50% of
healthcare is provided by the private sector, with financing provided by investment
platforms and fund managers promoting the development of healthcare asset classes
(Hunter and Murray, 2019). Enter digital healthcare, with its promise of better
diagnostics through advanced technologies, and a complex ecosystem ripe for ‘health
as an asset class’ initiatives.
PharmAccess Group, for instance, operates both on the supply side and the demand
side of private healthcare. It provides financing to small-scale private health
companies in Tanzania, Kenya, Ghana and Nigeria, from healthcare SMEs to
specialist care providers and other businesses catering to health facilities, through the
Medical Credit Fund. PharmAccess’ partners include AfDB, the World Bank and
most official development aid agencies, alongside foundation involved in the financial
inclusion project. On the demand side, it has received ODA funding for the
Safaricom-backed healthcare app M-Tiba, where users save for medical care, pay and
manage their insurance policies and support their dependants.
Digital healthcare can morph into surveillance devices whereby insurance companies
can adjust premiums via data delivered to doctors. For instance, MTiba launched a
new hypertension and care app for low-income patients in 2018, that allows them to
monitor blood pressure and blood glucose levels, digitally sending the results to
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