De-risking, sustainable development, and state investment capacity

Eric Brown

Keywords: The role of the state and the new spirit of capitalism(s)

Abstract:

My argument focuses evaluating the World Bank’s Maximizing Finance for Development program (2017), which is concerned with the development of infrastructure for climate change mitigation and adaptation, as well as other sustainable development goals established by the UN. The World Bank’s Maximizing Finance for Development program is intended to attract private investment in the Global South by de-risking various development projects, usually of an infrastructural nature. Some derisking is political derisking: the state contractually obliges itself to not change regulations in ways that might be detrimental to investors. Other forms of de-risking are financial: guarantees of profit to investors by the state and the development of local sovereign bond issuance and regulatory accommodation of repo/shadow banking. This makes the capital in these investments more “liquid” and capable of being wound down and invested in more profitable opportunities, leaving vulnerable economies even more exposed to volatility and systemic risk (Gabor 2021).
I argue that a more practical and ethically sound approach would be to increase state capacity for direct investment in developing public goods infrastructure and innovation. While this would run into the issue of soft budget constraints, I would argue with Max Jerneck (2020) that this state-led approach to development has a basis in Kornai’s own analysis (2002, 1121-1122) and that is its otherwise desirable in the face of a need for rapid development of mitigation and adaptation infrastructure in the Global South.

Gabor, D. (2021), The Wall Street Consensus. Development and Change, 52: 429-459. https://doi.org/10.1111/dech.12645
Jerneck, M., 2020. When soft budget constraints promote innovation: Kornai meets Schumpeter in Japan. Industrial and Corporate Change, 29(6), pp.1415-1430.
Kornai, J., Maskin, E. and Roland, G., 2003. Understanding the soft budget constraint. Journal of economic literature, 41(4), pp.1095-1136.