Means of implementation or means of appropriation?
The push for ‘blended finance’ to reach the Sustainable Development Goals
Catherine van Es (10563083) University of Amsterdam
LLM International and European Law: Public International Law Supervised by: prof. dr. mr. J.E. Nijman
August 3rd 2020 Word count: 12.420
1 ABSTRACT
‘Blended finance’ is the new catchphrase in the financial agenda of international development. It refers broadly to finance mechanisms that combine public with private finance to scale up the resources needed to meet the ambitious Sustainable Development Goals (SDGs), pursuing both development and commercial objectives. The issue of the notion of ‘development’ that is adhered to in international law is situated in the field of ‘Law and Development’. The field is dichotomized into ‘economic’ or ‘human’ development, which is overcome here by a ‘capabilities approach’ to development. This approach
centralizes ‘development as freedom’, with individuals as primary agents of development and a focus on the roots of ‘underdevelopment’. The capabilities approach to development serves as an analytical tool to study blended finance mechanisms situated within the broader trend of the ‘private turn’ embracing privatization in development. Against the background of the understanding that international law has an instrumental role in sustaining the neoliberal economic order that pursues the ‘private turn’, tensions in the aspiration for ‘equal
partnerships’ expose the hegemonic quality of blended finance mechanisms. Furthermore, procedures for development finance transfers demonstrate the terms under which financing is granted. A lack of coherent measures to the contributed value of public subsidies and the demand for deregulatory measures are identified, which have a contentious impact of blended finance mechanisms on the ability of the 2030 Agenda to comply with a capabilities
approach. The last chapter illustrates the hegemonic quality of blended finance mechanisms in renewable energy. Ultimately, this thesis contends that the current discourse on blended finance mechanisms as an instrument for realizing the SDGs is poorly constituted to comply with a capabilities approach to development.
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TABLE OF CONTENTS
1. INTRODUCTION ... 3
2. ANALYTICAL FRAMEWORK ... 6
2.1. Three ‘moments’ in the field of law and development ... 6
2.2. Human capabilities ... 9
3. THE DARK SIDE OF THE ‘PRIVATE TURN’ IN DEVELOPMENT ... 12
3.1. Conceptualizing blended finance ... 13
3.2. An economic philosophy of governance ... 14
3.3. ‘Grabbing’ under color of law ... 16
3.4. ‘Equal partnerships’ in the 2030 Agenda ... 17
4. ENABLING BLENDED FINANCE MECHANISMS ... 19
4.1. The ‘additionality’ requirement ... 19
4.2. Modernization of ODA reporting ... 22
4.3. The Cascade approach: towards a Wall Street ‘consensus’? ... 23
4.4. Private sector bias ... 26
5. EVALUATION OF THE LTWP WIND POWER PROJECT ... 27
5.1. A ‘communalist logic’? ... 28
5.2. ‘Green grabbing’ ... 30
6. CONCLUSION ... 31
3 1. INTRODUCTION
The Lake Turkana Wind Power project in Northern Kenya is the largest private investment for sustainable development in Kenya’s history, involving the construction of 365 wind turbines and other infrastructure on grazing lands used by indigenous pastoralists. Much of the financing of the project comes from official development sources in the global North, including Official Development Assistance (ODA), to support the mobilization of private investments. The lands and livelihoods of indigenous pastoralists came under threat as a result of land grabbing and people across Kenya shouldered heavy costs, whereas the Western companies involved including Vestas, Siemens and Google are positioned to profit from their investments1. This enormous renewable energy project is one of the many
examples2 in which already marginalized communities are ultimately affected by the current financial governance of such projects. Large-scale renewable energy and other infrastructure projects, require vast tracts of land that have the potential to trigger land-grabbing, human and indigenous-rights violations and the repression of social movements3.
These projects are undertaken to achieve the Sustainable Development Goals (SDGs) of the 2030 Agenda for Sustainable Development4 , which consists of 17 goals encompassing economic, social and environmental development with the central aim to combat inequalities and ‘leave no one behind’. Particularly infrastructure (e.g. power, renewable energy,
transport), telecommunications, and water and sanitation have a substantial shortfall in public sector funding for the SDGs5. They are often financed through ‘blended finance’
mechanisms, which use sources of public financing including official development assistance (ODA) to mobilize private finance towards sustainable development in ‘developing
1 Kanyinke, Renewable Energy Projects and the Rights of Marginalised/Indigenous Communities in Kenya, International Work Group for Indigenous Affairs, Report 21 2015.
2 Similar projects that have been reported include the building of wind farms in Mexico allegedly leading to land grabbing of indigenous communities’ agricultural land, renewable energy projects involving land grabbing in Myanmar and forced evictions to make way for a highway in Kenya.
See: Alexander Dunlap, The town is surrounded: From Climate Concerns to Life under Wind Turbines in La Ventosa, Mexico, International Institute of Social Studies (ISS) 2016 https://www.iss.nl/sites/corporate/files/4-ICAS_CP_Dunlap.pdf; Sylvia Kay, Landgrabbing: Contested meanings of land. Chapter published in the Spotlight Report on Sustainability in Europe by SDG Watch Europe ‘Who is paying the bill? (Negative) impacts of EU policies and practices in the world’. Transnational Insitute 2019 https://www.tni.org/files/publication-downloads/sylvias_chapter_in_who_is_paying_the_bill_2019_web.pdf; Amnesty International, Driven out for development. Forced evictions in Mombasa, Kenya. 2015, AFR 32/2467/2015
https://www.amnesty.org/download/Documents/AFR3224672015ENGLISH.PDF
3 See Grant and Das, Land grabbing, sustainable development and human rights, Transnational Environmental Law 2015.
4 UN General Assembly, Transforming our world: the 2030 Agenda for Sustainable Development, 21 October 2015, A/RES/70/1
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countries’6.In light of the significant resources needed to implement the 2030 Agenda, blended finance was cited as critical to mobilizing capital for the realization of the 2030 Agenda7. Blended finance mechanisms pursue both development and commercial objectives as they operate between public and private finance spheres. Eliminating the disparate
incentives between public development objectives and the commercial motivations of the private sector is therefore considered critical to the achievement of the SDGs8. However, the increasing prominence of presenting blended finance as the ‘solution’ to the development finance gap for the 2030 Agenda among the donor community contrasts with a limited body of evidence of good practice and growing concerns about its human rights implications. There are justifiable concerns indicating that blended finance is not appropriate for
addressing the needs of development cooperation: it can put heavily indebted countries at risk and there are no direct links between blending and poverty reduction9. The push for blended finance might subject the SDGs to the conditions of private investments, exposing aid-recipient countries to their speculative markets and increasing the privatization of
development10. Furthermore, increasing use of ODA to subsidize private finance complicates the justification of the development mandate of ODA as it could eventually divert aid
budgets, intended for the poorest, towards subsidizing multinational corporations from donor countries11. The push for the private sector appears to be ‘selling out’ development to
profiteering corporations and investors which are primarily from ‘developed’ countries. The Lake Turkana Wind Power illustrates the provision of aid subsidies to the private sector can be especially detrimental to people who already experience extreme inequalities. This is problematic, especially since the delegation of development through blended finance mechanisms cannot be used as an excuse to fail to comply with human rights obligations of the State12. In light of these concerns about the implications for compliance with human rights norms in using ‘blended finance’ to finance the SDGs, it has been argued that finance
6 OECD, Blended Finance for Sustainable Development: Moving the Agenda Forward, DAC Meeting, 9 March 2017. DCD/DAC/A (2017) para 1
7 Third International Conference on Financing for Development (Addis Ababa, Ethiopia, 13–16 July 2015), endorsed by the United Nations General Assembly in its resolution 69/313 of 27 July 2015
8 Blended Finance Task Force, Better Finance, Better World: Consultation Paper of the Blended Finance Task
Force (London, 2018) p. 108
9 Blending Grants and Loans for Financing the EU's Development Policy for 2014-2020. Directorate-General for External Policies, European Parliament 28 June 2012.
10 Prato, Beyond the current means of implementation. In: Spotlight on Sustainable Development Report 2016 11 Kate Hodal, Aid reforms could see a big increase in private sector subsidies. The Guardian, October 10 2016
https://www.theguardian.com/global-development/2016/oct/10/aid-reforms-could-see-big-increase-in-private-sector-subsidies
12 Human Rights Council Resolution 40/8, March 2019. Guiding Principles on Human Rights Impact Assessments of Economic Reforms (A/HRC/40/57), principle 15 and 15.3
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should be at the service of human rights and reverse the ideology of economic growth in development being the only way forward13. Concerns with blended finance mechanisms as an instrument for international development are whether it can facilitate development that
‘leaves no one behind’ or whether it is a guarantee to deliver profits for multinationals who pass on investment risks to the public sector. Essentially, these tensions reflect the ongoing debate about the contentious notion of ‘development’ in international law.
In this light, this thesis will answer the following question. Is the use of blended finance mechanisms for the implementation of the SDGs compatible with a capabilities approach to development?
The structure of my argument will be as follows. First, through an examination on the current debates in ‘law and development’ literature, the need for the adoption of a
‘capabilities approach’ to law and development is distilled. This will serve as an analytical tool to study blended finance mechanisms as an instrument for sustainable development. Second, the emergence and rationale of blended finance as a mechanism for financing
development will be situated within the broader trends in the ‘private turn’ in development. It will be argued that international law has an instrumental role sustaining the issues associated with this ‘private turn’. The aspiration for ‘equal partnerships’ and the attempt of the SDGs to bridge different notions of development will be contrasted with the role of blended finance mechanisms as its instrumentalization. Third, the policies and approaches of the World Bank Group and the OECD DAC will demonstrate the law and administrative procedures for development finance transfers, and the terms under which financing is granted. The lack of ‘development additionality’ and the issues associated with financial deregulation in the ‘Cascade’ demonstrate the contentious impact of blended finance mechanisms on the ability of the 2030 Agenda to comply with a capabilities approach. Finally, an evaluation of the Lake Turkana Wind Power project will illustrate the hegemonic quality of blended finance mechanisms, particularly on the renewable energy development agenda. Ultimately, this thesis contends that the current discourse on blended finance mechanisms as an instrument for the SDGs is poorly constituted to comply with a capabilities approach to development.
13 Bohoslavsky, UN Independent Expert on the effects of foreign debt and human rights. United Nations Human Rights Office of the High Commissioner. “An immediate human rights response to counter the COVID-19 and the global recession ahead is an urgent priority,” says UN expert.
6 2. ANALYTICAL FRAMEWORK
In analyzing whether the push for blended finance mechanisms for the implementation of the SDGs is compatible with a capabilities approach to development, the notion of ‘development’ takes center stage in issues which arise from the ‘private turn’ in development finance. There is a continuing debate over the meaning of and the theoretical approaches to the contentious notion of ‘development’ in international law. This debate is characterized by the
identification of ‘development’ as centered around economic development or human-centered and whether international law can and should be instrumental to its implementation. Tensions arising from the ‘private turn’ in accomplishing the SDGs and the implications for the role of international law in it, are ultimately situated in the Law and Development (L&D) discourse. L&D has since the 1960s become the framework and vocabulary for constructing and
debating development policies from a legal perspective14. In the debate about the contentious notion of ‘development’ and the ambivalent role of ‘law’ in it, there are competing narratives about how the two (should) relate.
To understand the issues arising in the contemporary debates in the field of L&D, the different ‘moments’ in the field will be identified to grasp how different notions of
development have changed and how the law has been implicated and related to these ideas. Throughout, conceptions from critical legal studies (CLS) scholarship will serve as a lens on the role of law in development and will shed light on the role of L&D studies in shaping the notion of ‘development’. These conceptions have contributed to a ‘critical turn’ in L&D, from which I will distill the need for a ‘capabilities approach’ to development. This could provide a turning point in L&D’s ambivalence and establish the case for an analytical frame that is better able to do justice to the complex realities of the development discourse.
2.1. Three ‘moments’ in the field of law and development
L&D was born in the post-WWII international order through the adoption of a Weberian understanding of modernity which dichotomized between ‘traditional’ and ‘modern’
societies. ‘Development’ involved an increase in man’s rational capacity to control the world, and his ability to improve his material well-being15. L&D as a legal field originated largely as a by-product of ‘development assistance’ activities by the US government in the 1960s and 1970s, which contributed to the first ‘moment’ in L&D. Confident that the characteristics of
14Lee, General Theory of Law and Development, Cornell International Law Journal 50, 2017 p. 416
15 Trubek, Law and Development: Forty Years after Scholars in Self-Estrangement. University of Toronto Law Journal, 2016 p. 305
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the Western liberal legal tradition provided the basis for creating a system supporting human welfare and national wealth, L&D attempted to create a specialized body of knowledge about the instrumental relationship between legal systems and ‘development’16. The dominant notion of ‘development’ was economically oriented and lawyers in the ‘Third World’ were encouraged to reform laws and institutions that failed to further their national economic development goals17. In the 1970s, this initial L&D concept of ‘law as modernization’ was portrayed as a ‘neo-colonial project that actually weakens developing societies while favoring global business’18. International law was supposedly ‘colonized’ by development, as it stood in an instrumental relationship to development’s neoliberal political objectives. In the attempt to overcome ‘underdevelopment’ through international legal means, ‘development’ was perceived as a hegemonic exercise perpetuating the structural inequalities it purported to overcome19. This gave international law in development an ‘inherently imperial or hegemonic quality’20 in being instrumental to serving the (economic) interests of ‘developed’ states or their businesses.
As a consequence of growing critique, the legitimacy of legal assistance in development was much doubted, questioning foundation of L&D scholarship21. This led L&D scholars into ‘self-estrangement’22 with their own field and only a decade later, scholars showed renewed interest in the field. In the late 1980s and 1990s, new ideas about law’s role in development were beginning to emerge. The consensus was that development was about economic growth, to be treated separately from social, cultural and political issues23. Supposedly, legal institutions were needed both to facilitate market transactions and to constrain undesirable state intervention in market activity24. This second ‘moment’ in L&D formulated three inferences about ‘law’ related to the push for privatization in development.
16 Ibid
17 Trubek and Galanter, Scholars in self-estrangement: some reflections on the crisis in law and development
studies in the United States. Wisconsin Law Review, 1974 p. 1083
18 Coined by Duncan Kennedy, one of the founders of the CLS movement. See: Trubek, Law and Development:
Forty Years after Scholars in Self-Estrangement. University of Toronto Law Journal, 2016 p. 310
19 Rajagopal, International Law from Below. Development, Social Movements and Third World Resistance, Cambridge 2003
20 Riegner, How universal are international law and development? Engaging with postcolonial and Third World
scholarship from the perspective of its Other. Verfassung und Recht in Übersee/Law and Politics in Africa, Asia
and Latin America, 2012, 45.2: p. 235
21 Trubek and Galanter, Scholars in self-estrangement: some reflections on the crisis in law and development
studies in the United States. Wisconsin Law Review, 1974 p. 1064
22 Ibid
23 Bradlow, Differing Conceptions of Development and the Content of International Development Law, South African Journal on Human Rights, 2005
24 Trubek, Law and Development: Forty Years after Scholars in Self-Estrangement. University of Toronto Law Journal, 2016 p. 312
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First, local laws of aid-recipient countries had to be changed to facilitate integration in the world economy. Second, regulatory law often presented an unnecessary intrusion on the market. Third, ‘law of the market’ prevailed over law as a guarantor of political rights or protector of the disadvantaged25. ‘Rule of law’ became significant not only as a tool of development policy, but as an objective for development policy in its own right26. The focus in this ‘rule of law’ was grounded on the stability of a rule of law in an open economy, which ultimately embedded the concept of international economic law as contract law enshrining
pacta sunt servanda. Critics argue this virtually excluded state intervention in the
development discourse in the attempt to balance development with social interest27. Rather than an instrument for state policy, law was thus understood as the foundation for market relations and as a limit on the state28. Social concerns, especially to the extent that they were political, were distinguished from economic concerns. They were identified not only as extraneous, but as conflicting with the pursuit of economic development29. L&D under preoccupation with this ‘rule of law’ became big business during this period, often referred to as the Washington ‘consensus’.
At the turn of the millennium, some legal scholars urged to incorporate social and human goals into the development agenda and to decenter its focus on economic growth30. The importance of markets as the main mechanism for economic growth was still
emphasized, but with the recognition that market failures could justify state intervention31. ‘Development’ included poverty-reduction objectives and focused on the legal and
institutional framework within which economic transactions are conducted32. Additionally, attention to local participation in the design and implementation of economic reforms increased, so aid-recipients could take ‘ownership’ of reforms and projects33. This third, currently still evolving ‘moment’ in L&D attributes a more proactive role to the state in development as a guarantor of a certain type of rule of law which enables the ‘frontline’
25 Rittich, The future of law and development: Second generation reforms and the incorporation of the social, 2006 p. 210
26 Hoffmann, Revolution or Regression? Retracing the Turn to Rights in ‘Law and Development’ Finnish Yearbook of International Law 23 (45), 2016
27 Maniruzzaman et al., eds. International Sustainable Development Law-Volume I. EOLSS Publications, 2010. 28 Trubek and Santos, eds. The new law and economic development: a critical appraisal. Cambridge University Press 2006 p. 2
29 Rittich, p. 200
30 Trubek and Santos, eds. The new law and economic development: a critical appraisal. Cambridge University Press 2006 p.7
31 Ibid, p.7
32 Rittich, 2006 p. 210
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actors of development (individuals, communities, but also corporations) to shape their development within a globalized market economy34. In this ‘new developmentalism’, the public and the private sector get a more flexible relationship, accompanied by a greater use of law in development initiatives 35. The state, once regarded as a problem in and for (economic) development, is now the principal addressee of individual and collective rights claims36. In this unfolding L&D paradigm, some adhere to a state-centric and procedural notion of development as ‘a political process in which the relevant participants decide on their understanding of development’37. It constructs ‘development’ around the administrative procedures of ODA transfers, which situates ‘development’ in the public law realm of the regulation of public spending, allowing for a legal reading of the political(ly contested) nature of ODA transfers. This interpretation derives the legitimacy of development from a ‘higher-level procedural legality’, which results in a state ‘politically neutralized and legally
streamlined according to a global good governance agenda’38. This neglects some of L&D’s most contested issues. Adhering to ‘ODA transfer law’ would convert development into a ‘post-political technocratic project’39 in which ‘development’ and ‘economic growth’ are posited as extra-legal, transcendental and universal aims. This diminishes the radical, ‘counter-imperial’ dimension of international law for developing countries in their demand for political, economic and social change40.
2.2. Human capabilities
L&D scholarship has been defined by the continuous struggle to overcome the dichotomy in the approach to law as instrumental to either human and social goals or economic growth. Fundamental critiques of the field resonate its self-estrangement, and emphasize its potential in having a depoliticizing effect to development which precludes democratic liberation and
34 De Feyter, The new wave of law and development, Völkerrechtsblog, 15 October 2019
35 Eslava and Sundhya, The State and International Law: A Reading from the Global South, Humanity: An International Journal of Human Rights, Humanitarianism, and Development 2019
36 Hoffmann, Revolution or Regression? Retracing the Turn to Rights in ‘Law and Development’, Finnish Yearbook of International Law 2016 (23): 45
37 Dann, The law of development cooperation: a comparative analysis of the World Bank, the EU and Germany. Vol. 11. Cambridge University Press, 2013 p. 25
38 Hoffmann, Twin Siblings: Fresh Perspectives on Law in Development (and Vice Versa), Leiden Journal of International Law 30, 2017 p. 274, 284
39 Pahuja, Decolonising international law: development, economic growth and the politics of universality. Cambridge University Press, 2011 p. 10
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economic self-determination of ‘developing’ states41. Throughout, hegemonic power asymmetries affect law in development approaches in the construction of the development discourse. International law is perceived as a ‘governance technique’ in the service of a development project entangled with Western liberal modernity, protecting Western political and economic interests by keeping the ‘developing world’ in a permanent bind between subjugation and exclusion. ‘Development’, then, implies not merely rule by law but the rule
of this particular international law42. Furthermore, there is a continuing debate whether human rights should be recognized as an integral part of the development process, as the internalization of human rights to the development discourse is by critics regarded as a controversial task43.Generally, human rights have been critiqued for their indeterminate and ‘ideologically flexible’ rights language, which can either enable emancipatory action or hegemonic enforcement in development approaches44. Additionally, simultaneous reference to universal human rights norms and the premise to foster local individual and collective empowerment may compromise on whether there is room for local variations and how much top-down imposition of human rights would be compatible with local empowerment through development45. Accordingly, human rights do not serve as a clear-cut solution to overcome dichotomies in the L&D field.
Amongst L&D scholars, there is no clear consensus about the scope of, and direction to be taken in the discourse on L&D. Some consider establishing a fourth ‘moment’ in L&D as an opportunity to give room to ‘global justice’46 whereas others propose a clear break from L&D through the ‘reinvention’ of development law essentially through a focus on
international investment and finance law under a new name47. Here, the ‘critical turn’ in L&D is countered through arguing for self-awareness instead of self-estrangement with L&D, through a more comprehensive understanding of development by way of adopting a ‘human
41 Reflections on the history and future of Law and Development. Recording of David Trubek’s keynote lecture at the LDRN Conference at Humboldt University Berlin on 27 September 2019,
https://voelkerrechtsblog.org/reflections-on-the-history-and-future-of-law-and-development/
42 Hoffmann, Twin Siblings: Fresh Perspectives on Law in Development (and Vice Versa), Leiden Journal of International Law 30, 2017 p. 282-283
43 McInerney-Lankford, Human Rights and the SDGs: Progress or a Missed Opportunity? Oxford Human Rights Hub January 6 2017
44 Perelman. Human Rights, Investment and the Rights-ification of Development. The Practice of ‘Human Rights
Impact Assessments’ in Large-Scale Foreign Investments in Natural Resources. In: Young, ed, The future of economic and social rights, Cambridge University Press 2019. p. 445
45 Hoffmann, Revolution or Regression? Retracing the Turn to Rights in ‘Law and Development’, Finnish Yearbook of International Law 2016 (23): 45
46 See Vandenhole, Towards a Fourth Moment in Law and Development? Law and Development Review 12(2), 2019 p. 265-283.
47 See for example Sarkar, International Development Law: Rule of Law, Human Rights and Global Finance, 2009.
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capabilities’ approach in development inspired by Amartya Sen48. Sen identified
development as ‘freedom’ by individualizing human welfare as the set of capabilities for ‘achieving the kind of lives people have reason to value’49. His ideas build on Aristotle in arguing that development is about providing conditions which facilitate people’s ability to lead flourishing lives50. Sens conceptualization of ‘development as freedom’ marks a sharp break from earlier notions of development that neither clarified the ends of development nor assigned critical significance to the values of democracy and rights to achieve goals of development51. He shifts ‘development’ from the focus on ‘needs’, to an expanded conception of individual freedom, with the corollary that individuals, not states, are the primary agents of development. This people-centric development paradigm focuses on the roots of poverty instead of economic growth, emphasizing the need for accessible education, health care and housing to overcome ‘underdevelopment’52. The perspective of ‘freedom’ is particularly concerned with the agency role of the individual as a member of the public and as a participant in economic, social and political actions53.
The capabilities approach to development thus reconstructs the framework of reference in development from the state to the humans living in them54. Subsequently, if international law and development form the same ontological entity in addressing fundamental critiques in the L&D discourse, then the objects of ‘development’ must be international law’s ‘real subjects’55. This consists of a shift away from the focus on the state and international organizations onto the local level, to the ‘smallest administrative units’ and ultimately onto the people of the ‘developing world’ themselves56. A decentralizing policy in ‘development’ through e.g. the turn to cities would then form a new paradigmatic remedy for ‘underdevelopment’ which serves to undermine issues with traditional sovereignty in
development and international law57. A capabilities approach to development shifts the use of law to a goal in itself instead of as means to another goal (e.g. economic growth). ‘Law’,
48 Sen, Development as Freedom, Oxford University Press 1999 49 Ibid, p. 18
50 Stewart and Deneulin, Amartya Sen’s Contribution to Development Thinking, Studies in Comparative International Development, 2002 p. 62
51 Chimni, The Sen Conception of Development and Contemporary International Law Discourse: Some
Parallels, The Law and Development Review, 2008
52 Ibid
53 Sen, Development as Freedom, Oxford University Press 1999 p. 17
54 Hoffmann, Between (Re-)Empowerment and (Hyper-)Conditionality. The Rise of Accountability-Driven
Governance in Development Cooperation. Völkerrechtsblog, 17 July 2018
55 Hoffmann, Twin Siblings: Fresh Perspectives on Law in Development (and Vice Versa), Leiden Journal of International Law 30, 2017 p. 267
56 Eslava, Local Space, Global Life. Cambridge University Press, 2015. 57 Ibid, see analysis under 3.4.
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then, plays an important role in assigning voice to development actors and provides instruments in their voice in the political process of development’58, particularly through bottom-up approaches to law in development.
Accordingly, the potential emancipatory character of a capabilities approach is shaped by the ‘hidden utopia’ of rights in development. This does not involve the empowerment of human rights experts or the global aid industry, but the manifestation of empowerment when Sen’s ‘freedom’ ‘momentarily frees itself from the constraints of neoliberalism and becomes an exercise in substantive self-determination’59. The turn to a capabilities approach could provide the re-balancing of development policy making by creating transparent feedback links between recipients and donors60. Consequently, this could constitute development cooperation more legitimate and could provide ‘development’ an instrument for genuine empowerment as a tool to overcome hegemonic power structures in the international development discourse. The adoption of a human capability approach to development provides a possible lens to address the assumptions derived from the neoliberal development paradigm, which will be examined hereafter.
3. THE DARK SIDE OF THE ‘PRIVATE TURN’ IN DEVELOPMENT
This section will uncover the implications of a ‘private turn’ in development finance. First, ‘blended finance’ as means to implement the SDGs will be conceptualized to be able to grasp it in its context. The dark side of the ‘private turn’ will pave the way to understanding the implications of global finance neoliberalism on the role of law in ‘development’. Notably, the role of ‘law’ in sustaining a neoliberal economic order poses questions about the notion of ‘development’. Against this background, the SDGs hinge at embracing a capabilities
approach to development to overcome these issues. It will be argued whether its compliance is obstructed by the ambition for ‘equal partnerships’ and demand placed upon on states to realize national social development goals.
58 Dann and Riegner, Actors and Instruments in Law and Development Governance: An Overview (February 24, 2020).
59 Hoffmann, Between (Re-)Empowerment and (Hyper-)Conditionality. The Rise of Accountability-Driven
Governance in Development Cooperation. Völkerrechtsblog, 17 July 2018
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3.1. Conceptualizing blended finance
In line with the 17th SDG (‘strengthen the means of implementation and revitalize the Global Partnership for Sustainable Development’) and the Addis Ababa Action Agenda (AAAA)61, governments and international organizations have been pushing for investments in the private sector and an increased involvement of financial markets in development to cover the
enormous financing gap in the realization of the 2030 Agenda62. Blended finance is defined as ‘the strategic use of public or private investment with a development objective, including concessional tools, to mobilize additional finance with a commercial motivation for SDG-aligned investments in developing countries’63. The main ‘blenders’ are multilateral
development banks (MDBs) or development finance institutions (DFIs) like the WBG and the European Investment Bank (EIB)64. The aim is to generate additional supply of commercial finance that would otherwise be unavailable for financing SDG-aligned investments65. To incentivize private sector investments and participation in ‘strong social and development benefits’, public resources are used to compensate for actual or perceived risks that challenge investment on commercial terms. Hence, public resources and particularly ODA are not used to cover full external financing needs, but function as an enabler of private financing that ‘would otherwise not have happened’. According to this rationale, blended finance enables the private sector to balance risk with rewards, creating ‘commercially sustainable’
development solutions66. Consequently, the costs of negative externalities and project failure are transferred to the public sector67.
The AAAA identifies essential social services, infrastructure, agriculture, small and medium-sized enterprises and investing in the planet’s ecosystems as potential investment areas. Every area depends on different combinations of public, private, domestic and international investments financing. Essential social services are to be financed
61 The financial policy on which the 2030 Agenda is based: Third International Conference on Financing for Development (Addis Ababa, Ethiopia, 13–16 July 2015), endorsed by the United Nations General Assembly in its resolution 69/313 of 27 July 2015
62 Prato. Beyond the current means of implementation. In: Spotlight on Sustainable Development 2016 and Weber, Politics of ‘leaving no one behind’: Contesting the 2030 Sustainable Development Goals agenda, Globalizations 2017, 14(3) p. 399–41
63 OECD, Blended Finance for Sustainable Development: Moving the Agenda Forward, DAC Meeting, 9 March 2017. DCD/DAC/A (2017) para 15
64 Blended Finance Task Force, Better Finance, Better World: Consultation Paper of the Blended Finance Task Force, London 2018
65 DCD/DAC/A (2017) para 17-19
66 Samans, Blending public and private funds for sustainable development, in: OECD Publishing, 2016 67 Blending private interests with taxpayer’s money: Towards a development-investment nexus? Global Health Advocates France (GHA), November 2019,
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overwhelmingly publicly, whereas promotion of job creation is largely private. Investments in infrastructure and structural transformation require a combination of public and private resources, and this area is estimated to need ‘trillions’ in development finance68, hence the interest in blended finance mechanisms is centered around this investment area69. However, these identifications are not determinate: the push for blended finance aims to extend beyond infrastructure investments, pushing for private reforms in essential social services as well. From the onset, the WBG announced it “will be expanded to finance, education, health and agribusiness”70. In fact, it has been proclaimed that blended finance solutions are not only ‘best used when partial market failures undermine economic efficiency, including pioneering investments in high-risk environments or those that use new technologies’, but also when ‘equity or distributional goals prevail, such as promoting affordable access to basic services for underserved groups’71. This latter claim seems confounding in light of the concerns around the ‘private turn’ in development finance and its impact on the commodification of basic social services in light of the SDGs ‘protection floors’.
3.2. An economic philosophy of governance
The push for blended finance is situated within a broader strategic shift towards privatization and the entrenchment of private actors in financing public goods. This is considered to originate from growing pressures among donors to link their commercial interests to
development policies, as many companies benefiting from blended finance mechanisms are from OECD countries that want to remain competitive in new markets and emerging economies72. The increase in using ODA for this purpose is thus regarded as a convenient excuse for rich countries to channel public development finance to their own domestic companies. The ‘private turn’73 is inherently linked to a neoliberal foundation in
development, reflected in the ideological preference among many policy-makers in the West
68 See OECD Publishing, Global Outlook on Financing for Sustainable Development 2019. Time to Face the Challenge 2018
69 Third International Conference on Financing for Development (Addis Ababa, Ethiopia, 13–16 July 2015), endorsed by the United Nations General Assembly in its resolution 69/313 of 27 July 2015
70 World Bank Group Development Committee: Forward Look. A Vision for the World Bank Group in 2030. Progress and Challenges. Spring Meetings 2017 DC2017-0002 March 24, 2017
71 Samans. Blending public and private funds for sustainable development. OECD Publishing 2016
72 Oxfam Briefing Paper, Private-Finance Blending for Development: Risks and Opportunities. February 2017
https://oxfamilibrary.openrepository.com/bitstream/handle/10546/620185/bp-private-finance-blending-for-development-130217-en.pdf?sequence=1
73 Coined by Van Waeyenberge, The Private Turn in Development Finance, 2015. Financialisation, Economy, Society and Sustainable Development (FESSUD) Working Paper Series No 14, 5
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to let the market and the private sector take care of social and economic issues74. Underlying this ideology is the belief that a neoliberal global economy serving international development is concomitant with aspirations of justice75. However, this belief ignores the consequences of widespread privatization and financialization in development. Through blended finance mechanisms, a greater corporate presence from the ‘global North’ is promoted and financially supported in the absence of an adequate legal framework guaranteeing corporate
accountability and transparency. This may incentivize exploitation and human rights violations rather than promote sustainable development76. Indeed, the extent to which international financial institutions and the UN have aggressively promoted widespread privatization of e.g. development, refugee protection and peacekeeping policies without regard to the implications for human rights, or the consequences for the poor, has been criticized77.
Privatization is perceived as an integral part of an economic philosophy of governance rather than simply a financing mechanism. It redefines the public good in terms of freedom from government, combined with the ‘liberation’ provided by corporate efficiency and profitability78. Blended finance mechanisms can only succeed in a system where economic growth and profit are conditional to the survival of financial capital, since far-reaching cross-border finance and investments are judged successful to the extent it leads to more capital accumulation for the managers of capital. To this end, international economic law facilitates the maximization of profits through deregulations of financial activities (or, what is called ‘profit-led’ regulation)79. In it, socio-economic or human rights are labeled as ‘market externalities’ that challenge the flow of capital and financial liberalization, which poses a disincentive to secure those rights80. As such, globalization of finance serves no social purpose. In fact, it includes systemic risks that have the potential to inflict substantial harm, particularly on the poor and the vulnerable and disproportionally on debtors relative to
74 Müller, Harnessing private finance to attain public policy goals? How governments try to involve the private
sector in times of austerity and what risks this entails, SOMO July 2016
75 Linarelli et al., The misery of international law: confrontations with injustice in the global economy. Oxford University Press 2018 p. 4
76 Joint CSO letter concerning the establishment and implementation of the EU External Investment Plan. Brussels, 9 September 2016, retrieved from https://eurodad.org/files/pdf/57e28c23c0011.pdf
77 Financing the SDGs, Privatization and Human Rights: A Discussion with Jeffrey Sachs and Philip Alston. January 30, 2019. Columbia Center on Sustainable Investment, Columbia University
78 UNGA Report of the Special Rapporteur on extreme poverty and human rights, Philip Alston, submitted in accordance with Human Rights Council resolution 35/19. UN Doc. A/73/396 p. 5
79 Linarelli et al., 2018 p. 228-229 80 Ibid, p. 232-233
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investors. It is passed on to marginalized communities through ‘diversification finance’81 which provides investors and traders with a framework within which they can diversify assets. Diversification has the purpose to share and hedge risk among the rich and has no ambitions for long-term sustainable finance. It shields investors from (financial) market risk, which results in the accumulation of systemic risk on states and societies at large82.
Understandably, the turn to diversification finance through the push for ‘blended finance’ poses enormous risks for receiving countries of financial ‘aid’. The separation of the ‘economic’ and ‘non-economic’ as a basis upon which the international legal system was built partly explains the inability to recognize socio-economic and human rightsas
constitutive of financial markets83.In this context, the role of international law in the ‘private turn’ will be analyzed to understand its contribution to hegemonic structures in development.
3.3. ‘Grabbing’ under color of law
The character of international law in a neoliberal rhetoric emphasizes the language and practices of markets and efficiency over the language and practices of democratic rights or equality of opportunity84. Instead, law enforces those rights essential to the smooth working of the market; the goal of the law should not be to try to aid the less well-off or the politically marginalized85. Therefore, ‘law’ loses many of its welfare and regulatory responsibilities, which are essential to a ‘just’ international legal order86. In aspiring a legal order structured around neoliberal ideologies rather than principles of justice, every state can ‘grab’ what it can in the economic sphere on the basis of power and interest, legally so and under color of law87.International law, then, enables and promotes a harmful and unjust international
economic order as it is instrumental in the realization of neoliberal policies. This results in the ‘misery’ of the international legal system which fails to internalize basic features of a ‘just’ law. It forms a normative order perpetuated by powerful states and the private actors they
81 ‘Development finance’ of the colonial era which was necessary to extract wealth from the colonies has been supplanted by ‘diversification finance’ today, see ibid, p. 182
82 Ibid, p. 183
83 Linarelli et al., 2018 p. 185
84 Villmoare and Stillman, The Neoliberal State’s Janus Faces of Law', Special Issue: Law and the Liberal State, Studies in Law, Politics, and Society 2014 (65): pp. 31-55.
85 Ibid 86 Ibid
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represent to serve as an instrument of their power, rather than as a restraint upon it88. As such, international law sustains a neoliberal international economic order.
The ability to ‘grab’ on the basis of hegemonic power in the globalized economic sphere can partially be attributed to the substantial inequality between states in the
international legal order. Behind the ‘veneer of sovereignty’, where formal sovereignty is emphasized over substantive sovereignty, is a substantial inequality89. When ‘sovereignty’ is understood along a spectrum of durability and permeability, ‘poor’ states tend to have permeable sovereignty, whereas ‘rich’ states have durable sovereignty. Permeable sovereign states are posited as passive recipients of law, whereas the real agents who are served by the international legal system are those with durable sovereignty90. As such, powerful states can potentially apply the ‘legitimating shelter’ of law in their interest to the detriment of other peoples. These laws or their application would categorically be rejected at home: they are developed as law for ‘the other’ in international law91. In what is referred to as a ‘neoliberal legality’, equal rights between non-equals in a neoliberal global order do not eliminate, but perpetuate this substantive inequality92. This may increase hegemonic structures in
development and perpetuate ‘misery’ in, and appropriation of, development outcomes. The ‘formal sovereignty’ between states through the idea of ‘equal partnerships’ in the 2030 Agenda and the hegemonic quality of the global financial system is cause for tension in the implementation of the SDGs, which will be discussed hereafter.
3.4. ‘Equal partnerships’ in the 2030 Agenda
The SDGs can be said to be an attempt to counterbalance the dominant neoliberal economic approach which brings about the ‘misery’ in the global economy through the incorporation of human and social goals in the 2030 Agenda. This is, among others, suggested by the adoption of ‘social protection floors’93 which embrace a socio-economic rights narrative to
development. Accordingly, the SDGs can be considered instrumental to the realization of a capabilities approach to development. However, the ‘private turn’ may hamper its
88 Sornarajah, Power and Justice in International Law, Singapore Journal of International and Comparative Law, 1997
89 Linarelli et al., 2018 p. 59 90 Ibid
91 See Orford. International law and its others. Cambridge University Press, 2006.
92 Brabazon (ed), Neoliberal legality: understanding the role of law in the neoliberal project. Routledge, 2018 p. 170
93 “nationally defined sets of basic social security guarantees which secure protection aimed at preventing or alleviating poverty, vulnerability and social exclusion”, implemented in SDG Target 1.3
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materialization. The turn to social protection does not challenge the commitment of DFIs to privatization and commodification of basic social services94. Additionally, by failing to frame social protection in terms of human rights, social protection remains a ‘charitable
undertaking’ advocated for reasons of efficiency and productivity, not a matter of right95. This leaves room for outsourcing basic social services to profit-seeking companies which eventually undermines the realization of human capabilities96. The instrumental use of blended finance mechanisms might therefore lead to an increase in the privatization of social actors.
The SDGs turn to ‘equal partnerships’ for development with a commitment to the ‘conventional terms’ of international trade, investment and finance. The 2030 Agenda’s aim to both ‘respect each country’s policy space’ in ‘ensuring economic and social development through national policies’, while simultaneously support an ‘enabling international economic environment, strengthening global economic governance’97. The realization of the ‘human capabilities’ is thus situated in the national domain of states and reflects the 2030 Agenda’s focus on national approaches to social development. This echoes a traditional view of sovereignty in development by treating social factors as ‘project externalities’ which implies the scope of the state’s sovereignty regarding other actors in development98. However, it misappropriates the idea of economic self-determination and sovereign equality, by failing to recognize the impact of the systemic risks emerging from global economic governance. The identification of state sovereignty through ‘equal partnerships’ does not empower the state freely to override the hegemonic power of foreign corporations and sovereignty cannot shield the state from outside intervention in its internal economic affairs99. This misconception is reinforced through the to focus on national level roles as an alleged response to control external actors, for example through the notion of ‘country ownership’ of the WBG. This notion eventually blames maldevelopment on failures of governance by the state itself, which ignores the role of the globalized economy and its international rules that ‘permeate’
94 Linarelli et al., 2018 p. 252
95 Alston, UN Doc A/69/297, 11 Aug 2014 para 30
96 See De Man, The Sustainable Development Goals and the rights-based approach to development: Compatible
or missing the point? African Human Rights Law Journal 19.1 2019: pp. 445-469
97 A/RES/70/1 par. 63
98 Bradlow, Differing Conceptions of Development and the Content of International Development Law, South African Journal on Human Rights, 2005 p. 56
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domestic policy100. The strictures imposed by the neoliberal finance system reduce both a state’s fiscal and, following its own public sector reforms, its policy space101.
Failure to recognize and counter the implications of adhering to the ‘conventional terms’ of (diversification) finance complicate the establishment of substantial sovereignty between states through ‘equal partnerships’. The demand for responsibility placed on a state by the logic of sovereignty and articulated through international law, and the factual capacity of a state to supply this normative demand with material substance emanates in a discrepancy in the harmonization of both demands for the implementation of the SDGs102. Against the background of these complications, the following part considers the core elements of blended finance mechanisms and their impact on compliance with human capabilities in development.
4. ENABLING BLENDED FINANCE MECHANISMS
The approaches taken by the OECD DAC and the WBG formulate the conditions that legitimize using blended finance as an instrument to realize sustainable development, which are fundamental to understand the role of blended finance in global development finance. To this end, compliance issues with the central requirement of ‘additionality’ are analyzed as well as the Modernization agenda of the OECD DAC which further complicates compliance with this requirement. The Cascade approach will provide insight in the framework of deregulatory reforms that are dictated for blended finance mechanisms to exist, which underlines the need to maximize profits through ‘profit-led’ regulation. Lastly, the analysis will return to the issue of blended finance in global partnerships and the implications of a ‘private turn’ for the ability of States to implement human capabilities.
4.1. The ‘additionality’ requirement
The OECD definition of blended finance103 and its subsequent principle 1: ‘anchor blended finance use to a development rationale’104 require that additional finance is mobilized and that the mobilized funds are used for sustainable development. This ‘additionality’
requirement should receive special attention due to the centrality of this concept in justifying
100 Rittich, The future of law and development: Second generation reforms and the incorporation of the social, 2006 p. 211
101 Hoffmann, Revolution or Regression? Retracing the Turn to Rights in ‘Law and Development’, Finnish Yearbook of International Law 2016 (23): 45
102 Ibid 103 See no 54
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blending: it is the core mandate of most DFIs and other blending entities105. To effectively increase total financing for development, blended finance mechanisms need to ensure additionality, by being deployed only for uses where commercial financing is not currently available for deployment towards development outcomes106. The contributed value of the public subsidy is for a large part measured by two types of ‘additionality’. ‘Financial additionality’ measures whether blended finance is necessary to ensure the project gets finance and can be implemented. ‘Development additionality’ measures if blended finance helps the project achieve better development results107. It refers to the outcome and impact of the investment that goes beyond what would have been achieved in the absence of additional finance (job creation, protected environment). It can be achieved not only through financial contributions, but also through non-financial elements (technical assistance or transfers of technology)108. Arguably one could condition ‘development additionality’ to facilitate a human capabilities approach, although its definition leaves wide room for interpretation: development should facilitate ‘faster, larger or better development impacts’ than the public or private sector would achieve working alone109.
Additionality is a contentious concept in terms of development impact. Tensions arise between the need to deliver financial returns for commercial investors and the sustainable development impacts on local communities. Views differ as to whether ODA will ‘unlock’ private resources, or whether blending mechanisms diverts scarce public resources to
subsidize private investors. Currently, there are no agreed common methodologies or criteria to evaluate with a sufficient degree of certainty whether public subsidies unnecessarily subsidize the private sector and, by doing so, displace other actors who could have provided the finance needed110. In fact, there is a growing body of literature that suggests that a significant share of blended finance mechanisms lack additionality. A systematic review of ‘additionality’ looking at several MDBs and DFIs, including 17 institutions from Europe,
105 Blending private interests with taxpayer’s money: Towards a development-investment nexus? Global Health Advocates France (GHA), November 2019,
http://www.ghadvocates.eu/wp-content/uploads/policy_brief_blended_finance_FINAL_web.pdf
106 OECD DAC Blended Finance Principles
http://www.oecd.org/development/financing-sustainable-development/blended-finance-principles/
107 DCD/DAC(2018)47/FINAL p.6
108 Blending private interests with taxpayer’s money: Towards a development-investment nexus? Global Health Advocates France (GHA), November 2019
109 Oxfam Briefing Paper, Accountability Deficit? Assessing the effectiveness of private finance blending in
ensuring that small-scale farmers are not left behind. April 2019.
https://oxfamilibrary.openrepository.com/bitstream/handle/10546/620753/bp-accountability-deficit-finance-blending-agriculture-300419-en.pdf
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found that 55% of the projects would have gone ahead without public finance. Similar results revealed that two third of companies in the EU would have invested in development without the public support they received111. A study into the development impact of blended finance projects in Bangladesh, Nepal and Uganda found no example could be located of ex-ante assessments on potential development additionality or impact, except for ‘mandatory
mentions’ of intended impact in project proposals which lacked any guidance regarding how it would be measured112. Furthermore, preference for financial viability supersedes potential development additionality outcomes in these projects. For example, the Agricultural Business Initiative (‘aBi trust’) in Uganda, was found to approve larger financial institutions projects based on the strength of its projected profits (‘cash flow’) without explicitly assessing whether the project actually had full or partial development additionality113.
From a sustainable development perspective, development additionality should be prioritized over financial additionality, to ensure that the public subsidy is used in a way that maximizes development impact114. However, evaluations conducted on EU blending facilities point out that the focus of measuring additionality is primarily on financial additionality, based on the project funder’s self-reporting115. Similarly, other evaluations of DFIs involved in blended finance concluded that the DFI had to respond to market opportunities, which resulted in a problematic trade-off between developmental objectives and the requirement of financial viability116. The very justification for using ODA to subsidize the private sector is its development mandate. In the absence of (a sound methodology to measure) additionality, blending eventually leads to extra profit for private investors117. Furthermore, the
legitimization of blended finance for development in this regard is dependent on the scattered nature of the arbitrary administrative procedures of the OECD DAC and DFIs.
111 Financing for Development Post-2015: Improving the Contribution of Private Finance. Directorate-General for External Policies of the Union, Directorate B, Policy Department.
https://www.europarl.europa.eu/RegData/etudes/etudes/join/2014/433848/EXPO-DEVE_ET(2014)433848_EN.pdf
112 Bhattacharya and Khan, Is blended finance trending in the LDCs? Perspectives from the ground. Southern Voice Occasional Paper Series no. 49 January 2019 p. 29
http://southernvoice.org/wp-content/uploads/2019/02/Ocassional-Paper-Series-N49.pdf 113 Ibid p. 20
114 Pereira. Blended finance: what it is, how it works and how it is used. Oxfam 2017 p. 14 115 Ibid, p. 15
116 Romero, A dangerous blend? The EU’s agenda to ‘blend’ public development finance with private
finance, Eurodad Brussels 2013
117 Blending private interests with taxpayer’s money: Towards a development-investment nexus? Global Health Advocates France (GHA), November 2019,
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4.2. Modernization of ODA reporting
In 2016, the OECD DAC agreed to a set of revised principles that will for the first time include some official flows to the private sector in donor countries’ reporting of ODA contributions, with the explicit objective of encouraging ‘the use of ODA to mobilize additional private sector resources for development’118. The agenda adopts rules allowing a variety of ‘private sector instruments’, which include a multitude of blended finance
mechanisms to be used as vehicles for aid, so donors can increase the amount of ODA they give to subsidize private finance119. New statistical measures enable the international donor community to monitor resources supporting SDGs ‘above and beyond ODA’ by including private resources that are mobilized through ODA. The renewed reporting measures extend the selection of ODA subsidies to direct investments in companies120. These statistical changes might seem primarily of a technical nature, but its implications will impact the content and character of finance for development. First, an ODA loan to a public sector actor would in many circumstances credit the donor with less ODA than a loan on the same terms to a private sector actor. This potentially creates perverse incentives that reward OECD DAC countries more generously for facilitating private sector development than for other uses of ODA that can have an impact for those ‘furthest behind’121. Accordingly, this incentivizes primarily ‘economic development’ investments rather than investments embedded in a human capabilities approach. Secondly, the modernized reporting system blurs the line between ODA and commercially motivated investments122, which eases the justification of ODA as facilitator of private sector profits. This could result in artificial aid inflation and further complicates the ‘additionality’ requirement123. Thirdly, the ‘modernization’ do not include sufficient safeguards against tied aid, which would lead to the promotion of businesses from the donor countries themselves124. This can impede local economic development as tying creates an unfair competitive position for the subsidized Western companies.
118 OECD, Private Sector Engagement for Sustainable Development: Lessons from the DAC, OECD DAC Paris, 14 Nov 2016. para 16
119 DCD/DAC(2018)47/FINAL
120 OECD, Blended Finance for Sustainable Development: Moving the Agenda Forward, DAC Meeting, 9 March 2017. DCD/DAC/A (2017) para 7
121 Joint Civil society submission to the 2017 High Level Meeting of the OECD Development Assistance Committee. October 2017 https://eurodad.org/files/pdf/59f2f0d2da8de.pdf
122 DCD/DAC(2018)47/FINAL
123 Pereira. Blended finance: what it is, how it works and how it is used. Oxford 2017 p. 13
124 See for example ActionAid, Both ENDS and SOMO. The Dutch Good Growth Fund - Who profits from
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Incentives rising from the modernization of ODA risk diverting ODA from its core mandate: to meet social needs of the poorest, and meet other public services that markets and private finance are unable to provide. This interferes not only with a capabilities approach to development, but also with the fulfillment of donors’ agreed international commitments, especially the 2030 Agenda’s commitment to ‘leave no one behind’. The implications of the modernization of ODA reporting is dubious in particular, since OECD DAC members unanimously expressed that ‘ODA, in particular given its scarcity and mandate, should not subsidize the profits of private sector companies’125. The current direction taken by the OECD DAC and its members contravenes this statement and potentially worsens the credibility and justifiability of the ODA mandate.
4.3. The Cascade approach: towards a Wall Street ‘consensus’?
A further limitation to the compatibility of blended finance mechanisms with a capabilities approach to development appears from contextualizing blended finance in the policy framework that enables it. This will be examined through the ‘Cascade’ approach in the WBG’s ‘Maximizing Finance for Development’ (MFD) agenda126, the decision-making scheme that guides recipient states on financing development projects. Before private capital markets can pour ‘billions of dollars’ into financing for development projects through blended finance mechanisms, developing country governments are required to undertake a series of major economic (privatizing) policy reforms. ‘Binding constraints’ have to be addressed to enable sustainable private sector solutions for development projects, which are essentially all kinds of ‘overregulation’: labor and business, land acquisition, environmental and social laws, and regulations127. Concerns about blended finance are related to these deregulatory reforms and further financial liberalization required of ‘developing’ countries. The degree of financial deregulation further increases the dependency of the national economy on short-term flows from global private capital markets, which undermines the sovereign power of governments and their autonomous control of the domestic economy.
The first ‘step’ in the Cascade prescribes the elimination of regulations and restrictions governing the financial sector to establish securitization markets and ‘shadow
125 OECD, Blended Finance for Sustainable Development: Moving the Agenda Forward, DAC Meeting 9 March 2017, DCD/DAC/A para 27
126 World Bank, Maximizing Finance for Development (MFD), 2019
https://www.worldbank.org/en/about/partners/maximizing-finance-for-development
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banks’128. The financial ‘liberalization’ and deregulation allow for shadow banks to take extreme risks that would never be allowed in the regulated banking system129. This results in enormous risks for the sustainability and availability of development finance, especially during financial crises which are prone to damage the securitization market. Apparently, governments and MDBs are prepared to put the ‘billions’ of public development finance for the mobilization of ‘trillions’ of private investments in jeopardy on the gamble that the global economy will not face another major financial crisis130. This has major implications for the overall public interest and human rights of recipient countries as their fate becomes
inextricably linked to the financial (in)stability of securitization markets131. The second ‘step’ in the Cascade requires developing countries to redirect public resources away from public investments towards ‘de-risking’ to attract private financing through blended finance mechanisms132. However, the approach uses public development financing to prioritize whatever is most profitable for the private sector133. The second ‘step’ fits in the narrative of the move to ‘diversification finance’ in financing development. This contrasts with the traditional approach to development which prioritizes development finance that supports long-term national economic development goals and examines the potential of an investment to reduce poverty and inequality over time134. Countries receiving blended finance are dependent on to the decisions of those well beyond their national economy who are not particularly concerned with the long-term national economic development and financial well-being of distant developing countries135.
The undertaken deregulatory reforms apply to all projects, already, and those yet to be financed. Thus, if the regulatory reform is already undertaken but does not attract a particular investment project, and the project is eventually financed through subsidies, the effect of the former regulatory reforms, like reducing environmental standards, affect all projects that end
128 ‘Securitization markets’ are markets where investors buy and sell securities (e.g. mortgages) they already own as ‘securities position’. ‘Shadow banks’ make profit from the daily changes in securities’ prices with a focus on short-term transactions. For a more elaborate analysis, see: Rowden 2019
129 Ibid, p. 22-27 130 Ibid
131 Ibid, p. 23 132 Ibid, p. 20-21
133 An example is Ghana’s Country Private Sector Diagnostic. The WBG looked at 22 sectors for their
attractiveness to the private sector and concluded that agribusiness, information and communications technology and education were ‘ripe for integration into global value chains linked to multinational corporations’. The diagnostic also concluded that several sectors such as the light industry had ‘too much public support’ to attract the private sector. See Rowden p. 19
134 Ibid, p. 20 135 Ibid, p. 34
