Taking Development into the Shadows

A critical political economy perspective on the G20’s decision to revive shadow banking to close the development funding gap

Thesis Submitted in Partial Fulfillment of the Requirements for the Degree of Master in Political Science (MSc). Name: Oumaima Majiti Student number: S1030990 Supervisor: Dr. A. Wigger University: Radboud University, Nijmegen, The Netherlands Faculty: Nijmegen School of Management Specialization: International Political Economy Date of Submission: 17 August 2020

Abstract This thesis critically analyzes and explains the G20s decision to reframe shadow banking, by means of its support for the MFD agenda. The analysis has an agential, material and ideational dimension to determine the forces pushing for the agenda and to determine the structure facilitating the agency of these forces. Theoretically, this thesis employs a historical materialist framework that draws mainly on French Regulation Theory and the Amsterdam Approach and is premised upon a critical realist philosophy of science. The thesis shows that the financial and productive capital fraction have been the drivers of this agenda. Furthermore, it is shown that the MFD agenda acts as a mode of regulation to stabilize the crisis prone nature of the financialized regime of accumulation. Combined, this indicates a hegemony of the neoliberal ideology.

Key words: Development; Shadow Banking; Financialization; G20; World Bank; Regulation Theory; Amsterdam Approach; Global South.

Cover image: Bretton Woods Project (2017). “Development to the rescue of finance – the Bank’s ‘cascade’ approach”, 3 Juli 2017 https://www.brettonwoodsproject.org/2017/07/development-rescue-finance-banks-cascade- approach/

II

If it looks like a duck, quacks like a duck, and acts like a duck, then it is a duck – or so the

“

saying goes. But what about an institution that looks like a bank and“ acts like a bank?

Often it is not a bank – it is a shadow bank

– Laura Kodres, IMF, June 2013.

III Table of Contents

Abstract ...... II

Table of Contents ...... IV

List of Figures and Tables ...... VI

Abbreviations ...... VII

1. Introduction ...... 8

2. Theoretical Framework ...... 14 2.1 Ontological Reflections ...... 14 2.1.1 Limitations of Rationalism and Constructivism ...... 15 2.1.2 The Critical realist alternative ...... 18 2.2 Theoretical Considerations: Historical Materialism ...... 19 2.2.1 Historical Context: Capitalism ...... 19 2.2.2 Regulation theory ...... 21 2.2.3 The Amsterdam Project ...... 24 2.2.4 Conclusion ...... 28

3. Research Strategy ...... 30 3.1 Epistemology ...... 30 3.1.1 Limitations of the Positivist and Interpretivist ...... 30 3.1.2 Critical Realist Epistemology: Relativism ...... 31 3.1.3 Critical Realist Analysis: Retroduction ...... 32 3.2 Methodology and Data ...... 32 3.3 Operationalization ...... 34

4. Empirical Analysis ...... 38 4.1 Explanandum: emergence of MFD and reframing of shadow banking ...... 38 4.1.1 The Maximizing Finance for Development agenda ...... 38 4.1.2 The reframing of shadow banking ...... 40 4.1.1 From Addis Abeba to Hamburg ...... 41 4.1.3 Criticism of the MFD agenda ...... 43 4.1.4 The decision-making arena: G20 ...... 43 4.2 Historic Bloc: Facilitating the MFD agenda ...... 44 4.2.1 Tightening bond between financial capital and the G20 ...... 44 4.2.2 Relationship between the class fractions ...... 45 4.2.3 Discourse Analysis: class fractions ...... 46 4.2.4 Discourse analysis: forces of resistance ...... 49 4.2.5 Summary and key findings ...... 50 4.2.6 Strategic selectivity of the state ...... 51 4.3 Material structures: Global North and South accumulation regimes ...... 53 4.3.1 Preceding regime of accumulation: Fordism ...... 53 4.3.2 Contemporary regime of accumulation: Financialization ...... 54 4.4 Adopting MFD: Neoliberal hegemony ...... 59

5. Conclusion ...... 60

IV Bibliography ...... 62

Appendix A: List of Global North and South Countries ...... 82

V List of Figures and Tables

Figure 1: Visualization of the theoretical framework ...... 29 Figure 2: The Cascade Framework ...... 39 Figure 3: Increase of the shadow banking system ...... 41 Figure 4: Gross capital formation (% of GDP.………………………………………………………...47 Figure 5: Market capitalization of listed domestic companies (% of GDP)...... 48 Figure 6: Total reserves (includes gold, current US$)...... 49 Figure 7: Foreign direct investment, net inflows and outflows (% of GDP)...... 50 Figure 8: External balance on goods and services ( % of GDP)...... 51

VI Abbreviations

B20 Business 20 C20 Civil 20 CMU Capital Markets Union EC European Commission FSB Financial Stability Board G20 Group of 20 GNI Gross National Income ICC International Chamber of Commerce IMF International Monetary Fund L20 Labout 20 MDB Multilateral Development Banks MFD Maximizing Finance for Development NGO Non-Governmental Organization ODA Official Development Aid SDGs Sustainable Development Goals UN United Nations WBG World Bank Group

VII

1. Introduction

“ [T]his crisis was caused by the rapid growth of the so-called shadow“ banking system over the past few decades and its remarkable collapse over the past two years – William Dudley, President and CEO of Federal Reserve Bank of New York, November 13 2009 This notion was not unheard of following the 2007-2009 financial crisis. It had become commonplace that the shadow banking system played a major role in the financial crisis, that was driven by rising global financial imbalances and accommodative monetary policy and inadequate supervision and regulation (Gabor 2018; SOMO 2014; Merrouche and Nier 2010). Shadow banking had intensified the credit boom leading up to the crisis, amplified the bust and complicated the recovery efforts (Tucker 2010). The shadow banking system refers to a network of non-depository financial institutions, such as asset managers and private equity and hedge funds, that provide credit intermediation, at least partly, outside of the traditional banking system (Tucker 2010; BlackRock 2018). The term was coined in 2007 by Paul McCulley, a senior partner at one of the world’s leading asset managers (PIMCO). McCully warned for the systemic risk and fragility of the ‘unregulated shadow banks that fund themselves with un-insured [short-term funding], which may or may not be backstopped by liquidity lines for real banks’ (2007: 2). He also stressed that the latter made shadow banks notably vulnerable for runs (ibid).

There are three crucial differences between shadow and traditional banks: shadow banks do not have traditional depositors, do not have to abide by traditional banking regulation and in in case of emergencies have no access to public sector guarantees in the form of insurance or federal/central bank liquidity, they reside in the ‘shadows’ (Kodres 2013; Poszar et al. 2010; Poszar and Singh 2011). Shadow banking being outside of the scope of supervision enabled the indefinite repackaging and trading of debt leading up to the financial crisis (Kabelik 2012; Plender 2018). This hindered adequate risk calculation, which in turn, resulted in a vast amount of credit being falsely priced as safe (ibid.). The opacity and misconception of the financial sector’s underlying leverage that this contributed to, was thus grounded in inadequate regulation and supervision of the financial sector and identified as one of the root causes of the financial crisis (Hannoun 2008; G20 2008; Merrouche and Nier 2010). Because of its role in the crisis, shadow banking took a prominent role in the financial reforms plan announced during the 2009 Group of 20 (G20) summit in London (G20 2009a: 3). This included the establishment of the Financial Stability Board (FSB) to strengthen the regulation and oversight of the shadow banking sector (G20 2009a: 3; FSB 2011).

One would expect that the call for strengthened regulation of shadow banking and the negative perception surrounding the issue would lead to a decrease of the shadow banking industry.

Paradoxically, shadow banking is bigger than ever. At its peak before the crisis, the shadow banking systems’ share of total financial assets was 27% in 2007 (FSB 2012: 3). After a slight decrease following the crisis, the shadow banking’s share of financial assets has grown to 48,5% in 2018 (FSB 2020a: 11). The underlying reason for this paradoxical trend lies, amongst other things, in regulatory arbitrage (Rixen 2013). This refers to reforms on traditional banking system, thereby encouraging a shift towards unregulated credit activities ‘in the shadows’ (Monaghan 2014; Irani et al. 2018). Not only has shadow banking expanded further, the perception of shadow banking activities has reversed completely more than a decade after the crisis. Under a new brand, ‘marked based finance’ (BlackRock 2018), shadow banking went from perceived as a root cause of the global financial crisis, to being portrayed as a solution to financial issues. At first instance, this trend is rapidly gaining traction in the case of the European Commission, which seeks to ‘unlock’ investment within the European Union with its Capital Markets Union (CMU) (Braun et al. 2018; EC 2015). According to the Commission ‘shadow banking performs important functions in the financial system as it creates additional sources of funding and offers investors alternatives to bank deposits’ (EC 2012).

In a similar fashion, this trend of reversing perceptions towards shadow banking is happening in the case of global development (Gabor et al. 2008). In 2030, the United Nation’ SDGs have to be met, but there is an estimated annual $2.5 trillion funding gap (Burgess 2018). In response, the World Bank Group (WBG), International Monetary Fund (IMF) and several regional development banks introduced a new strategy in 2015, ‘From Billions to Trillions: Transforming Development Finance’, aimed o ‘unlock’ the needed capital from the private sector (Edwards 2019; WBG 2015). Two years later, the World Bank intensified the ambition set out in the ‘From Billions to Trillions’ agenda and presented the ‘Maximizing Finance for Development’ (MFD) agenda (2017). Central herein lies the so-called Cascade approach, guiding the World Bank’s advice to client countries on whether the solution for or financing of a project should be sought in the private or public sector (WBG 2017a: 1). In principle, mobilizing the private sector is the first choice, the World Bank will only resort to public resources when reforms and risk-mitigation are insufficient to make the project viable for private sector funding (ibid.; WBG 2017b: 6; Kim 2017).

Whereas in the case of the Capital Markets Union, the use of shadow banking is explicitly acknowledged, it is not in the case of the MFD agenda. Implicitly, the MFD agenda promotes shadow banking in the following ways. Firstly, to mobilize finance from a wider range of investors the MFD agenda establishes securitization, which in turn constitutes a fundamental financial engineering method encouraging shadow banking practice (WBG 2017b: 5; WBG 2015; G20 EPG 2018: 39). Indeed, the main lesson of the recent global financial crisis is that securitization constitutes a risk-enhancing method decreasing the level of financial stability in an economy (Critical Macro Finance 2018; Financial Times 2018). Secondly, to attract institutional investors, it is spelled out that developing countries’ financial

9 systems will be transformed to create liquidity in their local securities market (ibid.). This requires the involvement the two shadow markets: derivatives and repo markets, ‘the same shadow markets that turned the fall of Lehman Brothers in 2008 into a global systemic crisis’ (Financial Times 2018). Furthermore, encouraging developing countries to join the securities market and re-engineer their financial system ‘exposes them to the rhythms of the global financial cycle over which they have little control’ (Critical Macro Finance 2018).

The MFD agenda, with its focus on mobilizing private capital for development, is an expansion of the objectives and principles set at the 2017 G20 Hamburg summit (WBG 2017a). During this summit, the G20 adopted a set of principles that justified and reinforced the role of the World Bank and other multilateral development banks (MDBs) in catalyzing private sector investments in development (G20 2017a: 7; G20 2017b: 3; WBG 2018: 2). Furthermore, a target was set to increase the mobilization of private sector financing by 25-35% over the next three years (WBG 2017a: 1). It is not uncommon for the World Bank and G20 to have a similar or identical stance on an issue, due to the fact that the G20 member countries hold a vast majority in share of votes of the World Bank, IMF and the other MDBs (Alexander 2017; Rowden 2019: 14). Moreover, the World Bank and G20 have been closely cooperating for years in the field of private financing for development. Financing infrastructure has been a key G20 focus since the Seoul Summit in 2010 (G20 2010). Ever since then the G20 has been MDBs to scale up their public-private partnerships efforts in developing countries (Alexander 2017). In 2014 the G20 intensified its efforts by focusing ways to break down the barriers for long-term private sector investments, by promoting infrastructure as an asset class through the OECD and World Bank and by urging Multilateral Development Banks to ‘crowd in’ the private sector (ibid.; Caliari 2015; Griffiths 2015). Interestingly, this came in the midst of infrastructure financing moving from the G20s Development to its ‘exclusive’ Financing track (Alexander 2017; Aizawa 2016).

The G20 support for the MFD agenda, which promotes shadow banking, is surprisingly considering that the same authority identified shadow banking as one of the main causes of the last financial crisis. This thesis seeks to explain this change, hence to answer the following research question:

Why did the G20 reframe shadow banking from the root cause of the 2007-2008 financial crisis to being the solution for the development funding gap by means of the Maximizing Finance for Development Agenda?

Much has been written about shadow banking in relation to the CMU. Engelen (2018) for example, traced the reframing of shadow banking from cause of the financial crisis to its solution, from the establishment of the FSB onwards. Fernandez and Wigger explain the rise of shadow banking against the background of capitalism’s structural problem of overaccumulation (2016; 2020). Braun, Gabor and

10 Hübner (2018) lastly, illustrate how shadow banking is part of the ‘governing through financial markets’ strategy. By contrast, the MFD agenda has not drawn such close attention. Little is known about the political struggles that lie at the heart of the G20s reframing shadow banking from root cause of the 2007-2008 financial crisis to a solution for the development funding gap. A notable exception is Daniela Gabor, who published an open letter on October 10th 2018 expressing concern about the promotion of shadow banking in international development by the World Bank, that to date has been signed by over 110 scholars (Critical Macro Finance 2018). That being said, a fully-fledged analysis of the G20s reframing shadow banking from root cause of the 2007-2008 financial crisis to the solution for the development funding gap is still missing. This thesis seeks to fill this gap and explain the reframing of shadow banking by analyzing the political struggles that have informed the G20’s promotion of the Maximizing Finance for Development agenda.

To understand the reframing of shadow banking in light of the MFD agenda, it has to be placed within the broader discussion on the financing for development strategy. This strategy is based on the mainstream economics approach which has been criticized by a range of scholars (Mawdsley 2018a; Brooks 2016; Van Waeyenberge and Bayliss 2018; Jafri 2019; Lee 2017). Mainstream economics sees the development funding gap as a financial issue, a mismatch between demand and supply that can be remedied by mobilizing private sector capital for development initiatives (Jafri 2019; Hudson 2015; UN 2002). The heterodox critiques from political economy scholars to this approach are reflected in the emergent literature about what Jafri (2019) calls the ‘encroachment of the financial sector into development’. Within this literature, the explanation for the ‘radical shift in development finance’ or ‘acceleration and deepening of the financial-development nexus’ (Mawdsley 2018a; 2018b), is usually sought in ‘a search for yield from global institutional investors’ (Jafri 2019; Black and O’Bright 2016; Van Waeyenberge and Bayliss 2018; Rowden 2019). It is argued that the new financing for development agenda provides the financial sector with investment opportunities in new markets after the overaccumulation of international capital of the past decades (Mawdsley 2018a).

However, in the literature looking at the resurgence of private sector involvement in development initiatives, shadow banking as a concept is not being discussed (Black and O’Bright 2016; Van Waeyenberge and Bayliss 2018; Mawdsley 2018a; 2018b;). These studies focus on the private sector in general or on specific forms of private sector involvement strategies such as public-private partnerships (PPPs) and blended finance (ibid.). An exception to this is Jafri (2019) who did a case study into Pakistan and argued that impact investing is a way to promote shadow banking. Other explanations given for the recent push of private sector involvement in development initiatives are tightened bank regulation, regulatory arbitrage, neo-liberal policy frameworks and a geopolitical competition between Western- led MDBs and those led by BRIC countries – especially China – over resources and markets in emerging and developing countries (Van Waeyenberge and Bayliss 2018; Jafri 2019; Rowden 2019; Black and

11 O’Bright 2016). Whilst this literature provides macro-level explanations for the resurgence of private sector involvement in international development, the transformation on institutional level is not discussed.

What is even more problematic, is that the aforementioned literature (Fernandez and Wigger 2016; 2020 is an exception) does not incorporate the underlying capitalist mode of development and its subsequent effects on development financing. This thesis, in contrast, does incorporate the historical contingent foundation as well as the inherent societal structures related to capitalism. These structures are incorporated because they affect the course of development funding as well as the G20s perceptions on it. In this regard, this thesis argues that a comprehensive explanation of the G20s reversed perception towards shadow banking needs to be situated against the backdrop of the current capitalist developments. Thereby, it will provide a better understanding of the transformation the G20 has made. Several authors have linked the rise of shadow banking to overaccumulation (e.g. Fernandez and Wigger 2016; 2020). Where this thesis distinguishes itself from these works, is in incorporating agency and thus not merely looking at structure. Whilst this expresses the scientific relevance of this thesis, the societal relevance should be sought in the potential risks of the G20’s promotion shadow banking in international development brings. As discussed before, developing countries are being exposed to the global financial cycle and thus also to its shocks. This is especially concerning now, as we are in the midst of the COVID- 19 pandemic and global economic growth not having been this low since the 2007-2008 crisis (BWP 2020a; UN 2020: 3). Herein lies the societal relevance of this thesis

To account for the fallacy of the abovementioned researches, this thesis has a historical materialist theoretical framework that draws on various historical materialist sub theories, most notably, French Regulation School and the Amsterdam Project. Using concepts from the latter, this thesis will seek to identify the class fractions pushing and forces of resistance opposing for the MFD agenda, and thus reframing of shadow banking. Regulation theory will then be used to research the structure that either facilitates or constrains the agency of fractions at the level of the state, in this case G20. Regulation theorists argue that modes of regulation, in this case the MFD agenda, stabilize crisis-prone regimes of accumulation. Combined, the two approaches give insight into the hegemonic neo-liberal hegemony that informs state policy. To this end, against the background of the capitalist mode of production, the G20’s reframing of shadow banking by means of the MFD agenda, will be explained by looking at the structural, agential and ideational dimension.

Empirically, this thesis draws on two methods and a wide range of sources. To determine the interests of the agents pushing for or opposing the MFD agenda, a critical discourse analysis is used. For this purpose, a range of qualitative sources such as speeches, reports and policy briefs. An explanatory narrative combing qualitative and quantitative sources is used to trace the move towards the current

12 financialized, or debt-led, accumulation regime. The quantitative sources used are derived from the World Bank.

Ultimately, this thesis is structured as follows. In the next chapter, the ontological foundations and theoretical framework of this thesis are discussed. The critical realist ontology on which this thesis is premised is a presented as an alternative to the rationalist and constructivist paradigms. Following this, the historical materialist approach employed is introduced, which mainly draws from French Regulation theory and the Amsterdam Project. In the chapter thereafter, the research strategy is discussed. More specifically, the critical realist epistemology and method of analysis, subsequently relativism and retroduction are introduced. Thereafter, the methods and data are discussed and lastly the theoretical frameworks’ key concepts are operationalized. Chapter four, contains the analysis. Before the agential, structural and ideational dimensions are analyzed, the explanandum and G20 are further discussed. This thesis will conclude with chapter five. Herein the research question is answered, results are summarized, and the research’s shortcomings and avenues for further research are discussed.

13 2. Theoretical Framework In this chapter, the theoretical framework will be introduced that will be used to explain the G20’s promotion of shadow banking by means of the MFD agenda. This thesis has a historical materialist framework that draws insights from mainly the French Regulation school and Amsterdam Project. However, before the theoretical framework can be discussed, its philosophical foundations need to be discussed because all research approaches, albeit indirectly, express a philosophical position. Thus, understanding the (implicit) fundamental assumptions that the philosophy of science brings along, is necessary to adequately assess the finding of the research (Buch-Hansen 2008: 21). The philosophy of science concerns itself with issues of ontology and epistemology. This chapter discusses ontological issues, epistemology will be addressed in the following one. As Colin Wight (2007: 385) stated, ‘any discourse on epistemology or methodology is bound to be more or less arbitrary without a prior specification of an object of inquiry’. Ontology focuses on ‘what is’; e.g. is there an objective reality (realism), or is reality subjective and constructed by human experiences (idealism) (Oakeshott 1966: 5; Jackson and Sørensen 2016: 243; Halperin and Heath 2012: 26). This chapter will start out by discussing the rationalist and constructivist paradigms, however to fully comprehend and guide this discussion the agency-structure and material-ideational debates will be introduced first.

2.1 Ontological Reflections The agency-structure and material-ideational debates One of the fundamental debates in the philosophy of social sciences concerns the agency-structure problem, as all social scientific theories (implicitly) have a perspective on this manner (Wight 2002: 24; Wendt 1987: 327). This problem concerns the importance of and relationship between the ability of agents to act (agency) and the structural context in which they operate (structure) (Wight 2002: 24; Hay 2002: 94). Traditionally, approaches often give primacy to either agency (individualism) or structure (structuralism) (Wendt 1987: 337; O’Neill et al. 2004: 151). Gaining in popularity has been viewing agents and structures as equally important in the explanation of social behavior (Hollis and Smith 1991: 396) Moreover, agency and structure influence each other (Wendt 1987: 350). Therefore, an ontology that not only equalizes agency and structure as well as conceptualizes their relationship is preferred. Ontologically intertwined with the agency-structure debate, is that of the material and ideational (Hay 2001: 2). Similar to the agency-structure debate, approaches can give primacy to either ideational factors such as ideas, norms and values (idealism) or material factors, non-ideational factors existing independent from actors (materialism) in explaining social phenomena, and in doing so reducing one to the other (idem: 205; Parsons 2002: 48; Wendt 1999: 24). However, far more common is approaches incorporating both aspects of social reality (Sørensen 1998: 91). The material and ideational aspects of social reality should be viewed as ‘complexly interwoven and mutually interdependent’ (Hay 2001: 7).

14 Therefore, an ontological approach is sought that acknowledges the importance of both ideational and material aspects of social reality and their interconnectedness.

2.1.1 Limitations of Rationalism and Constructivism The rationalist paradigm One of the most influential ontological debates in International Relations has been the ‘neo-neo debate’ between neo-realism and-neoliberalism (Grasa and Costa 2007; Powell 1994). Institutional liberalists, one of the most influential strands of neo-liberalism, argue that in the face of collective action problems, states with a great interdependence will set up international institutions to deal with them (Jackson and Sørensen 2016: 45). The ‘inter-paradigm’ debate came to an end during the 1980s when most neoliberals accepted the neorealist starting point of analysis: the international system is an anarchy in which the principal actors are states that each have their own ‘interest’ (Baldwin 1993; Jackson and Sørensen 2016: 47). The (partial) merge of neorealism and neoliberalism facilitated the emergence of a rationalist paradigm in the 1990s (Wæver 1996: 163). Rationalism finds it foundation in rational choice theory (RCT), the neoclassical economics’ model for individual behavior. RCT is based on ‘methodological individualism’: it is believed that everything in the social world can be explained by the properties and/or interactions of individual (Jackson and Sørensen 2016: 312; Elster 1989: 13; Wendt 1999: 26). Furthermore, all actors are assumed to be rational, self-interested, goal-oriented and utility maximizing (Jackson and Sørensen 2016: 312; Tierney and Weaver 2005: 8). When actors behave in such a way, the best possible outcome will be achieved through cost-benefit analysis (Jackson and Sørensen 2016: 312; Scott 2000). Actors are able to make informed decisions and their preferences are exogenously given, thus predetermined by the structures (Keohane 1984: 67; Smith 2004: 502; Sterling-Folker 2000: 103-104; Wendt: 1992: 391-392; Katzenstein et al. 1998: 662). Hence, actors’ behavior can be predicted (Jackson and Sørensen 2016312; Cooley 2009: 53).

The rationalist paradigm has many weaknesses. Firstly, rationalism has a structural bias regarding actor’s preferences and actions. It is assumed that all actors in the same context make the same (rational) choice, thus their behavior is fully determined and explained by the structure (Hindess, 1984: 270). Since structure determines the actions of actors, actors cannot change the structure. Therefore, this ‘structural’ explanation for the behavior of actors cannot explain shifts in structure and social change (O’Neill et al. 2004: 154). This makes the rationalist paradigm particularly unfit for this thesis: it is sought to explain changes in structure, G20 policy. Secondly, the rationalist approach is reductionist, reducing structure to the predetermined and fixed properties of actors (usually states) and their interaction (Wendt 1987: 339; Smith 2004: 502). Additionally, rationalist approaches overlook the role of ideas in their analysis. How preferences are formed is not discussed, only that preferences are exogenously given and how they causally affect the behavior of actors (Smith 2004: 502; O’Neill et al, 2004: 154, 159; Bieler and Morton 2008: 103-104). Although some scholars included ideas in their

15 research (e.g. Adler and Haas 1992; Goldstein and Keohane 1993; Haas 1992; Weingast 1995), they did not look at the nature of ideas. Instead, they focus only on their causal effect on the social world (outcome) (Bieler and Morton 2008: 103-104; Laffey and Weldes 1997: 199-201). Ideas are viewed as functional tools used by policy-makers to manipulate audiences or justify their interests (ibid.; Blyth 2002: 308-309). The interests of actors and ideas are seen as distinct objects influencing the subject, instead of ideas shaping interests (ibid.) Because of this, approaches based in rationalism cannot explain how ideas shape interests and why certain ideas prevail (Woods 1995: 161). The approach largely focuses on states and the structure, however the influence of other types of actors, such as non-state actors, and their interests has been demonstrated over the years (O’Neill et al. 2004: 155). To provide a comprehensive account of the explanandum at heart of this enquiry, it is necessary to incorporate an equal notion of agency. Therefore, this thesis does not take into account theories under the rationalist paradigm.

The Constructivist paradigm In response to the rationalist paradigm, reflectivist approaches gained traction, critiquing both the rationalist assumptions as well as which issues should have the focus in the study of IR (Smith 1996; Jackson and Sørensen 2016: 230). Reflectivists rejected the rationalist view of the existence of an objective reality (Kurki and Wight 2006: 22-25). Instead, reality is viewed as subjective and constructed through human experiences, ‘only ideas matter and can be studied’ (Jackson and Sørensen 2016: 243; Adler 1997: 321). Social constructivism, or simply constructivism, emerged in the 1980s as the middle ground between the rationalist and reflectivist positions (Adler 1997: 319; Jackson and Sørensen 2016: 206). Constructivism is less of a homogenous paradigm than rationalism, with scholars taking a position on the rationalist – reflectivist spectrum (Buch-Hansen 2008: 33). Therefore, this section will focus on some common features of constructivism. Firstly, constructivism is a social not political theory, it has neither a realist nor liberalist ideological conviction, but only challenges their ontological (and epistemological) foundations (Adler 1997: 323). The existence of a material world is accepted, but it is argued that it is constructed through human action and interaction and vice versa (idem: 322). Furthermore, in contrast to the rationalist paradigm, actor’s preferences and interests are not predetermined, but shaped through interaction, and thus formed endogenously (Abdelal 2009: 71; Ruggie 1998: 863). It is believed that ideas or ‘the identities, interests and behavior of political agents are socially constructed by collective meanings, interpretations and assumptions about the world’ (Adler 1997: 324). Thus, if the assumptions about the world differ, so do ideas and the identities, interest and behavior of actors. This explains why in an international anarchy some states behave as liberalists predict (cooperating states) and others as realists predict (conflicting states) (Cox and Campanaro 2016: 129). If structures fully determined the interest and behavior of states, all states would behave the same, but they do not. Their differing interests and behavior are socially constructed by the way each actor ‘perceives themselves and those around them’, or more generally, by their perceptions of the world

16 (idem: 130). This is summed up in Alexander Wendt’s (1992) statement ‘anarchy is what states make of it’.

One of the main weaknesses of constructivism is that despite acknowledging the importance of ideational and material aspects of social reality, it gives primacy to the former (Buch-Hansen 2011: 36). This is illustrated by Adler stating that the effect of the material on the ideational ‘depends on (...) [agents’] interpretations of the material world’ (1997: 322). In many mainstream approaches, ideas are seen as independent variables, disembodied from the material aspects of social reality (Bieler and Morton 2008: 109). Whilst constructivists can explain how the ideas and preferences of actors change, they cannot explain why certain sets of ideas prevail and become part of the structure, which agents shape the world’s core ideas and whose ideas the state embody the state (ibid.). This indicates that constructivists have undertheorized power and agency (idem: 104, 109). The relationship between power and ideas is usually theorized as power shaping ideas, powerholders using ideas to shape discourses, establish control (for example state) and ultimately influence the behavior of subjects (Bell 2012: 662). The under theorization of agency is the next point of criticism: constructivism is a ‘structure centered approach’ (Checkel 1998: 342). This is surprising since constructivists are responsible for putting the agency-structure debate on the map and arguing that structure and agency are ‘mutually constitutive’ (Wendt 1987: 350). Wendt has gone as far as take over the rationalist view that states are the principal actors in the international system (1992: 424; 1999: 39, 43). Some constructivists have attempted to overcoming this shortcoming with Anthony Giddens’ (1979) structuration theory, but this has been heavily criticized (see e.g. Stones 2005 and Archer 1995). Other scholars have gone further in their conceptualization of ideas, highlighting their intersubjectivity (Kratochwil 1988; 1989; Ruggie 1998; Kratochwil and Ruggie 1986).

Overarching critique A last, overarching, critique is that both the rationalist and constructivist paradigms fall victim to having an ahistorical nature, historical and cultural and developments such as capitalism are not theorized (Bieler and Morton 2008: 107; Smith 2004: 502) Because of this and the aforementioned weaknesses, approaches grounded in rationalism and constructivism are unlikely to consider all relevant explanations for social phenomena. Some scholars have proposed or even used a synthesis of rationalism and constructivism (see e.g. Paster 2005; Kratochvil and Tulmets 2010; Fearon and Wendt: 2005; Jupille et al. 2003), but it is deemed very unlikely that these diverging paradigms can form a coherent and non- biased ontology (Buch-Hansen 2008: 39). To overcome these shortcomings, this thesis uses a critical realist position. Critical realism acknowledges historical developments, the ideational and material and structural and agential dimensions and relationships between them in explaining social phenomena. Therefore, this thesis draws on a critical realism philosophy of science.

17 2.1.2 The Critical realist alternative A critical realist philosophy of science consists of a critical realist ontology and a relativist epistemology. This section focusses on the former, the latter will be discussed in section 3.1.2. Critical realism is more of a multidimensional spectrum instead of a clearly defined paradigm; therefore, it is impossible to provide one comprehensive, all-encompassing description (Buch-Hansen and Nielsen 2005: 104). Nevertheless, it is possible to discuss some of critical realism’s core features. The critical realist philosophy of science distinguishes between the intransitive and transitive dimension (Bhaskar 1975: 21-26). Each of these dimensions can change without this being reciprocated (Bhaskar 1986: 52). Ontology concerns the intransitive dimension which refers to the social reality that consist independently of human interaction or knowledge (ibid; Bashkar and Lawson 1998: 16-18. Epistemology concerns the transitive dimension, which refers to the (scientific) knowledge there is about social reality at a specific period in time (ibid). Critical realism has a stratified ontology: a distinction can be made between the real, actual and empirical domains of social reality (Bhaskar and Lawson 1998: 5). The real refers to structures, the actual to the events structures generate and the empirical to the way the events are observed, the ‘experiences’ (ibid.). The real cannot always be directly observed, but its existence can be proven through reference to its outcome (Bhaskar 1975: 14, 56).

Structures preexist agents, they are formed through past agency and constrain or enable current agency (Hay 2002: 124; Buch-Hansen and Wigger 2011: 10). Agents occupy structural positions in society that engender specific practices because of the ‘interests, resources, powers, constraints and predicaments’ that are associated with. This is called the position-practice system (Archer 1998: 201; Bhaskar 1979: 51). However, this does not mean that structure predetermines events or behavior, the events that are observed are never the only possible outcome (Sayer 2000: 12; Jessop 2005: 53). Structures can be either reproduced or transformed (often unintentionally) through the actions of agents (agency) (Bhaskar 1975: 35; Archer et al. 1998: xvi). Thus, the historical context is spatial-temporal dependent and can be used to explain social phenomena but structures cannot predetermine events (Bhaskar 1998: 218-219). With this, critical realism incorporates both agency and structure and conceptualizes their relationship. Agents are often unaware of the structural consequences of their actions because society consists of numerous agents behaving in unpredictable ways and complex and interrelated structures of which they only have partial knowledge (Buch-Hansen and Wigger 2011: 11; Buch-Hansen 2008: 41; Bhaskar 1979: 42-45). Thus, the identity, interests, preferences and strategies of agents depend on not only the position they occupy in the structural context, but also their degree of knowledge and perception of the world (Archer et al. 1998: 201; Jessop 2005: 53; Hay 2002: 209-210). The perception of the world, and thus agents’ identity, preferences etc., is based on various ideational factors which exist independently from actors (Buch-Hansen 2008: 43; Buch-Hansen and Wigger 2011: 11). Thus, both material structures and ideational factors are important in the explanation of social phenomena.

18 From ontology to theory To recapitulate, critical realism accounts for the ahistorical nature of the rationalist and constructivists paradigms with its discussion of historical context. Additionally, in the explanation of social phenomena agential, structural materialist and ideational factors are incorporated in critical realist research. The next step is to present a theory that informs us which agential, structural materialist and ideational factors can be used to explain the G20’s reframing of shadow banking to close the development-finance funding gap. Another implication of the critical realist ontology is that the research should be dialectic: ‘the particular part that we are studying [should be placed] in the context of the broader whole in order to arrive at an improved understanding of both’ (see also Ollman 2003: 14 in Buch-Hansen and Wigger 2011: 11). For this purpose, this thesis employs a historical materialist framework that draws on concepts of the French Regulation school and Amsterdam Project and several other historical materialist concepts. To appropriately situate this thesis in the broader developments of capitalism, the theoretical framework will start with a discussion on capitalism.

2.2 Theoretical Considerations: Historical Materialism 2.2.1 Historical Context: Capitalism Ever since the decay of the feudal system over five centuries ago, capitalism has been the dominant system ordering Western societies (Robinson 2004: 3). As a result, the capitalist logic has a significant influence on the economic sphere and overall nature of societies (Buch-Hansen and Wigger 2011: 12; Jessop 2002: 16). Capitalism is ever evolving and place and time contingent, depending on social struggles and structural changes (Robinson 2004: 3-5; Lipietz 1983: 19; Jessop 1997: 561). Thus, there is no a single, all encompassing, definition for capitalism. However, it can generally be described as an economic system in which a large number of firms intend to make a profit by using privately owned capital, goods and wage-labour to produce and sell goods and services (Bowles and Edwards 1985: 394 in Jessop 2002: 12).

The defining feature of capitalism as an economic system, or mode of production, is the commodification of labour (Robinson 2004: 5). This refers to workers (working class) offering their labour power to produce goods and services (commodities) in exchange for a wage from their employers who own the means of production (capitalist class) and sell these commodities for a profit (Wigger and Buch-Hansen 2011: 12-13; Jessop 2002: 12). A portion of the surplus capital is then reinvested to produce more surplus capital (Harvey 2006: 157-158). Marx (1986) labelled this process of capital expansion the ‘the circuit of capital’ (Robinson 2004: 15). The continued pursuit of capital accumulation is central in capitalism, referring to capital as accumulated wealth that can be utilized to accumulate further wealth (Wallerstein 2000: 147; Buch-Hansen and Wigger 2011: 12).

19 Capital accumulation, and thus capitalism, ultimately rests upon the exploitation of the working class as the wage that is being paid for the work is only a small share of the surplus value and this enables the capitalist class to appropriate enough surplus value to reinvest it (Harvey 1989: 180). Capital accumulation usually transpires in the context of competition (Wigger and Buch-Hansen 2011: 12). This pushes capitalists to innovate the production process both technologically and organizationally (Harvey 1989: 180). Subsequently, this leads successively to an increase of productivity, resulting in a surplus of labor, which decreases wage rates and thus ultimately increases the exploitation of labor (Harvey 2006: 108, 159). The exploitation of labor engenders the class struggles Karl Marx famously discussed (Buch-Hansen 2008: 57; Bevir 2009). Class will be further examined in the section 2.2.3.

Capital accumulation ultimately can only be sustained through a continuous supply of new raw materials, labor, land and markets (Robinson 2004: 3; Harvey 1989: 180). This makes capitalism, contrary to the feudal system and other social systems – by nature expansionary (ibid.). One way of expansion is through deepening the capitalist logic, and thus commodifying more social relations (Harvey 1989: 344). However, at some point markets gets saturated, you cannot expand the capitalist logic any further because the regime of accumulation is so dominant (Harvey 1989: 140). Another way of expansion is expansionary, geographical movement to places where the capitalist logics are less developed (Robinson 2004: 7). This is also called temporal and spatial displacement (Harvey 2016: 70). Trotsky observed a difference, unevenness, in the development rate of societies across spatial and temporal contexts (1977 [1932]); Ashman 2009: 32; D’Costa 2003: 213). He also stated that the less- developed countries ‘were compelled to follow after advanced countries (“the whip of external necessity”), but do not ‘take things in the same order’ (Trotsky 1977[1932] in Dunford and Widong 2017: 12). The different societies do not simply co-exist, they are interconnected, part of a single social system, and therefore, interact and influence each other (Dunford and Widong 2017: 7; Howard and King 1989: 228 in D’Costa 2003: 212). This results in the existence of combinations of the advanced capitalist mode or production and the backward feudal tradition. These combinations enable less-developed countries to ‘make leaps’ in development and thereby skip or combine different stages (Trotsky 1977 [1932]: 27- 28). This makes capitalism not only uneven, but also combined (ibid.).

Marx argued that capitalist modes of production are contradictory and unable to bring about stable growth, making capitalism inherently crisis-prone (Harvey 1989: 180). These crises would manifest itself especially as recurring phases of overaccumulation, in which there is no profitable outlet to reinvest surplus capital in the production realm (ibid.; Harvey 2014: 87; 2010: 45). One of the ways to deal overaccumulation is the geographical expansion discussed before (for more strategies see Harvey 1989: 181-188). Marx argued that capitalism’s crisis prone tendency of overaccumulation and its conflictual class nature make it inherently unstable (Bevir 2009; Waringo 1998: 66; Van der Pijl 2009: 153). Because these tendencies are engendered by the dynamics of capitalism, they can never be solved

20 by capitalism itself (Harvey 1989: 181; Jessop and Sum 2006: 3). A mode of regulation is needed to facilitated the expansion of the accumulation regime. This explains why the last century has shown that capitalist economies can have stable periods despite its inherent contradictions and crisis-prone nature. Regulation theory scholars attempt to explain how capitalism’s inherent contradictions and conflictual nature can be (temporarily) managed through regulation (Becker et al. 2010: 226; Van der Pijl 2009: 153). In the next section regulation theory and its origins will be discussed.

2.2.2 Regulation theory In the context of the crisis of postwar economies, a new paradigm arose in critical political economy in the 1970s in North America and Europe marking the revival of evolutionary and institutional economics (Jessop 2015: 1; Jessop and Sum 2006: 1). Regulation theory, often also referred to as Regulation School or approach, was developed by a group of heterodox economists as a “specific current of Marxist political economy” (Becker et al. 2010: 226; Jessop 2015: 1). This group of academics was dubbed the ‘New French School’, or as it is more commonly known, the Parisian school (Bevir 2009; Van der Pijl 2009: 151). The Parisian school is still the dominant regulation school; however, the approach is not homogenous (Jessop and Sum 2006: 2). Regulation theory is better served if it is seen as a broad and continuing research program in evolutionary, institutional and political economy both inside and outside France (ibid.; Jessop 2015: 1; Jessop 1990: 154). Within French regulation theory, three main branches can be identified: Parisian, Grenoblois and PCF-CME (Jessop 1990: 154). Other regulation approaches are the West German one, the American radicals, the Nordic model group and the Amsterdam Project (ibid.). It is important to mention that there is divergence within these schools, especially the Parisian, and overlap between them (idem: 160). In this thesis the focus will be on this Parisian approach, which is often associated with the likes of Aglietta (1979), Boyer (1986) and Lipietz (1982) (Van der Pijl 2009: 153).

Regulation theory aims to ‘explain the rise and subsequent crises of capitalist modes of development’ (Boyer 1990: 48). Modes of development are comprised of a combination of a regime of accumulation and a mode of regulation, in which the latter (temporarily) stabilizes the former (‘s inherent tensions of capitalism), allowing for a period of capitalist expansion (ibid.; Hein et al. 2014: 2-3). A regime of accumulation can be defined as “a specific pattern of production and consumption that can be reproduced over a long period” (Jessop 2015: 1). Regulation approach was initially developed to explain (the crisis of) ‘Fordism’, the postwar regime of accumulation, characterized by mass production and consumption (ibid.; Jessop and Sum 2006: 23-24). Two successors have been identified as finance-led accumulation and the knowledge-based economy (Jessop 2015: 2). Transitions from one accumulation regime to another are perpetually convulsive, for the novel regime to prospoer many structural changes and adjustments in economic behavior and policy are required (Aglietta and Breton 2001: 434).

21 Becker et al. (2010: 227) developed a typology of three axes of accumulation, a regime of accumulation is characterized by a combination of elements of these axes. The three axes are productive versus financialized accumulation, extensive versus intensive accumulation and introverted versus extraverted accumulation (ibid.). The first axe concerns productive versus financialized accumulation and distinguishes between profits being primarily steered towards the productive or the financial sphere (ibid.). Both types of accumulation co-exist, however one can be more dominant than the other. Nowadays the financial sphere is dominant, there is financialization. Greta Krippner (2005: 174) defined financialization as ‘a pattern of accumulation in which profits accrue primarily through financial channels rather than through trade and commodity production (see Arrighi, 1994)’. Within financialized accumulation the following two forms can be distinguished: accumulation of ‘fictitious capital’ (Marx, 1979: 487, 510), i.e. different types of shares and securities, and accumulation of different types of interest-bearing capital such as credits (Becker et al., 2010: 228; Becker and Jager 2012: 172). Important to note is that capital accumulation in the financial sphere is never completely autonomous from that in the productive sphere, as to some extent financial assets and credits are in fact surplus of productive accumulation (Becker 2002: 75; Husson 2004: 136 in Becker et al. 2010: 227).

The second axis distinguishes between two forms of productive accumulation (Becker and Jager 2012: 172). Historically, both forms of productive accumulation occur simultaneously, however one can be more prominent than the other in some periods (Robinson 2004: 7). Extensive accumulation is characterized by spreading to new markets, either at home or abroad and an increase in productivity through an extension of the working day (Jessop 1990: 156; Aglietta 1982: 60 in Van der Pijl 2009). Intensive accumulation on the other hand, is characterized by encouraging mass consumption and an increase in productivity through mechanizing the production process, which cheapens wage-goods and increases the relative surplus value (ibid.; Becker 2002: 67). The last axis refers to the relationship between the domestic and international markets (Becker 2007: 8). Introverted accumulation focuses on the domestic market, whilst extraverted accumulation has an outward focus on trade and flows of productive capital and money capital (Becker et al. 2010: 227). Within the latter two additional forms can be distinguished: active and extraversion, referring successively to and export and import orientation (Becker and Jager 2012: 172).

A mode of regulation refers to a set of structural forms (institutions, social networks, norms, organizational forms and patterns of conduct) that emerge through class struggle and thus historically contingent (Jessop 2015; Aglietta 1982: 16 in Becker and Jager 2012: 173). The following five structural form dimensions have been identified by Parisian regulation theorists: the wage-labour relation, the enterprise form (including competition), the money relation, forms of the state and position within the international regimes (for more on this see Aglietta 1982; Bieling 2014; Jessop 2015; cf. Boyer 1990: 48). Whilst it is theorized that a mode a regulation (temporarily) stabilizes a regime of accumulation,

22 this does not mean that there is a functional relationship between the two. To the question whether regimes of accumulation pre-exists modes of regulation, “[t]he regulationists’ answer is ‘yes and no’! For they both pre-exist regulation and are constituted in and through it” (Jessop and Sum 2006: 313). Both concepts influence each other in various ways. A mode of regulation can for example influence a regime of accumulation and another mode of regulation in the case of a spatial-temporal fix (either sectoral or geographical). Because this new mode of regulation “involve[s] a major reorganization and restructuring of mediating institutions in order to open up new channels for productive investments” (Harvey 2016: 70).

Shortcomings of the French regulation school The concepts of ‘regime of accumulation’ and ‘mode of regulation’ make regulation theory dynamic and historically dependent, overcoming the fallacies resulting from the ahistorical nature of theories with rationalist and constructivist ontologies. Regulation theory recognizes that modes of regulations can differ, as it depends on the regime of accumulation which differs depending on the spatio-temporal context. Additionally, in contrast to theories with a social constructivist ontology, in regulation theory both the material and ideational dimension have explanatory power. Because on the one hand the mode of regulation emerges out of the material structure, the inherent contradictions of a capitalist mode of accumulation, and on the other hand the ideas greatly influence the mode of regulation since both social networks and norms are part of it. Lastly, in contrast to theories grounded in both rationalist and social constructivist ontologies, regulation theory provides a ‘comprehensive account of capitalism’.

Despite this, some weaknesses of the French regulation theory have to be addressed. Firstly, the approach only looks at national accumulation regimes (Van der Pijl 2004: 182). Given the fact that the research subject of this thesis, the G20, a supranational organization is, an international perspective is inherent. Secondly, the approach has often been accused of functionalism, as it seems to presuppose that a mode or regulation emerges to ensure the continuation of a regime of accumulation (Jessop 1990: 197). Thirdly, and most importantly, the approach has been accused of structuralism, as with focus on the relationship between the economy and the state it fails to theorized state agency (Jessop 1990: 202; Van der Pijl 2004: 182). The emergence and transformation of modes of regulation and relationship between the state and social forces has not been discussed is not theorized, thus ignoring class struggle. To remedy this, theoretical concepts of the Amsterdam Project, a regulation approach that emerged in the 1970s from the International Relations Department of the University of Amsterdam, will be used in the remainder of this theoretical framework (Jessop and Overbeek 2018: 1). To start, we will go back to the discussion of classes.

23 2.2.3 The Amsterdam Project

Classes and Class fractions Previously, it was argued that capitalism is a class society that rests upon the exploitation of labor by the capitalist class, giving rise to class struggle (See Jessop 2002: 15-16 for the forms of class struggle). Despite the significant influence class struggle has on the overall nature of capitalist societies, the politics in them cannot be reduced to a struggle between two classes (Wigger and Buch-Hansen 2011: 18; Jessop 2002: 16). Not all struggles are related to class or class awareness (Marx 1966[1894]: 885; Jessop 2002: 32; Buch-Hansen and Wigger 2011: 18). However, this does not mean that they do not affect the classes, especially when it comes to the interests of the capitalist class (ibid.). Moreover, Marx (1986) himself had noted that society ‘by no means consists only of the class of workers and the class of industrial capitalist[s]’ (quoted in Bottomore et al 1983: 85).

The capitalist ruling class is internally fractured and consists of a wide range of groups with ‘conflicting interests and related structural cleavages’ (Van der Pijl 1989: 10-11; Apeldoorn 2004: 154). Individual capitalists are unified in class or capital fractions around performing similar economic and social functions in the process of capital accumulation, giving rise to common ideological inclinations and interests (Hickel 1975: 151 in Van der Pijl 1989: 11; Overbeek and Van der Pijl 1993: 3). Among the axes along which the fractionalization of capital can take place are ‘industrial versus money capital (Overbeek 1990: 25–7; Overbeek and Van der Pijl 1993: 3–5), (...) monopoly [versus] nonmonopoly capital (e.g. Poulantzas 1975: 144–5), and (...) nationally versus transnationally oriented capital (Overbeek and Van der Pijl 1993: 5–7; Robinson 2004: 49–53)’ (Buch-Hansen and Wigger 2011: 19). Because of the different axes along which capital can fractionalize, struggle does not only exist between classes, but also capital fractions (Buch-Hansen and Wigger 2011:19).

Conflict within the capitalist class is not new, as competition is a prerequisite of a capitalist mode of accumulation (Van Apeldoorn 2004: 154). Both the competition between individual capitalists and struggle between capital fractions ultimately concerns the redistribution of surplus value (Bode 1979: 30). The difference between the two lies in the former taking place within the prevailing capitalist mode of production and the latter concerns changing the mode of production through political action (Bode 1979: 30-32; Overbeek 1990: 25). In other words, the ultimate stakes of the struggle between fractions concerns power over the state, i.e. the nature of state intervention (Bode 1979: 32; Van der Pijl 1998: 50). Thus, the fractionization of capital should not be understood as based on its functional division within the production process, but ‘in terms of its distinctive political orientation’ (Bode 1979: 29).

24 (Transnational) Class formation It is important to distinguish between class structure and agency. In a structural sense a class, or in Marx’ words a ‘class-in-itself’, is comprised of a group of actors with a similar position in the economics structure (Buch-Hansen and Wigger 2011: 19). Class structure turns into class agency through the process of class formation competitive units become a collective social force, a 'class-for-itself’ (ibid.; Van Apeldoorn 2002: 21; Hickel 1975 in Van der Pijl 2004: 183). The individual and competing capitalists may develop consciousness of itself as (members of) a (transnational) class (or class fraction) in confrontation with other social groups and classes, most notably labor (Van Apeldoorn 2004: 154; Van der Pijl 1998: 49). The process of class formation is a political and occurs when the class consciousness is developed and the unified group is able to construct a shared identity enabling them to articulate a general interest (Van Apeldoorn 2004; 155; Van der Pijl 1998: 50).

One of the key contributions of the Amsterdam Project has been the notion that transnational (capitalist) class formation has taken place, induced by the globalization of capitalist accumulation (Van Apeldoorn 2000: 12; 2004: 144). Structurally, transnational class fractions emerge and form when firms transnationalize through the engagement in crossborder transactions, which can lead to the emergence of transnational class agency (Buch-Hansen and Wigger 2011: 19). (Structure prior to agency). Transnational structures of socialization have developed as far back as in the 18th century with the mercantile world economy (See Van der Pijl 1998 for a discussion of this). However, the transnational relation deepened unprecedently following the crisis of corporate liberalism, a capitalist world market was being established in which both production and finance are transnationally organized (Van Apeldoorn 2004: 157- 60; 2002: 55-60). Many large firms opted for geographical expansion to solve any overaccumulation issues (spatial fix) (Harvey 1989: 183). Simultaneously, the relocation across boarder granted a (partial) escape from straining national regulations and leverage in its struggle with labor (Van Apeldoorn 2004: 158). Importantly, ‘classes are not static and the significance of particular fractions changes in a dialectical interplay with the transformation of capitalism’ (Buch-Hansen and Wigger 2011: 19). Whilst this makes the class fraction approach particularly useful for the analysis of such broad changes, it has limitations when it comes to analyzing specific modes of regulation (idem: 20). Because groups can surface that represent the interests of both national and transnational capitals and cut across the functional axes described earlier (Buch-Hansen and Wigger 2011: 20). To account for this Buch-Hansen and Wigger introduced the concept of organized capital to refer to social groups that do not identify with specific capital fractions (2011:20).

Hegemony and Comprehensive Concepts of control For the capitalist class to rule, the general (capitalist) interest it articulates has to justify the exploitation of the labour class as the general interest (Van der Pijl 1998: 50). However, this interest does not reflect the perspective and interest of the capital class as a whole, but of the fraction that has (temporarily)

25 achieved a leading position within the class (Van Apeldoorn 2004: 155 as Van der Pijl 1984, 1998). Because of competition between capitalists, the fractions are in a never-ending struggle for political leadership at the level of the state (Hickel 1975: 151; Van der Pijl 1998: 50). Hence, capitalists are continuously building coalitions, aggregating the interests of different functional and historical fractions (Van der Pijl 1998: 50). Through compromises and the synthesis of ‘fractional’ interests, a framework of thought and practice emerges aiming to be perceived as the legitimate general interest by both the capitalist class and society as a whole (Bode 1979 in Van der Pijl 2004: 184; Van der Pijl 1998: 51). This is what Ries Bode (1979) has coined concepts of control (translation: beheersconceptie). The different (coalitions of) fractions express their view on how the social order, between both capital fractions and classes, should be managed through their concepts of control (Bode 1979: 20). These concepts of control are thus an outcome of and guide the direction and formation of (transnational) class strategy (Van Apeldoorn 2004: 155). To become comprehensive, they need to be effectively turned into state policy (Overbeek and Van der Pijl 1993: 3-4). Thus, the modes of regulation are influenced by the hegemonic concepts of control of that time.

Following Gramsci’s conception, hegemony refers to ‘a relation between social classes, in which one class fraction or class grouping takes a leading role through gaining the active consent of other classes and groups’ (Gill 1990: 42; [emphasis not added]). A prerequisite for maintaining hegemony, is the construction of a historical bloc (Rupert 1993: 80). This refers to an ensemble of economic, political and cultural structures articulating and reproducing the social order of a configuration of class fractions (or political alliance) in specific historically periods (Overbeek 1990: 125; Rupert 1993: 81). Each historic bloc expresses distinctive concepts of control (Leyshon and Thrift 1996: 268). The concepts of control are continuously reshaped and may differ depending on the temporal-spatio context, political conjuncture and party profiles, geo-political position and historical factors (Overbeek 2004: 132). However, the variations of the concept are not unlimited. This is due to what Cox coined historical structures, which are constantly changing and ‘result from the underlying exigencies of capital accumulation and the historical evolution of the class struggle’ (ibid.). The concepts of control express ta hegemonic ideology. In the case of neoliberalism, a market-oriented type of regulation and notion of global rule of capital are dictated (Idem: 132-133; Buch-Hansen and Wigger 2011: 17)

Shortcomings of the Amsterdam Project A main critique is that the Amsterdam Project puts too much emphasis on elite orientations and a substantive group of scholars hence argue that such an analysis also needs to incorporate forces of resistance (Bieler and Morton, 2018; Bohle, 2018; Horn and Wigger, 2018). Furthermore, to denote groups within the decision-making are that are neither capital fractions nor resistance groups that are located outside or the arena, this thesis follows Buch-Hansen and Wigger (2011) in the use of the

26 organised prefix. Thus for example a labour fraction at the decision-naking arena will be denoted organized labour.

The state and supranational organizations In discussing G20 policy, the role played by group, its member states and other state-like organizations also have to be theorized. “[W]hilst we all tend to think we know what we’re talking about when we refer to the state, it is a notoriously difficult concept to define” (Hay et al 2006: 1, see this paper for an overview). The capitalist state performs an abundance of tasks (see Jessop 2002: 45), resulting in its institutions ‘relating in numerous ways to a particular field of regulation’ (Buch-Hansen and Wigger 2001: 24). The state being not a fixed object but space and time dependent, makes it impossible to formulate a general definition for all states and state-like organizations (Hay 1996: 9). The different ‘moments of stateness’, the state as a nation, territory and institution, should be taken into account (ibid.). In this thesis we look at states and state-like organizations as providers of regulation and terrain of political struggle. Here, state and state-like organizations are conceptualized as ‘a relatively unified ensemble of socially embedded, socially regularized, and strategically selective institutions’ (Jessop 2002: 40) ‘that form part of various (sub)units of regulations making up the wider ensemble of regulation’ (Buch-Hansen and Wigger 2011: 24).

Poulantzas (1973) rejected the notion that the state is a ‘monolithic bloc’ or ‘sovereign legal subject’ (Jessop 1999: 48). It is not a single entity, it is ‘the material condensation of [the balance] among classes and class fractions’ (Poulantzsas 1973: 128-129). Reflecting Marx’s (1863) definition of capital, Poulantzas defines the capitalist state as a social relation (1978: 128-129). Similarly having a broad definition of the state, Gramsci incorporated both the political society and civil society in his definition of the integral state’ (1971: 261-263). However, some Neo-Gramscian scholars do not see the state as an agent in itself, and instead reducing it to a structure in which or through which social forces act (Bieler and Morton, 2001b: 18 in Buch-Hansen 2008: 67). An example of this is the Amsterdam Project discussed above. States are seen as arena’s or terrains of struggle between ‘(transnational) class fractions and on the interstate level political struggle is not so much between states but between social forces’ (Van Apeldoorn 2004: 168-169; 2002: 128). The state receives much of its power form civil society and is influenced by its (changing) prevailing social forces, this means that the modes of regulation are largely affected by the power balances in society (Buch-Hansen and Wigger 2011: 25).

However, the state is not simply an instrument reflecting these forces (Poulantzas 1978: 158 in Jessop 1999: 50). The state has a certain degree of ‘operational autonomy’ (Jessop 2000: 330). This independence is needed for the state to perform its tasks (Buch-Hansen and Wigger 2011: 25). Whilst the social forces can provide policy processes with ideational input, they cannot influence the policy making itself. Because of this the state does not always reflect the prevailing balance in society (ibid.).

27 The state possesses strategic selectivity, the social relations within the state are structurally organized, thereby it may privilege some interests, actors, strategies etc. over others and (Jessop 1999: 51; 2002: 40). This structural bias can constrain or enable the actions of certain classes or capital fractions in various ways using its regulatory mechanisms and institutional forms (Jessop 1990: 196; 1999: 58). including the opportunities to guide the course of modes of regulation (Jessop 1988: 38). The current strategic selectivity of the state emerges from the interaction between past strategic selective patterns and the strategies deployed by actors to transform them (Jessop 2007: 37). To recapitulate, the state is not a neutral terrain reflecting the prevailing balance of power between class fractions. Instead, it is a material condensation of the balance between social forces, as it facilitates it through its strategic selectivity (Poulantzas 1978; Jessop 1999: 51).

States and supranational organizations can both establish modes of regulation, but the twocannot be equalized (Ramsey 2006: 27). Many supranational organizations, have been established after the Second World War, resulting in governance being increasingly global or transnational (ibid.; Overbeek 2002: 13). These regulatory structures can be formal or informal and have both an economic or political nature and a wide range of functions (Rupert and Smith 2002: 223; see Pellerin and Overbeek 2001 for an overview of functions). Often, supranational organizations have no formal regulatory power, but still have a high degree of compliance from national states (Overbeek 2002: 13-14). Some have argued that the emergence of the supranational regulatory institutions means the end of the national states, but this is far from true: national states remain a pivotal in the governance and regulation of society (Hudson 2005: 110). Thus, it can be stated that one unit of regulation can be the shared responsibility of institutions at national, regional and international levels (Buch-Hansen and Wigger 2011: 25).

2.2.4 Conclusion This chapter has firstly critiqued the rationalist and constructivist paradigms, subsequently followed with an outline of the critical realist approach to guide the analysis the reframing of shadow banking by the G20 to close the development finance gap. It has been discussed that capitalist regimes of accumulation are inherently unstable and crisis and need a mode of regulation to (temporarily) stabilize it. Depending on several factors, including the spatio-temporal context, modes of regulation can vary in their content, form and scope. Modes of regulation reflect hegemonic concepts of control, which emerge through struggle between (coalitions of) (transnational) class fractions aiming to gain legitimate control over the state, in the eyes of both the rest of the capitalist class and society as a whole. Thus, the capitalist forces in power formulate through which mode of regulation and thus how, the regime of accumulation should be managed. Lastly, it was argued that states and supranational organizations are not merely structures, but ensembles of institutions that have relative autonomy from those social forces. Therefore, the modes of regulation are influenced by the power balances of the social forces in society, but do not merely reflect them. Figure 1 shows a visualization if the theoretical framework.

28

It is expected that this thesis will identify the finance capital fraction as dominant in the current transnational capitalist world. Because of this, concepts of control will be sought that express the hegemony of the neoliberal frame of thought.

Figure 1: Visualization of the theoretical framework

Capitalist mode of development

Structural- Material dimensiondimension

Mode of

Regulation

Ideational dimension

Agential dimension Source: Own visualization.

29 3. Research Strategy In the last chapter a critical realist ontology was presented, showing that agential, structural materialist and ideational factors should be included in the analysis of the explanandum at the heart of this enquiry. The next step is the epistemology which is concerned with ‘what is knowable’, e.g. what knowledge can we obtain about the world (Jackson and Sørensen 2016: 244; Halperin and Heath 2012: 26). This chapter discusses the critical realist epistemology employed in this thesis. First, the positivist and interpretivist epistemological positions are discussed. Then, critical realist ontology will be briefly revisited before the relativist epistemological position will be presented. Thereafter, retroduction, the critical realist method of analysis will be introduced. This chapter will conclude with a discussion of the explanatory narrative and critical discourse analysis research methods used in this study, data selection and operationalization.

3.1 Epistemology 3.1.1 Limitations of the Positivist and Interpretivist As mentioned in the previous chapter, the critical realist philosophy of sciences emerged in the 1980s out of the rationalist/ constructivist ‘paradigm war’ (Denzin and Lincoln 2011 in Fletcher 2017: 181). The rationalist paradigm is grounded in a positivist epistemology, modelling social sciences after the natural ones (Kurki and Wight 2006: 22-25). Here is argued that an objective reality is knowable through scientific methods, which are used to identify law-like regularities (ibid.). The theories that are developed to explain these observed regularities and predict events, are often simplified models of reality (Waltz 1979: 116; Buch-Hansen 2008: 27). Subsequently, from these theories falsifiable hypotheses are derived and empirically tested, to ultimately discard or refine the (deductive) theories (ibid.). The constructivist paradigm builds on an interpretative epistemological tradition (Adler 1997: 321). This tradition rejects the positivist notion that through scientific methods general laws can be discovered to explain an (external) social reality (Jackson and Sørensen 2016: 211). Following the reflectivist, ontological, position that reality is socially constructed, interpretivists focus on understanding social phenomena through the perspective of individuals, interaction among them, and the historical and cultural contexts (Creswell 2009: 8; Scotland 2012: 12). Furthermore, they go beyond the observable, objective behavior in the understanding and explanation of social phenomena, arguing that knowledge of the underlying motivations is needed (Scotland 2012: 12; Wight 2002: 32). Therefore, interpretivism aims to uncover the meanings that inform agents’ behavior and the way they are intersubjectively constructed (Kratochwil 1988: 277; Adler, 1997: 327-328). In this line, interpretivist theory aims to identify ‘mechanisms and processes, whose effect varies across different contexts” (Schweber 2015: 844). Interpretative theory is mostly inductive, data is used to develop, revise and redefine theories (ibid.; Cohen et al. 2007: 22in Scotland 2012: 12).

30 One of the main critiques of both positivist and interpretivist approaches is the reduction of ontology to epistemology. ‘Despite the seeming opposition between the constructivist and positivist perspectives, each reduces reality to human knowledge, whether that knowledge acts as lens or container for reality’ (Fletcher 2017: 182). While positivists reduce reality to what can be empirically known constructivists/ interpretivists reduce reality to a construction of and within human knowledge (ibid.). The ‘epistemic fallacy’, epistemology presuppose a certain ontology occurs often in the philosophy of science (Bhaskar 1998: 27). Social scientists often privilege epistemology over ontology, focusing on how research should be done and ignore questions on what the world is like (Wight 2007: 388). This results in choosing an ontology to fit with the chosen epistemology (Buch-Hansen 2008: 22). In contrast to this, critical realism privileges ontology over epistemology (Bhaskar 1998: 29).

3.1.2 Critical Realist Epistemology: Relativism Critical realism rejects both the positivist and interpretivist methods of knowledge generation. Epistemologically, it adopts a relativist position and judgmental rationalism (Patomäki and Wight 2000: 224). In this way, ‘[c]ritical realism claims to be able to combine and reconcile ontological realism, epistemological relativism and judgmental rationality’ (Archer et al. 1998: xi). An important element of critical realism is the non-reduction of ontology to epistemology (Fletcher 2017: 182). Although the social world is a pre-interpreted reality encompassing social forms that proceed intentional acts, the social world cannot be reduced to people’s ideas about the social world and can be scientifically studied (Jessop 2005:42). Social forms have causal efficacy, but human agency is needed to actualize it. Critical realism distinguishes between the intransitive and transitive dimension (Bhaskar 1975: 21-26). Each of these dimensions can change without this being reciprocated (Bhaskar 1986: 52). The intransitive dimension (the real) refers to the social reality that consist independently of human interaction or knowledge (Bhaskar 1986: 52; Bashkar and Lawson 1998: 16-18). The transitive dimension (the empirical) refers to the (scientific) knowledge there is about social reality at a specific period in time (ibid.). Knowledge (transitive) of the real, the structures, emerges through a continuing process of transformation of pre-existing knowledge such as models, paradigms, evidential statements, theories and hypotheses about intransitive objects (Jessop 2005: 43; Patomäki and Wight 2000: 224). This means that knowledge is a social product. It is produced using pre-existing knowledge, but based on the interaction with the intransitive object (Patomäki and Wight 2000: 224). This aligns with the notion that real phenomena are never directly reflected in the empirical (Jessop 2005: 43). Since knowledge is a social product, different theories can interpret the same reality can be interpreted in widely different ways (Patomäki and Wight 2000: 224). Therefore, critical realists consider all explanations of real phenomena as contingent and fallible, adopting an epistemological relativist position (Fletcher 2017: 188; Jessop 2005: 43). However, epistemologic relativism does not necessitate judgmental relativism, meaning that different judgements are equally good (Jessop 2005: 43). Knowledge is not arbitrary because social reality exists independently from human interaction

31 (Patomäki and Wight 2000: 224). Therefore, epistemological relativism is presupposed by judgemental rationalism, referring to the view that there are justifiable reasons to prefer certain knowledge or theories as they can provide a better account of reality than others (Danermark et al. 2002: 10 in Fletcher 2017: 182; Hartwig 2007: 238; Patomäki and Wight 2000: 224).

3.1.3 Critical Realist Analysis: Retroduction Critical Realism aims to explain social phenomena through the identification of the generative mechanisms and structures and their consequences (Fletcher 2017: 183). For this purpose, critical realism uses retroduction instead of empirical induction or logical deduction (Jessop 2005: 43; Fleetwood 2014: 210). ‘Retroduction involves asking what the real world must be like for a specific explanandum to be actualised’ (Jessop 2005: 43). The goal of retroduction, and critical realist analysis as such is to identify which contextual conditions had to be in place to causally result in the observed empirical phenomena (Fletcher 2017: 189).

The critical realist scientific discovery has been described by Bhaskar in a ‘three-phase schema’ (1982: 13). Firstly, explanations must be constructed for the identified phenomenon (ibid.; Jessop 2005: 41). Next, these explanations must be empirically tested to identify the responsible causal or generative mechanism (Bhaskar 1982: 13; Jessop 2005: 41). Lastly, the explanation of the phenomenon, thus the generative mechanism, becomes the new phenomenon that needs to be explained, starting from phase one (Bhaskar 1982: 13). At the same time, the knowledge gained each time might unravel deeper levels of reality which may result in the need to reconsider earlier explanations of the original phenomenon (Patomäki and Wight 2000: 224; Jessop 2005: 41). Thus, critical realist scientific discovery is a continuous process of discovery, understanding and revision (Patomäki and Wight 2000: 224). The scientific method’ does not exist in this process as the cognitive resources and physical tools can also be adapted and refined (ibid; Bhaskar 1989: 12 in Jessop 2005: 41).

3.2 Methodology and Data Following the critical realist strategy, this thesis aims to explain the emergence of the MFD agenda by identifying the generative mechanisms and structures that caused it. Following this, a methodological approach is needed that takes such mechanisms into account. One way of doing so is through methodological and data source triangulation (Downward and Mearman 2007: 82). This refers to combining multiple methods and data forms to make an analysis more comprehensive and valid (Patton 1999; Carter et al. 2014).

32 Methodology In the case of methodology, this thesis uses a critical discourse analysis and explanatory narrative. Drawing on the works of Norman Fairclough, critical discourse analysis here is defined as a ‘discourse analysis which aims to systematically explore often opaque relationships of causality and determination between (a) discursive practices, events and texts, and (b) wider social and cultural structures, relationships and processes; to investigate how such practices, events and texts arise out of and are ideologically shaped by relations of power and struggles over power’ (1993: 135). A discourse refers to the language used in written and spoken communication seen as a social relation (Fairclough 1993: 134). In this framework, Fairclough distinguished between the following three dimensions: text, referring to written or spoken language, discourse practice, referring to the interpretation, production and distribution of texts and lastly, it being a social practice of the discourse (idem: 136). In this thesis the focus is the Fairclough’s textual dimension, as there is no knowledge of the way the way the texts are received or interpreted by the G20 and there is also no social practice of the discourse. The critical discourse analysis will be used to analyze texts, policy briefs, and speeches from the resear influential G20 engagement groups, focusing on their view of private sector funding for development. In doing so, the hegemonic neoliberal discourse that has emerged from the dominant capitalist mode of production is traced.

The second method used in this thesis is the explanatory narrative. An explanatory narrative can describe the events leading up to the occurrence of the event of interest, in the form of a ‘causal chain’, reflecting the causal relation between them (Dray 1954: 25; Ryan 2016: 15). The historical context and structural and agential factors of all parts of the causal chain are taken into account (Dray 1985: 126; Suganami 2008: 335-6). Translating this to this thesis, an explanatory narrative will describe the events leading up to the emergence of the currently dominant debt-led accumulation regime.

Data This thesis uses data triangulation, meaning that different data forms are incorporated. Primary sources such as policy briefs and papers, media articles, speeches, reports and other official documents are used as qualitative sources for the critical discourse analysis to trace the interests of the different groups of agents with regards to the emergence of the MFD agenda. Secondary sources such as academic articles and books are used in the explanatory narrative to provide a historical overview of the political and economic situations in the Global North and South. Lastly, quantitative data is used to analyze the level of globalization and financialization of the regimes of accumulation in both parts of the world. All quantitative data used for this purposed is obtained from the World Bank (2019a-e). Combined with the secondary sources, the quantitative data enables an in-depth explanatory narrative on the emergence of the MFD agenda.

33 3.3 Operationalization The theoretical discussion of the Amsterdam Project, [historical materialism] and Regulation Theory in section ... has provided this thesis with several concepts that can be used to explain the emergence of the MFD agenda. The following concepts are the most relevant for this thesis: ‘class fractions’, ‘forces of resistance’, ‘strategic-selectivity’, ‘accumulation regime’, ‘overaccumulation’, ‘comprehensive concepts of control’ and ‘hegemony. The concepts are presented here in a slightly different order than they were discussed in the theoretical framework. To give primacy to the agents over the structure, the analysis in this thesis will start with the agential dimension. The discourses of the capital and class fractions and forces of resistance when it comes to the emergence of the MFD agenda will be analyzed. The different fractions express their view on how the social order, between both capital fractions and classes, should be managed through their concepts of control (Bode 1979: 20). The material structure will then be discussed to explain the outcome of the political struggle between fractions. The structure, derived from the dominant regimes of accumulation, can either facilitate or constrain the actions of the agents using the strategic selectivity of the state, in this case the G20. The ideational dimension is then discussed last. The concepts of control of the dominant fraction or coalition of fractions becomes comprehensive and expresses the content of the hegemonic ideology. In turn, this informs the mode of regulation that stabilizes the crisis-prone nature of capitalism. Therefore, in this thesis the mode of regulation, the MFD agenda, is researched by analyzing the agential, material and ideational dimensions.

Before the key historical materialist concepts can be used to explain the G20’s promotion of shadow banking by means of the MFD agenda, these concepts need to be concretized and operationalized. For this purpose, specific indicators are introduced in this section to measure the concepts, enabling them to be applied to the G20’s promotion of shadow banking by means of the MFD agenda. However,, before the concepts can be operationalized the temporal and spatial scope of this thesis has to be defined and justified. With regards to the temporal scope, this thesis employs a historical material approach, meaning that the historical context needs to be taken into account. Central in this thesis, is the period spanning from the end of the ‘Golden Age of Capitalism’ in the early 1970s to the emergence of the MFD agenda in 2017. This temporal scope allows for the analysis of the changes in the agential, material and ideational dimension against the background of the ascending and descending accumulation regimes structuring society. To better illustrate the change in dominant accumulation regimes in this period, the Fordist regime of accumulation that dominant from the end of the Second World War until the 1970s (end of Golden age of Capitalism) is briefly introduced in the structural-material part of the analysis. Furthermore, if the data is available, the temporal scope of the empirical analysis of regimes of accumulation will be extended to include 1960 to 1970, to better illustrate the shift between regimes of accumulation.

34 With regards to the geographical focus of this thesis, the world economies are divided in two groups, the Global North and Global South. As the world exists of a multiplude of countries, each with different production relations that in turn constitute different economic structure (Marx 1859). This is the notion of unevenly developed capitalism across spatial and temporal contexts (Ashman 2009: 32; D’Costa 2003: 213; Trotsky 1977 [1932]). This unevenness in development is most noticeable when comparing the countries in the Global North and South. With the former being more developed than the latter. However, the development process in Global South is making strides, as previously this is due to capitalism not only being unevenly developed but also combined (Dunford and Weidong 2017: 7; Howard and King 1989: 228 in D’Costa 2003: 212). This makes it especially interesting to compare the development of the accumulation regimes of the Global North and South. Furthermore, the divide between Global North and South lies implicitly at the basis of the MFD agenda. The MFD agenda attempts to encourage investments from the private sector, which is mostly located in the Global North, to where development funding is most needed, which is the Global South. Moreover, the accumulation regimes in the two parts of the world have to enable this, with that of the Global North being export oriented (active extravert) and that of the South import oriented (passive introvert).

Given the fact that the MFD agenda is development policy, I have chosen to divide the Global North and South based on the development. In this thesis, the Global North exists of North America, Europe and developed parts of Asia and Oceania and the Global South of the rest of the world (see appendix A for the full list). Given the big difference in number of countries that make up the Global North and South, 62 and 155 respectively, an average is made of the values on each variable. The preference for hand-coding this was given over the use of proxies to give an as accurate representation of the two parts of the world. Moreover, with regards to the averages used, simple averages have been preferred over weighted ones. This is done to avoid a minority of countries with much ‘weight’ to create a bias in the results. This does however introduce a potential bias in the case of data gaps having a big effect on the study. To avoid this, the time period may be shortened to a period where the data is sufficient or an average of the years prior and after may be used.

This thesis’ analysis will start with the agential dimension. To determine the agents pushing for the MFD agenda, the discourses of the class fractions and forces of resistance are analyzed. The class fractions under investigation are financial capital, productive capital, organized labour and organized civil society, each represented by a group lobbying at the G20. Firstly, financial capital is represented by Business 20 (B20), one of the eight official and perhaps most visible and influential engagement group at the G20 (Martens 2016: 3; Löschmann and Alexander 2016). The B20 serves ‘the entire G20 business community’, but in this thesis it is seen as representing the financial capital fraction more specifically (B20 2017: 21). Not only is the financial sector one the best represented sectors in the B20, in the taskforce of most interest for this thesis, ‘Financing Growth and Infrastructure’, the financial

35 sector enjoys an overwhelming majority (idem: 22). In 2017 for example, the Chair and 6 out of 7 Co- Chairs of this taskforce came from financial institutions such as BNP Paribas and Deutsche Bank (B20 2017: 22). Since this thesis focuses on financing for development and this is discussed within the taskforce in which financial sector has a big majority, the B20 will be seen as representing the financial capital. Secondly, productive capital is represented by the International Chamber of Commerce (ICC). This group claims being successful in influencing G20 policy, despite not being one of the official G20 engagement groups (Martens 2016: 3). In contrast to the B20, the ICC seeks to represent the interests of ‘companies and business organizations of all sizes and in all regions of the world’ (ICC 6th: 2). The ICC’s work on the G20 is guided by the G20 CEO Advisory Group, consisting of over 30 business leaders and CEOs (ICC 2016a). Thirdly, organized labour is represented by Labour20 (L20). This official G20 engagement group represents ‘workers’ at the G20, uniting G20 and Global trade unions and is ‘convened by the International Trade Union Confederation (ITUC) and Trade Union Advisory Committee (TUAC) to the OECD’ (L20 2020; ITUC n.d.). Lastly, organized civil society is represented by Civil 20 (C20), also an official G20 engagement group. The C20 provides ‘a platform of Civil Society Organizations around the world’ (C20 2020). CONCEPTS OF CONTROL

‘Forces of resistance’ here encompasses much of civil society outside of the G20 and its engagement groups, which acts as resistance towards the MFD agenda and/or further involvement of shadow banking in the international economic system. The influence of these forces of resistance is measured by analyzing the Bretton Woods Project two ad-hoc formed group of NGOs led by ActionAid International and Americans for Financial reform and a group of Academics. Through a thorough document analysis their stance towards the promotion of shadow banking, and subsequently their concepts of control, will be outlined.

The class fractions vying for influence over the state are either constrained or enabled by it. This is called the strategic selectivity. The strategic selectivity of the G20 is determined by looking at access to the state, newly established G20 engagement groups and constrainments by the host country. The strategic selectivity is the material condensation of past struggles, it is thus grounded in the material structure. This structure consists of the accumulation regimes of both the global North and the global South. As they are crucial in answering the research question, they have to be operationalized.

As explained in the theoretical framework, regimes of accumulation can be distinguished on the basis of three axis. For this thesis, only two of them will be used. The axis ‘intensive versus extensive production’ is not used as it focusses on the division of labor on the national level. The two axes that will be used are ‘productive versus financialized accumulation’ and ‘introvert versus extravert accumulation’. The ‘productive versus financialized’ axis will be measured by identifying the size and dominance of the financial sector vis à vis the productive sector. The first indicator for this is ‘Gross

36 Capital Formation (% of GDP)’ (World Bank 2019a). This variable measures the amount of investments made into the real economy. However, a decrease in investments in the real economy does not automatically lead to an increase in investments in the financial sector. Therefore, a second variable ‘Market capitalization of listed domestic companies (% of GDP)’ is used (World Bank 2019b). This indicator measures the size of the two region’s stock markets over time. An increase in stock market value can be seen as part of a growing financialized economy (Becker et al. 2010: 227).

The other axis ‘introvert versus extravert accumulation’ is measured through the use of the indicator ‘Foreign direct investment, net inflows and outflows (% of GDP)’ (World Bank 2019c-d). The indicator measures the in- and outflow of foreign direct investment into the two regions. High amounts of foreign direct investment, both flowing into- or out of the region, can be seen as part of an extravert accumulation regime. Opposite of that is an introvert accumulation regime, which is more dependent on domestic investment levels. An extravert accumulation regime can be either ‘active’ or ‘passive’ depending on the level of capital in- and outflows. A net outflow of capital points to an active extravert accumulation regime while a net inflow of capital characterizes a passive extravert accumulation regime. To identify this phenomenon in the two regions the indicator ‘External balance on goods and services (% of GDP)’ is used (World Bank 2019d). This indicator measures the import- and export of the regions. If a region exports more than it imports it is seen as having an active extravert accumulation regime while if it imports more than it exports it is seen as having a passive extravert regime of accumulation.

As this thesis expects that the MFD agenda emerges as a mode of regulation to stabilize the regime of accumulation to avoid a crisis of overaccumulation, this latter concept also needs to be operationalized. Overaccumulation is measured through the use of the ‘Total Reserves (including Gold, Current US$)’ indicator (World Bank 2019e). This directly indicates whether a region is over-accumulating over time. Overaccumulation is often a direct outcome of a particular regime of accumulation and leads to instability. These instabilities will need to be addressed in order for regimes of accumulation to reproduce.

37 4. Empirical Analysis The overarching goal of this thesis is to explain the G20 reframing of shadow banking by means of the MFD agenda. For this purpose, this chapter outlines the dialectical relationship between the agential, material and ideational dimensions. Before this will be done, the mode of regulation, MFD agenda, explanandum and the G20 will be briefly discussed.

4.1 Explanandum: emergence of MFD and reframing of shadow banking 4.1.1 The Maximizing Finance for Development agenda In September 2017 the World Bank introduced its MFD agenda. This market-based approach became epitomized as the new World Bank’s effort ‘to redefine [its] approach to development finance’ (WBG 2017c). Traditionally, the World Bank has relied on Official Development Aid (ODA) as a source to finance development. ODA refers to ‘government aid designed to promote the economic development and welfare of developing countries’ (OECD 2019). Back in 1969 the United Nations agreed on a 0,7% ODA target, which means 0,7% of the gross national income (GNI) of developed countries should be devoted to ODA. However, the 0,7% ODA target is nowhere near enough to raise the $2.5 trillion USD needed for the SDGs; therefore, the World Banks’ focus has shifted towards private finance (Mawdsley 2018a; Burgess 2018). Investable opportunities have to be created in developing countries to attract the global institutional investors needed to close the trillions dollar funding gap (Gabor 2019: 1). The MFD initiative sets out to leverage the private sector, both as an investor and source of expertise and innovation (WBG 2017c).

The World Bank’s Financing for Development strategy builds on three key papers. Firstly, ‘From Billions to Trillions: Transforming Development Finance’ (April 2015), jointly produced with the IMF and five other Multilateral Development Banks. Herein the ambition is set out to use ‘the “billions” in ODA and in available development resources to attract, leverage, and mobilize “trillions” in investments of all kinds: public and private, national and global, in both capital and capacity’ to close the SDG funding gap (WBG 2015). The second paper that is an important building block of the World Bank’s new strategy is titled; ‘Forward Look: A Vision for the World Bank Group in 2030’ (September 2016). Aiming to reach consensus amongst its shareholders, the World Bank Group outlines its plan to reach its goals of eradicating extreme poverty and ensuring shared prosperity in a sustainable manner whilst supporting the 2030 development agenda (WBG 2016: 1). At the heart lies the ambition that by 2030 the World Bank is not only a provider of capital, but also facilitator (ibid.; WBG 2018: 3). This is especially visible by the introduction of the ‘Cascade’ framework in the March 2017 ‘Forward Look: A Vision for the World Bank Group in 2030 – Progress and Challenges’ (WBG 2017b: 2). The Cascade framework consists of a series of questions that enable the World Bank to advise client countries whether the solution or financing of a project should be sought in the private or public sector

38 (WBG 2017a: 1). First, the question is asked whether a sustainable private sector solution exists that limits contingent liabilities and public debt (idem: 2). If such a private sector solution is found, it is promoted. If not, the question is asked whether this is due to regulatory or policy weaknesses or gaps? If so, the World Bank will seek to work with the relevant government(s) on the regulatory and/or policy reforms necessary to make the project viable for private sector funding (Kim 2017). This refers to either deregulating or the formulation of rules that provide the private sector access to new sectors (Gabor 2019: 13). If the private sector barrier lies in risk, thus ibid.). Public and concessional resources are used to cover the remaining risks (WBG 2017a: 1; WBG 2017b: 6;). This is called blended finance, ‘a financing package comprised of concessional funding provided by development partners, along with commercial funds from IFC’s own resources and from the private sector’ (WBG 2018a: 5). De-risking the development projects is crucial for attracting global institutional investors (Gabor sec: 6). If regulatory reforms or de-risking are not possible, the final question is whether (scarce) public resources can resolve development objectives (WBG 2017b: 6). If the answer is yes, public funding should be pursued for the project (ibid.). The cascade approach is also shown in Figure 2 below.

Figure 2: The Cascade Framework

Source: Alexander (2017).

Lastly, ‘Maximizing Finance for Development: Leveraging the Private Sector for Growth and Sustainable Development’ (September 2017) (WBG 2018a: 2). With this paper the World Bank rebranded its ‘Billions to Trillions’ approach to ‘Maximizing Finance for Development’ (MFD). With

39 the Cascade framework, the World Bank seeks to systemize the pre-existing efforts to leverage private sector finance within the Bank (idem: 2; WBG 2017b: 3). The five WBG institutions – IBRD, IDA, IFC, MIGA and ICSID – work together in improving the investment environment and credit worthiness and providing risk mitigation in client countries to remove the barriers for private investors (WBG 2018a: 3). Currently, the MFD approach is in its pilot face, with implementation underway on infrastructure projects in the following nine countries, each seeking private sector solutions to achieve their development goals: Cameroon, Cote d'Ivoire, Egypt, Indonesia, Iraq, Jordan, Kenya, Nepal, and Vietnam (WBG 2018b: 5).

4.1.2 The reframing of shadow banking The emergence of shadow banking needs to be located in the time after the fall of Bretton Woods in 1971, when banks faced a vast rise in demand for safe and liquid credit (Moreira 2014). However, the increase in credit provision was not matched by an increase in deposits, resulting in a growing funding gap (SOMO 2014). To bridge this gap and thus maintain their liquidity position, banks entered into interbank loans and engaged more and more in securitization – the pooling and trading of (riskier) credit such as mortgages and car loans (ibid.; Gabor 2018; Jobst 2008). Simultaneously, in the first decade of the new millennium, non-depository financial institutions were increasingly participating in credit provision and trading (DNB 2016; SOMO 2014). As a result, the shadow banking system rose in prominence and became manifest alongside and intertwined with the traditional banking system (SOMO 2014). The global financial landscape underwent a structural change: moving from a primarily traditional deposits-based banking system to growing a shadow banking one (ibid.; Gabor 2018). The increase of uncertainty resulting from this trend called a stop to the shadow banking boom in the summer of 2007 (Moreira and Savov 2017). Investors feared that shadow money would become illiquid, prompting them to switch from shadow to actual money and with this triggering a financial meltdown (ibid.).

The Deputy General Manager of the Bank for International Settlements, Hervé Hannoun, acknowledged that there had been ‘a misperception of the underlying leverage in the financial system, more generally because of the hidden leverage of the so-called ‘shadow banking system’ (2008). The ability to indefinitely repackage and trade debt had prevented the adequate calculation of their risk, resulting in opacity in a large amount of credit wrongfully being priced as safe (Kabelik 2012; Plender 2018). According to the International Monetary Fund (IMF) this was due to ‘financial regulation not [being] equipped to address the risk concentrations and flawed incentives behind the financial innovation boom markets’ (2009). Echoing this, the G20 leaders discussed the need for strengthening shadow banking regulation and supervision during the summits the following years (G20 2009a; 2010; 2011). This resulted in the newly established Financial Stability Board (FSB) being tasked with developing

40 recommendations for the extension of oversight and regulation to all financial markets, instruments and institutions whose failure might trigger a financial crisis (FSB 2010; G20 2009a).

Instead of the expected decline of the shadow banking industry, it prospered. Figure 3..shows that since 2011, controversy the year the FSB was established as an oversight instrument, it started to increase again. Moreover, with the MFD agenda, shadow banking is actively being promoted as a solution for the development funding gap.

Figure 3: Increase of the shadow banking system

Source: FSB 2020b

4.1.1 From Addis Abeba to Hamburg The emergence of the MFD agenda, this thesis’ mode of regulation, traces back to September 2015. On this day the 193 United Nations Member States unanimously adopted the Sustainable Development Agenda to pursue a sustainable future, address climate change and reduce poverty in all forms by 2030 (UN 2015a). This agenda contains seventeen global Sustainable Development Goals (SDGs) that build on the Millennium Development Goals and the Third International Conference on Financing for Development held in Addis Abeba, Ethiopia, in July that year (ibid.). During this conference governments agreed that the public sector alone could not raise the trillions of dollars needed to achieve the Agenda 2030, therefore much private sector funding was necessary (Rowden 2019: 4). After months of deliberations countries adopted the Addis Abeba Action Agenda, providing a framework to finance

41 the goals the global community was set to adopt two months later (UN 2015b). This agenda marked a new era of Financing for Development (WBG 2018a: 1). Prior to the adoption of the Agenda 2030 and the Addis Abeba Agenda, discussions had started between the World Bank, other Multilateral Development Banks and development institutions, the IMF and shareholder and partner countries on the financing needed to achieve the proposed SDGs (WBG 2015: 23). In April 2015 this resulted in the World Bank, IMF and five other Multilateral Development Banks announcing their joint. In the ‘From Billions to Trillions: Transforming Development Finance’ agenda the ambition is set out to initiate a shift in the development finance model, from the traditional model based on public funding to a new model based on mobilizing private funding from global capital markets (Rowden 2019: 4).

This ambition was intensified through the Hamburg Principles and Statement of Ambitions on crowding-in private finance (G20 2017b; 2017c). These MDBs agreements ‘provide a common framework among MDBs and quantify MDBs ability to crowd-in private funds’ and sets the target of a 25-35% increasing in mobilization of private capital in the following three years (G20 2017d: 3; G20 2017e: 7). During the 2017 G20 meeting in Hamburg, the member countries endorsed and encouraged the Principles and Statement of Ambitions, strengthening the MDBs’ role in catalyzing finance for development (ibid.; G20 2017a: 7; WBG 2018a: 1). Drawing on and expanding the Addis Abeba Action Agenda and Hamburg Principles and Statement of Ambitions and two years after ‘From Billions to Trillions: Transforming Development Finance’, the World Bank introduced its Maximizing Finance for Development (MFD) approach in September 2017 to unlock the needed capital from private sector finance, business and investment.

Whilst there has been a ‘radical shift in development finance’, the use of private finance for devlopment is not novel (Mawdlsey 2018a). The initial shift towards private sector involvement in development initiatives can be traced back to the 1980s, when the World Bank and Regional Development banks were actively promoting privatization to improve efficiency (Van Waeyenberge and Bayliss 2018; Stein 2010). Then, from the 1999 onwards the World Bank started to push for foreign bank ownership in developing and transitional countries (Stein 2010: 258). It urged governments to sell their stakes in the banking sector to enhance the efficiency and stability needed for financial liberalization and it would ‘reduce the need for regulation, provide new technical knowledge and skills, which would spread to domestic banks, create a larger capital base and a more diversified portfolio and even lead to an increase in lending to local small and medium size enterprises (SMEs) through enhanced competition.’ (ibid.). More recently, innovative finance sources were used to achieve the 2000-2015 Millennium Development Goals (UN 2015c: 68). However, in contrast to the SDGs, private finance was only used to supplement the public funding (Mawdsley 2018a). Private sector involvement in development is now more prominent and of a ‘different scale and phase’ than ever (Mawdsley 2018a).

42 4.1.3 Criticism of the MFD agenda Despite only being in the pilot phase, the MFD agenda has already received much criticism. Firstly, the re-engineering of the financial systems of developing countries to attract institutional investor involved in the MFD agenda, reduces their policy autonomy to both global (shadow) banks and the World Bank (Critical Macro 2018; Gabor 2018). The former decides the development strategy as they are able to choose what projects they fund, and the latter leads the effort to design the de-risking measures the developing countries need to abide to, to attract private investors (Gabor 2018). Furthermore, encouraging developing countries to join the securities market and re-engineer their financial system ‘exposes them to the rhythms of the global financial cycle over which they have little control’ (Critical Macro Finance 2018). Secondly, the re-engineering of financial system threatens the progress on the SDGs (Critical Macro Finance 2018). In many countries in the Global South public resources are very limited, despite this, a large part of those resources has to be dedicated to de-risking assets, identifying bankable projects, dismantling the former financial infrastructure and dealing with the financial crises the new financial system inevitably brings along (Gabor 2019: 46). Thirdly, the MFD agenda privatizes gains but socializes losses (Critical Macro Finance 2018). The World Bank’s infrastructure PPPs’ promotion indicates that it is very likely that developing countries will be pressured to bear the costs of the de-risking of projects and in doing so guaranties the profits of the private sector (Griffith and Romero 2018; Gabor 2019: 45). The MFD’s last critique, lies at the heart of this thesis, is its promotion of shadow banking. Daniella Gabor has argued that shadow banking’s revival is best seen against the background of financial globalization or financial capitalism (2018). ‘This involves the continuous search for new tradable asset classes, created through shadow or traditional banking, and the preservation of their value to facilitate financial profits.’ (Gabor 2018). However, before the explanation for the emergence of the MFD agenda and thus promotion of shadow banking can be researched, knowledge on the decision- making arena is necessary

4.1.4 The decision-making arena: G20 In the introduction it was discussed that the G20 has had an instrumental role in the MFD agenda. Over the past few years the G20 ‘has emerged as one of the most prominent political fora for international cooperation, far beyond its original mandate to tackle the global economic and financial crisis of 2007/2008’ (Martens 2016: 3). The G20 has even called itself the ‘premier forum for international economic’ (G20 2020). The G20 has meetings several times a year to discuss socioeconomic and financial issues on (ibid.). Furthermore, the G20 makes up 80% of the world’s GDP% and 66% of its GDP (Ibid.). In the introduction it was discussed that the G20 has had an instrumental role in the MFD agenda. Most notable has been the G20’s adoption of the objectives and principles set at the 2017 Hamburg meeting (WBG 2017a; 2018a: 1; G20 2017a; 7; 2017d: 3). The MFD can also be seen as responding to the G20’s interest in mobilizing private sector investments for infrastructure projects

43 (Alexander 2017). Since the Korean presidency in 2010 financing infrastructure development has been a priority in the G20, aiming to close the ‘infrastructure gap’ (Caliari 2015). To close the infrastructure funding gap, the G20 had been ‘urging the Multilateral Development Banks to standardize, scale-up, and replicate mega-projects, especially PPPs in emerging and developing countries’ (Alexander 2017). Furthermore, at the 2013 Saint-Petersburg Summit the G20 endorsed the ‘G20/OECD High-Level Principles for Long-term Investment Financing by Institutional Investors’, that the OECD developed at their request (OECD 2013). Moreover, between the G20 Korean presidency in 2010 and that of Turkey in 2015, a model for the financing of infrastructure was developed that is very similar to the MFD approach (Caliari 2015). It was agreed upon that infrastructure finance should be mobilized from mostly private institutional investors, recipient countries should focus on ‘bankable projects’, creating an enabling investment environment, and public sources should be used to leverage private investments (ibid.).

4.2 Historic Bloc: Facilitating the MFD agenda Now that the decision-making arena is known, agents pushing for the MFD agenda can be analyzed. Firstly, the tightening bond between financial capital and the G20 is discussed and between the class fractions themselves. Thereafter, the analysis of the discourses of the class fractions and forces of resistance will be done and lastly the strategic selectivity of the state.

4.2.1 Tightening bond between financial capital and the G20 Responding to the desire to find a coordinated response to the global financial crisis, G20 had its first. heads of governments and states Summit Washington in 2008 (Nikileava 2019). Despite having an early focus on financial stability, he G20 has been heavily criticized for not putting in place the regulations needed to prevent a new global financial crisis. It is argued that ‘G20 Leaders became complacent, listened to financial lobbyists, and compromised on some tasks and delayed others into the distant future’ (Alexander 2014: 9). As the self-proclaimed ‘premier forum for international economic co- operation’, the G20 provides lobby groups and transnational corporations an excellent opportunity to engage with and perhaps influence some of the powerful governments in the world (G20 2009b; Martens 2016: 3, 9). The absence of advanced financial sector regulations following the crisis points at a tight relationship between the financial sector and the G20. This is also reflected by the strong representation of the financial sector in the B20, this thesis’ financial capital fraction. The financial sector is alongside the big transnational consultancy firms, the chemical industry and energy, oil, gas and mining sectors traditionally best represented in the B20 taskforces (Martens 2016: 26).

The relationship between the financial capital fraction and the G20 can also be illustrated by the increasing amount of B20 recommendations reflected in the G20 communiqués. In 2011 the G20 was

44 reflective towards 46% of the recommendations, in 2012 towards 63%, in 2013 and 2014 towards 70%, 2015 towards 67% and in 2016 the G20 was reflective towards 76% of the B20 recommendations (ICC 2016b: 16). The correlation between G20 communiques and B20 recommendations shows a large degree of shared language and overlapping positions, indicating a large degree of direct or indirect influence of the financial capital fraction on the G20 agenda and discourse (Martens 2016: 3). Something else that points to a close relationship between financial capital and G20 is the B20 officially being recognized as ‘an important stakeholder and a constructive partner in promoting the shared objectives of global growth and job creation’ in the 2010 Seoul Communiqué (ICC 2016a: 4; G20 2010). Lastly, the relationship is also illustrated by the fact that up until 2016 the B20 summits were being held back to back with those of the G20 (Löschmann and Alexander 2016). This reflected the desire of financial capital to cooperate and interact on an equal footing with the G20 leaders (Martens 2016: 50-51). Interestingly, as of 2017 the B20 summit is being held a couple of months before the G20 one. Löschmann and Alexander (2016) argue that this points to limiting the influence of the B20 and affirming its consultative nature.

4.2.2 Relationship between the class fractions As mentioned before, in this thesis the B20 is viewed as the financial capital fraction and the ICC as the productive capital fraction. However, demarcating between the two groups does not do the situation justice, as a transnational capitalist class has been emerging (Robinson and Harris 2000: 12; Ramos and Schneider Parreiras 2019: 3). In the 1970s capitalist relations changed; there was simultaneously a globalization of production elations and internationalization of financial capital (ibid.). Responding to this, a transnational capital fraction emerged that has been hegemonic in much of the world over the past few years (ibid.). This fusion between the financial and productive capital fractions can, to some extent, also be found present-day when looking at the B20 and ICC. The ICC participates in the B20 process of formulating recommendations for the G20, endorses them and rarely presents its own recommendations (ICC 2017). The last time the ICC has given recommendations independently of the B20 was prior to the 2011 Cannes summit (ICC 2011). Since then, the ICC only presents its own recommendations on occasion to elaborate on the B20 recommendations or set forth a (slightly) different view. Furthermore, between 2011 and 2016 the ICC annually published a Business Scorecard assessing G20 reflectiveness on B20 recommendations. This indicates that the financial and productive capital fractions, despite being separate groups, have similar ideas and political messages overlap fairly (Martens 2016: 21).

The financial capital fractions interests are not only promoted in the B20 and ICC, but sometimes also in other engagement groups (Martens 2016: 21). B20 members have co-chaired several C20 working groups in 2013, most notably that on Global Financial Architecture; the B20 has strong ties to Think 20 (T20), notably is a 2015 meeting private sector involvement in the SDGs and lastly, two out of three

45 people in the Women 20 (W20) engagement are from the private sector (idem: 21-23). Furthermore, the new G20 engagement groups are built and consist of the G20 Agricultural Entrepreneurs Forum and the G20 Young Entrepreneurs (ibid.). Moreover, along with L20, representatives of the B20 are invited most often to participate in ministerial meetings and working groups (Martens 2016: 16). Thus, the B20 is also occasionally active and represented in the other engagement groups.

4.2.3 Discourse Analysis: class fractions Financial capital fraction Business 20 (B20), representing the financial capital fraction, has had financing for development, or more specifically infrastructure, as one of its priorities since its first report with recommendations for the G20 ahead of the Seoul Summit in 2010. In the five years leading up to the launch of the “From Billions to Trillions” agenda in 2015, private sector financing for infrastructure had gone from ‘becoming increasingly important’, to ‘a high priority’ and eventually ‘critical’ (B20 2010a: 91; 2012: 23; 2014: 5). Infrastructure development is seen as essential for development, which in turn is seen as ‘a potentially massive source of economic growth’ (B20 2010a: 91; 2011: 8).The B20 has stressed that mobilizing private finance is key in closing the infrastructure funding gap and in development in general, first with achieving the MDGs and later the SDGs (B20 2010b: 4; 2011: 13, A-64; 2017: 14). Logically following from this, is the notion that private sector investment in development is needed for economic growth (B20 2014: 5). Economic growth has been one of the key aeras for the B20, even calling upon the G20 in 2013 to shift its priority from financial regulation to growth, stating much has been done to increase the former (B20 2013: 14).

To encourage private sector investments, the B20 has over the years consistently called on the G20 to do the following. Firstly, adopting a consistent regulatory framework to encourage long-term investments and financing (B20 2010a: 92; 2015: 8). Secondly, creating or improving the global investment landscape to enable the development of infrastructure as an asset class (B20 2015: 7). Thirdly, identifying and promotion of investment-ready and bankable infrastructure projects (B20 2011: 14; 2017: 4). ‘The experience of B20 companies involved in infrastructure investment in the developing world is that for well-designed projects, it is not difficult to gather the appropriate funding support’ (B20 2011: A-71). Fourthly, increasing the number of public-private partnership (PPP) projects, which are especially attractive to institutional investors (B20 2015: 14). Fifthly, risk mitigation by governments and through modern investment vehicles to attract risk-averse institutional investors (B20 2010a: 91). Lastly, supporting the development of innovative and alternative financing mechanisms such as Green Bonds and the creation of liquid secondary markets to attract additional investments (B20 2010a: 91; 2015: 10). Most of these recommendations by the B20 have been reflected in G20 communiques and can be recognizes in the MFD agenda (ICC 2016a; WBG 2017a; b).

46

In 2010 it was stated that private sector investments in infrastructure could reduce those of the public sector (B20 2010b: 4). The following year the B20 called for a ‘prioritizing financing, project development and implementation’ over more public financial resources such as ODA’ (B20 2011: 14; A-71). One of the main challenges identified for this purpose was ‘to better leverage existing public resources –notably from multilateral development banks - in order to attract other sources of funding, particularly from the private sector’ (2011: 14). Strikingly, this bears a very close resemblance to the core message of the ‘From Billions to Trillions’ agenda announced year later: ‘using the “billions” in ODA and in available development resources to attract, leverage, and mobilize “trillions” in investments of all kinds: public and private, national and global, in both capital and capacity’ (WBG 2015: 1). Following this agenda the B20, ‘urged the G20 to enhance the catalytic role of MDBs in enabling private-sector infrastructure investment by (1) directing MDBs to enhance the scope and depth of coordination and cooperation, particularly in areas such as co-financing and technical assistance, and to provide more support to governments in developing bankable projects; and (2) encouraging MDBs to consider increasing their focus on crowding in private-sector financing by developing and supporting innovative financial instruments.’ (B20 2016: 7). The B20 repeated the call for increasing MDBs role as private sector funding catalysts (B20 2017: 4). It was during that summit in Hamburg in 2017 that the G20 reinforced the MDBs’ role in catalyzing development finance by endorsing and encouraging the Principles and Statement of Ambitions (G20 2017a: 7; 2017d: 3; WBG 2018: 1).

Productive capital fraction The International Chamber of Commerce (ICC), representing the productive capital fraction, has been involved in the formulation of the B20’s, financial capital, recommendations for the G20 (ICC 2013: 7). Therefore, the recommendations and thoughts expressed by the B20 also reflect those of the ICC. The last time the ICC has given recommendations independently of the B20 was prior to the 2011 Cannes summit. Striking herein, is the limited attention to private sector involvement in development, or infrastructure more specifically compared to the B20 that year (ICC 2011). The ICC only called upon the G20 to create a conducive environment ‘for scaling-up business contributions to sustainable development through public-private partnerships’ (idem: 1). As can be expected, the ICC has the same reasoning for private sector involvement in infrastructure development as the B20: stating that it would stimulate economic growth and job creation (ICC 2013: 3). To make private sector involvement in infrastructure more effective, the ICC called for ‘a more systematic approach to infrastructure investment projects and public-private partnerships’ (ibid.).

In contrast to the B20, the ICC sees mobilizing private finance for development, and the achievement of the SDGs, less as a ‘means to an end’ and instead as an end in itself. This is illustrated by the ICC calling it ‘vital that the G20 shows leadership in engaging the private sector to deliver on the promise

47 of the SDGs’ and for ‘commitments to achieve progress on the [SDGs]’(ICC 2015: 3; ICC 2016c). Additionally, the ICC states that ‘economic growth, job creation and sustainable development’ (emphasis added) can all benefit from international investment (ICC 2017).

Civil society Civil Society 20 (C20) recognizes the need for private sector involvement in development, even calling on the G20 to create a conducive environment and ‘drive responsibility and accountability of the private sector towards the [SDGs]’ (2014: 2; 2016: 3; 2017: 14).). However, at the same time the engagement group expressed its concern over governments focusing on for-profit investors for fund the large-scale and long-term investment required for the SDGs (C20 2017: 2). With regards to the “billions to trillions” agenda, the C20 expressed its concern over prioritization of private sector profits over public interest when it came to public infrastructure projects (idem: 14-15). The engagement group also stated that it was ‘particularly concerned’ over the promotion of PPPs, arguing that it potentially impedes public interest protection by governments and that their true costs are often concealed (C20 2017: 14-15). The C20 had then already been critical of PPPs prior to the ‘Bllions to Trillions’ agenda, warning the G20 for favoring them over public funding and as means for closing an infrastructure funding gap (C20 2014: 3). It was argued that ‘PPPs are not always the most economically efficient means of financing public infrastructure and may have negative impacts on public access’ (C20 2014: 3). The C20 has also been critical of private sector investments in infrastructure in general, pointing towards privatization of profits and socialization of costs (C20 2015: 8). Instead, the G20 is called upon to Increase public infrastructure investments, whilst the B20 has been seeking to reduce it since 2010 (C20 2015: 4; B20 2010a: 4). In that vein, the C20 pleas for ‘a radical transformation of the present neoliberal economic system’ by amongst other things ‘regulating financial markets so that they are no longer a casino of speculation but serve the needs of the real economy’ (C20 2017: 2).

Organized Labour Organized labour seems to have taken a middle position between civil society on the one hand and the capital fractions on the other when it comes to private sector funding of development. The L20 does neither explicitly express its support for nor opposition to private sector involvement in finance. Instead, it only gives recommendations to improve private financing; calling for transparent and fair risk and reward sharing between governments and the private sector, holding financial intermediaries such as asset managers accountable, having long-term-driven institutional investors abide by investment standards and the protection of public services (L20 2013: 3; 2015: 3; 2016: 2). In 2016, the years after the ‘from billions to trillions’ agenda came out, L20 seemed to express a preference of public funding over private when it came to infrastructure development. The engagement group stated that ‘the public sector is better suited to handle long term risks’ (L20 2016: 2). However, they quickly went back on this, stating that long-term-driven institutional investors can also play an important part (ibid.).

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This neither explicitly supporting nor opposing mobilizing private sector financing for development, begs the question whether this has something to do with the L20’s previously discussed close relationship with the B20. One issue that L20 and B20 are definitely not aligned on is regulation of the private sector. Whilst the B20 has been calling for a shift from a focus on financial regulation, the L20 has been consistently calling on the G20 to re-regulate the financial sector (2012: 1-4; 2014: 2; 2016: 3, 12). The L20 also spoke out about the ‘[u]ncertainty remains about the growth of the shadow banking sector, whose size and corresponding risks are in fact not entirely known at this point”’(L20 2016: 3). This is especially interesting since one of the main criticisms’ MFD agenda’s that was presented a year later, has been the promotion of shadow banking.

4.2.4 Discourse analysis: forces of resistance Social forces opposing the MFD agenda and the promotion of shadow banking also exist outside of the G20s formal engagement groups. In this section a few of those forces of resistance are discussed.

Bretton Woods Project One of the most vocal forces of resistance opposing the ‘private-finance-first’ MFD approach is the Bretton Woods Project (BWP), a civil society network that focuses on the WB and IMF (2020a). In 2015 the network called upon civil society to help ensure that the private-sector driven boom in infrastructure projects, does not lead to a derailment of the other SDGs (BWP 2015). One of the BWPs main concerns with the G20 and WB championed approach to development finance concerns the ‘socialising risk while privatizing profit’ the leveraging private sector investments using public resources brings (2015). Furthermore, the network strongly opposes the Cascade approach on which the MFD agenda is founded. The approach is, amongst other things, critiqued for a lack of transparency, being undemocratic, as private sector gets to decide what gets funded and what not, the risks governments need to take on to attract investments and for promoting PPPs that have been greatly criticized. More recently, in the midst of the COVID-19 crisis, the BWP argued that ‘the World Bank’s MFD approach, founded on privatization and financialization, is both a reflection of and contributor to the underlying dynamics of the current instability’ (BWP 2020b). This claim was made after a new IMF report has concluded that poorly managed financial sector contributions to development can amplify inequality and thus pose risks to financial stability (ibid; IMF 2020). Furthermore, the BWP has criticized the World Bank for announcing to double down on its MFD approach post-COVID 19 in light of this and urging the institution to reconsider its approach to development financing (2020a; 2020b).

Groups of NGOs In 2015 two groups of NGOs have written open letters to the G20 expressing their concern over the lack of financial sector regulation. Both groups, one led by Americans for Financial Reform and the other by

49 ActionAid International called upon the G20 not to give into the financial lobby (2015; 2015). The former highlighted the pressure being put on the G20 to shift its focus from financial regulation to economic growth and the latter the lobby to go back on adopted financial sector reforms (ibid.). Furthermore, both groups stressed the importance for a focus on the shadow banking sector, which has continued to grow after the financial crisis and warns that the FSBs current attempt to regulate focuses more on the benefits than risks of the sector (ibid.). The NGOs led by ActionAid International went one step further, expressing their concern over the risk-transference to governments that the mobilizing private sector funding for development entails (2015). Furthermore, it stressed its concern over private sector investments might result in the neglection of ‘economic, social and environmental sustainability safeguards’ (ActionAid International 2015).

Academia Critics are not only located in civil society, in 2018 over a hundred scholars has signed a letter expressing their concern over the MFD approach’s promotion of shadow banking (Critical Macro Finance 2018). The scholars, led by Daniela Gabor, have criticized the agenda not only promoting the privatization of public services with its Cascade approach, but also ‘privatizing gains, socializing losses’ (ibid.). Furthermore, it is argued that the MFD agenda promotes shadow banking by using securitization and creating of liquid domestic capital markets to attract a wider range, and more specifically institutional, investors (Critical Macro Finance 2018). Moreover, the scholars warn against exposing developing countries to the perils of global financial cycle by encouraging them re-engineer their financial system and joining the securities market (ibid.).

4.2.5 Summary and key findings Ultimately, mobilizing private sector funding for development and leveraging of public funding for that purpose, expanded and became formalize with the introduction of the MFD agenda. This agenda, therefore can be seen as the result of the struggle between the financial capital fraction, productive capital fraction, civil society, labour and the resistance groups. The clear winners of this struggle are the financial and production capital fractions, albeit with different discourses. The former seeing private funding of development as a means to economic growth, and the latter seeing private funding of development as a means to development itself. Labour was neither explicitly calling for private sector involvement in development nor opposing it. Civil society lastly, was very vocal about opposing the proposed private sector funding for development plans and more concretely the “billions to trillions” agenda, from which the MFD agenda. Labour and civil society have also been opposing the G20’s neo- liberal policies , most concretely calling for re-regulation of the financial sector. Contrastingly, the financial and thus also productive capital fraction have been calling for the G20 to shift its focus from financial regulation to economic growth.

50 4.2.6 Strategic selectivity of the state The previous section has shown that the MFD agenda is the outcome of the struggle between social forces and was in favor of the financial and productive capital fractions. It was previously discussed that the state and its policy is not a mere reflection of the prevailing balance of social forces in society. Instead, the state is the material condensation of that balance as it facilitates it through its strategic selectivity . Strategic selectivity refers to the social relations in the state being structured, meaning that the balance of social forces is inscribed the state and thereby creates a bias towards the dominant forces (Jessop 1990: 196, 201). States or state-like institution are able to constrain or facilitate the ability of social forces to influence the mode of regulation based on their preference of certain fractions, interests, strategies etc. over others (Jessop 1999: 51; 2002: 40).

One of the ways strategic selectivity can manifest itself is in certain social forces having better access to the state than others (Jessop 1990: 196). The B20, representing the financial capital fraction, has consistently enjoyed far better access to the G20 deliberations and decision-making processes than civil society and, to a lesser extent labour (Martens 2016: 53). This access usually takes the form of participating in G20 ministerial meetings and certain working groups, while engagement groups are not invited to the G20 summit itself (ibid.). Since the ICC, representing the productive capital fraction, is not a recognized G20 engagement group, it does not have any formal engagements with its members. However, as the ICC is a prominent member of the B20, it enjoys access to the G20 through that route. Thus, both the financial and production capital fractions enjoy better access to the G20 because of its structural selectivity. Another example of the G20’s structural selectivity in favour of private sector forces, is that ‘further groups and fora of private actors have been created around the G20, such as the Young Entrepreneurs Alliance, the G20 Agricultural Entrepreneurs Forum and the G(irls)20’ (Martens 2016: 16).

The G20 engagement groups are not only affected by the strategic selectivity of the organization as a whole, but also by the strategic selectivity of the G20 Summit hosts. This is because the engagement groups greatly depend on the respective presidency (Martens 2016: 16).). Civil society seems to be especially (negatively) affected by this strategic selectivity, as its members depend on the host countries’ definition of civil society (Martens 2016: 18). Therefore, the civil society represented at the Hamburg Summit is totally different that that at the Hangzhou Summit a year earlier.

This section has revealed that the financial and productive capital fraction have been pushing for the MFD agenda and how the G20’s strategic selectivity enabled this. Having knowledge on the who and how, leaves the question for the why, why did the G20 facilitate the capital fractions in their push for the MFD agenda instead of the resistance groups? For this purpose, we have to look at what informed the G20’s strategic selectivity. As mentioned before, strategic selectivity is structural, thus the balance

51 of social forces that are inscribed the state is the product of the interaction between past struggles and strategic selectivity approaches (Jessop 1990: 196, 201). Thus, the G20’s strategic selectivity and thus facilitation of the financial and productive capital fractions, can be explained by the structure in which the G20 is inscribed. Therefore, the dominant debt-led accumulation regime which denotes the structural component in this thesis will be empirically observed in the next paragraph.

52 4.3 Material structures: Global North and South accumulation regimes The overarching goal of this thesis is to explain the emergence of the MFD agenda as a new mode of regulation. The discourse [agential] analysis in section 4.3 showed that the financial fraction pushed for this agenda. However, in order to understand [explain] why the G20 facilitated this push for the MFD agenda, knowledge on the material structure in which it is situated is needed. For this purpose, this section will analyze the dominant accumulation regime of the Global North and Global South. Capitalist regimes of accumulation are contradictory and unstable, making them inherently crisis prone. These crises manifest themselves as recurring phases of overaccumulation. The most recent example of this is the 2008 global financial crisis, triggered by the collapse of the Lehman Brothers bank. The MFD agenda is seen as a spatial-fix for the Global Norths overaccumulation by enabling the North to offload its surplus credit to the South. To understand how the MFD agenda is expected to help stabilize the Capitalist Mode of Production in the Global North, the regimes of accumulation of the Global North and South are analyzed, and how the instabilities of the former manifests itself in the economy.

4.3.1 Preceding regime of accumulation: Fordism Following the Second World War an Embedded Liberalist international economic order was established that would last until the fall of the Bretton Woods Institutions in 1975 (Clark 1990: 4; Ruggie 1982: 392). Embedded liberalism is characterized by the combination of a Fordist mode of (economic) production, an open world economy and a domestically focused Keynesian welfare state (Ruggie 1982; Buch-Hansen and Wigger 2010: 26). Central in the Fordist regime of accumulation is the ‘rising productivity levels of nationally oriented companies’ enabling mass production to match the mass consumption (Buch-Hansen and Wigger 2010: 26; Jessop 2015: 1-2). The Keynesian welfare state emerged out of the class struggle between labour (working class) and capital, with the former having the upper hand and subsequently deploying macro-economic and social policies (Buch-Hansen and Wigger 2010: 26; Bello 2006: 1346). Furthermore, the Keynesian state was part of the mode of regulation (temporarily) stabilizing the Fordist regime of accumulation (Buch-Hansen and Wigger 2010: 26). The era of embedded liberalism resulted advanced industrialized countries enjoying an unprecedented period of economic prosperity, also known as the post-war boom or ‘Golden Age of Capitalism’ (Bello 2006: 1346). However, several political, social and economic factors led to the end embedded liberalism (Lipietz, 1992: 14–19 in Buch-Hansen and Wigger 2010: 27). One of the main manifestations of the crisis of the Fordist mode of production was stagflation, a combination of economic stagnation and inflation, heavily affecting the economies of the Global North and especially the US (Jessop and Sum 2006: 20; Bello 2006: 1346-7). At the same time, stagnation, inflation and massive indebtedness in the Global South backtracked the strides in equality and poverty reduction (idem: 1347).

53 4.3.2 Contemporary regime of accumulation: Financialization Against the background of the crisis of Fordism a transnationalization of production and markets ensued (Lipietz, 1992: 12 in Buch-Hansen and Wigger 2010: 32).). Along with the end of embedded liberalism, this enabled a shift towards neoliberal ideas in the 1980s (Buch-Hansen and Wigger 2010: 32). Crucial for this was the re-establishment of the power of capital over labor, as the latter was in power during the era of embedded liberalism (ibid.; Van Apeldoorn 2002: 55). Transnational capitalist elites in the US and Europe promoted neoliberal policies such as furthering trade liberalization and the deregulation of capital markets (Buch-Hansen and Wigger 2010: 32). The crisis of the Fordist regime of accumulation in the 1970s, enabled the emergence of new regimes of accumulations, of which the finance- or deb-led accumulation regime became dominant (Clark 1990: 4; Krippner 2005: 3; Boyer 2000: 112).

Productive vs Financialized accumulation Figure 4 shows that the investments in the productive sphere of the Global North has been declining since 1974 and has been somewhat stagnant since the 1990s. Interestingly, the 1980s and 1990s depressions and 2007-2009 financial crisis are all marked by an increase leading up to the event and a sharp decrease following it. In 1974 30% of the Global North’s GDP was being invested in the productive sphere, compared to 23% in 2018. Figure 4 shows that it took a little longer for the Global South’s increase in investments in the real economy to come to a halt. From the 1980s onwards a stagnation in investments in the productive sphere can be observed, with the Gross capital formation fluctuating between 20 and 25%.

Figure 4: Gross capital formation (% of GDP) 35

30

25

20

15

10

5

0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Global North Global South

Source: own graph, data from World Bank (2019a)

54 However, a stagnation in investments in productive sphere of the economy in the Global North and South, is not enough to claim an increase in investments made in the financial sector. Therefore, an indicator is needed to analyze the development towards financialization. The market capitalization of listed domestic companies, or shortly market cap, shows the market value of a publicly traded company's outstanding shares. ‘[A]an increase in market capitalization can only be realized through an increase in stock prices or through issuance of new stocks, both of which fall under financialized growth (Becker et al., 2010, p. 227)”.

Figure 5 shows there has been a clear financialization trend in the Global North in the recent decades. In 1974 the average market value of the shares of stock of publicly traded companies was only 22,5%, this has quadrupled to 118,9% in 2019. Peaks in the financialization can be found around the 2000 Dot.com bubble and 2007 housing bubble. These peaks resulted in steep valley, during the 2002 stock market crash and 2007-2009 global financial crisis and collapse of Wall Street. Other sharp decreases in market cap can be found around 2011’s Black Monday and amidst Trump’s trade war with China in 2018. When looking at the Global South, Figure 5 shows that these economies have not enjoyed the same degree of financialization. In 1993 the difference in market cap with the Global North was only 20,9%, this gap increased to 63,2% in the next six years. With the exception of the stock market crashes in 2002 and 2008, the market cap in the Global South lags behind about 50% to 70% of the Global North. Overall, a shift towards a more finance-led growth model in both the Global North and South can be observed, more so in the former than the latter.

Figure 5: Market capitalization of listed domestic companies (% of GDP) 140

120

100

80

60

40

20

0

1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Global North Global South

Source: own graph, data from World Bank (2019b)

55 Overaccumulation To recapitulate, there has been a stagnation in investments in the productive sphere and an increase in financialized growth. This points towards a shift from a productive to financialized regime of accumulation. Figure 6 shows that in the Global North an increase in total reserves started in the 1970s and accelerated around the turn of the century. An increase in total reserves points to a structural problem of overaccumulation, as an increasing amount of capital can no longer find a profitable outlet.

Figure 6: Total reserves (includes gold, current US$) 140000000000

120000000000

100000000000

80000000000

60000000000

40000000000

20000000000

0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Global North Global South

Source: own graph, data from World Bank (2019e)

However, the financialization of the economies in the Global North cannot go on forever, at some point they get saturated. With the overaccumulation of capital continuing to increase sharply, the Global North needs to find a new outlet of capital to avoid a crisis. One way this can be achieved is through a spatial- fix, expanding the financialized accumulation regime to new (less developed) markets. Figure 3 has shown that financialization is unevenly developed, with the Global South lagging behind the North. Also, Figure 46shows that over the past few years the total reserves in the South are only half of that of the North. This makes the Global South the perfect place for the Global North to offload its surplus capital. The mode of regulation that can facilitate this is the MFD agenda, as it pushes for private sector investment in developing countries. However, for the Global North to offload its surplus capital in the Global South both need to have extraverted regimes of accumulation, and more specifically an export oriented Global North and import dependent Global South are needed.

Introverted vs extraverted accumulation To determine whether the Global North and South have introverted or extraverted accumulation regimes the FDI flows are analyzed. Figure 7 shows that from the 1990s onwards, there has been an increase in FDI in and from both the Global North and South. Most sticking, the net inflows in the Global North

56 enjoyed a six-fold increase between 1999 and the 2006 peak. The increase in FDI flows indicates globalization and thus extraverted accumulation in the economies of both parts of the world. However, the integration in the world economy take different forms and shapes in the Global North and South, with the latter’s development having a smaller scale and slower trajectory. The first surge in FDI [inflows] in the Global South took place between 2000 and 2007, this is likely due to a boom in commodity prices, improved quality of institutions and macroeconomic management and ‘policy barriers to trade and financial flows have come down steadily’ in emerging and developing economies (IMF 2008). Figure 7 also shows that the FDI flows in both the Global North and South are very volatile, but overall follow a positive trend. Shocks in FDI flows can be due to (global) financial crises, trade shocks, sector-specific developments, political uncertainty and the individual situations of the corporations engaging in FDI’s (Lensink and Morrison 2001: 2; UNDP 2015: 86).

Figure 7:Foreign direct investment, net inflows and outflows (% of GDP) 40 35 30 25 20 15 10 5 0 -5 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Net inflows, Global North Net inflows, Global South Net outflows, Global North Net outflows, Global South

Source: own graph, data from World Bank (2019c; 2019d)

The Global Norths FDI volatility in that same period is due to the 2000 Dot.com bubble, 2002 stock market crash and 2007 Housing bubble. Following the peaks of 2007, the 2007-2009 global financial crisis resulted in FDI flows sharply declining. Interestingly, the FDI flows in the Global North were hit much harder than those in the South. Between 2014 and 2015 FDI flows surged once again, despite a decline in commodity prices and diminishing growth in emerging countries (UNCTAD: 2016 3). The surge is believed to be partly due to cross-border mergers and acquisitions (M&As), principally in developed countries (ibid.).

57 Passive vs active extraverted accumulation Having established that both the Global North and South, albeit to different degrees, have extraverted accumulation regimes, the type of extraverted accumulation needs to be determined. The external balance on goods and services indicator allows to distinguish between passive and active extraversion. Figure 8 shows that the Global South has had a passive extraverted accumulation regime from at least 1970 onwards. This means that the economies in the Global South are largely import dependent. The orientation of the Global North’s extraverted accumulation regime is more volatile. In 1984 there was a shift from passive to active extraverted accumulation. This coincided with the move towards Neoliberalism in the United States and Europe.

Figure 8: External balance on goods and services ( % of GDP) 6 4 2 0 -2 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 -4 -6 -8 -10 -12 -14

Global North Global South

Source: own graph, data from World Bank (2019f)

The Global North having an export-oriented accumulation regime and the Global South an import dependent, provides the circumstances needed for the former to offload its surplus in the later. Thus, the MFD should ultimately be seen as a mode of regulation enabling the Global North to offload its surplus capital in the South to avoid a crisis of overaccumulation.

58 4.4 Adopting MFD: Neoliberal hegemony

Neoliberalism has been emerging since the 1970s/80s and is characterized by a finance based and export-oriented regime of accumulation. A prerequisite for maintaining hegemony, is the construction of a historic bloc, which refers to an ensemble of economic, political and cultural structures, who articulate and reproduce the social order of the class configuration, and reproducing the social order of a configuration of class fractions (or political alliance) in specific historically periods (Overbeek 1990: 125; Rupert 1993: 81). This thesis’ analysis has shown a convergence in the discourse of the financial and productive capital fraction, with both important drivers for private sector involvement in development. These fractions pushing for the MFD agenda are dominant because of the financialized, debt-led accumulation regime which was facilitated by neo-liberalism. The strategic selectiveness of the state and the involvement of the financial capital fraction (B20) in other groups may have strengthened the influence of these agents. The Comprehensive Concepts of Control of the financial and productive capital fractions, which describes how society should be ordered and expresses the Neo-liberal hegemony is globalization, financialization and deregulation.

59 5. Conclusion The research question central in this thesis was: Why did the G20 reframe shadow banking from the root cause of the 2007-2008 financial crisis to solution for the development funding gap by means of the Maximizing Finance for Development Agenda? Given the role shadow banking played in the last financial crisis and the exposure of developing countries to the rhythms of the global financial cycle, the G20’s change perception of shadow banking needed to be researched. This thesis has done so by analyzing the power constellations behind the radical shift in development finance. The World Bank and other MDBs, with support of the G20, are leveraging private sector funding to raise the funds needed to achieve the SDGs. This ‘Maximizing Finance for Development’ agenda promotes shadow banking as a tool for development.

At first instance, this thesis analyzed the introduction of the MFD agenda as the result of the struggle between the advocating financial capital fraction (B20) and productive capital fraction (ICC) on the one hand, and the contesting organized labour (L20), organized civil society (C20) and other resistance groups (Bretton Woods Project, Academics and NGO groups led by ActionAid International and Americans for Financial Reform) on the other. In this regard, the hegemonic alliance was comprised of the financial and productive capital fraction. Embedding this agential perspective in the material undercurrent, in turn, revealed the dominance of a financialized accumulation regime in the international field of development. Hence, the role of the MFD agenda entails regulating current imbalances in the Global North and South. In accordance, the prevalent neoliberal ideology supports this structural dominance of financialization.

Moreover, this thesis layed out a historical materialist perspective that drew on mainly the French Regulation School and the Amsterdam Project to explain the G20’s stance towards shadow banking. Firmly rooted in a critical realist philosophy of science, the combination of concepts such as ‘mode of regulation’ and ‘regime of accumulation’ with ‘class fractions’, ‘strategic selectivity’, ‘comprehensive concept of control’ and ‘hegemony’ comprised the explanatory power in this thesis. While the incorporation of the Amsterdam Project constituted the remedy for the flaws inherent to the French Regulation School, this thesis additionally incorporated civil society actors and labour to account for the prevalent elite orientation inherent to the Amsterdam Project.

That being said, this thesis has not been free of constraints. In this regard, it must be acknowledged that the theoretical concepts of the French Regulation School were originally developed for the national level. Due to the fact that the MFD approach is situated on a global scale, this thesis did only partially account for possible omissions resulting from the application of the French Regulation School on the issue at hand. That being said, the incorporation of the Amsterdam Project brings necessary explanatory

60 power, but the fundamental critique remains. Secondly, it must be acknowledged that the analysis of the ‘comprehensive concept of control’ has fallen short. As Horn and Wigger rightfully criticized, ‘further methodological fine-tuning’ is needed to determine the concept and explain why it became hegemonic and not others (2018: 213). Furthermore, the Amsterdam Approach’s limited engagement with empirical analysis, makes it vulnerable to being dismissed as a ‘class conspiracy theory’ (Horn and Wigger 2018: 213).

Eelke Heemskerk (2018) has proposed one of the ways this can be improved in further research. Heemskerk argues that the Amsterdam Project’s focus on structure and agency make network analysis a suitable method to test the theoretical framework (2018: 233). Another suggestion for further research concerns the role of research on financialization in development. Whilst contemporary neoliberalism has no real adversaries that are able to challenge the current status quo, critical scholars should materialize on the stated goal of emancipation. With more and more funding gaps coming to light and the inherent prioritization on finance above anything, radical different alternatives are needed to improve the prospect of a sustainable future. Whilst critical IPE constitutes a niche that highlights this possibility, these scholars especially are most suitable for this task to change things for the better. Hence, this goal should be a first priority of future critical IPE research.

To conclude, even though this thesis has shown the emergence of the MFD agenda and reframing of shadow banking. The future of at least one of them is uncertain. The COVID -19 crisis has brought the fragilities of developing countries’ economies back to the surface. It has shown that the current way of funding development is not working and can even amplify inequality and endanger financial stability (BWP 2020b; IMF 2020). In light of this, civil society has been calling for a new financing for development system. Despite this, the World Bank has vowed to continue and even increase its efforts to leverage funding from the private sector (BWP 2020a; 2020b). However, with no end in sight for the COVID-19 crisis and a financial crisis on the horizon and the situation in developing countries deteriorating with it, the question remains for how the World Bank and G20 can defend their ‘private sector first’ policy. In turn, it will be interesting to see what affect this will have on the overall trend of reframing shadow banking. Up to now the World Bank and G20 have done a remarkable job in keeping their MFD agenda and shadow banking separated concepts for the broad public. However, another crisis with shadow banking at the root might change a little bit more than the perception of shadow banking this time. As reflected in the MFD agenda and the 2017 US Treasury Report, when it comes to shadow banking, we have learned not learned to stop doing it, but just reframe it.

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81 Appendix A: List of Global North and South Countries

Global North Global South Country Name Country Code Country Name Country Code Albania ALB Afghanistan AFG Andorra AND Algeria DZA Armenia ARM American Samoa ASM Australia AUS Angola AGO Austria AUT Antigua and Barbuda ATG Belarus BLR Argentina ARG Belgium BEL Aruba ABW Bermuda BMU Azerbaijan AZE Bosnia and Herzegovina BIH Bahamas, The BHS Bulgaria BGR Bahrain BHR Canada CAN Bangladesh BGD Croatia HRV Barbados BRB Cyprus CYP Belize BLZ Czech Republic CZE Benin BEN Denmark DNK Bhutan BTN Estonia EST Bolivia BOL Faroe Islands FRO Botswana BWA Finland FIN Brazil BRA France FRA British Virgin Islands VGB Georgia GEO Brunei Darussalam BRN Germany DEU Burkina Faso BFA Gibraltar GIB Burundi BDI Greece GRC Cabo Verde CPV Greenland GRL Cambodia KHM Hong Kong SAR, China HKG Cameroon CMR Hungary HUN Cayman Islands CYM Iceland ISL Central African Republic CAF Ireland IRL Chad TCD Isle of Man IMN Channel Islands CHI Israel ISR Chile CHL Italy ITA China CHN Japan JPN Colombia COL

82 Korea, Rep. KOR Comoros COM Latvia LVA Congo, Dem. Rep. COD Liechtenstein LIE Congo, Rep. COG Lithuania LTU Costa Rica CRI Luxembourg LUX Cote d'Ivoire CIV Macao SAR, China MAC Cuba CUB Malta MLT Curacao CUW Moldova MDA Djibouti DJI Monaco MCO Dominica DMA Montenegro MNE Dominican Republic DOM Netherlands NLD Ecuador ECU New Zealand NZL Egypt, Arab Rep. EGY North Macedonia MKD El Salvador SLV Norway NOR Equatorial Guinea GNQ Poland POL Eritrea ERI Portugal PRT Eswatini SWZ Romania ROU Ethiopia ETH Russian Federation RUS Fiji FJI San Marino SMR French Polynesia PYF Serbia SRB Gabon GAB Singapore SGP Gambia, The GMB Slovak Republic SVK Ghana GHA Slovenia SVN Grenada GRD Spain ESP Guam GUM Sweden SWE Guatemala GTM Switzerland CHE Guinea GIN Turkey TUR Guinea-Bissau GNB United Kingdom GBR Guyana GUY United States USA Haiti HTI

Honduras HND

India IND

Indonesia IDN

Iran, Islamic Rep. IRN

Iraq IRQ

Jamaica JAM

Jordan JOR

83

Kazakhstan KAZ

Kenya KEN

Kiribati KIR

Korea, Dem. People’s Rep. PRK

Kosovo XKX

Kuwait KWT

Kyrgyz Republic KGZ

Lao PDR LAO

Lebanon LBN

Lesotho LSO

Liberia LBR

Libya LBY

Madagascar MDG

Malawi MWI

Malaysia MYS

Maldives MDV

Mali MLI

Marshall Islands MHL

Mauritania MRT

Mauritius MUS

Mexico MEX

Micronesia, Fed. Sts. FSM

Mongolia MNG

Morocco MAR

Mozambique MOZ

Myanmar MMR

Namibia NAM

Nauru NRU

Nepal NPL

New Caledonia NCL

Nicaragua NIC

Niger NER

Nigeria NGA

Northern Mariana Islands MNP

Oman OMN

Pakistan PAK

84

Palau PLW

Panama PAN

Papua New Guinea PNG

Paraguay PRY

Peru PER

Philippines PHL

Puerto Rico PRI

Qatar QAT

Rwanda RWA

Samoa WSM

Sao Tome and Principe STP

Saudi Arabia SAU

Senegal SEN

Seychelles SYC

Sierra Leone SLE

Sint Maarten (Dutch part) SXM

Solomon Islands SLB

Somalia SOM

South Africa ZAF

South Sudan SSD

Sri Lanka LKA

St. Kitts and Nevis KNA

St. Lucia LCA

St. Martin (French part) MAF

St. Vincent and the VCT Grenadines

Sudan SDN

Suriname SUR

Syrian Arab Republic SYR

Tajikistan TJK

Tanzania TZA

Thailand THA

Timor-Leste TLS

Togo TGO

Tonga TON

Trinidad and Tobago TTO

85

Tunisia TUN

Turkmenistan TKM

Turks and Caicos Islands TCA

Tuvalu TUV

Uganda UGA

Ukraine UKR

United Arab Emirates ARE

Uruguay URY

Uzbekistan UZB

Vanuatu VUT

Venezuela, RB VEN

Vietnam VNM

Virgin Islands (U.S.) VIR

West Bank and Gaza PSE

Yemen, Rep. YEM

Zambia ZMB

Zimbabwe ZWE

86