Development Finance or Financial Accumulation for Asset Managers?: The Perils of the Global Shadow Banking System in Developing Countries

The private finance-led development model, promoted by international financial institutions, has faced a number of challenges. A major criticism is that the model promotes shadow banking, a system vulnerable to cyclical changes in liquidity. I argue that these criticisms do not go far enough because they fail to challenge the dominant understanding of shadow banking as a system of credit intermediation. In this paper, I propose an alternative analytical framework of shadow banking as a system that facilitates high risk-adjusted returns for institutional investors. This framework better clarifies the accommodations emerging markets make to sustain financial flows of which I outline two: (1) the provision of high-yielding financial assets, primarily through the issue of local-currency denominated sovereign bonds; and (2) the liquidity and insurance central banks provide, by drawing on expensive foreign exchange reserves, that enable investors to reap high risk-adjusted returns. The paper argues that rather than facilitating finance (or patient capital) to meet development objectives, a private finance-led model, by promoting the integration of emerging markets into the global shadow banking system, facilitates financial accumulation for global investors.