When does state-permeated capitalism work?

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In recent years, state capitalism has become an important buzzword in the development economics discussion (again). In view of the very different ways in which this term is used, Ilias Alami and Adam Dixon recently highlighted the dangers of using the term too loosely in an article in Competition and Change. In view of its recent popularity, state capitalism could suffer a similar fate to the terms “neoliberalism” or “financialisation” by becoming a very loose rallying cry without any significant analytical value. To overcome this problematic situation, Alami and Dixon propose that future research should (1) develop a theory of the capitalist state, (2) circumscribe the time horizons of state capitalism, and (3) locate state capitalism more precisely in territorial and geographical terms.

Although I am not sure whether the genius can be put back into the bottle by developing a unified theory of the state (too many different theoretical traditions are involved by now), I am very sympathetic to the latter two demands. Our recently published book “State-permeated Capitalism in Large Emerging Economies” (Routledge) is a modest contribution to the latter goals. It deals with the economic development of Brazil, India, China and South Africa between 2000 and 2015. Departing from a comparative capitalism perspective, we have developed an ideal type of state-permeated capitalism as opposed to liberal, coordinated and dependent capitalism – and examined to what extent large emerging markets are approaching this ideal type. Read More »

Facing a liquidity tsunami? Profit, risk, and discipline in emerging markets

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In April 2012, at the White House on her first visit to the United States since her election in 2010, Brazilian president Brazil Dilma Rousseff scolded advanced capitalist economies for unleashing a ‘tsunami de liquidez’, a ‘liquidity tsunami’, onto the developing world. The expression liquidity tsunami suggests that the sheer scale and volume of financial capital flows to developing and emerging markets had become an issue. It indicates that these quantities were overwhelming and could trigger devastating damages. 

This in itself is puzzling. Have we not been told by development economists and practitioners that financial capital flowing into the poorer areas of the world economy is something good and desirable? That one of the main causes of underdevelopment is actually the lack of capital and domestic savings in developing countries, and that this should be compensated with foreign capital inflows? Following this line of reasoning, vast swathes of financial capital flowing into emerging markets surely should be seen as a boon.

And there was some truth to that. The capital flow bonanza from the mid-2000s to late 2013 (coupled with the primary commodity super-cycle) did deliver some benefits to emerging markets. It helped governments fund themselves at better conditions. It provided the material basis for significant redistribution via a number of social policies. It contributed to economic growth performances much higher than over the previous decade. It also made a minority of people much richer in a very short period of time. In sum, the capital flow boom temporarily helped deliver some economic and social gains, and this was instrumental in consolidating social contracts between governments and their populations.Read More »

Currency crisis in Argentina or the IMF’s tango

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By Roberto Lampa and Nicolás Hernán Zeolla

The Argentinian government has requested financial assistance from the IMF to tackle the consequences of a serious currency crisis. Last Wednesday, the government emphatically announced the new terms of such an agreement. However, unpacking the terms of those agreements and the current situation reveals serious concerns about the country’s future .

A few months back (see here), we provided an analysis of the current Argentinian crisis, highlighting the excessive vulnerability of the economy produced by the abrupt financial deregulation carried out by Macri’s administration. Three aspects in particular threatened the country’s future prospects: the deregulation of foreign exchange that failed to stop capital flight, a boom in foreign debt (at a record level among emerging market economies) and the promotion of speculative capital inflows to carry trade (buying financial instruments issued by the Central Bank called LEBAC in order to pursue carry trade operations).

When international conditions worsened and the carry trade circuit came to an end, the “LEBAC bubble” exploded and produced a tremendous foreign exchange crisis that shook the Argentine economy, causing a sharp rise in inflation and a severe recession from which the country has not yet managed to escape. Read More »

How History Matters in Post-Socialist Economies

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Though it has been suggested that The Beatles Rocked the Kremlin’ it was “Wind of Change” by Scorpions in the early 1991 that captured the minds of the new generation of Eastern Europe (EE) and the Former Soviet Union (FSU).

The promise of more open societies following Mikhail Gorbachev’s perestroika announcement set in motion powerful dynamics completely transforming the world. The Berlin Wall fell in 1989 and by the end of 1991 the Soviet Union disintegrated bringing down the entire socialist institutional edifice. Newly independent nation-states emerged across Europe, the Caucasus, and Central Asia. This new “wind” was that of hope, progressive stability and economic prosperity, or so it seemed at the time. And yet, “[f]or whom the wall fell?” as Branko Milanovic has recently inquired, is not as straightforward as might have been expected.

Despite the independence premium in national policy and in parallel with evidence suggesting recent strong economic growth the post-socialist economies are yet to achieve the ideals announced at the outset of market reforms. Ironically, the most unfortunate economic plan was the 1990s script of transition from planned economy to free market in the EE and FSU.

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Unanswered Questions on Financialisation in Developing Economies

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The discussions of the processes behind the growing importance of finance, financial transactions and financial motives, as well as the sustainability of the financial systems, have been located in the critical political economy debate of financialisation and neoliberalism (Crotty, 2003; Epstein, 2005; Fine, 2013; Lapavitsas, 2013; Palley, 2016; Sawyer, 2013; Stockhammer, 2004).

The analysis of financialisation in developing and emerging economies (DEEs) is relatively novel (Bonizzi, 2013). It is rooted in earlier discussions about the risks of financial globalisation and liberalisation (Akyuz & Boratav, 2005; Barbosa-Filho, 2005; Crotty & Lee, 2005; Frenkel & Rapetti, 2009; Grabel, 2003; O’Connell, 2005; Palma, 1998; Taylor, 1998), including the Latin American Structuralist literature on the hegemonic role of the US dollar and its financial and monetary implications for DEEs (Belluzzo, 1997; Braga, 1997; Fiori, 1997; Miranda, 1997; Tavares, 1997); the debate on capital account liberalisation and capital market integration (Cohen, 1996; Rodrik, 1998; Stiglitz & Ocampo, 2008; Strange, 1994); and the Minsky-inspired currency and boom bust dynamics of financial crisis in developing economies (Arestis & Glickman, 2002; de Paula & Alves, 2000; Dymski, 1999; Kregel, 1998; Schroeder, 2002).Read More »

How We Learned Not to Say No to Gold… In International Reserves

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By Aleksandr V. Gevorkyan (St. John’s University) and Tarron Khemraj (New College of Florida)

In May 2016, economist Kenneth Rogoff argued that central banks in emerging markets should add gold to their reserves. Rogoff stated “that a shift in emerging markets toward accumulating gold would help the international financial system function more smoothly and benefit everyone.” Despite initial disagreement, we find there may actually be some justification for this view in a recent paper coming out in Emerging Markets Finance and Trade.Read More »

Emerging Market Downgrades: Panic at the Disco?

When it rains, it pours. For emerging markets, the downpour has come in the form of credit rating downgrades by the big three global ratings companies. Fitch, Moody’s, and S&P took a record 1,971 negative rating actions on emerging market sovereign and government-related entities in 2016. Emerging economies are right to be concerned. With a ‘good’ credit rating (AAA), a sovereign state can borrow at very low rates of interest from investors. A poor rating could force states to pay significantly higher borrowing costs. Rating downgrades could have negative ripple effects throughout the affected economies, raising the cost of borrowing for banks and firms, and, in turn, consumers.

Infrastructure projects, business ideas, and consumer credit extensions, become unprofitable due to the higher cost of credit to banks, businesses, consumers, and governments. If a country is downgraded to ‘junk status’ (more formally known as ‘non-investment-grade’ or ‘speculative-grade’), it risks the mass exodus of investors from its bond markets. As the cost of borrowing for governments increases, this can lead to a dangerous downward spiral as borrowing and spending dries up business and consumer activity declines.

Getting back on course
So what is the best set of policies for emerging markets to recover their credit ratings? On one side are economists who argue for ‘austerity’. In their view, recovering from a ratings downgrade requires sharp reductions in state spending, even if this results in poor conditions in the short term. The benefits are twofold: It can reduce inflation and prices, thereby helping restore a country’s price competitiveness in international markets; and it can enhance the credibility of a government when it comes to containing profligate spending.

Former British Prime Minister David Cameron called this philosophy ‘expansionary austerity’. The problem is that there is not much evidence to support this idea. The EU enforced austerity among its member states in response to the 2007 financial crisis, until it helped propel a ‘double dip’ recession in 2011/12. Following this largely unsuccessful adventure with austerity, the EU turned towards more pro-growth policies, which supported expansions in infrastructure and fixed-capital investment, with notable success.Read More »

The BRICS and a Changing World

This July and August, I led an international group of experts in preparing an Economic Report on the role of the BRICS countries (Brazil, China, India, Russia and South Africa) in the world economy and international development.  The Report was commissioned as an input to the Summit of BRICS countries that took place in early September 2017 in Xiamen, China.

It surveys the BRICS countries’ sizable contribution to global growth, trade and investment, evaluates the prospects for this to continue in the future, and explores the possible role that these countries can play in bolstering the global economy, in reshaping international economic arrangements and in contributing to the Sustainable Development Goals and to international development generally. An important conclusion in the report is that continued BRICS growth as well as policy initiatives can substantially benefit other developing countries (the report uses the IMF category of Emerging Market and Developing Countries, or EMDCs) – and developed countries too.  I will  be pleased if the report will be circulated widely, and welcome all reactions.Read More »