The Strategic Logics of State Investment Funds: Beyond Financialization

State capital has increasingly taken on marketized forms. From state enterprises to sovereign wealth funds, it is increasingly difficult to find much difference at the operational level with cognate organizations in the private sector. Manager cadres have become professionalized, with many having spent significant time honing their skills in the private sector before taking up their positions in state entities. Business practices and corporate governance standards typical of private capital and the syllabi of elite business schools have become the norm. This includes, as to be expected, an embrace of a shareholder value logic. State entities in doing so are becoming increasingly financialized, not dissimilarly to their peers in the private sector.

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The New “Passive” Wall Street Counterparts for States in the Global South

By Jan Fichtner and Johannes Petry

In the past, during the time of the “Washington Consensus” developing countries from the Global South faced the IMF and the World Bank as their main counterparts in important matters of global finance. Based on our recently published research paper “Steering Capital” we argue that due to an ongoing paradigm shift in financial markets this constellation is changing profoundly. A new breed of Wall Street firms is emerging that occupies a pivotal position in the relationship between (developing) countries and financial markets – index providers.

This rise of index providers is grounded in the global shift towards passive investment. Formerly, investors gave their money to funds where a well-paid fund manager was picking stocks (or bonds) with the aim to produce above average returns – to “beat” the market in finance parlance. But now more and more investors invest in cheap passive funds (which comprise both exchange traded funds and index mutual funds) that merely track financial indices. Unlike actively managed funds, however, the passive index funds industry is characterised by enormous economies of scale – in terms of technology it is not a big difference if a passive fund has ten million or ten billion US$ assets under management. In addition, there is a strong first mover advantage. As a result, BlackRock, Vanguard and State Street dominate passive funds as the “Big Three”. Excellent recent work has since focused on how this “new money trust” is shaping the emergent ”American Asset Manager Capitalism”.

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How pension funds shape financialisation in emerging economies in Colombia and Peru

By Bruno Bonizzi, Jennifer Churchill and Diego Guevara

In early spring 2020 emerging economies (EEs) were hit by the largest ever episode of portfolio outflows. Stock and bonds were sold as investors flight to safer investments in Europe and the United States, showing once again the fragile nature of EEs’ financial integration. To overcome this problem, one suggested solution is to allow for a larger base of domestic institutional investors, such as pension funds, which can stabilise financial markets. While having a large institutional investor base can be a source of demand for domestic financial securities, it is important to review the evidence from the experience of those EEs where pension funds have existed for more than two decades. 

As we show in our forthcoming article, the experience of Colombia and Peru can be instructive. Their pension system, while maintaining a significant parallel public Pay-As-You-Go structure, has a sizeable funded private component with assets that have grown to over 20% of GDP. These were established as part of the Washington Consensus reforms in the 1990s, following the prior example of Chile. 

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Economic Sovereignty for Developing Countries: What Role for Modern Money Theory?

With modern money theory (MMT) receiving impressive attention, the implications this theory has for developing countries have also been discussed more intensely. Emphasizing both its strengths and gaps provides a great chance to further develop macroeconomic strategies for poverty reduction and environmental sustainability.

In brief, the theory starts from the statement that money is issued by the government and brought into circulation via its expenditures. The government does not rely on taxes to fund expenditures when it is itself the source of money. Therefore, money can be created upon demand, is not limited, and can be used by the government to finance all expenditures it considers necessary to achieve policy goals such as full employment or a Green New Deal. The reason why agents in the economy accepts this money only consisting of numbers without any intrinsic value is the obligation to pay taxes. Since the state has the power to impose taxes, individuals need to get hold of money as this is the only way to meet their obligations; this is how the currency is accepted as a means of payments. The government thus has the power to run unlimited deficits because the fact that money is needed to pay taxes guarantees its acceptance even if those taxes do not cover expenditures. In fact, the government should run deficits because it creates the demand required for full employment while a balanced budget constrains it. The government cannot go bankrupt because there is no lack of currency it issues itself. The conditions identified by MMT for the system to work are the following: 1) the country must be sovereign of its own currency and 2) inflation needs to be kept under control. Once the latter starts accelerating due to increased nominal demand stemming from government expenditures, taxes can be increased in order to withdraw money from circulation. However, as long as full employment is not achieved, prices are argued to remain stable.

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Return of the Bond Villains

In 1825 a Javanese prince named Diponegoro touched off a five-year, ultimately unsuccessful, war of resistance against the Dutch colonial government. As detailed by Peter Carey in his biography of Diponegoro, one of the causes was a land-rent system imposed by the Dutch on the Javanese sultanate of Yogyakarta. Under this system, landowners were encouraged to rent their estates directly to European plantation owners for the production of cash crops. This had a disruptive effect on the local economy and the Governor-General ordered it halted. But there was a catch. As the land-rent system was unwound, the Javanese landowners were forced to buy out the plantation owners in order to get control of their land back.

Many had already used the rents to buy imported luxury goods, and they fell into debt paying out large and often inflated sums to the plantation owners. The sultan was expected to back-stop these debts using payments he received from the Dutch for granting them the right to collect revenue on the kingdom’s toll roads. This created a situation where a Javanese merchant travelling from Yogyakarta to Semarang had to pay fees to the Dutch toll road agents. A portion of those fees then went to the sultan, who used them to back-stop debts being incurred by Javanese landowners as they bought back their own land back from European plantation owners.

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Covid-19 and The Myth of Convergence: The West, the Rest and the urgent need for fiscal space in the Remainder

Imagining recovery, while a pandemic rumbles on, is an ominous task. But governments around the world have been forced to contend with this challenge. Several African, Asian and Latin American economies were in precarious financial positions before the pandemic hit. Fluctuations in global commodity prices in recent years and mounting trade deficits had already forced several African countries to request the International Monetary Fund (IMF) for a range of support mechanisms including credit facilities. Debt was already reaching alarming levels. The pandemic made economic dependencies more salient, with Zambia plunging towards becoming Africa’s first pandemic-related private debt default

The recent thrust of research championing possible convergence (often based on questionable and selective use of data) between ‘developed’ and ‘developing’ countries ignores the vast range of economic trajectories of former colonies. In slapdash cross-country economic studies, a strategic use of averages and unreliable categorisation is often used to draw generalisations about large-scale change. Sweeping claims made about a rising ‘developing’ world often fail to isolate China’s rise. There is rarely any acknowledgment that most countries’ economies remain undiversified and deeply dependent on foreign actors. The data used to make the case for convergence often relies on GDP and human development indicators, rarely mentioning let alone measuring the structural transformation of economies. Structural transformation remains one of the essential facets of economies that have ‘caught up’ historically. Whether countries can retain fiscal space after this crisis will inevitably depend on the nature of structural transformation and how that has shaped national growth and dependency within the global economy.

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Where Is the Risk in the COVID Economy? A look at shadow banking

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By Janet Roitman and Andrew Moon

We are witnessing a public bailout of the private sector that dwarfs the bailout response to the 2007­–2008 Great Recession. Compared to the $700 billion Troubled Asset Relief Program (TARP) implemented in 2008, today’s mobilization of public funds through the Coronavirus Aid, Relief, and Economic Security (CARES) Act amounts to a whopping $2.3 trillion, thus far.

As we know from media coverage of the CARES Act, today’s relief programs are intended to support payrolls, corporate operations, and small business overhead. What we don’t hear from the mainstream media is news on how these relief programs serve, once again, to privatize profits and socialize losses.

Unfortunately, few people are training their sights on that process — that is, on the actual mechanisms by which public funds are being used to underwrite not payrolls or job creation, but rather new sites of capital accumulation.

Just where are these new sites?Read More »

The perils of monetary policy in the global periphery during the Covid-19 pandemic

For several decades, countries of the periphery have been deeply in the grip of debt. The Covid-19-induced crisis has severely accelerated indebtedness and thus increased financial vulnerability. Recent policy measures by peripheral governments and central banks have brought momentary relief, but ultimately represent a manifestation of the interests of finance capital to get the most out of peripheral economies as long as it is still possible. 

Because of the dependence of their currencies on international capital flows, political autonomy in peripheral economies is extremely limited due to the possible effects of political decisions on the movement of such flows. The enormous power of financial markets over monetary policy in the periphery is again becoming evident during the current crisis. The crisis in the global periphery is generally much more severe than in the central countries, not only because of often inadequate health systems that have been abandoned under three decades of neoliberal policy. As peripheral assets do not serve as a store of value, “investors” withdrew almost 100 billion dollars from “emerging markets” within three months, constituting a historically unprecedented capital flight. Factors such as the deflation of prices of primary resources, the fall in external demand for manufactured products, and the fall in cash flows due to decreasing remittances and tourism mean that financial pressure has increased even more. Consequently, peripheral currencies significantly depreciated with the beginning of the crisis, in some cases by as much as 20-30%, as in the cases of Brazil and Mexico.

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