Latin America: still caught in the capital flows trap

In a recent article, I discussed the poor state of Latin American economies drawing on some rather obscure works by Raúl Prebisch, explicitly addressed to the disturbing role of capital flows on (primarized and open) Latin American economies. I find that the post-2008 cyclical trend of capital flows is an exacerbated version of what has been affecting Latin America since the days of Prebich .

Mainstream literature on capital flows to developing countries has shared two important commonalities since the 1990s. This literature, for example in the tradition of New Institutional Economics,  tends to assume a beneficial effect of capital inflows, which leads to an improvement of peripheral institutions, whose deficiencies are ostensibly the main cause of economic turmoil and/or failure in attracting capital flows. In doing so, however, mainstream economists deliberately overlook the asymmetric characteristics of the international monetary system and the persisting hegemony of the US Dollar. 

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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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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 »

Oikonomia is Back, for Now

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Plato and Aristotle, at The School of Athens. Photo by By Raphael – Web Gallery of Art.

The current pandemic is a human tragedy on an enormous scale, not only in terms of death and illness but also in loss of employment, disruption to education and increased anxiety. Perhaps of most concern to politicians, the various restrictions put in place to reduce the spread of COVID-19 have had large negative effects on national and regional economies. 

As a result, many leaders have opted to ‘re-open’ their economies prematurely, partly since economic performance affects electoral cycles. In some cases there have been disastrous consequences to such loosening of social distancing restrictions, with spikes in infections in various countries or states. This has led to a discussion of a false dichotomy – between protecting human life and reviving the economy. 

This dichotomy is false for several reasons. At the most basic level, if large parts of the population get infected and either die or are unable to work, this would not bode well for the economy either. But more fundamentally, what we think of as ‘the economy’ is really broader than just profits and asset values. Read More »

Financializing state capitalism: Exchanges, financial infrastructures & the active management of capital markets in China

DCE trading floorThe development of capital markets has been a core focus of financialization research. For Epstein, financialization ‘means the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies’, while Pike and Pollard define financialization as the ‘growing influence of capital markets, their intermediaries and processes in economic and political life’. Other scholars also attribute a significant role to capital markets in financialization processes, be it in the dissemination of market-based financial activities and practices, the rise of shareholder value-oriented corporate governance, or ‘the increased ability to trade risk’. At the heart of and as a precondition of many aspects of financialization stand capital markets and their development. 

This is not only the case when it comes to financialization in advanced economies, but also with respect to the study of financialization in developing and emerging economies. Financialization processes are not uniform, they are rather variegated and refracted by national institutional settings that lead to different trajectories of financialization. As Lapavitsas and Powell emphasized, ‘both the form and the content of financialization vary according to institutional, historical and political conditions in each country’. This has also been picked up in debates about the relationship between financialization and the state. Previously, many scholars argued that financialization often results in a relative loss of state power vis-à-vis finance and the effects on developing economies are often described as potentially negative with financialization for instance decreasing their borrowing capacity and thereby policy space or deepening existing power asymmetries between states. But stemming from earlier discussions on transformations of the developmental state, more recent scholarship has highlighted that financial market development has often been actively facilitated by states. It argues that an increasing hybridization of financialization processes takes place in which state and (quasi-)state institutions often co-constitute financialization processes. 

Contributing to the growing literatures on variegated financialization and the state, in a paper titled ‘Financialization with Chinese characteristics? Exchanges, control and capital markets in authoritarian capitalism’ (recently published in Economy & Society) I argue that states are not only important actors facilitating financialization but can also exercise a considerable degree of control over financialization, thereby shaping its very form. Instead of a financialization process that follows a neoliberal logic and constrains state power, what we see in China is a ‘financialization with Chinese characteristics’ where the state actively tries to manage financialization and its social outcomes. Read More »

Cambridge Journal of Economics Special Issue on Financialisation in developing and emerging economies: Manifestations, Drivers and Implications Deadline 31st August 2020

Screenshot 2020-05-18 at 08.07.58In December 2018, we organised a two-day workshop on “How to Conceptualise Financialisation in Developing and Emerging Economies? Manifestations, Drivers and Implications” at Girton College, University of Cambridge. The idea behind this event was to move away from a significant focus on developed economies when discussing financialisation phenomena and give more space to find out what is happening in developing and emerging economies (DEEs). Existing studies on DEEs have often focussed on particular case studies. Investigating empirical aspects already observed in developed economies, There have been both limited attempts to engage with the concepts and perspectives from the Global South and at systematising the literature and in analysing particularities of DEEs.

The workshop was a success in many fronts, such as attendance, quality of papers and exchange of ideas. Five roundtables attempted to encompass key crucial aspects of this discussion in the context of DEEs, namely, Financialisation and The Global Economy, Financialisation and Production, Variegated Financialisation, Financialisation and the State, and Micro-financialisation. This was complemented by two excellent plenaries approaching both the theorisation of financialisation in DEEs and the avenues for future research. See the programme here.Read More »