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 »

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


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 »

Lean on me: Development financial struggles and national development banks


National development banks are back in fashion and here to stay. A number of countries benefited from the global economic boom during the 2000s as exports and commodity revenues surged. These countries’ governments stored some of the current and fiscal account surpluses and used the capital to expand state financial institutions. Two prominent types of institutions have grown rapidly, namely sovereign wealth funds (SWFs) and national development banks (NDBs), which often have financial return and development stimulation as their core mandates, respectively. Much attention has been afforded to how these organisations’ activities have turned into a global force. For example, the Norwegian SWF’s investment spans across 73 countries, including shares in more than 9,000 companies, and China’s NDBs have emerged as the developing world’s leading project backer.

More recently, NDBs have been identified as important agents in funding domestic development projects in a wide range of developing and advanced countries. The perceived role of NDBs is shifting from a reactive counter-cyclical role towards a proactive patient capitalist role. Popularity in NDBs may appear to be obvious due to the rising interest in pursuing state-designed development planning and industrial strategies over the past decade. While many observations have focused on the growing inclination towards state activism as catalyst to NDBs’ expansion around the world, this piece examines three structural challenges incentivising developing countries to mobilise NDBs. Read More »

The currency hierarchy and the role of the dollar as world money

dollar-1445476_1920There has recently been much talk that the hegemony of the United States is crumbling, from the decline in its share of world GDP to its possible submission to a new economic power such as China. However, little has been said about the fundamental pillar that sustains the power of the United States, the US dollar.

Globally, the dollar is the most utilized currency, both in trade in products and services and in cross-border financial operations. Given the continued dominance of the US dollar as the key currency of the international monetary system, it is difficult to speak of a declining US hegemony. But how to explain the power of the dollar and the apparent immunity of the United States hegemony in times of financialization?Read More »

NEW BLOG SERIES: State capitalism(s) – Interrogating the ‘return’ of the state in development

6a00d83452719d69e2014e86055c29970d-800wi.jpgFrom Quantitative Easing to neo-mercantilist policies, the renewal of industrial policy, the multiplication of sovereign wealth funds and marketized state-owned enterprises, increased state participation in global value chains and global networks of corporate ownership, the state seems to be ‘back in business’ everywhere. This raises a series of questions:

  • Are we witnessing a shift to state-led development? A return of ‘state capitalism’ under a globalised and financialized form? Are these processes challenging market ascendance and/or neoliberalism as a global development regime?
  • Has there been a transformation of the developmental state and of the logics and instruments of ‘catch-up’ development? New tools of state intervention for industrial and innovation policy?
  • What are the implications of the resurgence of ‘state-capital hybrids’ (state-sponsored investment funds, state-owned enterprises, development banks, etc.) as key actors in development? Are these transforming the global development finance architecture? What is the relationship between, on the one hand, state-owned, state-controlled, and state-directed capital, and on the other hand, private capital?
  • What are the wider geopolitical and geo-economic shifts in which the rise of the new state capitalism is embedded? What is new about the recent ‘wave’ of state capitalism across the global economy? What are the strategic, structural/epochal, and contingent drivers of its emergence?
  • What is the progressive potential of these developments, both in the global South and in the global North? What are the limits to the new state capitalism, and the various forms of resistance to it?

Read More »

Finance Damages Democracy – and Brexit Will Make it Worse!


The ‘do or die’ Brexit deadline this Halloween has come and gone without bringing much certainty about the policy and political landscape going forward. UK voters who hoped for a clear-cut end of the Brexit saga were disappointed as big questions remain unanswered while new ones have been added: What will the December election bring? Will there be a second referendum? A different deal? A further extension? 

There seems, however, one definite outcome of the Brexit process: UK democratic institutions have been hollowed out permanently. Individual politicians have certainly contributed to this outcome. However, it would be too easy to blame the disintegration of democracy in rich countries entirely and exclusively on Johnson, Trump, and the like. Rather more systematic and structural trends are at play, which raise the old question of whether capitalism and democracy are compatible or rather contradictory systems. The claim that capitalism will usher in democracy, since free markets rely on an open societal order, or at least fundamentally weaken authoritarian regimes, has been proven untenable. This is particularly clear as the Chinese Communist Party tightens its grip over social media, using information technology to survey ever-growing parts of Chinese people’s lives.   

It is striking though that among rich countries the crassest examples of democratic disintegration are unravelling in the two Anglo-Saxon economies which have been hailed as economic success stories during the 1990s and early 2000s: the UK and US. Much of their growth spurts over this period was fuelled by the increasing size and influence of their finance industries and so is the current hollowing-out of their democratic institutions. In brief, we are currently experiencing the effects that financialisation has on democracy. Of course, capitalism and democracy are generally difficult to reconcile as convincingly argued by Polanyi. The fact that a democratic order calls for equality of all citizens before the law and provides all of us with the same vote, while our economic order simultaneously introduces a strict hierarchy based on ownership is possibly the clearest illustration of the conflict between democracy and economic order. But it is further stoked under financialisation. This blog post unpacks how financialization affects democracy in a variety of ways, through three examples, namely social provisioning, the Euro crisis, and the Brexit saga.Read More »

From the Washington Consensus to the Wall Street Consensus

Photo: Jpellgen

A new report published by the Washington DC office of the Heinrich Böll Foundation reviews the recent initiative being led by the G20 countries and their respective development finance institutions, including the major multilateral development banks, for the financialization of development lending that is based on the stepped-up use of securitization markets.

The report details how the initiative goes beyond the Washington Consensus reforms of the last few decades by calling on developing countries to adopt even farther-reaching degrees of financial liberalization on a new order of magnitude. In what Prof. Daniela Gabor of the University of West England, Bristol, calls the Wall Street Consensus,” such reforms would involve a wholesale reorganization of the financial sectors and the creation of new financial markets in developing countries in order to accommodate the investment practices of global institutional investors.

The new report, From the Washington Consensus to the Wall Street Consensus describes the key elements of the new initiative – specifically how securitization markets work and how the effort is designed to greatly increase the amount financing available for projects in developing countries by attracting new streams of private investment from private capital markets. The paper introduces the basic logic underpinning the initiative: to leverage the MDBs’ current USD 150 billion in annual public development lending into literally USD trillions for new development finance. In fact, the World Bank had initially called the initiative “From Billions to Trillions,” before finally calling it, “Maximizing Finance for Development.

While securitization can be useful for individual investors and borrowers under certain circumstances, the proposal to use securitization markets to finance international development projects in developing countries raises a set of major concerns. The report lists 7 important ways in which the G20-DFI initiative introduces a wide range of new risks to the financial systems in developing countries while undermining autonomous efforts at national economic development.

The key risks of securitization are:

  • The inherent risk because securitization relies on the use of the “shadow banking” system that is based on over-leveraged, high-risk investments that are largely unregulated and not backed by governments during financial crises;
  • The extensive use of public-private partnerships, despite the poor track record of PPPs, many of which have ended up costing taxpayers as much if not more than if the investments had been undertaken with traditional public financing;
  • The degree of proposed deregulation reforms in the domestic financial sector required of developing countries would undermine the ability of “developmental states” to regulate finance in favor of national economic development;
  • The degree of financial deregulation required would also undermine sovereignty by making the national economy increasingly dependent on shortterm flows from global private capital markets and thereby undermine the sovereign power of governments and their autonomous control of the domestic economy;
  • The uncertainty relating to governance and accountability for the environmental, social and governance standards associated with development projects. Such accountability has been fixed to traditional forms of public MDB financing for development project loans, but as future ownership of assets is commercialized and financialized, fiduciary obligations to investors may override obligations to enforce ESG implementation;
  • The deepening of the domestic financial sectors in developing countries, as required by the initiative, can create vulnerability as the size of the financial sector grows relative to that of the real sector within economies; and
  • The privatization and commercialization of public services, including infrastructure services, as called for by the initiative, has faced a growing backlash as reflected by the global trend of remunicipalizations. The fact that the securitization initiative is being promoted in such a high profile way by the G20 and leading DFIs despite all of these risks reflects an intensified contest between those supporting the public interest and those supporting the private interest.

The report also documents the relatively minor degree of interest expressed so far by global financial markets in the initiative, suggesting it is not likely to galvanize the trillions of dollars claimed by its proponents.

It concludes by reviewing the arguments for the scaled up use of traditional public financing mechanisms and several of the important ways in which this can be done, including steps that could be taken by G20 countries, DFIs and governments.

Rick Rowden recently completed his PhD in Economic Studies and Planning from Jawaharlal Nehru University (JNU) in New Delhi.