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”.
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.
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.
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 »
In 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 »
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 »
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 »