When President Obama’s fortunes were tanking in the winter of 2010, he needed a way to come out punching at the bankers again in order to gain some more momentum on financial reform—and with the voters. So he turned to an unlikely “populist” symbol—Paul Volcker, former head of the Federal Reserve System from the 1980s, who had been widely reviled, especially on the left, for his anti-inflationary crusade and high interest rate policy at that time. Volcker’s policy raised unemployment to dizzying heights, resulted in thousands of bankruptcies, and ushered in the Third World debt crisis that left much of South America in economic ruin for a decade or more. But as a sign of how crazy U.S. politics had become and how far economic discourse had shifted to the right in the ensuing 30 years, Paul Volcker had become a voice of relative sanity in the fight over financial reform in the wake of the Great Financial Crisis of 2007-2008. Obama called a press conference with Volcker at the front and Timothy Geithner, Obama’s Treasury Secretary who had been very unenthusiastic about significant financial reform, slightly behind and with a scowl on his face. The conference announced Obama’s support for “the Volcker Rule,” which was to be included in the Dodd-Frank Financial Reform bill that was under development and the subject of furious debate in Washington—and that ultimately became law in the summer of 2010.
Shadow banking in China has become an important, closely watched topic. This sector outside of traditional bank loans is relatively large and growing, and there are many risks associated with it, as I have discussed in previous posts (see here, here, and here). However, it is a topic that will soon fade into the background as regulation issues are resolved, the economy declines, shadow banking institutions fail, and financial reform takes place.
When I first began to study this sector in 2006, shadow banking was mainly referred to as informal finance, which encompassed everything in the non-bank financial sector, from pawn shops to private equity firms. Since then, alternative financial institutions have been revived (such as trusts) or have grown in importance (like credit guarantee companies) and begun to overshadow curb lending. China’s economic boom that preceded the global economic crisis was extended by government spending, and increased investment in fixed assets like real estate or plant expansion allowed the boom to continue.
During times of economic growth, financial innovation thrives, in many forms. Loans were extended to real estate developers who were constructing anything from luxury hotels to new cities, to local governments that were building up infrastructure, and to a range of industries. Many funded ventures are now flagging, and the financial sector, particularly the shadow banking sector, is bearing this stress.
“There is nothing called junk food. The problem with obesity lies with children who do not exercise enough. What is needed is for them to run and jump, and to do this they need to consume high-calorie food. So, food high in salt, sugar and fat is good for them.” This is what was argued vehemently and rudely by representatives of the food industry in the committee, set up under directions from the Delhi High Court to frame guidelines for junk food in the country.
On the face of it there was no one from the junk food industry in the committee. In the early meetings, we only knew that there were members of two associations who were representing the food industry in the committee. But as discussions got under way, it became clear that the big junk food industry was present in the meeting. We learnt that the member representing the National Restaurant Association of India was a top official from Coca-Cola—the world’s most powerful beverage company that is at the centre of the junk food debate globally. The other grouping, All India Food Processors Association, was represented by Swiss food giant Nestle, which has commercial interest in instant noodles and other junk food.
Sharmini Peries of the Real News Network interviews Triple Crisis blogger Gerald Epstein about new U.S. federal government regulations raising the required capital banks must hold. Epstein explains why the regulations will be more stringent, allowing fewer loopholes, than previously, why they will reduce systemic risk somewhat in the banking system, but why they’re “probably not enough.”
This is the second part of a four-part interview with Costas Lapavitsas, author of Financialised Capitalism: Expansion and Crisis (Maia Ediciones, 2009) and Profiting Without Producing: How Finance Exploits Us All (Verso, 2014). This part turns toward international aspects, including the contrasts between financialization in high-income and developing countries and the relationships between financialization and both neoliberalism and globalization. (See the first part here.)
Costas Lapavitsas, Guest Blogger
Dollars & Sense: You’ve anticipated our question about whether financialization is exclusive to high-income capitalist countries or is also happening in developing countries. How is it different in developing countries?
CL: Financialization in developing countries is a recent phenomenon, which has begun to emerge in the last 15 years in full earnest. We see a number of middle-income countries that are financializing, and we have to look at it carefully to understand it. One thing that is immediately obvious is that, in mature countries, financialization has been accompanied by weak or indifferent performance of the real economy. Rates of growth have been weak, crises have been frequent, unemployment has been above historical trends. We see a problematic state of real accumulation in mature countries. But when we look at developing countries, it is possible to see countries with phenomenal financialization, where growth has been reasonably strong. Brazil has been financializing during the last ten years, and yet its growth rate has been significant. Turkey has been financializing and yet its growth rate has been significant, and so on. So financialization in developing countries is not the same as in mature countries, because typically in the last ten years, it’s been accompanied by significant rates of growth.
The European Parliament has just released a major report with a clear message for all those engaged in the growing debate about the role of external private finance in development: quality matters far more than quantity. As the post-2015 debate on financing development continues, and the UN gears up for a major Financing for Development conference in 2015 or 2016, this timely paper – authored by four experts (I was one of the co-authors) gives clear recommendations on how European governments can ensure that fighting poverty stays at the heart of this agenda.
The Current Picture
Firstly, here are the main findings of the report’s review of all available data on global private finance flows:
Domestic private investment is significant and growing. Public and private investment, taken together, have grown as a proportion of GDP, from 24.1 % in 2000 to 32.3 % in 2011.
Outflows of private financial resources are extremely large. Most are not productive investments in other countries but repayments on loans (over USD 500 billion in 2011), repatriated profits on foreign direct investment (FDI) (USD 420 billion) or illicit financial flows (USD 620 billion).
Figures greatly overstate the real net financial private flows to developing countries. Foreign Direct Investment (FDI) is the largest resource flow to developing countries, but outflows of profits made on FDI were equivalent to almost 90% of new FDI in 2011. In addition, FDI includes the reinvestment of earnings from within the ‘destination’ country: not an inflow.
Argentina’s Economic Policy in a Time of Crisis: Don’t Throw the Baby Out With the Bathwater
Santiago Capraro, Guest Blogger
“Our definition of the concept of “monetary regime” had two parts to it: it is (a) a system of expectations governing the behavior of the public, and (b) a corresponding set of behavior rules for the policy-making authorities that will sustain these expectations.”
- A. Leijonhufvud, “Inflation and Economic Performance,” WP No. 223, UCLA, 1981.
In the first three months of 2014, the Argentine peso suffered a nominal devaluation of 20% (an annual rate of over 60%) and the real interest rate jumped from zero to around 10-15%. Argentina’s government has wanted to stop the fall of the Argentinean Central Bank’s (BCRA) international reserves. The drop in reserves has three origins:
Bilge Erten and José Antonio Ocampo, Guest Bloggers
The ongoing financial volatility in emerging economies is fueling debate about whether the so-called “Fragile Five” – Brazil, India, Indonesia, South Africa, and Turkey – should be viewed as victims of advanced countries’ monetary policies or victims of their own excessive integration into global financial markets. To answer that question requires examining their different policy responses to monetary expansion – and the different levels of risk that these responses have created.
Although all of the Fragile Five – identified based on their twin fiscal and current-account deficits, which make them particularly vulnerable to capital-flow volatility – have adopted some macroprudential measures since the global financial crisis, the mix of such policies, and their outcomes, has varied substantially. Whereas Brazil, India, and Indonesia have responded to surging inflows with new capital-account regulations, South Africa and Turkey have allowed capital to flow freely across their borders.
This is the first part of a four-part interview with Costas Lapavitsas focusing on the Era of Financialization and the transformations at the “molecular” level of capitalism that are driving changes in economic performance and policy in both high-income and developing countries. Lapavitsas is a professor of economics at SOAS, University of London, and the author of Financialised Capitalism: Expansion and Crisis (Maia Ediciones, 2009) and Profiting Without Producing: How Finance Exploits Us All (Verso, 2014).
Costas Lapavitsas, Guest Blogger
Dollars & Sense: Over the past few years we’ve heard more and more about the phenomenon of “financialization” in capitalist economies. This concept appears prominently in your writings. How would you define “financialization”?
Costas Lapavitsas: Well, it’s very easy to see the extraordinary growth of the financial sector, the growth of finance generally, and its penetration into so many areas of economic, social, and even political life. But that, to me, is not sufficient. That is not really an adequate definition. In my view—and this is basically what I argue in my recent book and other work that I’ve done previously—financialization has to be understood more deeply, as a systemic transformation of capitalism, as a historical period, basically. I understand it as a term that captures the transformation of capitalism in the last four decades. To me, this seems like a better term to capture what has actually happened to capitalism during the last four decades than, say, “globalization.”
The concept of the “middle-income trap” had been brought into fashion by Barry Eichengreen and colleagues (see their recent NBER Working Paper). The concept is used to describe the challenges, for countries with GDP per capita of around $16,000 (at 2005 prices), in achieving productivity growth and key institutional transformations.
Many economists have taken note of the fact that, as economies converge to this middle-income level, “easily-accessible” sources of growth based on the transfer of virtually unlimited supplies of labor from rural agriculture to urban centers and towards capital-investment-led high profit sectors gradually lose their stimulating impact. Technologies grow mature and finally become worn out. After this threshold is reached, sources of growth must be derived from technological and institutional advances and productivity gains, which can only be achieved by investments in human capital, research and development (R&D), and institutional reforms. This, however, is no easy task, and countries often get “trapped” at this stage of development, hence the middle-income trap.
Yet, as such, the middle-income trap is an average concept defined by national boundaries. Recent work reveals, however, that divergences persist, and often times are reinforced, between regions embedded within national economies and even within municipalities. In many instances, poverty-stricken regions co-exist side by side with rich and highly productive regions. The persistent co-existence of such divergent structures leads us to ask whether poverty is in fact being reproduced by the workings of the market mechanism favoring high-income regions. This observation has its roots in a long tradition in development economics of duality and dependency theories.