Financialisation in Latin America

Challenges of the Export-Led Growth Model

Noemi Levy, Jorge Bustamante

• Publisher: Routledge
• Year: 2018
• ISBN:
  9780429874413
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Financial capital continues to dominate Western economic organisations, despite major financial and economic crises. While these have not affected Latin American countries in the same way, other economic problems emerged after the reversion of loose monetary policies that debilitated the export-led growth model. This book discusses the issue of the financialised globalisation model in Latin America, looking at the region's relationship with the international market.

This edited collection is divided into three main sections. The first section discusses regional trends highlighting issues of trade and payments in financialised economies, the impact on deindustrialisation, its effect on inequality, external capital movements and monetary policies. The second section analyses the failure of comparative advantages of the export-led model in Colombia, Argentina and Mexico. Finally, the last section deals with the growth of financial balance sheets in small and developing economies such as Chile; how growth, investment and big corporation evolution were affected in Brazil and Mexico; and the effects of foreign exchange activity in Mexico. Through these discussions, this book aims to deepen the understanding of the crisis of financialisation and the export-led model, raising the question of whether it is possible for this model to continue or if it requires major readjustments to unfold economic growth.

This book provides a distinctive analysis of the financialisation mechanisms in developing countries in order to emphasise affinities and differences between the countries of the region in productive and financial terms. It will be of great interest to economic and social science scholars and students, to journalists specialising on economic and development issues, and, more importantly, to policy makers.

Part I

Regional trends

1

Multilateralism and regional trade and payments¹

Jan Toporowski

The question of multilateralism emerged in the 1930s as a result of the breakdown of the gold standard. Faced with insufficient gold reserves to maintain payments on cross-border debt obligations, most notably in the case of the German reparations, the issuers of the major trading currencies suspended the convertibility of their currencies into gold, and sought to create international currency areas in which the currency of the central bank at the monetary centre of the currency area could be used as a means of payment (Kindleberger, 1973, Chapter 11). For residents in those areas, this in effect introduced a two-tier trading system in which trade, income and capital payments to countries within the currency area could be made freely, while such payments to counterparts outside the currency area were subject to exchange rate risk and bureaucratic impediments, such as blocked accounts or obligations to transfer at expensive official exchange rates. Formally, or informally, such currency areas were ways of economising on international reserves or, to put it another way, preventing the circulation of reserves between currency areas.

In this situation, multilateralism represented an ideal international payment system, in which revenue from trade with one country could be used to pay for trade with any other country at a stable and convenient rate of exchange between the currencies. This ideal was originally represented by the gold standard, under which gold obtained from exports to any country on the gold standard could be used to pay for imports from any other country on the gold standard. But gold had the disadvantage of being inelastic in supply and, by the end of the Second World War, of being concentrated in the USA. The solution made famous in the Keynes Plan was to substitute gold for a bookkeeping currency (Keynes’s “bancor”), whose supply would be more elastic than that of gold. The first departure from multilateralism following Bretton Woods was a gold and dollar standard, whose presence in the reserves of governments committed to the new fixed exchange rates was insufficient to support international trade. In a situation of widespread capital controls, this reserve insufficiency appeared as problems in balancing foreign trade. This was the beginning of a reduction of the monetary question of multilateralism to a real issue of foreign trade that came to be soluble by the autonomous monetary policy of a given country’s government by means of official interest or exchange rates. In academic discussions, the problems of balancing foreign trade were a prelude to a reconstruction of currency area theory in real terms, in which a currency area represents an “optimal” solution when the labour market is flexible, as opposed to the way in which currency areas appeared in the 1930s, and more recently, in response to a shortage of foreign currency reserves.

This chapter argues that currency areas are a means of economising on foreign currency reserves, and they arise in order to overcome a scarcity of such reserves that inhibits international payments. The essence of a currency area is a sharing of such reserves. Hence, a currency board is not necessarily a currency area: Argentina, during its ill-fated currency board with the US dollar, clearly was not in a currency area with that currency. (The question of whether the US Federal Reserve’s swap agreements with its counterparts in the European Monetary Union, Canada, the UK, Japan and Switzerland constitute a “currency area” is not for this paper.)

The section that follows examines the historical discussion preceding the Bretton Woods conference, and the emergence of multilateralism as an essential monetary counterpart to free trade. This is followed by a summary of the criticism, presented by “Fritz” Schumacher, Michał Kalecki and Thomas Balogh, which addressed the official proposals at Bretton Woods and assessed them against the standard of multilateralism. The final section examines how the Bretton Woods arrangements gave way to a re-emergence of currency areas, a re-emergence that is not explained by optimal currency, or floating exchange rates, but by the shortage of international reserves built into the international monetary system.

The Bretton Woods discussions

In 1933, a World Economic and Monetary Conference was held in London to consider measures to reverse international economic deflation and rescue free trade from protectionist pressures. The failure of the conference gave way to tariffs and bilateral payment agreements between governments. Interwar financial and economic diplomacy was succeeded in wartime by autarky. At the start of the Second World War, regulations were introduced in Britain to give the government control over foreign assets and payments. This in effect reduced international payments to bilateral clearing between the British government and the governments of its allies and neutral states, while freezing payments to “hostile powers”. Already in 1941, partly in response to German plans for a payments union in Europe, economists employed in the British War Cabinet were working on the question of how bilateral payments could be replaced after the War by multilateral payments, that is, payments directly between traders in different countries and in currencies that were directly convertible against each other. While there was general agreement that free trade was desirable, the British Treasury’s advisor on the question of international payments, John Maynard Keynes and his US counterpart, Harry Dexter White, wanted to establish a system of multilateral payments in which exchange rates were fixed but adjustable, although they were famously to differ on how this was to be achieved. In April 1943, Keynes’s proposals were published in London as a Government White Paper, simultaneously with the publication in Washington of White’s proposals (White Papers proposals, 1943, 1944). The key difference between them was that Keynes wanted a Clearing Union with a currency, provisionally called “bancor”, issued by an International Clearing Bank that would serve as the benchmark against which exchange rates would be fixed. Trade surpluses would be automatically deposited in an investment fund for on-lending to deficit countries, and interest payments, deducted from surpluses above a certain quota necessary for trade, were supposed to discourage excessive surpluses. Governments in deficit would have automatic borrowing rights, subject to similarly modest interest payments. The White’s proposal recommended an exchange rate stabilisation fund, into which member countries would pay gold, foreign currency and government bonds, in exchange for overdraft facilities with a right to automatic borrowing against a quota set by the deposits of the government in the fund. Above quota borrowing would require the agreement of a majority of depositors in the fund (weighted by their deposits).² In May 1943, the US government started meetings, with representatives of Allies and governments associated with them, to discuss and agree financial and monetary arrangements for the post-War peace, with a clear view to avoiding the financial difficulties that had exacerbated economic instability in the 1920s and 1930s.³

Despite the high level of these discussions, the key issues surrounding multilateralism were outlined outside the official exchanges in a paper that Schumacher published in 1943, but whose foundations date back to 1941 (Schumacher, 1943a; Keynes, 1980, CW, Vol XXV:21). Keynes paper (ibid.), entitled “Multilateral Clearing”, laid out the advantages of multilateralism and the disadvantages of bilateralism. Under multilateralism, anyone in any country could buy goods anywhere else in the world using their income irrespective of whether it had been accrued in the home market, in the domestic currency of the purchaser or in any other market in a foreign currency. By contrast, bilateralism restricts trade to bilateral balance with all trading partners:

Under a regime of bilateral clearing each country has, one might say, free access to the trade and raw materials, not of the world as a whole, but only of those other countries which are its customers. Under pool (multilateral) clearing access to trade is universally free.⁴

In this way, Schumacher underlined the dependence of free trade on the international payments system. This was a radical break with the conventional theory of international trade and payments: in Schumacher’s time, and in ours, the arguments around free trade, such as the theory of absolute or comparative advantage, or the more recent “new” trade theory, are conducted in real terms, usually using stylised bilateral trade analysis, whose conclusions are then supposed to apply also to multilateral trade. Similarly, exchange rate theory is presented in a bilateral way, with the currency unit of the home market, or its interest rate, compared to that of the “rest of the world”. This real or bilateral thinking applies as much to the recent “optimal currency area” analysis that is used to frame the discussion on currency areas, as it did during the Bretton Woods discussions. As a result, the actual rationale for currency areas, in the shortage of international reserves to the needs of international trade and payments, is largely ignored, or reduced to its symptom, such as the “dollar shortage” in international trade in the middle of the last century.

In the summer of 1943, a special supplement of the Oxford Institute’s Bulletin, on international payments, was prepared by economists at Oxford University. The editor of the Supplement explained the rationale for it as follows:

The subject matter of international trade and finance is of a highly technical nature and discussions of these problems tend, therefore, to be confined to ‘experts’, city circles and business men. It is, of course, appropriate that the efforts to come to a satisfactory plan should be left to the experts of the Allied Nations whenever technical details are concerned. It is important, however, that a wider circle than the mere experts should understand the general issues involved and help to shape the line along which agreement should be sought by the experts. For, although questions of social security and full employment would appear to affect the life of the average citizen more immediately and fundamentally, there can be no doubt that his welfare and standard of living will be greatly influenced by the sort of international order or disorder in the economic relations between States which will emerge after the war, see Lessons of the Past.

(1943)

Apart from the editorial, approximately two-thirds of the Supplement consisted of a long article by Schumacher summarising the key mechanisms of the Plans proposed by Keynes and White. Given that one of the other two papers in the Supplement was co-authored with Kalecki, it could be said that the Supplement owed more to Schumacher than to anyone else at the Institute. Schumacher’s summary endorsed the view in both plans that free trade alone could not secure full employment. Left to themselves, market forces would not make trade balances converge on equilibrium, and the absence of equilibrium would deflate demand in trade deficit countries, reinforcing a tendency towards deflation in the global economy as a whole. However, he considered that both plans were inadequate to provide the liquidity necessary to maintain multilateralism, and this brought with it the danger that individual governments would revert to rationing foreign exchange or bilateralism, that is, settlements between central banks on a net basis. The net basis (transferring only the foreign currency or gold equivalent to the balance between imports and exports during the settlement period) would inevitably encourage the direction of exports towards countries from which excess imports were being purchased, or else limitations on those imports. In this way, bilateralism undermines free trade.

According to Schumacher, although the Keynes Plan offered a higher level of international reserves to support free trade, it suffered from a lack of clarity about the concept of equilibrium. “Under the British Plan ‘equilibrium’ is defined as the absence of bancor credits and debits”. However, this supposes that the flow of bancor credits and debits is determined by trade flows. In fact, the balance of payments consists of three parts: the balance of trade and income payments (the current account), the balance of long-term capital flows and the balance of short-term bank transactions. These last, in the Keynes proposal, would be the bancor credits and debits. The flaw in the Keynes Plan was its presumption that long-term capital flows are balanced or non-existent, so that the balance of trade and income payments is equal to the net flow of bancor credits and debits. But if there are long-term capital flows, then their balance can seriously disrupt the flows of short-term bancor credits and debits (Schumacher, 1943b). Keynes did indeed advocate capital controls to eliminate such disruption (Skidelsky, 2001:231). But then he could not also claim, as the White Paper stated, that foreign exchange transactions can be “carried on as freely as in the best days of the gold standard”, that is, as Schumacher noted, without even having to notify the monetary authorities of the transaction.

The Kalecki/Schumacher plan

The third paper in the Supplement was jointly written by Schumacher and Kalecki. Like Schumacher’s summary paper on the White and Keynes Plan, the paper co-authored with Kalecki found the Keynes Plan to be preferable to the White Plan. But the Keynes Plan would not be effective unless modified and ...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Table of Contents
• List of figures
• List of tables
• List of contributors
• Acknowledgements
• Introduction
• Part I Regional trends
• Part II The failure of comparative advantages
• Part III The growth of financial balance sheets
• Index