Financialisation in Emerging Economies

Changes in Central Banking

Juan Pablo Painceira

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781317366645
• Edition: 1
• Topic: Economía
• Subtopic: Macroeconomía

Since the beginning of the 2000s, emerging market economies, or middle-income countries, have embarked on major changes in their domestic financial systems. These changes – in which central banks have been key players – are shaped by the process of financialisation, which can generally be characterised by the dominance of financial considerations in the conduct of major agents (banks, non-financial corporations and households). As a consequence of the emerging markets crisis at the end of the 1990s, a new phenomenon in global financial markets emerged: a massive accumulation of foreign reserves in emerging economies. This has had important consequences for the global economy in which developed economies are the major beneficiaries.

Based on Marxist political economy, this book studies the trends towards financialisation in emerging economies, focusing on the effects of the reserve accumulation in their international and domestic spheres. It argues that reserve accumulation has been the very catalyst of financialisation, being related to the subordinated position of emerging economies in the international monetary system. The chapters explore how these trends were exacerbated by the 2008 global financial crisis as well as the extraordinary monetary measures undertaken by the major central banks to deal with the effects of this. Foreign investors invested an enormous amount into emerging economies between 2010 and 2012 and emerging-market financial assets have doubled since 2008. To conclude, the book discusses how the US monetary policy normalisation has added more complexity to these trends since 2013 by putting pressure on emerging markets related to the level of global liquidity.

This book provides essential reading for students and scholars of finance, economics and political economy who are interested in the unfolding of the subordinated financial integration of emerging economies into global financial markets.

Part I
Setting the scene on financialisation in emerging market economies – financialisation and liquidity management

Challenges to central banking in contemporary capitalism

1 Some notes on financialisation and a brief outline of the book

DOI: 10.4324/9781315670287-2

Financialisation is broad phenomenon and has been well discussed in the last years, particularly in developed countries. There are different interpretations on this phenomenon, and its definition and scope have been subject to an open debate. Financialisation can be defined as the dominance of the finance sphere and its agents in recent economic performances (Epstein, 2005). Financialisation can also be understood as a “pattern of accumulation in which profits accrue primarily through financial channels rather than through trade and commodity production” (Krippner, 2005: 174). It reflects the systemic power and importance of “financial markets, financial motives, financial institutions, and financial elites in the operation of the economy and its governing institutions, both at the national and international level” (Epstein, 2002).

Some authors from the Regulation School consider financialisation as change in the regime of accumulation in capitalism (Boyer, 2000; Aglietta and Breton, 2001; Becker et al., 2010), from the Fordist regime of accumulation to a new regime that combines flexible labour markets with credit expansion in order to compensate the declining real wages (Boyer, 2000). The convergence of interests between workers and managerial class through the expansion of pension funds schemes has reinforced financialisation (Van der Zwan, 2014).

Another approach identifies some changes in contemporary companies as the major driver for financialisation, namely the shareholder value. Shareholder value means that the major purpose of companies is to make profit (or capital gains) for their shareholders. According to Aglietta (2000), shareholder value has become the rule for the transformation of capitalism, which in turn has provided the justification for the spread of new policies and practices favouring shareholders over other objectives of the firm. Financialisation can be defined as a trend on accumulation in which the profit making has mainly been through financial mechanisms rather than through trade and real production (Krippner, 2005). Sawyer (2015) says that the pursuit of shareholder value by corporations (principle for corporate governance) and the rise of household debt are the major features of financialisation. These features have shaped the practices of the financial system, which in turn have constrained the rise in real investment, consequently, output growth.¹

From the Marxist tradition point of view, the process of financialisation should be understood as an attempt to address the main features of contemporary capitalism. In this regard, Chesnais (2016) established that we live in a financialised accumulation regime in which there is the predominance of financial capital in real capital accumulation. Financial capital is a large concentration of money capital in the hands of global banks, and big pensions and mutual funds. These institutions are the money capital managers. Sotiropoulos et al. (2013) understand financialisation as organic development of the capitalist accumulation.

On the other hand, Fine (2010) put forward some general characteristics of financialisation, such as the expansion and proliferation of financial markets, complexity of financial instruments and services, domination of finance over industry, rising inequality and penetration of finance in a wide range of economic and social reproduction. Financialisation has been described in different ways, but in essence, it expresses the control of interest-bearing capital upon the allocation of social resources and social reproduction more generally, through distinct forms of fictitious capital (Fine, 2014).

The sources of financialisation can be defined both in terms of domestic economic developments and by the end of the Bretton Woods system in 1970s. These sources include the stagnation of late capitalism, the falling rate of profit and the consequent contraction of demand, requiring a series of financial activities for the continuance of the system (Magdoff and Sweezy, 1972; Magdoff and Sweezy, 1987; Arrighi, 1994; Brenner, 2004). The role of the state can be seen through the lifting of regulations on financial markets, such as opening of capital account and capital markets deregulation. The end of the Bretton Woods system is discussed by McNally (2009), Brenner (2006) and Lapavitsas (2013). The financial deregulation by government actions, which has unleashed the forces of finance, led to an unprecedented increase in financial markets and financial actors (Boyer, 2000; Aglietta and Breton, 2001; Dumenil and Levy, 2004).

More specifically, based on the Marxist tradition, financialisation represents a profound transformation of the financial system based on changes in real accumulation since the early 1970s (Lapavitsas, 2009, 2013). Financial activities have spread into several new economic sectors and areas of daily life: housing, pensions, consumption and so on. Growth of finance has provided a fresh scope for the form of value to expand, mainly in developed capitalist economies. Important elements of this process have been the privatisation of activities and capital assets that were previously under state control, as well as the deregulation of financial markets and institutions. Therefore, there has been an expansion of the circulation sphere relative to the productive sector in the last decades. In this sense, the process of economic development has been shaped by financialisation.

In this book, the general financialisation approach is based on the Lapavitsas’s contribution that addresses this phenomenon through changes in the key economic units, namely non-financial companies, banks and households. The first agent, non-financial companies, has been increasingly more engaged with financial practices in an independent manner. Financial considerations have become more important in the processes of determination of their profitability, investments decisions and organisational structure. They have increasingly relied more on open capital markets than on banks’ loans in funding their business activities.

On the role of the financial system, and of banks in particular, the transformation of banks has been analysed by Dos Santos and Lapavitsas (2008) and the rising importance of the financial markets by Aglietta and Breton (2001) as one of the main characteristics of the financialisation era. Banks have relied more on trading activities in open financial markets than in lending and borrowing transactions, particularly for non-financial companies. Banking deposits have been a declining source of funding for banks in the financialisation era (Dos Santos and Lapavitsas, 2008). The spread of trading operations through financial derivatives markets and the securitization activities were drivers of the process of financialisation beyond the traditional loans operations (Brian et al., 2009). Concomitantly, banks have also focused on boosting their relation with households through financial operations of making loans and taking their deposits or savings. Banks often have combined trading activities with lending operations to households. The rise in banking loans to households in selected emerging economies, particularly Brazil and South Korea, in the last decade or so, will be discussed later in this book.

The rise in banks’ trading activities is closely related to the development of derivatives markets. According to Bryan et al. (2009), derivatives and all “exotic” modern financial devices and innovations are the necessary precondition for the implementation of financialisation. They introduce a formative perspective on actual concrete (and different) risks, making them commensurate with each other and reducing their heterogeneity to a singularity (abstract risk).² Derivatives markets have also been key to the expansion of financialisation to new areas of the social life, such as health and sports (Bryan and Rafferty, 2014). Banks are the core of this market. Banks have been the key players in the global derivatives markets, being the pillars of their development, as they are the major counterparties.³ However, in our view, the preconditions for the spread of financialisation are the changes in key economic agents in capitalism and not the existence of risk and the possibility of measure through derivatives markets.

Finally, households have become more dependent on financial markets in order to satisfy their basic needs such as health and education as well as for the acquisition of key goods and housing. The rise in the level of indebtedness among households is key aspect in the financialisation era (Foster, 2006, 2008; Langley, 2008; Stockhammer, 2010). Households’ savings resources have also been increasingly managed by the financial system, in particular banks. In this sense, households have been integrated into financial system during the financialisation era.

More important, this book shows that the process of financialisation has a monetary basis as the role of the major players in the financial markets (banks) is based on the concept of money, which connects the production and circulation spheres. Monetary issues matter for the process of capital accumulation, and the expansion of finance in contemporary capitalism has been supported by banks through their liquidity pr...

Table of contents

• Cover
• Half Title
• Series
• Title
• Copyright
• Contents
• About the author
• Part I Setting the scene on financialisation in emerging market economies – financialisation and liquidity management: challenges to central banking in contemporary capitalism
• Part II Major emerging markets’ experiences across the global financial markets
• Final considerations
• References
• Index