Premature financialization: a conceptual exploration Hugh Whittaker

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Discussion Paper Series 2017 #02

Premature financialization: a conceptual exploration

D. H. Whittaker

Professor in the Economy and Business of Japan and Director, Nissan Institute of Japanese Studies, University of Oxford

January 2017

This work has received funding from the European Union’s Horizon 2020 research and innovation programme under the Marie Skłodowska-Curie grant agreement No 645763.

INCAS Understanding institutional change in Asia: a comparative perspective with Europe http://incas.hypotheses.org/ ABOUT THE INCAS PROJECT

INCAS is a Marie Skłodowska-Curie Actions R.I.S.E funded project under the European Commission’s H2020 Programme.

The project INCAS aims at creating a top-level research and advanced training network on institutional change in Asia, in comparative perspective with Europe. The coordinator, Ecole des Hautes Etudes en Sciences Sociales (France), promotes this network together with Oxford University (UK), Freie Universität Berlin (Germany), and in collaboration with Waseda Uni- versity (Japan). The aim of the proposed mobility scheme is to give birth to a European consortium and network of faculties and advanced graduate students specialized in the comparative analysis of institutio- nal change in Asia and Europe. The partners have chosen Japan as a reference point because of its com- parability with Europe as shown by previous studies, its historical influence on development and further institutional changes in Asia, and the expertise accumulated within our research team.

Analyzing current economic dynamics in Japan and later expanding this analysis to other Asian countries promises to generate insights that might be help to better understand challenges for Europe and to prepare relevant policy proposals. Our purpose is to compare the results obtained in the case of Japan and few other Asian countries (South Korea, Taiwan, China, and possibly Thailand, after having checked the data availability), not only to previous results on Europe but also to original results we will get on European countries (primarily France – which will be our reference country in Europe – and then the UK, Germany, and Italy) in mobilizing new historical data and applying our theoretical framework. INCAS DP SERIES / 2017 #02 1 3 There are many possible perspectives for considering financialization, financialization, considering for perspectives possible many are There 2 (provisional title, forthcoming, Oxford University Press). Press). University Oxford forthcoming, title, (provisional to it. This happens through financialization, which changes the orientation not just of financial financial of just not orientation the changes which financialization, through happens This it. to financialization, development, premature deindustrialization premature development, financialization, Premature financialization: a conceptual exploration exploration a conceptual financialization: Premature of development through industrialization, without restraint, eventually comes to dominate it, and indeed and it, dominate to comes eventually restraint, without industrialization, through development of Keywords: This paper reviews some of the recent writing on financialization and its effects in developing countries. countries. effects its indeveloping and on financialization writing recent of reviews the This paper some ‘financial of a certain point beyond that argues it in development, finance of role the positive Acknowledging In and alsostate. the the affects economy, Financialization consequences. negative are there deepening’ may but periodof industrialization, a long follow necessarily doesnot financialization countries developing this From de-industrialization.’ be ‘premature linked to indeed may and it, with simultaneously happen financialization.’ also be talk ‘premature meaningful to may of it timing, of perspective, namely JEL Codes: B52, F63, G10, N20, O19 Abstract

here. Cf., for example, Lim and Tomaskovic-Devy, 2013; Arnum and Naples, 2013; and Jacoby, 2008, concerning the US. 2008, concerning Jacoby, 2013; and Naples, and 2013; Arnum Tomaskovic-Devy, Lim and example, for Cf., here. 1. Although important, the relationship between financialization on the one hand and employment and inequality on the other is not considered considered not is other on the inequality and employment and hand one on the between financialization the relationship important, 1. Although Development Compressed et.al., 2. Whittaker

of a bigger project on ‘compressed development.’ ‘compressed on project a bigger of economies. The intent, however, is to draw attention to issues of time and timing in the evolution of economies, as part of economies, in the and timing evolution of time issues to attention to draw is however, intent, The economies. The title of the paper is perhaps inappropriate in implying that financialization may be appropriate for ‘mature’ ‘mature’ for appropriate may be financialization that in implying inappropriate is of perhaps the paper The title to consider ‘appropriate finance’ for developing countries, and possibly measures for ‘de-financialization.’ for measures and possibly countries, developing for finance’ ‘appropriate consider to be linked to ‘premature de-industrialization,’ and certain features of the so-called ‘middle income trap.’ Thus it is crucialit Thus trap.’ the so-called income of ‘middle certain features and de-industrialization,’ be ‘premature linked to developed countries, it has been occurring at the same time as industrialization in newly emerging economies. It may may It economies. newlyin emerging been industrialization has time as theoccurring same it at countries, developed countries. While present day financialization is associate with post-industrial transition, of not de-industrialization, in de-industrialization, not of transition, with post-industrial associate is financialization day present While countries. This discussion paper will explore these propositions in a historical context, with a particular interest in today’s developing developing today’s in a particularwith interest context, in a historical propositions these will paper explore discussion This implications for democracy as well as governance. democracy governance. as well as for implications institutions and objectives are reshaped as well, often willingly, for political as well as economic objectives. This has This objectives. as well economic as political for willingly, often well, as reshaped are objectives and institutions public sphere of activity, and a contraction of policy space. But ‘financialization of the state’ is more than this; state state this; than more is state’ of the ‘financialization policy But of space. a contraction and activity, of sphere public can become predatory become can the into markets of is this seen encroachment as dichotomies state-market In a is dimension. political there Third, amplifies inequality. It contributes to ‘de-regularization’ of employment and to de-industrialization. and of employment ‘de-regularization’ to It contributes inequality. amplifies facilitator and wealth it concentrates so In doing households. of and businesses, also non-financial those of but institutions, Second, in addition to cyclical tensions, there are structural tensions between finance and industry. Finance as a as Finance industry. and betweenfinance structural tensions are there cyclicalto tensions, addition in Second, contains the seeds of instability, the fruits of which have proven to be to crisis. proven which have the fruits of the seeds instability, of contains threefold. First, although advocates claim that financial ‘deepening’ and ‘openness’ enhances stability, finance also finance stability, enhances ‘openness’ and ‘deepening’ financial that claim advocates although First, threefold. relationship is far from simple, however, and beyond that point, it can have negative consequences. These are (at least) least) (at are These consequences. negative have can it point, that beyond and however, simple, from far is relationship Finance is undoubtedly necessary and beneficial for economic development – up to a point, and in certain forms. The forms. certain in and a to up point, – development necessary economic beneficial for and undoubtedly is Finance Introduction and developing country financial crises since the 1980s. Minsky also proposed four historical periods in the relation relation periods historical in four the proposed also Minsky crises country 1980s. financial since the developing and development. It then considers Minsky’s Keynsian twist and its application to international development finance, finance, development international to application its and twist Keynsian Minsky’s then considers It development. The paper is structured as follows. The first section starts with a Schumpeterian view of the role of finance in economic economic finance in of role of the view Schumpeterian startsfirst The with section a follows. structuredas is The paper focused and defended with empirical evidence. empirical with focused defended and current dilemmas of development. ‘Conceptual exploration’ signifies that the paper is exploratory, rather than tightly tightly than rather is exploratory, the paper signifies that exploration’ ‘Conceptual development. of dilemmas current and many currents have emerged in recent years. While liberally trespassing on some of these, the goal is to consider consider these, the to goal is of some on liberally While trespassing years. in recent emerged have currents many and INCAS DP SERIES / 2017 #02 the 3 century, particularly Germany, forged a close forged particularly Germany, century, th 4 century version with that of a century later. Financialization of now-developed now-developed of Financialization later. century a of that with version century th -early 20 -early th the state – including state policies towards the financial sector – as well as financialization of as financialization well as – thesector financial policies towards state – including the state and Finance and economic development and Finance

Significantly, the increasing scale of industry and pressure for bigness foreclosed the English path. Thus Gerschenkron Thus Gerschenkron path. English the foreclosed bigness for pressure and industry of scale increasing the Significantly, institutions. financial do so change, systems production if industry; and finance between link co-evolutionary a to pointed of realm the in active also is entrepreneur Schumpeterian the out, points Minsky As apply. also might reverse The financing. the structuring in problems novel have always innovator Schumpeterian a finance who ‘Those finance: 1988: 3). (Minsky, economy’ the of evolution the drive finance, in and production in combinations, of sets new Two ‘Between the English bank essentially designed to serve as a source of short term capital and a bank a bank and capital term short of serve to as a source designed essentially bank English the ‘Between The German gulf. complete was a there economy the of needs investment long-run the finance to designed basic the combined successfully bank, universal type of the of as a paragon taken be may which banks, 1962: 13). (Gerschenkron, banks’ commercial of activities term short the with mobilier crédit the of idea ‘(C)redit is essentially the creation of purchasing power for the purpose of transferring it to the entrepreneur, but not not but entrepreneur, the to it transferring of purpose the for power purchasing of creation the is essentially ‘(C)redit method the principle, in characterises, power purchasing of creation The power. purchasing existing of transfer the simply are entrepreneurs credit, By labour. of division and property private with a system in out is carried development which by as it substitutes, temporarily It it. to claim normal the acquired have they before goods of stream social the to access given system economic the on order an as operates sense this in credit Granting itself. claim the for claim this of fiction a were, entrusting means it needs: he which goods the on order as an entrepreneur, the of purposes the to itself accommodate to perfectin flow circular mere the from arise could development economic that thus is only It forces. productive with him 1934/1983: 107). (Schumpeter structure’ credit modern the of keystone the constitutes function this And equilibrium. 1.

Russia had its great spurt three decades after Germany, in the 1880s-90s, on the basis of an even more ‘backward’ economy, economy, in the 1880s-90s, on the basis of an even more ‘backward’ Russia had its great spurt three decades after Germany, with less capital available, and low levels of trust for long-term banking. Here the state had to play a more direct role, and it did and low levels of trust for long-term banking. Here the state had available, with less capital so with considerable repression (ibid, pp.17-20). 3.

England industrially. industrially. England link between finance and industry through institutions providing long term finance. This helped them to catch up with up catch helped to them This term finance. long providing institutions industryand linkthrough between finance and people come to expect the expansion to continue. This expectation creates the conditions for speculation: ‘Many ‘Many speculation: for conditions the expectation creates This continue. to expect to the come expansion people and others rush to imitate the new combination, and others invest to supply them; rising incomes promote consumption, consumption, promote incomes them; rising supply to invest others and the new combination, imitate rush to others of credit-financed innovation creates a secondary wave which spreads throughout the economy; investment risesas investment the economy; throughout spreads a which secondary wave creates innovation credit-financed of The ‘two sets of combinations’ are not only co-evolutionary, but also cyclical. In Schumpeter’s schema, a primary wave primary a wave schema, In also Schumpeter’s but cyclical. co-evolutionary, only not are of combinations’ ‘two sets The Cycles and financial instability and Cycles capital-scarce (and capital-diffused) continental late developers in 19 the developers late continental capital-diffused) (and capital-scarce the industrialization of England due to its gradual unfloding, and the greater prior accumulation of capital. By contrast, By contrast, of capital. accumulation prior and the greater gradual unfloding, its to due England of the industrialization changes over time. Gerschenkron (1962: 13-14) pointed out that long-term financing institutions played little part in little played institutions financing long-term that out (1962: 13-14) pointed Gerschenkron time. over changes for those countries, but not necessarily relative to earlier developers. However, the nature of ‘financial revolutions’ revolutions’ ‘financial of the nature However, developers. earlier to relative necessarily not but those countries, for Rousseau’s ‘financial revolutions’ refer to the establishment of a sound financial and banking systems; revolutionary revolutionary banking systems; and financial of a sound to establishment the refer revolutions’ ‘financial Rousseau’s working capital, particularly for the large companies which traded on early stock exchanges. exchanges. stock early which traded on companies the large particularly for capital, working and Japan (1880-1913). They did so by generating information, pooling funds, facilitating payments and providing providing and payments facilitating pooling funds, information, generating by (1880-1913). They did so Japan and trade, commerce and industrialization in the Dutch Republic (1600-1794), England (1700-1850), the US (1790-1850), (1600-1794), England Republic in the Dutch industrialization and commerce trade, revolutions’ (new financial instruments, institutions and markets) played a central role in the subsequent growth of growth subsequent in the role a central played markets) and institutions instruments, (new financial revolutions’ and long-run growth as suggested by Schumpeter 80 years ago.’ Historically, Rousseau (2002) found that ‘financial ‘financial that (2002) found Rousseau Historically, ago.’ 80 years Schumpeter by suggested as growth long-run and 1960 and 1989, for example, King and Levine (1993: 719) found ‘an important link between financial development link between development financial important ‘an Levine and (1993: 719) found King example, 1989, for 1960 and studies have tested the link between credit-money and economic development. In their study of 80 countries between 80 countries of their study In development. economic and the link between tested credit-money have studies For Schumpeter, economic development is driven by innovation, which is funded by credit-money. A large number of of number A large credit-money. funded which is by innovation, by driven is development economic Schumpeter, For and compare the late 19 the late compare and between finance and business (and households). We consider this in section 2 under the concept of financialization, financialization, of in this section concept 2 under the We consider households). (and business and between finance financialization financialization developed countries, but in a different context, and hence with potentially different results. The fourth considers The section results. different with hence potentially and context, in a different but countries, developed The third section considers financialization in developing countries themselves, which takes similar forms to that of tothat forms similar which takes themselves, countries in developing financialization sectionThe considers third countries has a strong influence on developing countries. on developing influence a strong has countries

Section 5 considers the concept of ‘premature financialization,’ and ‘appropriate finance’ for developing countries. countries. for developing finance’ ‘appropriate and financialization,’ ‘premature of the concept Section 5 considers state, involving (re)structuring of the state and state policies, as well as the use of financial instruments by the state itself. itself. state by the instruments financial the use as of well policies, as state and the state of (re)structuring involving state, INCAS DP SERIES / 2017 #02 Periods of stability stability of Periods 5 involved the financing the financing involved , in which non-labour costs costs , in which non-labour century, the last of these (IT) beginning of the last century, th 5 The collapse of the speculative phase of the secondary wave of the phasesecondary speculative of wave the collapse The 4 profile the business itself is not or no longer viable, and the firm needs firm the and viable, longer no or not is itself business the profile Ponzi

emerged after the Wall Street crash of 1929, the Depression, New Deal and Second World World New Deal and Second of 1929, the Depression, crash Street Wall the after emerged profile firms are still viable (they have positive net present value) but there may be short periods in which repayments which in periods short be may there but value) present net positive have (they viable still are firms profile Financialization managerial capitalism profile firms have a sufficient cushion to cover future repayments, even with unexpected income disturbances. In a disturbances. income unexpected with even repayments, future to cover cushion a sufficient firms have profile hedge

2.

. Schumpeter 1934: 226. a In . speculative a In reserves. and flow cash from covered be can’t new finance simply to cover debt obligations. 5 4

and future income uncertainties, Minsky identified three profiles – hedge, speculative and Ponzi. and speculative – hedge, profiles three identified Minsky uncertainties, income future and Investment occurs when profits are foreseen in both spheres. Considering firm balance sheets, repayment schedules, schedules, repayment sheets, firm balance Considering spheres. in both foreseen are occurs when profits Investment Like Keynes, Minsky linked the monetary mechanism to the cost of capital as well as the financing of investment. of investment. the financing as well as capital of the cost to linked the monetary mechanism Minsky Like Keynes, . finance to endogenous is instability that argued and Keynes, also on drew Minsky Schumpeter, on drawing While in the 1970s.

Third, Third, process of industrial concentration. industrial of process played this role, as noted), some of whom, like J.P.Morgan, became extremely influential, both politically, and in and the both politically, influential, became extremely J.P.Morgan, like whom, of some noted), as this role, played finance capitalism small was was finance in Thescale. production second when finance of structure banks universal (in Germany bankers of investment organization under the created were flotations bond and stock for their needs finance to companies enabled which profits of a level ensured This demand. aggregate maintaining and of goods that were traded or processed. The main instrument was the bill of exchange, and it corresponded to the it corresponded and of exchange, bill was the instrument main The processed. traded or were goods that of markets Here ownership. of form the dominant as emerged thecorporation and important machinery– became – more them, which finance the institutions and mortgages supporting role, larger a much played the government Here War.

households), dominant in successive eras, or stages, with some overlap. Commercial capitalism overlap. some with stages, or eras, successive in dominant households), Observing the US, Minsky (1992) described four models of structured relations between finance and business (and (and business and between finance Observing relations structured (1992) described of models the four US, Minsky

anticipation in the end acquires a causal significance.’ a causal acquires in the end anticipation things float on this “secondary wave,” without any new or direct impulse from the real driving force, and speculative speculative and force, real driving the from impulse or direct new any without “secondary wave,” on this float things

and eventually stagnation. Perez describes five such cycles since the late 18 since late the such describes cycles five Perez stagnation. eventually and regulation, laying the grounds for a ‘development’ period, starting with a golden age of synergy, and then maturation then maturation and synergy, of age period, a golden with starting a ‘development’ for the grounds laying regulation, however, and a turning point is reached – often in the form of a crash – which forces the government to step in with in with step to government the forces – of a crash which form in the – often reached is point a turning and however, comes to dominate, both in the decline of the old paradigm, and the emergence of the new. This is unsustainable, is unsustainable, This the new. of theemergence paradigm, and the old of bothin the decline dominate, to comes occurs with the old paradigm. This is followed by a frenzy, as investors pile in, speculation mounts, and financial capital capital financial and mounts, speculationpile in, investors as a by frenzy, followed is This paradigm.occurs the old with of the new technology – a kind of big bang in the midst of a period of stagnation. Investors are attracted, and a split a split and attracted, are Investors a period stagnation. of in the midst of bang big the new technology of – a kind of Perez (2002) amplifies this schema and its links with Kondratiev cycles. An ‘installation’ periodan irruption begins with An ‘installation’ cycles. Kondratiev its links with and this schema (2002) amplifies Perez bankers swing from reckless lending to excessive caution (Leather and Raines, 2004). and (Leather caution excessive to lending reckless from swing bankers the collapse of speculation produces other casualties, as normally viable businesses are forced into liquidation when liquidation into forced are businesses viable normally as casualties, other produces speculation of the collapse produce downward pressures on prices, and firms and industries decline. Downturns have a cleansing function, but but function, cleansing a have Downturns decline. industries and firms and prices, on pressures downward produce is accompanied by downturn from the first. Entrepreneurial investments have already been made, the innovations innovations been made, the already have investments Entrepreneurial the first. from downturn by accompanied is this perspective to the countries engulfed by the Asian Financial Crisis. Financial the Asian by engulfed this perspective the countries to decade’ of growth and political instability, which the opening of capital accounts prolonged. Kregel (1998) also applied (1998) also applied Kregel prolonged. accounts capital of which the opening political instability, and growth of decade’ countries in particular saw their speculative profiles become Ponzi ones. The result was a series of crises, and a ‘lost and a ‘lost was a of crises, series result The ones. Ponzi become in particular profiles theirspeculative saw countries international capital flows increased, and following the sharp rise of interests rates in the US in 1980, Latin American American in US in 1980, the Latin rates of interests sharp risethe following and increased, flows capital international to industrialized countries, under conditions similar to ‘hedge’ or ‘speculative’ financing. From the 1970s, however, as however, 1970s, the From financing. ‘speculative’ or ‘hedge’ to similar conditions under countries, industrialized to in the case of exports, due to exchange rate movements. In the early postwar period most international lending was was lending period postwar the international early most In movements. rate exchange to exports,in the case due of income. Developing countries, on the other hand, face uncertainties both in respect to their repayment schedules, and and schedules, both their repayment in respect to face uncertainties hand, the other on countries, Developing income. firms, repayment obligations are generally known, or under control of the firm, while uncertainty lies on the side of onthe side of firm,the lies whileuncertainty control or under generally known, are obligations repayment firms, Kregel (2004) applies Minsky’s repayment profiles to financing for development. In the case of domestic business business domestic of Inthecase for development. to financing profiles repayment Minsky’s (2004) applies Kregel full-blown financial crisis, and then an economic crisis. an economic and then crisis, financial full-blown Ponzi financing’ (Kregel, 2004: 5). Bernanke’s (2015) account of how the US subprime mortgage crisis morphed into a into morphed crisis mortgage subprime US the how of (2015) account 2004: 5). Bernanke’s (Kregel, financing’ Ponzi in which everyone is a seller and prices continue to fall, causing even hedge units to be driven into speculative and then and speculative be into to driven units even hedge fall, causing to continue prices in which everyone a seller is and causes the value of the assets to plunge further, as investors sell position to make position, creating a downward spiral spiral a downward creating position, make to sell position investors as further, plunge the to assets of the value causes create crises which engulf firms with even sound profiles: ‘Borrowers attempt to sell assets to repay liabilities, which which liabilities, repay toassets to sell attempt ‘Borrowers profiles: crises firms with whicheven sound engulf create and expansion breed euphoria and speculative bubbles which, when they are eventually popped as credit is tightened, tightened, is credit popped as eventually which, when they are bubbles speculative and euphoria breed expansion and INCAS DP SERIES / 2017 #02

7

6 This shift shift This 9 from the 1970s from 8 6

Stockhammer (2004) attempts to quantify the impact of such financialization on investment, cautiously investment, on financialization such of impact the quantify to attempts (2004) Stockhammer

These activities became increasingly distant from production and exchange of conventional goods of conventional exchange and production from distant These activities increasingly became 10 .

Today’s narrowly-focused financiers do not conform to Schumpeter’s vision of bankers as the ephors of ephors the as bankers of vision to Schumpeter’s conform not do financiers narrowly-focused Today’s Keynes’ to akin more is structure financial Today’s progress. serves finance that assure who capitalism 1992: 113). (Minsky, casino’ as a capitalism advanced of arrangements financial the of characterization

. Pozsar et.al (2010: 9) estimate gross liabilities of the shadow banking system in June 2007 at $22 trillion, as against $14 trillion $14 trillion as against of the shadow banking system in June 2007 at $22 trillion, gross liabilities (2010: 9) estimate . Pozsar et.al . The scale of these markets rose from $339 billion in 1988 to $2.7 trillion in 2007, $8 billion in 1991 to $176 billion in 2005, in 1991 to $176 billion in 2007, $8 billion in 1988 to $2.7 trillion rose from $339 billion of these markets The scale . . Paul Volcker, an earlier Fed Chairman, famously . commented Paul Volcker, in 2009 that the innovation most overuseful the‘financial’ past 2009. . Cf. also Lazonick, . ‘That is, the predator state is a Big Government operating in the interests of money managers under cover of laissez faire of laissez under cover managers of money interests in the operating Big Government is a state predator is, the . ‘That finding support in the case of the US, UK and France. for banks. and under $20 billion before 2003 to $180 billion in 2007 respectively (Bord and Santos, 2012: 21-22). and under $20 billion before 2003 to $180 billion in 2007 respectively (Bord two decades had been the automated teller machine. marketing – and this played a key role in the transition from paternalistic to money manager capitalism’ (Wray, 2009: 815). Wray Wray 815). 2009: (Wray, capitalism’ manager money to paternalistic from transition the in key role a played – and this marketing (2008) The Predator as well as Galbraith’s and predator capitalism, predation of (1904) concept Veblen’s is probably drawing on State 10 8 7 6 9

banking system. banking also provided a stimulus for the huge growth in nonbank financial intermediation chains – the so-calledchains shadow intermediation financial in nonbank growth the huge for a stimulus also provided

growth in the syndicated loan market, the secondary loan market, and in collateralized loan obligations. loan in collateralized and the secondary market, loan market, loan in the syndicated growth to-distribute’: Bord and Santos, 2012; Lazonick and O’Sullivan, 2000). The ‘originate-to-distribute’ model stimulated stimulated model ‘originate-to-distribute’ 2000). The O’Sullivan, and 2012; Lazonick Santos, and Bord to-distribute’: (‘originate-to-hold’), to trading a range of products, including corporate loans, funded by a range of sources (‘originate- sources of a range funded by loans, corporate including products, of a range trading to (‘originate-to-hold’), For their part, financial firms shifted from using deposits for loans which they kept on their books until maturity maturity until on theirkept books which loans they for using deposits from shifted firms their part, financial For real economy. It was overseen, he suggests, by financial and political elites which he dubs the ‘predator state.’ ‘predator dubs the he which elites and political financial by suggests, he overseen, was It economy. real of countless financial innovations, and more systemic changes which reversed the relationship between finance andthe finance between relationship reversed the which changes systemic more and innovations, financial countless of 08 in terms of Minsky’s money manager capitalism, Wray (2009; 2011) also argues that the crisis was the culmination the the culmination crisis was that (2009; 2011) also argues Wray capitalism, manager money Minsky’s of 08 in terms and speculative excess, which Schumpeter disapproved of. Analyzing the build up to the Global Financial Crisis of 2007- Crisis of the Global Financial to up the build Analyzing of. disapproved which Schumpeter excess, speculative and of Schumpeter to defend financial innovations and de-regulation in the US, which they characterize as ‘reckless finance’ finance’ ‘reckless as in US, characterize the theywhich de-regulation and innovations financial defend to Schumpeter of financial crises have proliferated since the 1980s. Leathers and Raines (2004) criticize Alan Greenspan’s appropriation appropriation Greenspan’s and (2004) criticize Alan Raines 1980s. since the Leathers proliferated crises financial have Unsurprisingly, there has been an upsurge of interest in these views, and the downside of financial innovations, as innovations, financial of in these the downside views, and interest of been upsurge has an there Unsurprisingly, Minsky viewed this stage with deep with viewed concern: thisstage Minsky the financial sector became unshackled and capital-gains-oriented blocks of managed money became a major influence. influence. major a money became managed of blocks capital-gains-oriented and unshackled thesector financial became from internal cash flows, enhancing managerial autonomy. Finally, under moneyunder manager capitalism Finally, autonomy. managerial enhancing flows, cash internal from

argues that the shift has fundamentally undermined the ability of US corporations to innovate. of US corporations ability undermined the has fundamentally the shift that argues from those left. Lazonick (2015) characterizes this as a shift from ‘retain and reinvest’ to ‘downsize and distribute,’ and distribute,’ and ‘downsize to reinvest’ and ‘retain from shift as a thosecharacterizes this (2015) left. from Lazonick on core value adding activities, they restructured their organizations, slashed their workforces and sought flexibility flexibility sought and their workforces slashed their organizations, activities,they adding restructured value core on them towards financial markets, to which they increasingly went when they needed finance. Under pressure to to focus pressure Under when theyneeded went finance. to which they increasingly markets, financial them towards (Useem, 1996). They were disciplined by ‘markets for corporate control’ and incentivized by stock options, orienting orienting options, stock by incentivized and control’ corporate for ‘markets by disciplined were 1996). They (Useem, came under pressure to manage for shareholders, partly as a result of failed diversification efforts and declining profits profits and declining efforts failed diversification of partly a result as shareholders, for manage to pressure under came activities. Looking briefly at each of these in turn, and again focusing on the US, from the 1970s, corporate managers managers 1970s, corporate the on US, the focusing from again and turn,of these in at each activities. Looking briefly as well as transacting with households; and households themselves become increasingly oriented towards financial financial towards oriented increasingly become themselves households and households; with transacting as well as their own financial capacities; banks shift from traditional business lending to mediation in open financial markets markets financial open in to mediation lending business traditional from shift banks capacities; financial their own Lapavitsas (2011) emphasizes three concrete, inter-related features: Large corporations rely less on banks, and acquire acquire banks, and on less rely corporations Large features: inter-related concrete, three emphasizes (2011) Lapavitsas financial institutions in the operation of domestic and international economies’ (Epstein, 2005: 3). (Epstein, economies’ international and of domestic operation in the institutions financial widely cited. He sees financialization as ‘the increasing role of financial motives, financial markets, financial actors and actors financial markets, financial motives, of financial role ‘the increasing as sees financialization He cited. widely investments) of non-financial firms, which she empirically demonstrates for the US. Epstein’s broader definition is also broader definition Epstein’s forthe US. demonstrates empirically she firms, which non-financial of investments) accrue increasingly to the financial sector, and to financial activities (interest payments, dividends and capital gains on gains capital and dividends payments, (interest activities to financial and the financial sector, to accrue increasingly accrue primarily through financial channels rather than through trade and commodity production’ (p.12). Profits thus thus Profits (p.12). production’ commodity and trade through than rather channels financial through accrue primarily argues for an ‘accumulation centred’ approach. She defines financializaton as ‘a pattern of accumulation in which profits profits in which of accumulation pattern ‘a as financializaton defines She approach. centred’ ‘accumulation an for argues Agreeing that industrial employment and GDP shares are not appropriate measures of financialization, Krippner (2005) Krippner financialization, of measures appropriate not are shares GDP and employment industrial that Agreeing financial sector and other sectors of the economy. of the economy. other sectors and sector financial growth in financial transactions has also been accompanied by qualitative changes in the relationship between the relationship in the changes qualitative by has also been accompanied transactions in financial growth payments from foreign direct investment become financial income (Mitchell and Toporowski, 2014). Yet quantitative quantitative Yet 2014). Toporowski, and (Mitchell income financial become investment direct foreign from payments may require a number of balance sheet operations to develop a project, as well as increased hedging activity. Dividend Dividend activity. hedging increased as well as a project, develop to operations balance sheet of a number require may sector activity in itself is not evidence of a structural shift. Increased international activity by MNCs, for example, example, for by MNCs, activity international Increased a structural evidence shift. of not is sector in itself activity The term ‘financialization’ has been applied to these developments, although it is a slippery one. Increasing financial financial Increasing one. slippery a is it although tothese applied developments, has been ‘financialization’ term The INCAS DP SERIES / 2017 #02

century and that that century and th -early 20 -early th

12 7 (They also show a corresponding rise in inequality, most strongly in in strongly most rise in inequality, a corresponding (They alsoshow 11

It follows… that under these circumstances the men who have the management of such an industrial enterprise, enterprise, industrial an such of management the have who men the circumstances these under that follows… It by earning-capacity, actual and putative the induce to able will be market, the on quotable and capitalized sagaciously as misinformation, as well information, partial purpose, the for approved and known well expedients so and kind, this of discrepancy temporary a favourable producing toward will go far juncture, a critical at out given 1904: 156-7). (Veblen, themselves to advantage with concern the of securities sell and buy to managers the enabling

. The Index weights market-based and new banking activities related to securitization relative to traditional banking. . and profit leaves them by settled habit, unfit . ‘Addiction to a strict and unremitting valuation of all things in terms of price to appreciate those technological facts and habits that can be formulated only in terms of tangible mechanical performance; to appreciate those technological facts and habits that can be formulated only 1921: 39). (Veblen, management…’ increasingly so with every further move into a stricter addiction to businesslike views, cited above, strongly echo this censure. Lazonick’s 12 11

risk to much higher levels relative to the first financialization is hard to know. to hard is financialization the first to relative higher levels much to risk interpenetration of the financial sector with other sectors of the economy, including households, has raised systemic raised systemic has households, including of the economy, other sectors with thesector financial of interpenetration financial investment and speculation (others might disagree that this is different as well; cf. Ahamed, 2010). Whether 2010). well;cf.Ahamed, as is different this disagree that might speculation (others and investment financial fourth, in the second financialization central banks directed their efforts to supporting finance, implicitly insuring insuring implicitly finance, supporting to efforts directed their banks central financialization in the second fourth, colonialism; the second an ‘invasion’ of the ‘territory’ of the welfare state – into health, education and pensions. And And pensions. and health, education – into state the welfare of the ‘territory’ of ‘invasion’ an the second colonialism; bank-based, and the second market-based. Third, the former saw a geographical expansion through imperialism and and imperialism through expansion geographical a saw former the Third, market-based. the second bank-based, and in the first financialization, and ‘intrinsic’ in the second (although Veblen might disagree). Second, the former was former the disagree). might Second, Veblen inthe(although second and ‘intrinsic’ financialization, in the first (2014) proposes a number of further differences. First, the power of finance over the productive economy was ‘extrinsic’ ‘extrinsic’ was economy productive overthe of finance the power First, further of differences. a number (2014) proposes It accompanied de-industrialization of the Global North (and partial industrialization of the Global South). Vercelli the Vercelli Global South). of partial (and industrialization the Global North of de-industrialization accompanied It albeit with slowing growth, inflationary pressures, and the end of the US gold standard and Bretton Woods system. Woods system. Bretton and standard gold of US the end and the pressures, inflationary growth, slowing with albeit The second financialization, on the other hand, followed a sustained period of postwar prosperity in many countries, countries, many prosperity in sustained period of a postwar followed hand, other onthe financialization, The second

willing to serve as ‘lieutenants’ to business men and the captains of industry. of the captains and men business to servewilling to ‘lieutenants’ as Veblen believed this had a negative impact on (industrial) innovation, and lamented how many engineers had become become had engineers many how lamented and innovation, (industrial) on impact believed this a negative had Veblen continental European and Nordic countries. Nordic and European continental purposes. Nonetheless, as Zalewski and Whalen (2010) show using IMF Financial Index data from 1995 and 2004, 1995 and from data Index IMF Financial using Zalewski as (2010) show Whalen and purposes. Nonetheless, in less and countries, Anglo-American in more albeit countries, in developed broadly advanced financialization developers such as Germany and Japan, in which banks played a larger role in intermediation, for developmental developmental for in intermediation, role a larger in which banks played Japan, and Germany as such developers These developments have gone further in the US and UK, which were historically more market-based, than late late than market-based, more historically were UK, further and which gone in US the have These developments consumption has become increasingly privatized and mediated by the financial system’ (Lapavitsas, 2011: 620). 2011: 620). (Lapavitsas, system’ the financial by mediated and privatized increasingly become has consumption accounts, pensions, insurance, etc. And with the retreat of the state from the provision of a range of services ‘workers’ services of a range ‘workers’ of the provision from the state of theretreat with And etc. insurance, pensions, accounts, increased substantially, and as did ownership of financial assets – most significantly of housing, but also money market market money butalso housing, of significantly most assets – financial of did ownership as and substantially, increased Banks also turned to households and individuals with mortgages and other financial products. Household borrowing borrowing Household products. financial other and mortgages with individuals and Banks also households to turned and services (Fine, 2014), and they created commodities which could be compared and traded across space and time. and space traded across and be which could compared commodities servicesand they created 2014), and (Fine,

the disruption of production, as well as manipulation of information. of manipulation as well as production, of the disruption capitalization. Leaders of large corporations found they could affect their share prices through production, or conversely or conversely production, prices through share theytheir affect could found corporations large Leaders of capitalization. pointed to the transition to large corporations and the growth of intangible assets, which had become central to to central become assets, which had intangible of the growth and corporations large to the transition to pointed dispensing state’ (Hilferding, 1981 [1910], pp.370; 301). Writing at roughly the same time in the US, Veblen (1904) time in the US, Veblen the same roughly at 301). Writing 1981 [1910], pp.370; (Hilferding, state’ dispensing dominated finance capital, a ‘capitalist oligarchy’ which in Germany’s case sought to create a ‘centralized and privilege- and ‘centralized a create to case sought in which Germany’s oligarchy’ ‘capitalist a capital, finance dominated The first financialization took place in this context. It fused commercial, industrial and banking interests into into banker- interests and banking industrial It commercial, fused context. in place this took financialization first The 1873, pushed millions into poverty or migration. migration. or poverty into millions 1873, pushed economy on the gold standard when supplies of gold were not expanding (ibid). The Great Depression, starting in Depression, Great The (ibid). expanding not were gold of when supplies standard the gold on economy the result was overproduction and depressed prices. It did not help that they were being inserted into the global being inserted into they were that help did not It prices. depressed and overproduction was the result similar strategies at the same time, and needing to maximize their production to recoup their Kaldorian investments, investments, their Kaldorian recoup to their production maximize to needing and time, the same at strategies similar labour-intensive products, to ‘Kaldorian’ industrialization strategies (Schwartz, 2010). With multiple states pursuing pursuing states multiple 2010). With (Schwartz, strategies industrialization ‘Kaldorian’ to products, labour-intensive developers’ such as Germany, which were attempting to shift from ‘Ricardian’ strategies of exporting agricultural and and agriculturalof exporting strategies ‘Ricardian’ shift to from attempting which were Germany, as such developers’ of industrialization of the Global North (and de-industrialization of the Global South), and the emergence of ‘late ‘late of the emergence and the Global South), of de-industrialization (and the Global North of industrialization of of a century later (Minsky’s finance capitalism and money manager capitalism). The first occurred in the context context first The in the occurred capitalism). manager money and capitalism finance (Minsky’s later a century of

There are both similarities and differences between the financialization of the late 19 of the financialization betweenthe differences and similarities both are There ‘First’ versus ‘second’ financialization‘First’ versus ‘second’

public policies.) public the Nordic countries, albeit from a low base – and argue that the variable impact may be due to welfare and egalitarian egalitarian and welfare to be due may impact the variable that argue base – and a low from albeit countries, the Nordic INCAS DP SERIES / 2017 #02 In 13 FDI is often seen often is FDI 16

15 8 ; The surge in the 1970s, moreover, was followed by a sharp reversal, creating financial financial creating reversal, sharp by a followed was moreover, in 1970s, the surge ; The 14 He might also have added 1MDB, set up in 2009 to make Kuala Lumpur a financial centre, which

Financialization of developing countries developing of Financialization

In 2014, 55% of global FDI was directed to developing countries (and roughly two thirds of this went to developing Asia, countries (and roughly two thirds of this went to developing to developing In 2014, 55% of global FDI was directed 3.

. Brazilian President Vargas complained in 1951 that Brazil had been experiencing negative net capital flows from 1939: Kregel, 1939: from flows capital net negative experiencing been had Brazil that 1951 in complained Vargas President Brazilian . its Discontents.’ review is titled ‘Financialization and . UNCTAD’s . Bonizzi, 2014: 90-91. . Bonizzi, particularly China and Hong Kong: UNCTAD, 2015). By sector, roughly two 2015). thirds of By the sector, global stock of particularly China FDI and was Hong in Kong: services, UNCTAD, 49% to rose from of services share From 1990-2012 the sector. primary the in balance the and in manufacturing, quarter a dropped from 41% to 26%, a shift which can be seen in both developed and developing 63%, while the share of manufacturing has become more prominent over time (ibid). countries. M&A 2004: 2. became embroiled in scandal in 2016. 15 16. 14 13

the potential for sustainable growth and development’ (p.28). development’ and growth sustainable for the potential and the risks of financial boom-and-bust cycles. Such flows ‘alter prices and influence policy in ways that compromise compromise that ways policy influence and in prices ‘alter flows Such cycles. financial boom-and-bust theof risks and and their long-term development.’ Indeed, DTEs have become more vulnerable to short-term speculative capital flows, flows, capital speculative short-term to vulnerable more become have DTEs Indeed, development.’ their long-term and financial system, UNCTAD (2015: 27) argues that ‘there has only been a weak link between the integration of most DTEs most of only weakbeen a linkhas between ‘there integration the that argues (2015: 27) UNCTAD system, financial In its pessimistic review of the effects of integration of developing and transition economies (DTEs) into the global into (DTEs) economies and transition developing of of integration the effects pessimistic review of its In 91). lending, such as trading, as well as through fees and commissions and aggressive household lending’ (Bonizzi, 2014: lending’ household aggressive and commissions and fees through as well as trading, as such lending, key agencies in transmitting “financialized” practices, that is, they obtain high profits through activities unrelated to unrelated activities through profits high is, obtain theypractices, that “financialized” in transmitting agencies key which had become a major presence in many developing countries (sometimes through post-crisis ‘fire sales’) ‘are often often ‘are sales’) post-crisis ‘fire through (sometimes countries developing in many presence a major become which had policies also expanded the balance sheets of developing country banks, contributing to financialization. Foreign banks, Foreign financialization. to country banks,contributing developing policiesalso of thesheets balance expanded bubble). The creation of large financial reserves, including sovereign wealth funds, and accompanying sterilization sterilization and accompanying wealth funds, sovereign reserves, financial including of large creation The bubble). but also securitized mortgage-backed assets, which were considered relatively safe (and ironically fed the US housing the US housing fed ironically (and safe relatively considered also securitized assets, which were but mortgage-backed To avoid them, developing countries had to build large external reserves, through the purchase of US Treasury bonds, bonds, US Treasury of external reserves, the purchase through large build to had countries them, developing avoid To surged in the 1990s, the crises continued. surged (among other things) public sector expenditures, de-regulation and capital account opening. Private capital inflows inflows capital Private opening. account capital and de-regulation sector expenditures, public things) other (among fiscal house in order, and letting markets do the rest’ (UNCTAD, 2015: 41). Structural adjustment programmes targeted targeted programmes Structural 2015: 41). adjustment (UNCTAD, rest’ do the markets letting and order, fiscal in house crises which became sovereign debt crises. ‘The conventional wisdom that emerged emphasized getting a country’s a country’s getting emphasized emerged that wisdom crises. ‘The debt crises conventional which became sovereign Foreign direct investment (FDI) to – and from – developing countries has surged since the 2000s. since surged has countries – developing from – and to (FDI) investment direct Foreign Foreign direct investment availability of affordable housing, which slowly turned into the biggest securitization provider in in country.’ the provider biggest securitization the turned into slowly which housing, affordable of availability Bonizzi cites as paradigmatic the case of Cagmas in Malaysia, ‘a state-led financial institution set up to facilitate the to facilitate up set institution financial state-led ‘a Cagmas the in Malaysia, case of paradigmatic as Bonizzi cites expansion of stock markets, changing role of banks, and rise of institutional investors. investors. institutional rise of banks, and of role changing markets, stock of expansion needed for productive activities). Within the financial sector there has been a move towards market-based systems, systems, market-based towards has beenmove a thethere sector financial activities). Within productive neededfor shareholder value corporate governance, and ‘over-capitalization’ (holding substantially more financial assets than assetsthose than financial more substantially (holding ‘over-capitalization’ and governance, corporate value shareholder countries. Bonizzi (2014) finds increasing investments of non-financial firms in financial activities, the espousal of espousal financial theactivities, in firms non-financial of investments Bonizzi increasing (2014) finds countries. Lapavitsas’ three inter-related features of financialization in developed countries can also be found in developing in developing also can found be countries in developed financialization of features inter-related three Lapavitsas’ countries than other types of finance, especially debt. finance, types other of than countries through independent efforts at innovation as well. For these reasons, it is often viewed more favourably by developing by developing favourably more viewed often is it reasons, these For well. as at innovation efforts independent through it much-needed technology, expertise and network connections. It can stimulate local businesses to raise their game their game raise local to businesses stimulate can It connections. expertise network and technology, much-needed it in the 2000s than in the previous three decades. FDI is often seen as a long-term commitment, which can bring with bring with can which commitment, seenas a long-term often is decades. three FDI in the previous in the 2000s than the build-up – and use – of foreign currency reserves by developing countries, volatility of flows has been more muted muted has beenmore flows of volatility countries, currency developing reserves by foreign use – of and – thebuild-up as more stable than portfolio investment, and both are seen as more stable than debt. Because of this, in addition to to Because this, in addition of debt. than stable seen more as bothare and investment, portfolio than stable more as often neither high, nor stable. high,nor neither often importance of high and stable capital flows from developed to developing countries, but in reality, capital flows were were flows capital reality, in but countries, to developing developed from flows capital stable high and of importance and their integration with global capital flows and markets. Postwar international development policystressed the development international Postwar markets. and flows global with capital their integration and Not surprisingly, processes of financialization in developing countries are influenced by the context of their emergence, emergence, of their context by the influenced are countries developing in financialization of processes surprisingly, Not 1960s and 1970s, was transformed into DBS, a regional financial services powerhouse, is emblematic (ibid.). (ibid.). is emblematic services financial a regional DBS, powerhouse, into transformed 1970s, was 1960s and economy, but the rapidity with which the Development Bank of Singapore, which provided long term financing in the term financing long which provided Singapore, Bank of which the with Development the rapidity but economy, expanded customer base in regional and global markets’ (Lai and Daniels, 2015: 2). Singapore is no longer an emerging emerging an longer no is 2). Singapore 2015: Daniels, (Lai and global markets’ and base in regional customer expanded complex financial institutions offering an extensive and sophisticated array of financial products and products an to services financial of array sophisticated and an extensive offering institutions financial complex neighbouring Singapore, too, banks have merged, and transformed from traditional banking service providers to ‘more ‘more to service banking traditional from providers transformed and merged, banks have too, Singapore, neighbouring INCAS DP SERIES / 2017 #02 is

18 9 However UNCTAD (2016: 21) notes that a sample of MNEs from 25 developed 25 developed MNEs from of a sample that (2016: 21) notes UNCTAD However 17

Financialization and the state and Financialization

‘Developing countries today, as a group, are being ever more tightly constrained in their national development strategies being ever more are as a group, ‘Developing countries today, about not are regulations These organizations. international by enforced and formulated regulations proliferating by of developing options the limiting about are they rather, normally connotes; as ‘regulation’ options, companies’ limiting In effect, country governments to constrain the options of companies operating or hoping to operate within their borders. the new designed are regulations to expand the options of developed country firms to enter and exit markets easily, more 2003: 621-22). (Wade, and with obligations, fewer and restrictions to of lock-in technological their rents’ appropriation ‘“Multiple passport affiliates” are the result of indirect foreign ownership, transit investment through third countries, countries, third through investment transit ownership, foreign indirect of result the are affiliates” passport ‘“Multiple entity; domestic a through owned foreign indirectly are affiliates foreign of cent 30 per About round-tripping. and ultimately are cent 1 per about country; third a in entity intermediate an through owned are cent 10 per than more of cent per MNEs: 60 largest the in common more much are affiliates of types These entity. a domestic by owned xii). 2016: (UNCTAD, company’ parent the to links ownership cross-border multiple have affiliates foreign their 4.

. ‘Wealth structuring expert’ cited in Financial Times, 7 April, 2016 (‘Tax Havens are a Cog in Global Economy, Say Havens are a Cog in Global Economy, April, 2016 (‘Tax 7 Times, cited in Financial structuring expert’ . ‘Wealth in countries the policy developing on space of impacted have liberalization and globalization that argues (2009), too, . Akyüz Defenders’). to susceptible them more makes restrictions capital trade and of dismantling their own First, ways. reinforcing mutually two international argues, Wade as Second, policy. national of impact weakens the and – shocks financial as – such external conditions structural with countries of Governments policy instruments. over control countries’ developing reduce rules obligations and use willing what to less are policy and space, constrained in particular have capital foreign high dependenceweaknesses of and space they have. 18 17 scope, and effectively operate in a regulatory no man’s land. land. man’s no regulatory in a operate effectively and scope, of combinations and trusts of the first financialization, only now they are orders of magnitude larger, transnational in transnational larger, magnitude of orders are nowthey only financialization, the first trusts of and combinations of difficult for tax authorities and experts to understand. Their complexity is somewhat reminiscent of the structures of the structures reminiscent somewhat is complexity Their and experts understand. to authorities for tax difficult almost eight times the GDP of Bermuda! Holding company structures have become very complex, and are very are and very become complex, have structures company Bermuda! Holding of times the GDP eight almost countries booked more profits in Bermuda than China in 2014 ($44 billion versus $24 billion), and those profits were were profits and those billion), $24 versus billion in in 2014 ($44 China than Bermuda profits booked more countries the ‘territory’ of the state in areas such as pensions, health and education (cf. Vercelli, 2014, above). Policy space 2014, above). Vercelli, (cf. education health and pensions, as such in areas the state of the ‘territory’ itself is constant. From a states-versus-markets perspective, the state is encroached financialization, which eats into into eats which financialization, encroached is perspective, the state a states-versus-markets From constant. is itself the state’s policies are seen to still be developmental; finance is a new industry to be promoted. The nature of the state ofthe state nature The newis a industrypromoted. to be finance seen still to be policies are developmental; the state’s some perspectives, but active and contested in others. In the Singaporean case cited above (Lai and Daniels, 2015), Daniels, (Lai and above case cited the Singaporean In in others. contested and active perspectives,some but state in financialization, and indeed in the financialization of the state itself. The state is largely implicit or passive in passive or implicit largely is state The itself. ofthe state indeedand in financialization the in financialization, state While most studies of financialization consider changes in the economy, there is a growing interest in the role of the role in the interest is a growing there in the economy, changes consider financialization of studies most While the wheels of international trade.’ international the wheels of follows: as countries developing double taxation, for instance – and to provide stability in a complex and uncertain world. They are ‘the grease on ‘the grease are They uncertain world. and in a complex stability provide to – and instance for taxation, double on policy constraints growing Wade (2003) depicts financialization, of the concept using Without also encroached. Proponents of such structures claim they are necessary to handle complex investment and taxation issues – to avoid avoid – to issues taxation and investment necessary complex they handle to are claim structures such of Proponents almost 70 entities in offshore investment hubs’ (UNCTAD, 2016: xiii)! (UNCTAD, hubs’ investment in offshore 70 entities almost cross 6 borders), they have about 20 holding companies owning affiliates across multiple jurisdictions, and they have have andthey jurisdictions, multiple across affiliates owning companies 20 holding about they have 6 borders), cross countries. They have 7 hierarchical levels in their ownership structure (i.e. ownership links to affiliates could potentially potentially could affiliates to links ownership (i.e. structure ownership in their levels 7 hierarchical Theyhave countries. The top 100 MNEs on UNCTAD’s Transnationality Index have ‘on average more than 500 affiliates each, across 50 across each, affiliates 500 than more average ‘on have Index Transnationality on UNCTAD’s 100 MNEs top The

UNCTAD (2016) estimates that 40% of foreign affiliates worldwide have ‘multiple passports.’ passports.’ ‘multiple have worldwide affiliates foreign 40% of that estimates (2016) UNCTAD additional $100 billion may be lost through these mechanisms. That is most likely a very a estimate. likely most conservative is That these be mechanisms. through lost may $100 billion additional xiii) estimates that while MNE foreign affiliates contribute $730 billion in taxes to developing countries annually, an annually, countries to developing in taxes billion $730 contribute affiliates while MNE foreign that xiii) estimates for developing countries, and may negate the incentives they offer to attract FDI in the first place. UNCTAD (2015: UNCTAD place. in first the attractFDI to they offer the incentives negate may and countries, developing for avoidance – structures and strategies affect both developed and developing countries, but are particularly consequential particularlyconsequential are but countries, developing and developed affect both strategies and – structures avoidance investments are routed through such hubs, largely – but not exclusively – for ‘tax planning’ purposes. Tax planning – or – or planning purposes. Tax planning’ ‘tax – for exclusively not – but largely hubs, such through routed are investments increasingly financialized, one aspect of which is the use of ‘offshore hubs.’ Some 30% of cross-border corporate corporate cross-border of 30% Some hubs.’ ‘offshore of use aspectis of the one which financialized, increasingly investments more liquid, so the distinction with debt can be more apparent than real. And third, MNCs have become become have MNCs third, And real. than apparent be can more debt so with the distinction liquid, more investments Moreover, as Kregel (2014) argues, multinational enterprises (MNEs) have various mechanisms to make their make to mechanisms various (MNEs) have enterprises multinational argues, (2014) Kregel as Moreover, concentrated in the home country/headquarters, and lower value adding activities in subsidiary host countries. activities in subsidiary countries. adding host value lower and country/headquarters, the in home concentrated But the extent of spillover effects is strongly contested, with high value added activities and key decisions typically typically key decisions and added high activities with value contested, strongly is effects spillover of the extent But INCAS DP SERIES / 2017 #02 Gabor (2015), for example, example, for (2015), Gabor 20 (2008: 131).

21 The postwar balance was overturned following following overturned was balance The postwar 19 10

. Cf. Wray (2009), cited above. Galbraith contrasts the ‘New Industrial analyzed State’ by his father with the emergence of . Inflation targeting and related policies ‘are designed to create a neo-liberal central banking structure, that is, a centralbank . ‘(T)he gentlemen of the City were well placed, by virtue of social and physical proximity, to carry their interests into the the ‘Predator State’ – ‘a coalition of relentless opponents of the regulatory framework on which public purpose depends, with of relentless opponents of the regulatory framework on which public – ‘a coalition the ‘Predator State’ Deal’ New enduring the of functions public principal the on encroach or with compete business of lines major whose enterprises and ‘operate as a rule on a transnational basis’ who ‘have no intrinsic loyalty to any country’ that is consistent with an economy with a small government role, privatized industries, liberalized financial markets, and flexible and markets, financial liberalized industries, privatized role, government small a with economy an with consistent is that adopting countries, and in developing bank “independence”, central adopting bank proposals include central These markets. labor 2005: (Epstein, tender’ legal domestic as -- dollar the commonly most -- currency foreign a substituting and/or boards, currency 3). If a key institutional feature of the developmental state was a (MITI ‘pilot case, in agency’ the Japan’s Economic Planning case), its counterpart in the financialized state is an independent central bank. Board in Korea’s corridors of power in London, unlike British industry, which suffered from being heterogeneous, small scale and provincial’ and provincial’ scale small heterogeneous, from being which suffered British industry, corridors of power in London, unlike (Cain and Hopkins, 1993: 87). 21 20 19 highly political process as well. Nowhere is this more apparent than in the US itself. than apparent this more is Nowhere well. as highly political process bank policy. In other words, it is not simply a matter of policy, or a changing balance of power within ministries, but a ministries, within but power balance of a changing or policy, of a matter simply not is it words, other In bank policy. is that it increases the power of ‘rentier interests’ and insulates them from the influence of democratic forces over central central over forces of democratic the influence them from insulates and interests’ ‘rentier of the power increases it that is convincing evidence supporting the claims of its proponents (apart from inflation reduction)? The answer, he suggests, suggests, he answer, The reduction)? inflation from (apart proponents its of the claims evidence supporting convincing Why, Epstein (2005) asks, has inflation targeting by independent central banks become so widespread despite a lack of a lack despite banks so central become widespread by independent targeting inflation has (2005) asks, Epstein Why, privileged transnational financial actors in the incorporation of Romania into European financial structures. structures. financial European into of Romania in incorporation the actors financial transnational privileged industry through tight monetary policies and exchange rate flexibility. The second stage of ‘dependent financialization’ financialization’ ‘dependent of stage The second flexibility. rate exchange monetary policies tight and industry through first stage, ‘central-bank led financialization,’ changed relational banking into arms-length relations between finance and finance between relations arms-length into banking relational changed ledfinancialization,’ ‘central-bank stage, first details a two-stage process of financialization of the Romanian economy, designed by the state under IMF guidance. The IMF guidance. under state by the designed economy, of Romanian the financialization of process a two-stage details mark-to-market losses, which have recently come to light (Lagna, 2015). light to come recently losses, which have mark-to-market power, and to entrench it by participating in the EMU. One unfortunate result of their (mis)use of derivatives was huge huge was derivatives their (mis)use of of result unfortunate One in the EMU. participating by it entrench to and power, left politicians came to power in Italy, and from 1993 to 1999 used a series of financial innovations to both bolster their both tobolster usedto 1999 innovations 1993 a of financial series and from Italy, in to power came left politicians governance and management processes as well. In Italy, for example, an alliance of pro-market technocrats and centre- and technocrats pro-market alliance of an example, for Italy, In well. as processes management and governance Finally, financialization not only concerned with changing policies and politics, but it has become a part of state state of a parthas it become but and politics, policies changing with concerned only not financialization Finally, 1984) under ‘gentlemanly capitalism’ (Cain and Hopkins, 1980; 1993). Hopkins, (Cain and capitalism’ ‘gentlemanly 1984) under and de-industrializer, Britain was an early convert. Finance and industry were always divided to some extent (Ingham, (Ingham, extent some divided to always industry were and Finance convert. early an was Britain de-industrializer, and The balance of power within states is thus influenced by, and influences, financialization. As the first modern industrializer, industrializer, first modern the As financialization. and influences, by, influenced is thus states within of power The balance with them. with from allying themselves with external (and internal) financial interests, or who have a cultural or ideological affinity or ideologicalaffinity a cultural have or who interests, financial internal) external (and with themselves allying from pressures, moreover, some state actors will be constrained and others will be empowered, notably those who will gain notably will be others empowered, and will be actors constrained state some moreover, pressures, These firms, needless to say, include FIRE (finance, insurance and real estate) and financialized firms. Under such Under financialized firms. and real estate) and insurance (finance, FIRE include say, Theseto needless firms, ensuring that the interests of international investors are prioritized, as Wade suggests. Wade as prioritized, are investors international of the interests that ensuring on foreign capital and integration into global financial markets has effectively meant adopting these policies, thereby these policies,thereby adopting meant effectively has globalmarkets financial into integration and capital foreign on simultaneously changes the economy and the state. In developing and transition countries in particular, dependence in particular, countries transition and developing In the state. and the economy changes simultaneously the state. Indeed, the rise of monetary policy administered by independent central banks using inflation targeting targeting inflation banks using central independent the monetary rise by policy of Indeed, administered the state. In these analyses, financialization of the economy is accompanied by, or preceded by, a changing balance of power within within of power balance changing a by, preceded or by, is accompanied of the economy these financialization analyses, In financial view of wealth generation steadily gained influence. gained steadily generation wealth of viewfinancial for Japan’s industry-led postwar model switched to actively trying to dismantle it from the 1990s, and that a neoliberal, a neoliberal, that the 1990s, and from it trying actively to dismantle industry-led to model switched postwar Japan’s for undermine its recovery to achieve these ends. The politics may be debated, but it is clear that the government’s support support government’s the clear that is it but be debated, may these The achieve politics ends. to recovery its undermine growth was now becoming a liability. Werner suggests that the BOJ went so far as to accentuate Japan’s bubble and and bubble Japan’s accentuate to as so far the BOJ went that suggests Werner a liability. becoming now was growth fundamentally reshape Japan’s economic policy, believing that the postwar system which had delivered unprecedented unprecedented delivered which had system the postwar believing that policy, economic Japan’s reshape fundamentally Asian developmental state, the Bank of Japan waged a long-running campaign not just to gain independence, but to to but independence, gain to just not campaign a long-running waged Japan the Bank of state, developmental Asian Britain is by no means alone in intra-state struggles and rebalancing. Werner (2003) describes how, even in Asia’s original in Asia’s even (2003) describes how, Werner struggles rebalancing. and in intra-state alone means no by is Britain manufacturing grew by a mere 13 percent (ibid.). 13 percent a mere grew by manufacturing of UK industry’ (ibid, p. 1). Investment in financial services grew by 320 percent between 1979 and 1989, while that in 1989, and while 1979 between servicesfinancial in that 320 by percent grew Investment 1). p. industry’ UK (ibid, of towards free markets, but a particular economic policy paradigm that advantaged finance and aided the financialization aided financialization the and finance policy advantaged a particular paradigm that economic but free markets, towards was undermined and further placed in the hands of its London-centred financial sector. This was not simply a lurch lurch a not simply was This sector. financial London-centred its further of undermined and was placed in the hands outlook to that of its own. In the process, the UK financial sector was continually boosted while its core industrial base industrial boostedits core while continually was thesector UK financial the process, In own. its of that to outlook and Walsh, 2015). The Treasury ‘attempted to remake the DTI in its own image, subjugating its alternative economic economic its alternative subjugating own image, its in DTI the remake to ‘attempted Treasury The 2015). Walsh, and weakening the Department of Trade and Industry (DTI). Mrs Thatcher accentuated this for political reasons (Davis (Davis reasons political for this accentuated Thatcher Mrs (DTI). Industry and Trade of the Department weakening led to greater Treasury oversight and control of government department budgets, and strengthened the Treasury while the Treasury strengthened and budgets, department government of control and oversight Treasury greater ledto the IMF bailout in 1976, an early example of conditionalities, and Mrs Thatcher’s subsequent accession in 1979. These in 1979. accession subsequent Thatcher’s Mrs and conditionalities, of example early in 1976, an the IMF bailout INCAS DP SERIES / 2017 #02

22 11 Given that such a link has been posited in developed countries, been a link has countries, in developed such posited that Given 23 ., 2010) on the other? the other? ., 2010) on Premature financialization? Premature

5.

. Cf. Block and Somers (2014); Levitt (2013). Allami (2013), Demir (2007), and Levy-Orlik (2014). . E.g. Cibils and 23 22 de-industrialization has been starting at increasingly lower levels of per capital GDP. Rodrik (2015) and Felipe et.al Rodrik Felipe (2015) and GDP. per capital of levels lower increasingly been has at starting de-industrialization absorb a smaller share of the working population than previously, and the peak has moved to the left, meaning that that meaning the left, to the peak and moved has previously, than population the working of a smaller share absorb pattern, but the bell curve has changed over time. The height has fallen, meaning that manufacturing has come to come has manufacturing fallen,that has meaning height The time. the bell over curve but changed has pattern, (Whittaker et.al (Whittaker general is a This rises, peaks, de-industrialization. it as then declines GDP; and per capita and manufacturing of share industrialization’ (Dasgupta and Singh, 2006; Rodrik, 2014) or ‘simultaneous industrialization and de-industrialization’ de-industrialization’ and industrialization 2006; Rodrik, Singh, ‘simultaneous and 2014) or (Dasgupta industrialization’ curve bell-shaped between U or the employment been has found, inverted Another developers. earlier to relative also because of but earlier, happening is because it only not ‘premature’ is It particularly in employment. but countries, it is worth considering. In particular, is there a link between financialization on the one hand, and ‘premature de- ‘premature and hand, one on the a link between there financialization is particular, In considering. worth is it developers in recent employment manufacturing of share the highlights diminishing de-industrialization’ ‘Premature in developing output manufacturing and manufacturing of share fall in employment both the ‘premature’ a find (2014) in developing countries, especially in Latin America. countries, in developing Other researchers have posited a link between financialization and de-industrialization (and sometimes reprimarization) reprimarization) sometimes (and de-industrialization and a link posited between financialization have Other researchers curve associated with deepening, and a negative impact on total factor productivity growth beyond a certain point. a certain point. beyond growth productivity factor total on impact curve a negative deepening, with and associated 100% of GDP. Similarly, in their study of financial deepening, access and efficiency, Sahay et.al. (2015) found found a bell (2015) et.al. Sahay efficiency, and deepening, financial access of in their study Similarly, GDP. 100% of and volatility of output growth. In both cases, the curve peaked when credit to the private sector reached approximately approximately sector reached both cases, the curve In the private growth. to peaked when credit output of volatility and growth, similar to that of Easterly, Islam and Stiglitz (2000), who examined the relationship between financial depth between depth financial the relationship (2000), who examined Stiglitz and Islam Easterly, of that to similar growth, more finance is associated with less growth.’ They found an inverted U – bell shaped – relationship between depth and between depth relationship – inverted U –shaped bell an found They less growth.’ with associated is finance more (Rousseau and Watchel, 2011). Arcand, Berkes and Panizza (2012: 1) found that ‘at high levels of financial depth, depth, financial of high levels ‘at that (2012: 1) found Panizza Berkes and 2011). Arcand, Watchel, and (Rousseau justified on this basis. However, a growing number of studies have pointed to a ‘vanishing effect’ of financial deepeningfinancial of effect’ ‘vanishing to a pointed have studies of number a growing However, on this basis. justified in the postwar period. Reforms aimed at ‘financial deepening,’ sometimes imposed through loan conditions, were also were conditions, loan imposed through sometimes deepening,’ ‘financial at aimed in the period. postwar Reforms limitations in its availability. To accelerate economic development, international development finance was promoted promoted was finance development international development, economic accelerate To availability. in its limitations and democracy. We will return to this view in section 4, when we consider the state and financialization. and this the view state to will in section consider return 4, when we We democracy. and face initially countries severe but developing development, for is economic crucial section, in the first finance noted As project, which destroys the social foundations required to maintain it, and the tensions between economic liberalism between economic the tensions and it, maintain to required the social foundations which destroys project, countries. for developing implications consider we Here countries. of types different for different are the implications of ‘dis-embedding’ from social constraints. Polanyi’s work stands as a warning to the consequences of this utopian this utopian of the consequences to warning a as stands work Polanyi’s social from constraints. ‘dis-embedding’ of But a global is phenomenon. it Indeed, economies. transition and developing developed, of a feature is Financialization reflect the quest by the ‘rentier class,’ in conjunction with the state, to create self-regulating markets through a process process a through markets self-regulating to create state, with the conjunction in class,’ ‘rentier by the quest reflect the From a Polanyian perspective, the underlying dynamics between the first and second financialization are similar. They are similar. financialization and second between the first dynamics perspective, the underlying a Polanyian From violence, at home and abroad. abroad. and home at violence, utopian – or dystopian – self-regulating market required constant intervention, and where necessary, state-sanctioned state-sanctioned necessary, where and intervention, constant required market – self-regulating dystopian – or utopian endowed with a central bureaucracy able to fulfill the tasks set by the adherents of liberalism’ (Polanyi, 1944:145). The 1944:145). (Polanyi, of liberalism’ fulfill to by adherents the able the tasks set bureaucracy a central with endowed restrictive regulations, but also an enormous increase in the administrative functions of the state, which was now being now whichwas the state, of functions thein administrative increase alsoenormous an but regulations, restrictive century liberalism, but its architect and enforcer: The 1830s and 1840s ‘saw not only an outburst of legislation repealing of legislation outburst an only not ‘saw 1840s and 1830s The enforcer: and architect its liberalism,century but from a Polanyian perspective. The British state, Polanyi argued, was not a passive bystander or victim of nineteenth or nineteenth of victim bystander a passive not was argued, Polanyi state, British perspective. The a Polanyian from To see the state as deeply involved in financialization in both developed and developing countries is only natural natural only is countries developing and in developed both in financialization involved deeply as see the state To neoliberal contexts, for different purposes, and under different political coalitions or configurations or political coalitions purposes, different under and different for neoliberal contexts, that at least some of the governance processes or techniques associated with financialization can be applied outside outside applied can be financialization with associated techniques or processes the governance of some least at that entrepreneurship coupled with financialization’ created ‘a new stage of late development’ (pp.608; 604). It appears appears It 604). (pp.608; development’ of late newstage ‘a created financialization’ with coupled entrepreneurship Western corporations from the 1960s to 1990s, but in China’s case the combination of ‘state developmentalism and and developmentalism ‘state of case the combination in China’s 1990s, but the 1960s to from corporations Western ‘shareholder state’ and argues that the shift from ‘managerialism’ to ‘shareholder value’ parallels what happened in happened parallels what value’ ‘shareholder to ‘managerialism’ the shift from that argues and state’ ‘shareholder external sources of finance. The measures provided a huge boost to China’s stock markets. Wang (2015) calls itthe (2015) calls Wang markets. stock to huge China’s boost a provided The measures finance. of externalsources maintain control over SOEs as the key shareholder, to pursue restructuring and efficiency improvements, and to tap toand improvements, efficiency and restructuring pursue to the shareholder, key as SOEs over control maintain reform, the measures created a whole new asset management structure which simultaneously enabled the state to to the state enabled which simultaneously structure new management a whole asset created the measures reform, Born out of budget constraints, and central government alarm at wildcat privatizations in the initial stage of SOE SOE of in the initial stage privatizations wildcat alarm at government central and constraints, budget of Born out In a completely different state context the Chinese government revamped its relations with state owned enterprises. ownedenterprises. state with relations its revamped government the Chinese context state different a completely In INCAS DP SERIES / 2017 #02 the establishment of a financial system system a financial of the establishment 12 First, rather than financialization happening after happening financialization than rather First, 24 with the development of financial infrastructure. It is ‘premature’ relative to the development of finance. of finance. to development the relative ‘premature’ is It infrastructure. financial of the development with

‘Premature isfinancialization’ not intended to imply that financialization ‘mature’ is a natural process. For Arrighi (1994),

financialization is a ‘sign of autumn’ for a hegemonic power, as here would suggest autumn coinciding with spring. it‘Premature’ exhausts sources of profits from commerce and industry. 24. countries, in two senses. in two countries, Although the analogy is imperfect, it might also be possible to talk about ‘premature financialization’ in developing in developing financialization’ ‘premature also talk the be analogy to might possible Although about it imperfect, is de-industrialization in his analysis, although he does not use the former term. use the does former he not although analysis, in his de-industrialization services, including financial services, on the other. Thus there are two links between financialization and premature premature and two linksare financialization between there Thus services, services, financial other. on the including productivity catch-up. He proposes a ‘Dutch disease’ effect from new primary commodities on the one hand, and and hand, one on primarythe new effect commodities from disease’ a ‘Dutch proposes He catch-up. productivity and monetarist economics policies (‘massive institutional and financial transformations’) from the 1980s as well as well as 1980s the from transformations’) financial and institutional policies (‘massive economics monetarist and international US$). Palma considers a number of reasons behind this double trend, including neoliberal policies including trend, behind this double reasons of a number considers Palma US$). international By Palma’s (2005: 9) calculation, the peak moved from $20,645 in 1980 to $9,805 in 1990 and $8691 in 1998 (in 1985 $8691 in 1998 and $9,805 in 1990 1980 to $20,645 in from the peak calculation, (2005: 9) moved Palma’s By its negative effects on economic growth (and democracy). (and growth on economic effects negative its financial deepening – may turn out to most be perilous. the out turn deepeningmay – financial financial structures, markets and regulations. If not, what promises to offer the shortest path – through untrammeled untrammeled path – through shortest the offer to promises what not, If regulations. and markets structures, financial into predation (or value creation to value extraction), it is vital to ensure that developing countries have appropriate appropriate have countries developing that ensure vital to is extraction), it value to creation value (or predation into to financing for economic development. Given that instability is endogenous to finance, and that facilitation can turn can facilitation andthat to finance, is endogenous instability that Given development. economic for financing to and industrial policy to incentivize and reward value creation activities over value extraction. A similar logic applies extraction. logic A similar value applies activities over creation value reward and policy industrial incentivize to and of financial markets and the de-financialization of real economy companies should be coordinated with innovation with innovation should be coordinated companies real of economy de-financialization and the markets financial of Mazzucato concludes that financial markets should be reformed to support rather than hinder innovation. Regulation Regulation innovation. hinder than rather support to reformed be should markets financial that concludes Mazzucato activities. of the ‘good’ risk arising from R&D uncertainty versus the ‘bad’ risk of weak performance, high debt and speculative speculative and high debt weak performance, of risk the ‘bad’ versus R&D uncertainty from arising risk the ‘good’ of financialization of banks, moreover, has left them unable or unwilling to distinguish between different risk profiles – risk between different distinguish to unwilling or unable leftthem has moreover, of banks, financialization from shareholders, results in a focus on share price maximization rather than innovation for the long term. The term. The the long for innovation than rather maximization price share in a focus on results shareholders, from the case of large firms, she agrees with Lazonick (2007) that the financialization of US corporations, and pressure pressure and corporations, US of financialization the (2007) that with agrees Lazonick she firms, large thecase of startups, especially in science-based sectors, or sectors in which the knowledge base is complex and uncertain. In uncertain. In and especially base complex in which is the in science-based knowledge sectors startups, or sectors, Dismissing the ‘romanticization’ of venture capital, she argues that this is actually a poor fit for the needs of many many of needs the for actually this a poor is fit that argues she capital, venture of the ‘romanticization’ Dismissing Returning to the Schumpeterian perspective, Mazzucato (2013) considers ‘appropriate’ finance for innovation. innovation. for finance ‘appropriate’ (2013) considers perspective, Mazzucato the Schumpeterian to Returning markets, including financial markets. financial including markets, place of a simplistic belief in the virtues of financial deepening, or ideological belief in the virtues of self-regulating or ideological deepening,of financial belief in self-regulating in thebelief virtuesvirtues the of a simplistic of place countries. At the very least, however, it suggests a need to consider appropriate forms of finance for development in development for finance of forms appropriate a need consider to suggests it the very however, least, At countries. More work is clearly needed to establish a link between financialization and ‘premature de-industrialization’ in developing developing in de-industrialization’ ‘premature and a link betweenfinancialization needed establish to clearly is work More than that of the gold standard in practice. standard the gold of that than recent financialization removes buffers to international competition, and imposes a monetary straightjacket tighter tighter imposesmonetary a and straightjacket competition, international to buffers removes financialization recent regulation as countries left the gold standard in the early 1930s, and finance was heavily regulated. By contrast, the contrast, By regulated. was heavily finance and 1930s, in the early standard gold left the countries as regulation rather than intensifying it (Polanyi, 1944). Moreover, the period was followed by substantial reforms and financial financial and reforms substantial by the period followed was Moreover, 1944). (Polanyi, it intensifying than rather and allocate stresses transmitted by the gold standard, while bank-led cartels and mergers restricted competition competition restricted mergers while and bank-led cartels standard, the gold by transmitted stresses allocate and kind of financialization. The newly created central banks of late developers in the 1870s were used to cushion shocks toused cushion were in 1870s the late developers of banks central created The newly financialization. of kind experienced financialization as they were setting up their central banks and financial systems. But this was a different a different was But this systems. financial and banks up central their setting as were they experiencedfinancialization This is admittedly speculative, and it might be countered that industrializers of the late nineteenth century century also nineteenth of late the industrializers that be countered it might and speculative, is admittedly This finance, creating early bubbles; and household finances become financialized. financialized. become finances household and bubbles; early creating finance, firms are financialized from a very early stage of their development; sectors such as real estate receive large injections of injections large receive estate real as such sectors oftheir very development; a stage from early financialized are firms with industrialization itself. Not simply coinciding, it contributes to ‘premature de-industrialization.’ Non-financial Non-financial de-industrialization.’ ‘premature to contributes it coinciding, simply Not itself. industrialization with Second in its relationship with industrialization, financialization coincides not with a post-industrial transition, but but a transition, with post-industrial not coincides financialization industrialization, with relationship Second in its simultaneously primarily to support industrialization, in a supporting role, the financial sector has come to assume a leading role role a leading assume to come has thesector financial role, a supporting in industrialization, support to primarily INCAS DP SERIES / 2017 #02 13 References

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