THE DIVERSITY OF CONVERGENCE: STATE AUTHORITY, ECONOMIC GOVERNANCE AND THE POLITICS OF SECURITIES FINANCE IN CHINA AND INDIA A Dissertation Presented to the Faculty of the Graduate School of Cornell University In Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy by Matthew C.J. Rudolph May 2006 © 2006 Matthew C.J. Rudolph THE DIVERSITY OF CONVERGENCE: STATE AUTHORITY, ECONOMIC GOVERNANCE AND THE POLITICS OF SECURITIES FINANCE IN CHINA AND INDIA Matthew C.J. Rudolph, Ph.D. Cornell University 2006 This dissertation explains contrasting patterns of financial reform in China and India. It focuses on “securitization” – the structural shift from credit-based finance (banking) to securities-based finance (stocks and bonds) – as a politically consequential phenomenon in comparative and international political economy. The analysis revises common theories of the developmental state – theories derived from Gerschenkron’s emphasis on directed-credit and the state’s role in capital formation – in light of securitization’s growing global importance in the last twenty years. Contrasting responses to securitization are explained using international and domestic variables including the profile of a country’s exposure to the world economy, the distributional coalition supporting the state and the prevailing structure of property rights. At a theoretical level, the dissertation highlights the political consequences of securitization for state authority in the economy, arguing that directed-credit; 1) enhanced state discretion in the management of distributional coalitions; 2) facilitated the perpetuity of poorly specified property rights; and 3) mitigated the consequences of the country’s position with respect to external trade and investment. Empirically, the research presented here demonstrates that China and India responded differently to the process of securitization, contrary to the expectations of globalization theories that identify finance as a domain in which international forces favoring convergence should be strongest. The thesis also shows that, in contrast to the scholarly depiction of China’s authoritarian system as superior to India’s democracy in the reform process, in the area of finance, Indian and Chinese reform patterns are mirror images: reform with substantive change in India, reform without substantive change in China. Finally, most scholars viewed China’s massive foreign exchange reserves and world-topping volumes of foreign direct investment as signs of economic strength. This thesis suggests the opposite: that these signs indicate Chinese vulnerability is derived from an “affliction of abundance.” India, however, made a virtue of its weakness, exploiting the “advantages of adversity.” With little foreign direct investment, few exports, and (until recently) scant hard currency reserves, India chose to develop world-class securities markets and a rich tapestry of securities governance institutions in order to better mobilize and direct corporate finance and attract hard currency through foreign portfolio investment. BIOGRAPHICAL SKETCH Matthew C.J. Rudolph graduated with Honors in Political Science and Art History from Swarthmore College. Before seeking a Doctoral degree at Cornell, he worked in Washington, D.C. at the Henry L. Stimson Center. There, Matthew’s worked focused on conflict avoidance in South Asia. He has lived, studied and worked in South Asia and Greater China for over eight years. iii With thanks to S & L who were always kind, patient and supportive. iv ACKNOWLEDGMENTS For support on this project I wish to thank the Cornell East Asia Program, The Committee for Scholarly Communication with China and the American Institute of Indian Studies. Many good and patient people helped with this project. Without their support it would never have been possible. Above all I am grateful to Peter J. Katzenstein and Vivienne B. Shue. Peter always urged me to “lean forward”. Vivienne blended skepticism with humanity. Ronald J. Herring helped hone any of the good ideas that are to be found within. Derek Hall, William J. Hurst, John Echeverri-Gent, and Jenny Rudolph commented helpfully on various chapters. Kasey M. Kozara and Yogesh Wadhwa helped with the manuscript and with sanity. v TABLE OF CONTENTS Chapter One 1 Global Script, Local Enactment: The Dragon and Elephant on the Way to Globalization Chapter Two 42 Late Development, Securitization, and State Authority Chapter Three 98 Explaining Securities Governance in Developing and Transitional Economies Chapter Four 162 Finance and the Developmental State in China and India: Comparisons and Antecedents Chapter Five 232 Structural Junctures and Political Incentives Chapter Six 293 Taking Stock: The Politics of Equity Securities Chapter Seven 343 Extending Concepts and Arguments: The Politics of Bond Finance Chapter Eight 366 Conclusions vi LIST OF FIGURES Figure 2-1: The Size of Securitization 47 Figure 2-2: Trading Places: “Monetization” and “Securitization” in China’s Developing and Transitional Economy 50 Figure 2-3: Securitization Teleology?: M2 to Market Capitalization for Selected Countries 52 Figure 2-4: Portfolio Inflows to Low and Lower Middle-Income Countries 80 Figure 2-5: Securitization and the Liquidity Spectrum: Political Control and the Commodification of Finance 85 Figure 3-1 Economic Governance Regimes 103 Figure 3-2 Depicting the Dual Imprint 117 Figure 3-3 Structure and Process in the Explanation: International Junctures, Domestic Politics, and Securities Governance Regimes 122 Figure 3-4 Process-Tracing the Politics of Securitization: The Asset-Class/Financial Position Matrix 129 Figure 3-5 Using the AC/FP Matrix: Observable Domains of Securitization Politics 131 Figure 4-1: Trends in New Indian Securities Issuance 1951-1994 214 Figure 4-2: Movement of the Reserve Bank of India’s Ordinary Share Price Index 1951-1994 215 Figure 5-1: Export Contribution to Growth and Foreign Currency Reserves 244 Figure 5-2: Balance of Payments (B-of-P) and Forex Reserves 247 Figure 6-1: The Origins of Competition Among Indian Stock Exchanges 315 Figure 6-2: Number and Percentage Change of Chinese Companies Listed 324 Figure 7-1: The Structure of Chinese and Indian Bond Markets 346 vii LIST OF TABLES Table 1-1: A Scorecard for the Dragon and the Elephant 3 Table 1-2: Sectoral Variation in Reform Outcomes 18 Table 1-3: The Explanation 21 Table 1-4: The Asset-Class/Financial Positions Matrix: Analyzing the Domestic Politics of Securitization 29 Table 2-1: Country Classification of Financial Structure 48 Table 3-1: The Explanation 123 Table 3-2: Varieties if Comparative Case Selection 145 Table 4-1: China Securities Governance before 1992 186 Table 4-2: Trends in Fiscal and Budget Deficits 211 Table 4-3: Indian Securities Governance before 1992 223 Table 5-1: Foreign Direct Investment into China and India 242 Table 5-2: Structure: External Exposure Profiles 249 Table 5-3: External Exposure Profiles and Political Incentives 255 Table 5-4: India's GDP Growth in Percent 262 Table 6-1: Isolating Equity Politics: Breaking Down the Domains of Action 296 Table 6-2: A Decade of Change in the Indian Equities Markets 302 Table 6-3: China’s Short March to Involution 320 Table 7-1: Regulatory Framework for Sub-national Borrowing 358 Table 8-1: What is Securities Finance For? 369 viii Chapter One GLOBAL SCRIPT , LOCAL ENACTMENT : THE DRAGON AND ELEPHANT ON THE WAY TO GLOBALIZATION I. Increasing Assets: the contemporary life of securities finance Cab drivers call it the “share bazaar,” and will convey a passenger as close as the thronging traffic permits. Crowding up and around its vast flanks are shoeshine boys, snack kiosks, and vendors of share applications (who will, for a fee, fill out the applications – different prices for handwritten or typed). Banks with doors half open are guarded by desultory chowkidars (security guards) drinking tea. The traffic in and out, as well as around the building, is incessant and raucous. Despite the fact that it is one of the tallest buildings on the south Bombay skyline, situated on hugely valuable property, it can be accessed only by way of labyrinthine small lanes. This is the Bombay Stock Exchange, India’s best-known securities exchange. In Shanghai’s glittering new Pudong financial district, rising majestically between a manicured empty greensward and a wide yet often empty boulevard, stands the Shanghai Stock Exchange. Inside and out, it is disconcertingly still, soporific. In the solitude of the foyer, a footfall is deafening. The exchange building itself is a huge chrome and steel affair shaped like a square doughnut, with a vast empty space in the middle. These renderings of the different social geographies and built environments in which the Chinese and Indian securities exchanges exist, evoke themes that distinguish the two countries’ patterns of securities finance. Observers often view China as a surging dragon, a vigorous economy with a dynamic reform agenda. India 1 is viewed less favorably, as a plodding elephant, a sluggish economy, and a listless reformer. Contrary to these common characterizations, I argue in what follows that, when we look at the area of securities finance in stocks and bonds, the dragon is less fierce than often believed and the elephant more nimble. Where will China and India be tomorrow? Two prominent political economists, one Chinese and one Indian, reason that “the answer will be determined in large measure by how well both countries utilize their resources, and on this score,