“Financialization of the global economy: Macroeconomic implications and policy challenges for Ukraine” Tetiana Bogdan https://orcid.org/0000-0002-6133-5336 AUTHORS Vitalii Lomakovych https://orcid.org/0000-0002-4945-1713 Tetiana Bogdan and Vitalii Lomakovych (2021). Financialization of the global ARTICLE INFO economy: Macroeconomic implications and policy challenges for Ukraine. Investment Management and Financial Innovations, 18(1), 151-164. doi:10.21511/imfi.18(1).2021.13 DOI http://dx.doi.org/10.21511/imfi.18(1).2021.13 RELEASED ON Wednesday, 10 February 2021 RECEIVED ON Wednesday, 11 November 2020 ACCEPTED ON Thursday, 04 February 2021 LICENSE This work is licensed under a Creative Commons Attribution 4.0 International License JOURNAL "Investment Management and Financial Innovations" ISSN PRINT 1810-4967 ISSN ONLINE 1812-9358 PUBLISHER LLC “Consulting Publishing Company “Business Perspectives” FOUNDER LLC “Consulting Publishing Company “Business Perspectives” NUMBER OF REFERENCES NUMBER OF FIGURES NUMBER OF TABLES 30 2 3 © The author(s) 2021. This publication is an open access article. businessperspectives.org Investment Management and Financial Innovations, Volume 18, Issue 1, 2021 Tetiana Bogdan (Ukraine), Vitalii Lomakovych (Ukraine) Financialization BUSINESS PERSPECTIVES of the global economy: LLC “СPС “Business Perspectives” Hryhorii Skovoroda lane, 10, Macroeconomic Sumy, 40022, Ukraine www.businessperspectives.org implications and policy challenges for Ukraine Abstract The acceleration of the global economy’s financialization with the spread of the COVID-19 pandemic highlights the risks of financial markets volatility, boom and bust cycles, violation of price stability, and debt sustainability. In such conditions, the high degree of Ukraine economy’s external openness, significant amounts of external debt, and lack of domestic investment and credit resources raise the issue of external financial threats to the national economy. This study aims to identify the risks of finan- cialization and debt accumulation across the globe, specify protective arrangements and vulnerabilities of Ukraine’s credit system to external shocks and develop a set of policy actions for global risks mitigation in Ukraine. To achieve this goal, available theoretical sources and policy studies were reviewed, and international databases of fi- nancial indicators have been analyzed. As a result, the underdevelopment of the finan- cial system in Ukraine and insufficient use of the credit levers by the private sector are revealed, which impede economic growth but simultaneously mitigate the impact of Received on: 11th of November, 2020 external shocks in Ukraine’s economy. On the other hand, high external debt reliance Accepted on: 4th of February, 2021 is confirmed, which increases the risks of financialization and cross-border capital Published on: 10th of February, 2021 flows for Ukraine’s economy. A set of financial and organizational measures (targeted at eliminating credit and debt distortions in Ukraine and creating a financial basis for © Tetiana Bogdan, sustainable economic growth) are devised; they refer to development of the national Vitalii Lomakovych, 2021 capital market, fiscal policy adjustment, acceleration of the foreign direct investments inflows, shifts in the NBU’s monetary policy, and the management of foreign exchange reserves. Tetiana Bogdan, Doctor of Economics, Scientific Director, NGO “Growford Keywords financialization, global debt, capital market, financial Institute”, Ukraine. (Corresponding author) deepening, debt sustainability, monetary policy Vitalii Lomakovych, Chief of the Board, JEL Classification F65, F34, E61, G18 NGO “Growford Institute”, Ukraine. INTRODUCTION In recent decades, the financial sector has increasingly distanced it- self from the real economy and has partially reproduced itself within the financial assets generated by the sector itself. This was one of the reasons for the global financial crisis of 2008–2009 and caused a deep economic recession in the world. In 2009–2019, tighter regulation of banking activities and control over the financial instruments driven the slowdown in financialization, which, however, began to intensify again with the spread of the COVID-19 pandemic. This is an Open Access article, In 2020–2021, the global economic crisis, unprecedented packages of distributed under the terms of the fiscal and monetary stimulus, and unstable investor sentiments again Creative Commons Attribution 4.0 International license, which permits raise the problems of financial market volatility, “boom-bust” cycles, unrestricted re-use, distribution, and possible violations of price stability, and debt sustainability in various reproduction in any medium, provided the original work is properly cited. sectors of the economy. At the end of 2020, global debt reached 365% Conflict of interest statement: of global GDP, and the leading central banks’ financial assets grew Author(s) reported no conflict of interest by 40-50% over the year. According to reputable experts, the combi- http://dx.doi.org/10.21511/imfi.18(1).2021.13 151 Investment Management and Financial Innovations, Volume 18, Issue 1, 2021 nation of high debt and monetary expansions in the future will contribute to the rapid transmission of financial shocks and the more frequent emergence of financial crises. In such conditions, threats of transmission of external shocks and violation of the economy’s external sustainability for countries with a high degree of openness, unfavorable investment climate, and low credit ratings are getting quite real. Ukraine also belongs to the group of such countries. Therefore, important tasks for Ukrainian scholars and policymakers should be identifying external risks and vul- nerabilities of the national credit system and developing a toolkit of instruments to enhance Ukraine’s domestic credit and investment potential while increasing the resilience of the economy to the impact of negative global factors. 1. LITERATURE REVIEW An integral attribute of financialization has been AND RESEARCH ANALYSIS the accumulation of private debt and the in- crease in global debt. According to the Institute In most studies, financialization is viewed as a of International Finance (n.d.), at the end of 2020, process or result of the increasing volume and global debt amounted to USD 277 trillion or 365% importance of the financial sector (its domi- of GDP (Figure 1), while the debt of advanced nance) compared with other sectors of the econo- countries rocketed to 435% of their GDP. my. Epstein (2001) defined financialization as the enhancing role of the financial markets, finan- At the end of the third quarter of 2020, the non-fi- cial motives, financial institutions, and financial nancial sector accumulated the largest debt lia- elites in the operations of the economy and its bilities globally – 104.8% of global GDP. The sec- governing institutions, both at the national and ond-largest was the general government sector, international levels. with a debt of 103% of GDP. The financial sector’s debt constituted 90.2% of GDP, and the household Krippner (2005) argues that the key feature of fi- – 65.3% of GDP. Over the past year, general gov- nancialization is a radical change in the process ernment debt (by USD 8.5 trillion, or 12.3%) and of accumulation in which profit-making occurs non-financial corporate debt (by USD 5.9 tril- increasingly through the net financial transac- lion, or 8%) grew most rapidly. tions not related to the real economy rather than through the production of goods and their sales. An alarming phenomenon pointed out by the IMF experts is the possibility of shifting corpo- The rapid growth of the financial sector in many rate debt to public finances, which will increase countries worldwide took place from the 1990s the overall level of fiscal risks. For example, since until the onset of the global financial crisis in the beginning of the COVID-19 pandemic, gov- 2008. For example, the value of financial assets in ernments of different countries have announced the world grew from fourfold GDP in 1980 to ten- guarantee programs equivalent to USD 3.8 trillion fold GDP in 2007. The share of corporate profits (International Monetary Fund, 2020a). generated by the financial sector in the US econo- my’s total income rose from 10% in the early 1980s Mbaye, Moreno Badia, and Chae (2018) found that to almost 40% in the run-up to the global financial excessive private debts could migrate to the public crisis (Crotty, 2009). sector balance sheets through three main chan- nels: (1) direct public support to the corporations Turner (2020) points out that financial markets, or their creditors, (2) calls on state guarantees on the functioning of which is entirely based upon private debts, or (3) countercyclical fiscal response market forces, generate activity beneficial from an to the corporate deleveraging episodes. individual, private point of view but can be harm- ful from a public point of view. The too big vol- Assessing the global debt, the International ume of the financial sector and intensive financial Monetary Fund (2020b) suggests that current- transactions become destructive for the economy. ly, the riskiest is the non-financial corporate debt 152 http://dx.doi.org/10.21511/imfi.18(1).2021.13 Investment Management and Financial Innovations, Volume 18, Issue 1, 2021 Source: Compiled by the authors using the data from the Institute for International Finance (n.d.). USD trillion Absolute amount, USD trillion