Financialisation in a capitalist world market
3.2 THE DEVELOPMENT OF THE WORLD MARKET
3.3.2 Global financial liberalisation
The second strand in the literature on financialisation, focusing on the role of global financial liberalisation, is one which threads its way through accounts from a wide variety of disciplinary perspectives and levels of abstraction. In post-Keynesian work, the liberalisation is itself the causal factor leading to the financialisation of the economy, driven by the rise of a rentier class and accompanying inequality. In Marxian accounts, liberalisation is a proximate factor, leaving open the possibility that liberalisation is itself reflective of deeper structural transformations in capitalism. In the literature which stresses the role of financial liberalisation, there is a broad acceptance that financialisation is a secular phenomenon (or, if cyclical, of a
61 long-term duration), if disagreement over whether its course can be halted and a lid put back on Pandora’s box. This is a large literature, so I have chosen to limit the exposition to exemplary references of two seminal elements of broader financial liberalisation: capital market liberalisation, and foreign bank entry.
Capital market liberalisation involves the removal of constraints on both incoming and outgoing monetary flows, be they direct investment, portfolio flows, or cross-border lending. Advocates argue that the consequent deepening of financial markets improves both access to capital and the price discovery process, resulting in the more efficient allocation of funds (McKinnon, 1973; Shaw, 1973; Fry, 1997). In economies of the periphery, capital market liberalisation has been variously undertaken at a country’s own behest, as an urgent necessity during times of crisis, or as a contractual requirement; the latter stipulated by loan conditionalities, or bi-/multi-lateral investment and trade agreements.
Against orthodox accounts, the literature on financialisation finds that, by enlarging domestic capital markets and allowing access to international capital markets, capital market liberalisation has facilitated increased investment in financial assets by non-financial corporations, with negative implications for levels of productive investment. This has occurred in countries as diverse as the United States (Orhangazi, 2007, 2008, 2011), India (Sen, 2008), South Africa (Mohamed, 2009), Mexico (Vidal, Marshall, & Correa, 2011), Argentina, Mexico and Turkey (Demir, 2009a), and Hong Kong, Singapore, Indonesia, Korea and Malaysia (Yan, 2010).
Declining productive investment may either be the result of improved relative profitability in finance following capital market liberalisation, or simply from the ensuing volatility discouraging real investment (Demir, 2009a; Stockhammer &
Grafl, 2010). Financial investors have taken advantage of capital market liberalisation to ‘hollow out’ productive firms through the leveraged purchase and subsequent break-up and sale of firm assets in countries such as Mexico (Correa, Marshall, & Vidal, 2010). Governments have had to adopt monetary and exchange rate policies which protect the financial gains of investors at the expense of domestic fixed investment and employment, as documented in Mexico (Levy-Orlik, 2008), Brazil and Korea (Kaltenbrunner, 2010; Painceira, 2010).
A second central tenet of financial reforms over the last three decades has been the opening up of domestic banking markets to foreign competition. The
62 arguments advanced in favour of foreign bank entry (Claessens, Demirgüc-Kunt, &
Huizinga, 2001; Claessens & van Horen, 2010; Levine, 1996) can only be summarised in general terms here. First, benefits are said to be derived from increased competition. Larger foreign banks are able to access more diversified funding sources, and invest in a more diversified range of assets. This allows them to lower funding costs, and achieve higher returns through better risk diversification.
Customers then stand to benefit from a decreased interest rate spread, resulting in more efficient allocation of resources. A second set of benefits is related to positive spill-over effects. Along with greater size and reach, foreign banks introduce best-practice policies and procedures, more experienced staff and cutting-edge technologies. It is hoped that competitive pressures will force domestic banks to adopt such features. This leads to both greater efficiency and stability. Third are governance benefits. Foreign banks reputedly demand improved systems of regulation and supervision from regulatory authorities, and reduce the influence of the government on financial sector allocation decisions. They may also serve to weaken cronyism in lending between units affiliated to family-based conglomerates.
In contrast to this ruddy prognosis, there is increasing evidence that the claims in the orthodox literature are overstated. A similarly large body of literature finds evidence that foreign bank entry may lead to decreased competition (Beck &
Martinez Peria, 2010; Kim & Lee, 2004; Lensink & Hermes, 2004; Levy-Yeyati &
Micco, 2007; Schulz, 2006; Tregenna, 2009), a fall in access to credit for certain sectors (Berger, Klapper, & Udell, 2001; Gormley, 2010; Mian, 2006), and weakened governance (dos Santos, 2007). However, what is of greater interest to the present discussion is the literature which looks at the relationship between foreign bank entry and the financialisation of accumulation. Foreign banks may face an environment in which large firms are self-financing, but lack the local relationships and monitoring skills to profitably exploit SME markets. This fact, combined with the technical expertise developed in advanced economies for the securitisation of household lending for housing and consumption, induces a turn of the banks towards the household (dos Santos, 2009a; Gorton, 2009; Kregel, 2010). In developing country contexts, this change may be accompanied by banks’ reliance on investments in government securities. These critical changes in bank behaviour have been claimed in, for example, Eastern Europe (Raviv, 2008), the Balkans (Ćetković,
63 2011), Korea (Crotty & Lee, 2005), Turkey (Karacimen, 2013), India (Chandrasekhar, 2007) and Mexico (Levy-Orlik, 2009).
By construction, literature focusing on the import of global financial liberalisation for financialisation integrates analysis of the changes on the countries of the periphery. As such, it provides significant empirical insight into the commonalities and the divergences between how these processes are experienced in different institutional settings. Without specifically linking these processes to transformations in the world market, it suggests that financialisation is related to the nature of a state’s insertion into the global economy.