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Financialisation  in  advanced  capitalist  economies 1

4.3     FINANCIALISATION  VARIED:  THE  EMPIRICAL  EVIDENCE  IN  ACEs

4.3.1     The  macroeconomic  picture

One simple way to capture the increasing role of finance is to look at total financial sector assets as a share of GDP (see figure 4.01; for source notes, except where otherwise noted, see Appendix A). A caveat is first required that too much emphasis should not be placed in the interpretation of cross-country differences in levels, due to the many difficulties in constructing comparable data sets as enumerated above.

Having said this, through the 1990s, the UK, France, the US and Germany all show parallel growth trends starting from different levels. In the 2000s, financial sectors in the UK and France rise rapidly while their US and German counterparts continue on their earlier growth path. The exception to this story is Japan. After explosive growth during its bubble period in the 1980s, and then slower growth in the 1990s, the financial sector has shrunk as a share of GDP in the last decade.

Comparing figure 4.01 with the growth of bank assets as a share of GDP (figure 4.02) counsels against making any simple macroeconomic distinctions between those economies which are traditionally thought to be bank-based and those which are not. The growth in the financial sector in Japan in the 1980s is due to the growth in bank balance sheets, but since that time, any growth relative to GDP has come in the non-bank financial sector. For the UK and France, most of the growth in the financial sector in the last two decades is accounted for in the growth of banks;

however, in the US and Germany, the opposite is true. Grasping the bank-based market-based typology and the transformation of banks in an era of financialisation clearly requires nuanced investigation.

84 Figure 4.01: Financial sector total financial assets as a share of GDP

Figure 4.02: Banks’ total financial assets as a share of GDP

Typically the relative importance of market-based finance is gauged by looking at stock and bond market development (Beck, Demirgüc-Kunt, & Levine, 2009; Demirgüc-Kunt & Levine, 2001). Figure 4.03 shows stock market capitalisation as a share of GDP, while figure 4.04 shows private bond market capitalisation as a share of GDP. Stock markets have grown in size relative to GDP across the sample in the last two decades, however, clearly they are more central to

0  

85 the market-based economies of the US and UK. Private bond market capitalisation defies easy classification. It is at similar levels and shows no growth for all countries, except for the US where it is at both a much higher level and increasing in relative size.

Figure 4.03: Stock market capitalisation as a share of GDP

Source: WB financial structure dataset, from Standard &Poor’s emerging market database

Figure 4.04: Private bond market capitalisation as a share of GDP Source: WB financial structure dataset, from BIS Quarterly Review

0   0.5   1   1.5   2   2.5  

1989   1991   1993   1995   1997   1999   2001   2003   2005   2007  

GBR   USA   JPN   FRA   DEU  

0   0.2   0.4   0.6   0.8   1   1.2   1.4  

1990   1992   1994   1996   1998   2000   2002   2004   2006   2008  

USA   FRA   JPN   DEU   GBR  

86 A number of other measures have been used to show the increasing ‘footprint’

of the financial sector. These include the increasing share of the Finance, Insurance and Real Estate sectors (FIRE) in GDP4, while its share in employment has remained stagnant5. US data on wages from the FIRE industries shows that after two decades at a stable 15 per cent, the FIRE share of domestic private income rises to over 20 per cent in the 1980s, where it has stayed for the last two decades6. A number of attempts have been made to unravel the complexities of accounting for financial profits as a share of total profits. The first work on the US economy was done by Krippner (2005), while that on France by Duménil and Lévy (2004a). Lapavitsas (2013) confirms Krippner’s finding that financial profit as a share of total corporate profit in the United States has been rising from approximately ten per cent in the 1940s and 1950s to reach nearly 35 per cent before the crisis of 2007-8; to this he adds the findings that the pre-tax profits of financial corporations as a share of total pre-tax profits have risen in the UK from below ten per cent before 2000 to above 35 per cent before the crisis, and have risen in Japan from approximately ten per cent in the early 1980s to 20 per cent in recent years.

But while such measures illustrate the undeniable growth in the size, share and reach of finance, they do not provide a deeper understanding of the structural transformations going on within and between key sectors of the economy, and how and why those transformations differ across countries. It is these processes of the penetration of financial motives into the operations of and relations between firms, financial intermediaries and households which characterises financialisation.

4 Tracing such a ratio using data from OECD.stat shows the FIRE sector growing in all countries of the sample from approximately 15 per cent of GDP in 1970 to 30 per cent in 2008, with the exception of Japan which grows from approximately 10 per cent in 1970 to 17 per cent recently. The direct contribution of finance is masked in such calculations by the inclusion of real estate. However, data for the finance sector alone are both less reliable due to differences in categorisation and available for a much shorter time period. Efforts by Lapavitsas (2013) to reconcile individual national accounts data estimate the growth of the finance sector from approximately five per cent in the early 1980s to between seven and eight per cent more recently, with the exception of Germany, the ratio for which moves around five per cent since data become available in 1991.

5 Using data from OECD.stat shows employment in financial intermediation at approximately 4.5 per cent in the US and UK, 3.5 per cent in Germany and France, and 2.5 per cent in Japan.

6 Source is US National Income and Product Accounts (NIPA) tables 6.1 and 6.2.

87 4.3.2    Non-­‐financial  corporations  

According to the theory of financialisation adopted here, it is expected that non-financial corporations (hereafter just corporations) will, first, turn away from bank loans towards open financial markets and, second, accumulate a greater proportion of financial relative to other assets. The bank-based versus market-based distinction has historically pivoted on the degree to which corporations seek financing from

‘patient’ relationship-based bank lending as against ‘impatient’ open market capital.

Examining loans as a share of liabilities (figure 4.05) suggests that overall there has been a secular decline in the use of loans as corporations turn to self-finance.

However, two distinct levels persist. Germany and Japan on the one hand, and the US and UK on the other, with France moving from the former towards the latter.

Figure 4.05: Non-financial corporations’ loans as a share of total liabilities (and linear trend)

Some care should be taken in drawing any firm conclusions about the magnitude of the move away from bank borrowing. The classification of what is a loan is critical. As an example, the line given in figure 4.05 above shows loans from only UK MFIs (monetary financial institutions) as a share of liabilities. If total loans is used instead, the UK appears to join the bank-based group. But total loans masks

0   0.05   0.1   0.15   0.2   0.25   0.3   0.35   0.4   0.45   0.5  

1980   1982   1984   1986   1988   1990   1992   1994   1996   1998   2000   2002   2004   2006   2008  

DEU   JPN   FRA   GBR   USA  

88 both increased borrowing from foreign monetary financial institutions (MFIs), and more importantly from increased ‘direct investment loans’. The latter represent cross-border borrowing and repurchases between affiliated enterprises, where an MFI does not participate as a lender or borrower. In effect, a form of short-term internal credit which masks the fall in bank borrowing.

The impact of financialisation comes out more starkly with examination of the uses side of the balance sheet (figure 4.06). For France, the US and the UK, there is a marked secular rise in the ratio of financial assets to fixed assets, reflecting the shift in corporate holdings of financial versus ‘productive’ assets7. Once again, Japan and Germany appear to be marching to a different tune, in trend if not in the level of this ratio. All five countries exhibit cyclical fluctuation, however finer analysis would be required to disentangle asset price inflation from net acquisition of financial assets.

A number of interesting stories suggest themselves here. First of all is that of Japan. The ratio rises spectacularly during the bubble decade of the 1980s, reaching 240 per cent. This then falls back to hover around 150 per cent for the next two decades, with a second smaller period of inflation between 2002 and 2006. This flattening out of the trend post-1990 suggests that Japanese corporations, due to their earlier experience, have become reluctant to or are unable to re-engage in financialisation.

7 It would have been desirable to only include what might be termed ‘tradeable’ or ‘portfolio’ assets in the numerator, however, at the national flow of funds level, differences between countries’

categorisation makes interpretation of such a ratio difficult. By using ‘total financial assets’, I can be sure that I am not missing part of the story due to different classification systems. Fixed assets was used to avoid volatility in land prices (included in tangible assets) and cyclical inventory stocks (included in produced assets).

89 Figure 4.06: Non-financial corporations’ total financial assets as a share of fixed

assets

The second interesting story is that of France. From 1982 to 2000, the ratio explodes from about 70 to 270 per cent, far exceeding the levels of both the Anglo-American economies and Japan. This is particularly notable in that it occurred during a period of the “unravelling” of the French system of cross-shareholding (Morin, 2000). In the first round of privatisations of state-owned enterprises in the 1980s, French businesses were sold to five categories of investors only: a core of stable shareholders (‘noyau dur’), the workforce, public, French and foreign institutional investors. Thus, according to Bob Hancké (2001, p. 320): “… an ownership structure of loyal investor cores emerged, which consisted of groups of banks, insurance companies, and industrial companies that acted as long-term institutional investors and were supposed to help govern the company and protect it from takeovers.” This explains the relatively high level of corporate holdings of financial assets from the outset of figure 4.06. Then in 1993, the French government resumed those privatisations which had been earlier postponed and allowed sales of the core shareholdings which had been meant to protect the newly privatised companies. In late 1996, one of the two major cross-shareholding structures collapsed. This led to a wave of merger activity, with the amount of equity raised by French corporations increasing by 38 per cent (Culpepper, Hall, & Palier, 2006).

0.00   0.50   1.00   1.50   2.00   2.50   3.00  

1978   1980   1982   1984   1986   1988   1990   1992   1994   1996   1998   2000   2002   2004   2006   2008  

FRA   JPN   GBR   USA   DEU  

90 French companies during this period also looked abroad for acquisitions and joint ventures.

The third question which arises from figure 4.06 is the contrasting movement of US and UK corporations during the most recent decade. Decomposition of the ratio shows that for the US, both financial and fixed assets continue to grow but at an equal (nearly exponential) rate. While in the UK, the stock of financial assets continues to grow post-2001 on a near-exponential trend, but growth in fixed assets is clearly linear. This suggests that the difference in behaviour is down to the relatively slower growth of UK corporations’ fixed investment. This view is partially explained by higher rates of gross fixed capital formation in the US over the past two decades, though the difference here does not seem to fully justify the trend in the ratio of financial to fixed assets.

German  and  Japanese  corporations  apart  

Further insight can be gleaned through the examination of the historical changes of corporations’ balance sheets8. On the asset side, levels of corporate deposits decline in the US, France and Germany, coinciding with the rise of the use of money market instruments. This has eaten into the liability side role of banks in these countries.

The exceptions are Japan and the UK. However, if deposits with foreign MFIs are subtracted from UK corporate balance sheets, the UK joins the ranks of the former group.

Trade credit is squeezed in the eager financialisers much more so than in Japan and Germany. This follows the financialisation story: corporations are pushed towards the use of factoring to turn over their trade receivables as quickly as possible.

Japan stands out for its persistently high level of trade credit. This reflects both the more export-intensive and manufacturing-based nature of its economy, as well as the history and customs of the physical payments system. Germany shows an increase in trade receivables (though not payables) over the last decade. This might reflect

8 The analysis here reflects the author’s analysis of national accounts data, plotting the change in the portfolio composition of the balance sheets of non-financial corporations over the period in question.

91 growing German strength (both absolutely and relatively) in export markets where credit terms may be longer than for domestic production.

Equity holding trends increase universally with cyclical fluctuations. Levels reflect national institutional histories. France stands out for the reasons explained above. In Japan, corporations’ holdings of shares and equity increase dramatically, first during the infamous bubble period in the 1980s, but then again more recently between 2002 and 2006. However, what is interesting to note is that in the earlier boom, a doubling of bond issuance and a 50 per cent increase in loans (in absolute terms, on the asset side) suggests that corporations were ‘in on the party’. Industrial firms reduce their own borrowings, and begin lending their surpluses to others, leading to a rise in financial assets to liabilities and an increase in financial profits (Calder, 1997). Financial manipulations, known as zaitech (‘financial technology’) become a key source of profitability. In contrast, during the 2002 to 2006 period, there was a modest decline in absolute holdings of securities and loans, pointing to a more conservative corporate response.

On the liability side of the balance sheet, there is both an increasing share of equity, and within credit market instruments, a shift towards securities and away from loans and mortgages. However, German corporate liabilities are distinctive both for their composition and the stability of that composition. Securities make up a much smaller share of liabilities than in other countries. Loans make up both a higher share of liabilities throughout the period and are consistently of a longer-term nature, made up of 70 per cent ‘longer-term loans’9.

A number of attempts have been made to move German corporations towards the Anglo-American model of shareholder value orientation. This includes, for example, the 1998 Law for Control and Transparency in Large Companies which authorised the use of stock options for managers and share buy-back programmes (Vitols, 2001) and measures to allow greater foreign equity ownership and introduce hostile takeovers. All have been met with a lukewarm reaction from German business. According to Beyer and Hopner (2004), most firms still fund from retained earnings and bank finance, and cross-shareholdings have shifted but not enough to

9 According to 1993 System of National Accounts (SNA) guidelines, long-term loans must be greater than one year, but may be greater than two years to accommodate national variation. Loans may include repo where it is not included in the broad money definition.

92 end firm protection from hostile takeovers. Unlike France, growth of foreign ownership has been stable at 23 per cent during the 1990s (Gourevitch & Shinn, 2005) and what entry there has been has happened through lower-turnover pension funds rather than hedge and mutual funds (Goyer, 2007).

The picture of French corporations’ financial liabilities is broadly similar to those of UK corporations. There is an increasing holding of securities, made up of negotiable debt securities (over 50 per cent) and derivatives (over 10 per cent) rather than bonds, which have shrunk from 100 to 30 per cent. The breakdown of loans has edged slightly more towards short-term loans. This reflects both the liberalisation of the system of industrial credit starting in 1984, and increased access to money markets granted large enterprises starting in 1985 (Loriaux, 1997).

Corporate  size  matters  

Other things being equal, large non-financial corporations, corresponding to the ‘monopolistic’ capitals of Marxist analysis, are expected to be more financialised than their smaller counterparts. They have the easiest access to open financial markets, facilitating acquisition of financial skills and extraction of financial profit.

The European Commission’s Bank for the Accounts of Companies Harmonised (BACH) database provides a unique way to test this hypothesis. BACH contains the harmonised annual accounts of non-financial enterprises for 11 European countries (not including the UK), Japan and the United States. Importantly, BACH provides aggregated accounts of non-financial enterprises divided by size10.

Despite heroic attempts to harmonise diverse national accounting standards, the creators of the BACH database emphasise that while trend comparisons can be made, comparisons in terms of level should be done with considerable caution (DG ECFIN, 2006). A preliminary investigation was conducted using the data for France, where the growth in the ratio of financial to fixed assets has been most pronounced.

The French data gives a flavour of the internal variation of corporate behaviour according to firm size. Figure 4.07 provides support for the hypothesis that large

10 Small enterprises are those with turnover less than 10 million euros; medium enterprises between 10 and 50 million euros; and large enterprises those with turnovers exceeding 50 million euros.

93 corporations are leading the turn away from bank-based finance, though corporations of all sizes appear to be returning to bank loans in the two years before the current crisis. Figure 4.08 shows large corporations leading a general trend towards increased reliance on financial relative to productive income. Figures 4.09 and 4.10 show the ratio of fixed financial assets11 to tangible fixed assets12 (respectively flows and stocks). In both cases, the upward trend is clear across the three size categories.

The lower-than-expected level in the ratio of stocks of financial assets relative to tangible fixed assets for large enterprises could reflect differences in sectoral composition or business model, but would require further investigation. Pending further analysis, these data provide qualified support for Deeg’s (2009) theory of internal capitalist diversity, which highlights the differentiation between ‘traditional’

SMEs versus highly-financialised international firms.

Figure 4.07: French non-financial corporations’ loans (short and long-term) to total liabilities (stocks)

11 ‘Fixed financial assets’ includes holdings of stocks and bonds, but does not include ‘current financial assets’ of trade credit and cash in hand. The latter are included in ‘total financial assets’.

12 ‘Tangible fixed assets’ refers to land and buildings, plant and machinery, other fixtures, and assets in construction.

0   0.02   0.04   0.06   0.08   0.1   0.12   0.14   0.16  

1999   2000   2001   2002   2003   2004   2005   2006   2007   2008  

SM   MED   LG  

94 Figure 4.08: French non-financial corporations’ financial to total income (flows)

Figure 4.09: French non-financial corporations’ acquisition of fixed financial assets to tangible fixed assets (flows)

0   0.005   0.01   0.015   0.02   0.025   0.03   0.035   0.04   0.045   0.05  

1999   2000   2001   2002   2003   2004   2005   2006   2007   2008  

LG   MED   SM  

0   0.5   1   1.5   2   2.5   3   3.5  

1999   2000   2001   2002   2003   2004   2005   2006   2007   2008  

LG   MED   SM  

95 Figure 4.10: French non-financial corporations’ fixed financial assets to tangible

fixed assets (stocks)

To recap, corporations across this survey of advanced capitalist economies are financialising, as they are moving away from relation-based lending and acquiring more significant portfolios of financial assets. However, resistance to both trends is more marked in Japan and Germany. French firms appear to have rapidly financialised, though finer historical analysis suggests that this is related to a very particular institutional development. There is some preliminary evidence to suggest that financialisation is more pronounced among large corporations. All of this suggests that while the bank-based vs. market-based typology still holds, it is being

To recap, corporations across this survey of advanced capitalist economies are financialising, as they are moving away from relation-based lending and acquiring more significant portfolios of financial assets. However, resistance to both trends is more marked in Japan and Germany. French firms appear to have rapidly financialised, though finer historical analysis suggests that this is related to a very particular institutional development. There is some preliminary evidence to suggest that financialisation is more pronounced among large corporations. All of this suggests that while the bank-based vs. market-based typology still holds, it is being