Exclusion and Fragility: Across Time and Space

Dymski’s overview of the chapters in the book usefully captures the aspects of continuity and change characterizing global finance and merits an elaborate quote. As he points out, while chronic fiscal crises in peripheral countries remain a feature of the contemporary world economy, these crises have been transformed from what they once were, and differ from those in the past in several ways. ‘First, the pace of investment is now more assuredly in the hands of multinational banks and companies than in the colonial era. Second the locus of crises has shifted… Financial crises that previously would have devastated entire economies, snapped currencies like twigs, and destroyed over-lending banking enterprises, are today largely contained… Instead, the legacy of the crises is a ruined terrain in affected peripheral countries—businesses with decimated balance sheets due to home currency devaluations, bankrupted companies, and suicidal entrepreneurs, reduced wages and unemployment for the workers of the periphery, another ratchet turn of increased global north ownership of the enterprises, energy resources, and nature of the global south, and a grinding growth in the sovereign or private indebtedness of peripheral countries and their economic units’ (p. 22). Despite these adverse fallouts, much contemporary policy advice is built on what Dymski has termed as ‘an ideology of normality’. This ideology supposes, according to Dymski, that any given nation and its agents anywhere in the world face the same opportunities to benefit from undertaking optimal economic policies; and optimal policies are those that would yield welfare maxima under the assumptions that financial markets are efficient, that agents are rational and not myopic, and that the markets for goods traded cross-border are competitive (p. 23). The reorganization of our analytical frame to bring in the ‘real features’ of the world we live in at once reveal how exclusion, vulnerability and systemic fragility are not anomalies from policy ‘normality’ but phenomena that ‘challenge the best intentions of idealists, reformers and pragmatists alike’.

The sixteen papers in the book (which includes those of the two author-editors mentioned above) are organized under four broad heads: Themes and Trends: Developing Nations in the Age of Finance; Histories of the Periphery and of the Centre; Insights into the Indian Financial Structure and Experience; and Comparisons and Lessons. Space constraints do not permit discussion of all papers.

In her contribution Jayati Ghosh critiques the notion, as well as, the calls for, and action towards, providing central banks with more ‘autonomy’ in a context where the rise of finance and the associated wave of banking and financial liberalization have eroded the powers and therefore the functions of central banks. Further, most of the policies of financial liberalization in developing countries were, in the first place, driven by the hope that such measures to attract investors would aid foreign capital inflows into the developing economies and thereby also heighten economic activities leading to profits and employment in high value services generally. The examination of available evidence indicates that, quite apart from the fact that flows of capital into developing nations have little relevance to their financing needs, the very process of trying to attract such capital inflows carries very high costs for the domestic economy, not least among them being the upward pressure on domestic interest rates, the consequent adverse impact on domestic economic activity, raising the cost of government borrowing and thereby putting the economy on a deflationary course, among others. In sum, therefore, Ghosh argues that rather than continue to hold on to the sham of more autonomy, it is imperative to bring financial regulation and control back into the ambit of macroeconomic policy and central bank functioning.

Through what he calls the Illusionism of Finance, Prabhat Patnaik explicates the changed role that the state has set for itself in the age of finance, namely, that of improving the ‘attitude’ and ‘climate’ in the country to ostensibly facilitate investment rates, but by catering to the interests of finance capital. This obsession with maintaining the ‘confidence’ of finance capital at any cost has pushed the Indian government to ludicrous lengths when faced with domestic crises, manifest, for example, in the way it has handled, or rather, mishandled the issue of acute food shortage in several regions and among several sections of the populations amidst bourgeoning food stocks with the FCI (held at considerable cost to the nation) even when it was clear as daylight that ‘an increase in government investment financed by a fiscal deficit, would scarcely increase even the net indebtedness of the State’. The pervasive spread of such illusionism from praxis to theory is evident in the manner in which reputed socially aware economists a la Amartya Sen have felt compelled to argue that implementing an Employment Guarantee Scheme would come in the way of much needed expenditure on education and health. Given a situation where the economy has not reached a state of supply constraint, Patnaik argues that plentiful unutilized capacity and unsold foodgrain stocks could be used for financing both an Employment Guarantee Scheme and larger expenditure on education and health (emphasis as in original). These and several other examples contained in the paper reveal the underlying agenda of ‘redefining the very concepts of democracy and representative government in a manner that conforms to the illusionism of finance’ according to Patnaik.

Marc Flandreau and Clemens Jobst discuss the ‘financial architecture’ characterizing the global financial system, and the basis on which countries were designated as core or periphery. Focusing on the late nineteenth century, the authors find that there is surprising lack of association between the ranking of currencies according to their international status and the popular macroeconomic indicators such as per capita income, financial development, geographic location, net debtor-creditor position, exchange rate regime and political stability. The authors propose an alternative method of identifying core and peripheral nations based on the frequency with which national currencies are quoted in foreign currency markets, which exercise reveals that ‘size effects and persistence are the two most crucial ingredients determining the contours of the international monetary system’.

John McGuire’s essay on the Imperial Impact on the Globalization of Indian Finance is a study of how the needs of the British imperial state assumed precedence over and therefore dictated the direction of Indian finance. A relatively small number of exchange banks that emerged in the middle of the nineteenth century, with head offices in the city of London, facilitated the transfer of India’s finances. These banks whose banking practices were subject to the laws of the British state, effectively scuttled any benefit that India might/could have gained, for example, from a global commodities boom at the turn of the twentieth century, since the banks helped Britain manipulate the surpluses so as to maintain the dominant position of the gold-based pound and of British banks in global exchange markets. McGuire concludes his essay by asserting that ‘the transfer of gold from India to London helped sustain the position of the Bank of England. Again, the ready access of Indian funds located at the India Office ensured a very cheap ongoing supply of cheap money to the exchange banks and other financial institutions. What is certainly not in dispute is that the cultivating peasants who produced a large proportion of India’s surplus were not the beneficiaries of the exchange banks’ movement of capital out of India’.

In The Globalization of Financial Exploitation, Dymski dwells on what he calls the ‘micro’ dimensions of financial globalization, namely, the links between globalization and financial market structure, including intermediary strategies that, according to him, have not been much explored. This aspect, Dymski emphasizes, is extremely crucial since the financial market-structure interacts in complex ways with the income and wealth distribution in developing nations. Since increasing access to financial markets is touted as a significant benefit of financial globalization, Dymski discusses in considerable detail the theme of access to financial markets, the terms of such access, and, the degrees of access for households and firms. He introduces the notion of ‘financial citizen’ to connote those household and/or firms that have ready access to standard banking services. Following this, he tries to assess the extent of the global spread of financial citizenship. The central point of Dymski’s paper is that financial globalization has transformed, not eliminated, financial exploitation and this, despite the fact that, financial globalization generates new possibilities for financial ‘inclusion’, but on terms that deepen the financial exploitation of the most vulnerable among the socially and economically poor.

C.P. Chandrasekhar provides an overview of the process characterizing financial liberalization in India, with covertly denationalization measures marking a major shift from an earlier interventionist regime that had developmental overtones including measures to direct credit to what were officially viewed as ‘priority’ sectors. Financial liberalization is generally justified on the grounds that it infuses competition into the financial sector and increases the flexibility of the individual institutions to respond to that competition thereby leading to a greater degree of efficiency of the financial sector and to a better allocation of investible resources between alternative investment options. Available evidence on the contrary points to a shift away from lending for investment in production activities towards trade and consumer financing, towards purchase of shares and towards loan commitments to brokers—in short, activities that increase financial fragility. The two facets of financial liberalization, namely, facilitating capital inflow and restructuring the domestic financial structure, has increased domestic fragility not only because of the volatility of financial flows but also because of the change in local financial institutional structure that has militated against the introduction of measures to regulate the destabilizing forces that financial liberalization unleashes.

Parthapratim Pal attempts to assess whether the development and rapid growth of the secondary stock market in India has helped the corporate sector to mobilize resources from the stock market. Pal’s empirical exercise shows that after an investment surge in the late 1990s, the level of investment financing supported by the Indian stock market has fallen dramatically. Another disturbing fact flagged by Pal is that the FIIs have emerged as important players in the secondary segment of the stock market, which has become an arena for speculation with no positive feedback on the real economy.

The papers on the financial globalization experience of Eastern Europe and China provide useful comparative perspectives. For want of space we highlight only the very interesting case study of subcontracting by Italian firms in Romania, which example, according to the author, Guiseppe Tattara, represents the developing countries as a whole. ‘If a country is successful in attracting financial flows, the consequent tendency for its currency to appreciate—as is seen in Rumania since the first months of 2005—endanger the transformative role of the economy as it increases the relative cost of production, and forces the central government to intervene in the currency market to purchase foreign currency and prevent excessive appreciation. The consequent build-up of foreign currency assets, while initially sterilized through the sale of domestic assets, especially government securities, soon reduces the monetary flexibility by the central bank and leads to increased deflation… The real benefit of such flows is derived by the US government, which, being the home of the reserve currency, can resort to large-scale deficit financing’.

Bagchi’s concluding piece is an interesting interpretive essay where findings from contributions contained in the book are synthesized along with research from elsewhere to provide a possible canvas for policy debate on the theme for India.

Notwithstanding the uneven quality as well as dreary manner of presentation of data by some of the contributors, the book as a whole is a significant contribution to the theme of global finance, particularly its emphasis on the ideology that underpins the functioning of financial global markets, the implications for local institutions and market structures, and for macroeconomic and regulatory policy. The contextualization of current financial fragility and speculative impulses in asymmetric power that is historically rooted in imperialism cautions us to the fact that nations, particularly the developing ones, can hope to ‘adapt’ to the onset of financial globalization.

Padmini Swaminathan is Professor at the Madras Institute of Development Studies, Chennai.