Rethinking Financial Dependency

Linked with Pierre Salama – France, with Strategies and Preparedness for Trade and Globalisation in India, and with La décennie perdue et la finance « vicieuse ».

Excerpt: … (see page 3, download the rest of this 38 pages on UNCTAD India.org): The financial crisis did not have the same significance in the eighties as in the nineties. In both cases it resembled a Ponzi- type crisis as applied to the State : domestic resources were not sufficient to service the debt in its entirety. In the eighties, the country had to sign letters of intent in order to obtain “involuntary” credits to supplement the country’s own resources. In the nineties access to international financial markets was renewed but this did not exclude recourse to “involuntary” credits. In the earlier period, debt servicing generated hyperinflation and a large internal debt. The drop in purchasing power was a consequence of both inflation and the economic crisis. For a large part of the population, the most impoverished, pauperization was absolute. In the second case, the debt was serviced during a period of economic recovery with a significant increase in labour productivity. Financial dependence led to the relative pauperization of a significant portion of the population, except in times of financial crisis or when incomes levels declined. This is what we will try to show. The lost decade and “vicious financing” The development of financial activities is not parasitical by nature. Generally, firms operate in a macroeconomic environment over which they do not ordinarily have much control, and they do so on the basis of very limited information.

The current complexity of the production process increases uncertainty with regards to project profitability. Covering new risks also leads to the development of equally complex financial products. On this count, the financial market – on the condition that it be sufficiently large and diversified, which is not the case in Latin America – can generate new technologies and consequently ensure the conversion of the production apparatus towards the fabrication of increasingly sophisticated industrial products by creating financial instruments adapted to risk. The export of complex products requires not only the intervention of banks and the setting up of a complex and original financial “package”, but also the use of financial derivatives to cover a series of risks, including the exchange rate risk. Thus, the ever more complex organisation of the financial market with regard to its products and their interplay is to some extent the result of the increasing complexity of production. This financial complexity intensifies with financial liberalisation (de-compartmentalization, dis-intermediation and deregulation). Of course there is an additional cost but the profits are higher than the costs5. The development of finance and the increase in sophisticated financial products thus allow for an increase in capital in abstracto, for the capital cycle occurs only if financial activities favour the valorization of productive capital. The
growth of the industrial sector requires a more than proportional development of the financial sector. There is a shift towards financialization” when these activities are developed because financial products are attractive per se, and not as a result of a will to lower the risks in financing production. Financialization is the threshold from which 5 Very often analyses that are either Marxist in inspiration or adopt a Marxian approach, have a tendency to dwell upon the cost factor alone … (Download the rest of this 38 pages on UNCTAD India.org).

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