Info Service on Finance and Development (Mar12/06)
9 March 2012
Third World Network
on "The paradox of finance-driven globalization"
9 March (Bhumika Muchhala) - In its first policy brief for 2012, UNCTAD
says that the globalization process has been shaped by a sharp growth
in the financialisation of economic activity across both developed and
This “finance-driven globalization” has produced winners and losers
in the developing world, and UNCTAD posits that diverse growth outcomes
depend on the degree to which developing countries reject the dominant
economic wisdom of trusting their growth prospects to financial markets.
Those countries that instead pursue heterodox and innovative policies,
tailored to local conditions, allows a shift of resources to economic
and social activities that are increasingly productive. On the other
hand, developing countries that have embraced finance-driven globalization,
have seen their ability to achieve this structural transformation greatly
Titled “The paradox of finance-driven globalization”, the policy brief
asserts that the key to long-term economic success continues to depend
on establishing strong links between resource mobilization and structural
transformation. For this, effective policies matter in establishing
the right linkages, particularly because
“productivity-enhancing structural change does not emerge spontaneously
from unleashing (financial) market forces.”
Rather, positive structural change is the result of strategic government
policies to “raise capital formation, strengthen productive capacities
and diversify the economy.” Conversely, a narrow prioritisation of improving
the efficiency of specific industries or sectors by exposing them to
international competition and unregulated, pro-cyclical financial flows
often has significantly adverse impacts on the economy, and country
as a whole.
The entry of finance-driven globalization
marks the intensification of a finance-driven globalization with the
time period of the early 1980s, when extensive financial deregulation
and liberalization of capital flows signaled a radical break with the
post-war international policy framework. For the first time in economic
history, capital flows surged ahead of trade flows.
Subsequently, the proportion of national income derived from the financial
sector increased across all countries and regions, and with this financial
leverage (the ratio of debt to revenue) also rose. Financial leverage
was supported by the proliferation of opaque financial products and
markets, “shadow” financial institutions, and speculative behaviour
driven solely by quick returns on assets, currencies and property. As
a result, the world economy has witnessed dangerous bubbles in all these
As finance expands and tightens its grip over both corporate and political
governance, the measure of economic “success” has been disconnected
from productive investments and job creation. It is this structural
shift from the real economy to the financial economy, and the behavioural
changes in economic actors (from production to speculation), that is
at the kernel of finance-driven globalization.
The failure of finance-drive globalization
economic wisdom rationalized financialisation, claiming that “a combination
of efficient markets and financial innovation would create a more dynamic
economic environment from which all countries would benefit.” In reality,
the world economy experienced an aggregate slowdown in global growth,
led by the advanced countries.
Investment rates tumbled in the 1980s and as of yet have failed to return
to previous levels, despite a visible shift in world income from financial
market returns. The retrenchment of public-sector investment has been
especially pronounced, and in most cases, private (domestic and foreign)
investment has failed to fill the gap.
This failure is partly due to the fact that financialisation has had
an adverse impact on household savings, through three different channels:
(a) wage incomes have been squeezed; (b) banks have moved away from
the business of long-term investment projects, to become heavily involved
in lending to consumers and governments; and (c) trade and financial
liberalization have raised the propensity to consume, including luxury
goods, and have fuelled speculative purchases of real estate.
Moreover, while profit levels have often risen, financialisation has
also had a damaging impact on the profit–investment nexus, by channelling
retained profits into less productive activities.
In the new millennium, the financial markets in the advanced countries
created a debt-driven consumption boom in order to boost domestic demand
and consumption of goods and services. However, rather than “reviving
productive investment, the debt-driven consumption boom created a series
of closely interconnected imbalances.” Following the collapse of Lehman
Brothers in 2008, the consumption boom “turned into the biggest burst
since the Great Depression.”
“Winners” and “losers” from finance-driven globalization
econometric modeling with regression analysis between financial globalization
and output growth across a wide range of developing countries, the UNCTAD
policy brief finds that there are clearly some winners and some losers,
defined primarily by the causal relationship of financial globalization
on economic output.
Developing country “winners” are divided into those that embraced financial
globalization and those that resisted financial globalization. The former
group is comprised of small island economies (such as Antigua and Barbuda,
Dominica, Seychelles, and Saint Vincent and the Grenadines among others),
commodity producers (such as Angola, Botswana, Chile and Qatar) and
regional financial centres (namely, the four commercial cities in Lebanon,
Singapore, Panama and Uruguay).
Notably absent in this group, UNCTAD points out, are countries with
a strong manufacturing sector.
The latter group, developing countries that resisted financial globalization,
are countries that have achieved economic growth “without substantial
financial globalization.” These countries, including China, India and
Vietnam, have taken diverse paths, “but their economic gains cannot
be attributed to the standard policy formula associated with finance-driven
While China and Vietnam have launched robust industrialization take-off
strategies, countries like India have developed niche service and commodity
industries, but still lack a substantial industrialization strategy
The importance of economic structure
asserts that financial globalization appears to have benefited only
a small group of economies. The developmental impact of finance, as
suggested by the data, depends on structural changes at the national
The causal relationship between structural change and economic performance
has been extensively analysed in the 2011 Trade and Development Report
as well as in the Least Developed Countries report. Recent assessments
by McMillan and Rodrik (2011) highlights that productivity growth is
explained either by rising labour productivity or by a shift from low-productivity
to high-productivity sectors.
However, if resources and labour move in the opposite direction (e.g.
from efficient enterprises or sectors to less productive activities
or unemployment) the overall impact on the economy may be negative.
This differential, between productivity levels and structural shifts,
tends to be small in high-income countries and greater in developing
countries where the output difference between agriculture and manufacturing
Data on productivity growth and structural change in economic sectors,
activity and employment show that in the 15-year period from 1990-2005,
developing countries as a whole have gained from productivity growth
within sectors. But where Asia differs from Latin America and Africa
is that the “impact of its structural change has been positive, whereas
for both Africa and Latin America it has been negative.” This is because
Asia has structurally transformed from low- to high-productivity sectors
to a greater degree than Latin America and Africa have.
The missing link
country case studies, UNCTAD has found that those countries that have
been able to adopt “creative and heterodox policy innovations tailored
to local conditions” have fared better in the financialisation of the
Such strategic policies involve a management of insertion into global
competition and capital forces through: “high (but temporary) tariff
and non-tariff barriers, publicly owned development banks, directed
credit, domestic-content requirements and capital controls. In addition,
some have used targeted industrial policies to diversify their economies
and develop a wider range of productive activity,” which improves employment
numbers and resilience to external shocks.
of productive capacity has often occurred in the “context of a strong
regional growth dynamic,” for example, the Sino-centric production network
(also known as triangular manufacturing) between China and Southeast
However, as expounded in many academic and institutional studies, there
are serious consequences to financialisation (such as volatile and ungoverned
capital movements, excessive commodity and food price fluctuations,
rapid shifts in exchange rates and speculative boom-bust cycles that
have led to chronic financial crises).
Industrial capacity has been constrained by trade liberalization, while
balance of payments problems have become increasingly severe. Such alarming
features of the global economic landscape is what has led to the deepest
economic collapse since the Great Depression.
In conclusion, UNCTAD argues that “productivity-enhancing structural
change does not emerge spontaneously from unleashing (financial) market
forces, but rather is the result of concerted government policies to
raise capital formation, strengthen productive capacities and diversify
the economy.” Upward movement in the value chain of national and regional
economies necessitate, to some degree, a strategic industrial policy,
stronger regulation and policy space in trade rules.
A narrow preoccupation with improving “efficiency” through international
competition and unpredictable financial flows can have a “strongly adverse
impact on the performance of the economy as a whole.” +
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