The discussions of the processes behind the growing importance of finance, financial transactions and financial motives, as well as the sustainability of the financial systems, have been located in the critical political economy debate of financialisation and neoliberalism (; ; ; ; ; ; ).

The analysis of financialisation in developing and emerging economies (DEEs) is relatively novel (). It is rooted in earlier discussions about the risks of financial globalisation and liberalisation (; ; ; ; ; ; ; ), including the Latin American Structuralist literature on the hegemonic role of the US dollar and its financial and monetary implications for DEEs (; ; ; ; ); the debate on capital account liberalisation and capital market integration (; ; ; ); and the Minsky-inspired currency and boom bust dynamics of financial crisis in developing economies (; ; ; ; ).

Recently, a literature has emerged which looks more directly at the financialisation of DEEs. One strand of this literature has focused on its international dimension, particularly the ability of both foreign and domestic actors to exploit interest rate differential and exchange rate volatility and the political economy implications of such a process (; , ; ; ). This aspect of DEE financialisation is associated with, and reinforced by, the capital flows dependency of many DEEs, which demands appropriate economic policies that guarantee and contribute to generate attractive financial returns (; ). Indeed, a key issue in this literature is the extent to which DEE governments have been compelled to provide liquidity to financial markets, as financial investors have a significant influence on the domestic currency, weakening central banks exchange rate management and contributing to exchange rate volatility (; ; , ; ; , 2011; ). This is closely associated with growing national public debt, which has been understood as a core feature of financialisation in DEEs, as government bonds are used to mitigate and protect the country against investor speculation, usually by accumulation of foreign exchange reserves and their use as hedge mechanism (Alves, 2017; ; ; ; , ).

Another strand of the literature has sought to map the financialisation phenomena encountered in the Anglo-Saxon core onto DEEs. For example, empirical evidence has been used to show the transformation of non-financial corporations (NFCs), i.e., their shift from being primarily involved in real sector activities to becoming financial actors themselves. The debate draws attention to the costly efforts to increase shareholder value, which induces NFCs to decrease productive investments, which negatively affects employment and wages, and increases their vulnerability to (international) market conditions (; ; ; ; ; ; ; ; ; ). Further, the literature shows that NFCs in DEEs have also started to rely on long-term bond issuance rather than bank borrowing (; ; Lee, 2012; ; ). Related analyses have examined financialisation in DEEs from the perspective of changes in the financial sector, such as the entry of foreign banks in DEEs and the adoption of practices found in financialised developed countries, in particular, lending to individuals for mortgages and consumption and the creation of new tradable financial securities based on these cash flows (; ; ; ; ; ; ; ; ).

The above reflects a rising interest in the issue of DEE financialisation, its manifestations, drivers and implications. However, despite this rising interest, many questions still remain unanswered. For example, what, if any, are the specific features of financialisation in DEEs? Can domestic public debt (Alves, 2017; ) or high interest rates () or a subordinate aspect () be such a feature? What is the link between DEEs鈥� specific financialisation features and their 鈥榬eal鈥� international integration into international production networks? Does mapping the phenomena encountered in the Anglo-Saxon core onto DEEs overlook the structural differences of these economies and, therefore, their different financialisation practices and features? Also, can financialisation processes be compared between DEEs? What are the roles of different institutions, policies and indeed locational factors in shaping these processes? Can the notion of 鈥渧ariegated financialisation鈥� be helpful in these respects (; )? Similarly, is financialisation driven rather by international factors or by autonomous domestic political economy processes ( , ; )? Empirically, is it possible to delineate financial development and deepening from financialisation in DEEs, and to what extent can it be quantified (Karwowski and Stockhammer, 2017)?

With these questions in mind, a workshop on How to conceptualise Financialisation in Developing and Emerging Economies? Manifestations, Drivers and Implications will be hosted at Girton College, University of Cambridge, 13-14 December 2018. For more details, please, see the .

We will be delighted to see you there!

Carolina Alves, ,

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The work of Hyman Minsky highlighted the essential role of finance in the capital development of an economy. The greater a nation鈥檚 reliance on debt relative to internal funds, the more 鈥渇ragile鈥� the economy becomes. The of this post used these insights to uncover the weaknesses of today鈥檚 global economy. This part will discuss an alternative international structure that could address these issues.

Minsky defines our current economic system as 鈥�,鈥� a structure composed of huge pools of highly leveraged private debt. 聽He explains that this system originated in the US following the end of Bretton Woods, and has since been expanded with the help of 聽financial innovations and a series of economic and institutional reforms. Observing how this system gave rise to fragile economies, Minsky looked to the work of John Maynard Keynes as a start point for an alternative.

In the original discussions of the post-war Bretton Woods, Keynes proposed the creation of a stable financial system in which credits and debits between countries would clear off through an international clearing union (see Keynes鈥檚 collected writings, 1980).

This idea can be put in reasonably simple terms: countries would hold accounts in an International Clearing Union (ICU) that works like a 鈥渂ank.鈥� These accounts are denominated in a notional unit of account to which nation鈥檚 own currencies have a previously agreed to an exchange rate. The notional unit of account 鈥� Keynes called it the bancor 鈥� then serves to clear the trade imbalances between member countries. Nations would have a yearly adjusted quota of credits and debts that could be accumulated based on previous results of their trade balance. If this quota is surpassed, an 鈥渋ncentive鈥� 鈥� e.g. taxes or interest charges 鈥� is applied. If the imbalances are more than a defined amount of the quota, further adjustments might be required, such as exchange, fiscal, and monetary policies.

The most interesting feature of this plan is the symmetric adjustment to both debtors and creditors. Instead of having the burden being placed only on the weakest party, surplus countries would also have to adapt their economies to meet the balance requirement. That means they would have to increase the monetary and fiscal stimulus to their domestic economies in order to raise the demand for foreign goods. Unlike a pro-cyclical contractionist policy forced onto debtor countries, the ICU system would act counter-cyclically by stimulating demand.

Because the bancor cannot be exchanged or accumulated, it would operate without a freely convertible international standard (which today is the dollar). This way, the system鈥檚 deflationary bias would be mitigated. 聽Developing countries would no longer to counter potential balance-of-payment crises. Capital flows would also be controlled since no speculation or flow to finance excessive deficits would be required. Current accounts would be balanced by increasing trade rather than capital flows. Moreover, the ICU would be able to act as an international lender of last resort, providing liquidity in times of stress by crediting countries鈥� accounts.

Such a system would support international trade and domestic demand, countercyclical policies, and financial stability. It would pave the way not only for development in emerging economies (who would completely free their domestic policies from the boom-bust cycle of capital flows) but also for job creation in the developed world. Instead of curbing fiscal expansion and foreign trade, it would stimulate them 鈥� as it is much needed to take the world economy off the current.

It should be noted that a balanced current account is not well suited for two common development strategies. The first is , which involves running a current account deficit. 聽The second is export-led development, which involves 聽a current account surplus. However, the ICU removes much of the need for such approaches to development. Since all payments would be expressed in the nation鈥檚 own currency, every country, regardless it鈥檚 size or economic power, would have the necessary policy space to fully while sustaining its hedge profile and.

Minsky showed that capable international institutions are crucial to creating the conditions for. Thus far, our international institutions have failed in this respect, and we are due for a reform.

Undeniably, some measures towards a structural change have already been taken in the past decade. The IMF, for example, than before. But this is not sufficient, and it is up to the emerging economies to push for more. Unfortunately, the ICU system requires an international cooperation of a level that will be hard to accomplish. Aiming for a second-best solution is tempting. But let鈥檚 keep in mind that Brexit and Trump were improbable too. So why not consider that the next unlikely thing could be a positive one?

Virto Mello recently graduated from the Levy Economics Institute of Bard College. This blog post was originally published on . Read Part 1 here.

Photo: Pontificador

This year the global system has seen two major shocks: Brexit, and Trump. What these events have in common is their populist rhetoric that promised to bring back jobs, while also making xenophobic statements. These elections have tapped into growing anxiety over job security, which has not been addressed by most governments and has given room for demagogues to tap into the anger of the people. They reflect a problem that transcends the boundaries of any single nation: the global economy has been in a slump for almost a decade. Governments need to create jobs, and public fiscal stimulus is the way to do so. To allow it, we must that system.

To understand why we have to consider the international system in which nation states currently operate in. Its current characteristics present challenges for developed and developing economies alike. There are two important features to consider: first, the system creates a deflationary bias by requiring recessionary adjustments and hoarding of the international mean of payment (i.e. dollars). Second, it lacks mechanisms to offset the chronic surpluses and deficits between nations, thus breeding financial instability. In a nutshell, it leads to poor creation and distribution of demand that is managed through capital flows. Instead of propping up demand, the global economic system props up debt.

This post will be split into two parts. This first part will employ the theories of Hyman Minsky to explain the features of our current global economy. Next week, we will follow up to discuss 聽an alternative system that would allow for a better distribution of demand among countries and would support emerging economies鈥� development by freeing them from the swings of international markets.

In his , Minsky addresses the ability of a company to honor its debt commitments. Companies can finance investment through previously retained earnings (internal funds) and/or by borrowing (external funds). If retained earnings prove to be insufficient, and the company comes more and more reliant on borrowed funds, the company’s balance sheet structure shifts from being stable to unstable. As presented in a previous on this blog, Minsky described this process as moving from a stable 鈥渉edge鈥� profile to a riskier 鈥渟peculative鈥� profile, and finally to a dangerous 鈥淧onzi鈥� profile.

Similarly, a country has three ways in which it can meet its debt commitments denominated in foreign currency: i) by obtaining foreign exchange through current account surpluses; ii) by using the stock of international reserves (obtained through previous current account surpluses); and iii) by obtaining access to foreign savings, i.e. borrowing. The first characterizes a hedge financial profile in which the cash inflows are sufficient to pay the foreign currency denominated liabilities. Any mismatch between inflows and outflows can be covered by reserves (its cushion of safety) or by borrowing; while the former can still characterize a hedge profile 鈥� as long as the cushion of safety is big enough to cover the shortfall for the necessary period of time 鈥� the latter is said to be speculative. In other words, the country borrows to cover a mismatch with the expectation that future revenues will be used to meet those debt obligations.

A situation in which further rounds of borrowing are necessary to meet those commitments is by definition a Ponzi scheme. It can only be sustained over time if it manages to keep fooling investors to continue to lend. Once a greater fool is not found and financial flows are reversed, the economy collapses in a Fisher-type debt deflation: as assets are liquidated to meet those financial obligations, their prices fall and the debt burden becomes increasingly heavier. The case of a country is different from a company, where outflows are often accurately expected, and it commonly leads to massive capital flight, currency devaluation, fall in public bond prices and increase in its premiums (i.e. interest rate payments). This last point illustrates the implications of accumulating foreign liabilities 鈥� reserves included 鈥� and implies the growth of negative net financial flows from borrowers to creditors through debt servicing. In general, from developing to developed countries.

The adjustment process punishes the borrower much harder than the lender. Greece presents a clear example. For the borrowing country, the standard imposed is austerity: curtail of imports and public expenditure in order to forcefully meet those debts. Or, more often, to stir up enough confidence and access additional financial resources from private investors; in other words, continuing the Ponzi financing. Even in a case where interest payments on the borrowed funds are lower than the rate of capital inflow, the stock of debt would still expand, increasing financial fragility. A dependable on increasing usage of foreign savings is thus not feasible.

Of course, economic development is an extremely broad subject and we sure don鈥檛 want to commit the mistake of suggesting a 鈥渙ne-size-fits-it-all鈥� policy a la neoliberal disciples. Nonetheless, a common issue for many developing economies is the lack of 聽complexity and variety of its production structure 鈥� heavily dependent on primary goods 鈥� and the low price-elasticity of demand for its exports, which means that shifts in prices (exchange rate) do not do much to stimulate exports (increasing demand). As such, price adjustments might not always work as expected. This is one of the rationales behind the familiar 鈥渋mport substitution industrialization鈥� strategy that tragically seems to have become and US.

These common characteristics affect the ability of emerging economies to face both up- and downswings of the international economy with countercyclical policies. While international liquidity is abundant in booming periods, it becomes extremely scarce during the slumps. Both capital floods and flights can be domestically disruptive for developing economies, affecting its employment and output level, and solvency 鈥� ultimately, its sovereign power. With scarce demand and international liquidity, the indebted economy falls into the debt-deflation spiral: it has to incur in a recession big enough to collapse imports at a faster rate than exports thus generating surpluses to clear off debt.

It should be clear that besides being completely inefficient 鈥� as opposed to the argument commonly used by 鈥渇ree-the-capital鈥� defenders 鈥� the current economic system does little to stimulate demand. It is quite the contrary. Notwithstanding, after almost 10 years after the financial crises, the world economy is still suffering the consequences of economic 鈥渇reedom,鈥� and the fighting tool has focused excessively on monetary rather than fiscal policy. Instead of cooperation, we are prone to have currency wars, protectionism, 鈥渂eggar-thy-neighbor鈥� policies and chronic debt accumulation.

These points of criticism are not novel, but they do deserve more of our attention. The same applies to their solutions, which will be our focus next week. Stay tuned.

Vitor Mello recently graduated from the Levy Economics Institute of Bard College. This blog post was originally published on .