Week 10 - Financialisation and Development Flashcards
What does financialisation refer to and what does the trend highlight?
the increasing dominance of financial markets, motives, institutions, and actors in shaping economic, social, and political dynamics within the global capitalist system
highlights a shift where financial markets extend beyond traditional economic boundaries, embedding themselves into the fabric of everyday life and governance
What did financialisation arise from?
the convergence of neoliberal ideology, historical context, technological advancements, IT Revolution
Why did financialisation arise from neoliberal ideology?
promoted deregulation and market supremacy
Why did financialisation arise from historical context?
stagflation in the 1970s destabilized post-war economic frameworks, paving the way for market-oriented policies
Why did financialisation arise from technological advancements?
tools like the Black-Scholes model revolutionised financial valuation and expanded the scope of speculative activities
Why did financialisation arise from IT Revolution?
lowered financial engineering costs, facilitated global trading, and enhanced the speed and scale of financial transactions
What do some opponents say played a central role in financial crises?
neoliberalism
Why do opponents frame neoliberalism not as a set of policies but as a systemic tool for transforming capitalism into a “rentiers’ delight?
it minimises pressures on big businesses by removing “compulsions,” such as taxation and regulation, while increasing constraints on workers and small firms
What is neoclassical mainstream economics based on?
the premise that rational, utility-maximising agents interacting in competitive markets create equilibrium that is optimal, stable, and self-correcting
What does neoclassical mainstream economics believe financial crises can arise from?
can only arise due to exogenous interference in market mechanisms, such as government overreach, unpredictable bad luck, like natural disasters or sudden economic shocks, currency depreciations caused by large, unexpected external factors
What does Polayni’s framework suggest capitalism alternates between?
suggests capitalism alternates between periods of minimal market regulation, where crises become frequent and periods of active societal intervention, especially in finance and labour markets, to stabilise the system
What is the criticism of Marxism in relation to neoliberalism?
inadequately explains how neoliberalism emerged as a dominant ideology (fails to capture how neoliberalism reshaped the social world to facilitate dispossession and restore class power to the capitalist elite)
Does neoliberalism believe that markets are natural or artificial, and what do they require?
views markets as artificial constructs requiring state support to function efficiently
What ideology calls for “a state under the surveillance of the market, not the reverse”=
Neoliberalism, emphasising minimal regulation and maximum freedom for capital
What does Foucault describe neoliberalism as and what is his critique?
“technology of power” designed to rationalise society
critiques how the capitalist elite misused this technology, using it not for rationalisation but for dispossession and rentier accumulation
What does efficient capital market theory posit?
that financial markets always reflect all available information, making systemic crises unlikely unless external disruptions occur
What ideology promotes the idea that markets are “good servants but bad masters”?
Keynesian-style Liberalism
What does Keynesian-style Liberalism believe? (challenging neoclassical view)
that unregulated markets often lead to sub-optimal equilibria, unemployment, and crises
argues that markets should be regulated by a strong state agency to ensure private self-interest aligns with socially optimal outcomes
Regarding financial inclusion, what are the impacts of financialisation?
while offering benefits like efficient transactions and expanded investment options, inclusion also reinforces the dependency of vulnerable groups on financial systems, leaving them exposed to market volatility
What type of investments did firms prioritise after financialisation?
firms focus on maximising short-term gains for investors, often at the expense of long-term strategic investments and innovation
After financialisation, why did real investments in capital formation decline?
Shift to speculative practices (profits are redirected into financial markets, prioritising high returns over economic productivity)
What does debt-driven consumption after financialisation refer to?
middle- and lower-income groups increasingly rely on credit to finance essentials like education, healthcare, and housing
Why is there loss of fiscal sovereignty in developing countries after financialisation?
reliance on foreign finance limits their ability to pursue independent economic policies
How does financialisation impact growth and inequality?
exacerbates income and wealth inequalities by enabling rent-seeking behaviours among financial elites
What does the real investments decline as profits are channeled into speculative markets lead to?
slower capital accumulation
What does debt dependency refer to (financialisation)?
global economies increasingly rely on debt to sustain growth, exposing nations to systemic risks and potential crises
Why does financialistion lead to rising inequality?
financial deregulation disproportionately benefits the wealthy, while the middle and lower classes face stagnation and rising indebtedness
What are finance-friendly policies?
governments, influenced by financial markets, reduce taxes on capital and deregulate industries to attract investments
What does rent-seeking practices lead to? (financialisation)
oligopolistic capital benefits disproportionately, concentrating wealth in the hands of a few and undermining democratic principles
When the GFC revealed deep systemic flaws but failed to dismantle financial supremacy, why?
due to a lack of viable alternatives
To what vulnerability does over-reliance on financial instruments like derivatives and shadow banking lead to an increase?
economic shocks
__(1)__, framed as efficient and welfare-enhancing, often exacerbate __(2)__ and divert resources from __(3)__
(1) market-based systems
(2) inequalities
(3) real economic activities
financialisation prioritises __(1)__ and rent-seeking over __(2)__
(1) speculative gains
(2) inclusive and productive economic development
Who’s and what claim underpins the belief in the superiority of financial markets, legitimising financialisation and sidelining state-led alternatives?
Hayek’s claim of market omniscience (neoliberal ideology)
What are the challenges to developmental states under bank-based systems?
bank-based systems, while fostering long-term ties, can encourage cronyism and corruption, weakening corporate governance and state-led development efforts
Financialisation has led to the discontent from ____
the real economy
What could policy recommendations involve to mitigate problems caused from financialisation?
introduce regulations to reduce systemic risks and direct financial activities toward socially beneficial purposes
promote accountability and challenge the dominance of financial markets in policymaking
adopt policies similar to East Asian developmental states, focusing on equitable growth and strategic investments
policymakers and the public must demand greater transparency and efficiency from financial systems
Why was the stagflation of the 1970s an enabler to financialisation?
disrupted the post-war economic order, creating conditions for neoliberal financial policies
Why was technological advancements an enabler to financialisation?
tools like the Black-Scholes model and IT innovations expanded the scope and speed of financialisation
What did the GFC lead to?
a decade of stagnation, rising inequalities, and systemic risks, yet financial markets remained dominant
What did World Bank policies advocate for regarding financialisation?
“de-politicisation” of the state and independent central banks to enforce free-market principles (promoted transparency and accountability as tools for disciplining state action along market-friendly lines)
What role does democracy play in financialisation and what does it replace ?
“low-intensity” liberal democracy became a tool for maintaining market freedom and blocking progressive political agendas
replaced military regimes as the hedge against challenges to neoliberal capitalism
What is the increase in inequality linked to? (finance) (3)
to financialisation that prioritized speculative activities
poor productivity growth
declining savings and private investment rates
What is History’s Impossibility Theorem?
argues that systems where elites face little political or ideological challenge become inefficient due to unchecked rent-seeking behaviours and are prone to self-destruction as inequality undermines systemic stability
What was the main cost the GFC risks fostering?
beyond asset deflation and economic disruption, the crisis risks fostering right-wing, xenophobic, or fascist movements that exploit societal discontent and a rejection of collectivist ideals, deepening divisions
What were financial liberalisation measures framed as and what was the actual impact?
framed as modernising and stabilising economies, but often had destabilising effects
How many major financial crises across developing nations were there between 1981and 1992?
15
What is the link between financial liberalisation and crises?
78% of banking crises 1980-1995 were linked to financial liberalisation (liberalisation policies were introduced in 70% of countries that experienced banking crises during this period)
Why did financial liberalisation lead to recurring cycles of economic instability?
poorly regulated banking systems collapsed under the weight of speculative lending and external shocks
What is a criticism of financial liberalisation?
the focus on superficial solutions (reforms focused on issues like deregulation and privatisation and did not address systemic weaknesses, like inadequate capital buffers or poor institutional frameworks)
The World Bank initially focused on deregulation and liberalisation, but following 1990s crises, what did it begin promoting?
began promoting foreign ownership of banks (argued it would improve competition, efficiency, and stability in domestic banks)
What role did deregulation play in the instability? (financial liberalisation)
Removing internal and external controls encouraged speculative lending rather than investments in productive sectors (e.g. banks prioritised short-term, high-yield projects, often ignoring developmentally significant but riskier ventures like manufacturing)
From 1995-2005 what was the development of the foreign ownership of banks?
expanded significantly, particularly in regions like SSA and Central/Eastern Europe (in some cases, exceeded 90% of total banking assets within a decade)
Why did foreign banks often enter developing economies?
Foreign banks, often backed by international financial institutions (e.g. World Bank, IMF), entered these markets not to serve local development needs but as part of profit-maximisation strategies (avoided risky ventures typical of developing countries and focused on safer, more profitable sectors)
What was foreign entry of banks promoted as?
a solution to financial instability post-crisis (assumed to bring technical expertise, improve competition, and reduce likelihood of government interference in financial systems)
What did the World Bank and IMF often tie aid to? (financial liberalisation)
World Bank and IMF often tied loans and aid to conditions of privatisation of state-owned banks and the issuance of foreign banking licenses
What were the arguments for foreign ownership of banks increasing efficiency?
better management practices, reduced overhead costs, improved competition
What were the arguments for foreign ownership of banks increasing technical expertise and knowledge transfer?
foreign banks were believed to introduce technical knowledge and risk management practices, which would be adopted by domestic banks
What were the arguments for foreign ownership of banks reducing regulatory burdens?
local regulators could rely on foreign banks’ headquarters’ regulations
What were the arguments for foreign ownership of banks increasing lending to SMEs?
increased competition was expected to encourage it (critical for job creation and economic growth)
What was the actual outcome of foreign ownership of banks on lending to SMEs?
decline in private sector and SMEs lending as foreign banks prioritised large corporations and government securities → focused on safer, short-term investments, neglecting developmental sectors like agriculture
What was the actual outcome of foreign ownership of banks’ focus?
focus on foreign assets as foreign banks’ strategies emphasised global profitability, often leading to capital outflows and minimal reinvestment in local economies
What was the actual outcome of foreign ownership of banks on local control?
Loss of local control, as dominance of foreign ownership reduced governments’ ability to direct banking systems toward national development priorities
What did liberalisation of capital accounts lead to?
short-term capital inflows → raised exchange rates and worsened the current account balance
What are proposals for reform to mitigate issues caused by financial liberalisation?
Governments should implement risk-sharing mechanisms (e.g., developmental banks) to support lending to SMEs and manufacturing
Introduce incentives for banks to finance developmentally significant projects
Balance foreign and domestic ownership to ensure alignment with national priorities and equitable access to credit
What are financial crises seen as outcomes of systemic flaws exacerbated by? (6)
excess liquidity
income polarisation
conflicts between financial and productive capital
a lack of regulation
asymmetric information
bounded rationalities that destabilise markets
Why did excess liquidity exacerbate systemic flaws leading to financial crises?
led to to speculative bubbles
Why did income polarisation exacerbate systemic flaws leading to financial crises?
concentrates wealth and reduces aggregate demand,
Why did conflicts between financial and productive capital exacerbate systemic flaws leading to financial crises?
where financial markets dominate productive investments,
Why did a lack of regulation, asymmetric information and bounded rationalities that destabilise markets exacerbate systemic flaws leading to financial crises?
destabilise markets
What did the neoliberal state transformation lead to? (3)
redefines the role of the state from regulator to facilitator of market dynamics
public policies shift toward rent-seeking behaviours, supporting financialisation and deregulation
promotes “low-intensity liberal democracy” to maintain market freedom while preventing progressive agendas that could challenge neoliberal capitalism
During the Keynesian period, what was capital accumulation like?
capital accumulation relied on expanding productive capacities as constraints on income inequality limited surplus extraction
During the Neoliberal period, what was capital accumulation like?
marked by financialisation, with accumulation driven by surplus extraction and financial speculation rather than productive investments
Under neoliberalism, what replaced productive investments as the primary driver of wealth accumulation?
rent-seeking
What created an illusion of growing wealth during financial liberalisation?
asset inflation through speculative financial activities (Greenspan-style virtual wealth creation)
Did financial markets expand or contract during financial liberalisation?
Expanded, financial markets grew excessively large and complex, contributing to instability
What did wealth accumulation increasingly rely on during financial liberalisation?
surplus extraction, sidelining investments in productive capacities
What effect did reduced taxes for top earners and corporations have during financial liberalisation?
undermined funding for public goods and increased inequality
What effect did wage suppression have during financial liberalisation?
suppressed wages limited aggregate demand growth, weakening economic foundations
What were the asymmetric compulsions seen during financial liberalisation?
Neoliberal policies imposed minimal constraints on oligopolistic capital while maximising pressures on workers and small firms
The GFC exposed the systemic flaws of neoliberal capitalism. What was it driven by?
deregulated financial markets fostering instability
income polarisation weakening aggregate demand
debt-fueled consumption masking the unsustainable economic model
What transition occurred during financialisation?
transition occurred from bank-based systems, where long-term relationships between firms and banks prioritised strategic goals, to market-based systems, emphasising short-term profit maximisation
What did financialisation do to domains like healthcare and education?
financial logic extended into them, commodifying these sectors through instruments such as bonds and securitised loans
What did financialisation do to everyday life?
everyday life became financialised, with households relying on credit and investments for basic needs, making debt a cornerstone of modern financial systems
Over-abundance of finance is one of the key traits of financial domination. What does this mean?
cash finance, rather than driving productive investments, often funds speculative activities in new financial instruments
Rise of shadow banking is one of the key traits of financial domination. What does this mean?
parallel financial systems lack systemic regulation, creating chains of credit, liquidity, and leverage comparable in size to traditional banks, increasing systemic vulnerabilities
Foucauldian view is one of the key traits of financial domination. What does this mean?
finance operates as a form of social authority, where wealth owners assert power through financial claims, reshaping societal ties and governance structures
What does the privatisation of social risk mean= (financialisation)
instruments like catastrophe bonds shift risks from public entities to private investors, benefiting financial elites while eroding public welfare
What led to the increased reliance on credit and financial markets that undermines economic stability, especially for lower-income groups? (debt dependency)
Financialisation
How did financial liberalisation impact developing nations in the 1980s?
It aimed to modernise and stabilise economies but often had destabilising effects, leading to 15 major financial crises between 1981 and 1992
How did the World Bank’s approach to financial systems evolve after the 1990s crises?
It shifted from deregulation and liberalisation to promoting foreign ownership of banks to improve competition, efficiency, and stability
What percentage of banking crises between 1980-1995 were linked to financial liberalisation?
78% (Stein’s paper)
Why did financial liberalisation lead to recurring financial crises?
Poorly regulated banking systems collapsed due to speculative lending and external shocks
What were the main criticisms of financial liberalisation policies?
They focused on superficial solutions like deregulation and privatisation, failing to address systemic weaknesses such as inadequate capital buffers and poor institutional frameworks
How did deregulation contribute to economic instability?
By encouraging speculative lending over investments in productive sectors, banks prioritized short-term, high-yield projects
What macroeconomic issues arose from capital account liberalisation?
Short-term capital inflows led to higher exchange rates and worsened current account balances
How did foreign bank ownership change between 1995-2005?
It expanded significantly, with foreign ownership exceeding 90% of banking assets in some regions like SSA and Central/Eastern Europe
What was the World Bank’s argument for promoting foreign bank ownership?
It claimed foreign ownership would improve competition, efficiency, technical expertise, and risk management
Did foreign banks increase lending to SMEs in developing countries as expected?
No, foreign banks focused on large corporations, government securities, and safer, short-term investments, neglecting SMEs and developmental sectors like agriculture
What were some negative outcomes of foreign bank ownership?
Decline in SME lending
Focus on foreign assets, causing capital outflows
Loss of local control over banking systems
What were the outcomes of financial liberalisation in Zambia?
By 2005, 73% of banking assets were controlled by foreign banks
Deposit-to-GDP ratio stagnated at 15%, below 1980s levels
91% of loans were concentrated among elites
High real interest rates (28%) discouraged productive investments
Most investments were directed to government securities and foreign assets
What were the outcomes of financial liberalisation in Uganda?
Between 1993-1997, 10 private banks were created, and state-owned banks were privatised
Lending to agriculture dropped to 3% by 2004
50% of total assets were allocated to government securities
Efficiency metrics worsened, with higher net interest margins and increased overhead costs
What overall conclusions does Stein draw about financial liberalisation and foreign bank ownership?
Foreign bank ownership, tied to World Bank and IMF policies, failed to meet development needs, often prioritising profit over local development and contributing to economic stagnation in many developing countries
