The logic of the minimal state

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By Luiz Fernando de Paula* and Pedro Lange Netto Machado**

The failure of neoliberalism as a path to economic development has revealed itself in varied and indisputable ways.

Disruptive events, such as the Covid-19 pandemic, tend to foster expectations around the rise of new approaches in the economic sphere and reconfigurations in the pact between State and society. That was how it was, after all, after the cataclysm of the two world wars, when Keynesian and social welfare policies came to prevail in the developed Western world. On the capitalist periphery, national-developmentalist strategies spread, giving the State a leading role in the management of its national economies.

The crises of the 1970s, however, would disfigure this international order. In the last quarter of the 2008th century, the imperatives of globalization gave rise to the financialized and neoliberal capitalism that took hold. A basic aspect of this transformation was the predominance of the logic of the minimal State in the economic sphere. However, with the global financial crisis unleashed in XNUMX, the recurring diagnosis pointed, in line with the pendulum of history, to a reorganization of relations between the market and public power, in which orthodox parameters would be abandoned in favor of a greater activism role for the state authorities.

Despite the emergency Keynesianism adopted in several countries to contain the crisis, this projection did not materialize. Indeed, even though the monetary easing policies in the advanced economies have led to the questioning of conventional canons, due to the strong expansion of liquidity and the drop in interest rates without generating inflation, what was observed was the resilience of the neoliberal prescription . This, in the wake of the crisis, continued to support the austerity policies adopted by national governments, often with deleterious effects for lower-income segments of the population.

It is in this context that one must observe how the risk rating agencies contributed greatly to sustaining the international economic order that threatened to collapse. Now, in the face of the global chaos caused by the Covid-19 pandemic, the actions of agencies are once again highlighted, proving to be, once again, an obstacle to overcoming neoliberal orthodoxy and establishing a social pact favorable to well-being of populations around the world. But what are these actors and why do they act this way?

Although their origins go back to the beginning of the XNUMXth century, risk rating agencies, also known as rating, gained prominence in the context of financial globalization. In the environment of globalized capital markets, S&P Global, Moody's and Fitch Ratings constitute an oligopoly in the segment of assessing the credibility of debt instruments issued by companies and governments. For this purpose, the agencies assign risk scores – known as ratings, which take the form of concepts – to financial assets, aiming to mitigate informational asymmetries between debt issuers and their potential creditors, in order to influence investment decisions.

An implication of this reality for national states is that obtaining good ratings for public debt securities has a direct impact on the financing conditions of their economies. This effect is further enhanced by the legal linkage between the shares of various investment funds and the grades assigned by the agencies, which can cause automatic and intense movements of capital inflows or outflows in an economy, depending on the rating obtained and the public title in question. This type of institutional imbrication ends up justifying the fact that agencies are often given the nickname of gate keepers access of States to capital markets: if a country is poorly (well) evaluated, it is less (more) likely to obtain the financing it wants and worse (better) are the financial conditions of the securities it issues (maturity, fees paid, etc.) .).

As the academic literature notes, the parameters used by S&P Global, Moody's and Fitch to formulate their risk ratings are ideologically informed by neoliberal orthodoxy. This, in turn, directly serves the interests of investors in the financial world, favorable to an environment of freedom of action (that is, less susceptible to State interventions) and with policies that guarantee a good return on their investments. From this aspect of the agency's activities, non-trivial problems arise for the management of national economies. Due to the position they occupy in the international financial system, a government that deviates from orthodox precepts has to deal with the consequences of obtaining banknotes that signal to the market a greater risk of insolvency: capital flight, exchange rate devaluation, increases in interest rates and the other deleterious effects arising therefrom.

Another serious problem lies in the modus operandi agencies, which are not limited to just issuing risk assessments to inform agents operating in the capital markets. Not infrequently, we see their executives in media channels publicly criticizing or praising governments, based on allegedly technical reports and supposedly supported by sophisticated risk quantification models – aspects that are often contested. As a consequence, based on the epistemic authority they enjoy, agencies begin to act as effective political actors in the state sphere, openly interfering in democratic choices and processes in favor of advancing the neoliberal agenda.

Among its main recommendations, fiscal austerity stands out as a constant imperative of economic policy, the stimulation of a policy of growth using foreign savings, liberalizing reforms and a reduced role for State intervention in the economy. It is mainly due to the pressure exerted on governments to adhere to this prescription that the agencies of rating were so criticized in the wake of the 2008 financial crisis, and not just for their notable mistakes in asset risk assessment subprime. In that context, different countries, from Europe to Brazil, began to suffer from the repercussions of the crisis under the constant threat of worsening their risk assessments if they abandoned or did not adopt the policies advocated by the agencies.

But what explains the persistent pressure for measures that often do not bring concrete results in terms of the resumption of economic growth? At this point, it should be clarified that the aforementioned policies aim, as a priority, to protect the financial interests of the State's creditors. At the same time, to make this reality more palatable to non-financial agents in the economy, the actions of the agencies also include the propagation of the fallacious hypothesis of “expansionary fiscal contraction” and the benefits of a “growth policy based on foreign savings” – both not supported by the experience of emerging economies

It is in this way that risk rating agencies have integrated into the network of norms, practices and institutions of the international economic order of financial globalization, which stopped the historic pendulum towards overcoming neoliberal orthodoxy and contained the disruptive nature of the 2008 crisis. , the Covid-19 pandemic, in view of its unprecedented proportions and the socioeconomic scourges it must bequeath us, may strain this barrier to the point of raising the role of the State to a new condition. This must necessarily include the guarantee of new policies aimed at the well-being of society, such as universal and quality health systems, even at the expense of neoliberal policies so dear to the actors of the international financial system.

In view of this scenario, the agencies are already on the lookout, waiting for the storm to pass to restart the pressure on governments in favor of alignment with orthodox policies[I]. Indeed, Latin American countries, such as Argentina[ii] and Brazil itself[iii], have already suffered deterioration in their risk assessments, even in the midst of the chaotic situation that prevails for the time being. The reconfiguration of the social pact in favor of a more active role for the State in the provision of social policies will therefore require, by all indications, learning how to deal properly with these actors.

A necessary clarification resides in the identification of the true audience of the rating, who are investors operating in the financial world, not governments or their general constituents. In other words, it is necessary to recognize that the policies propagated by S&P, Moody's and Fitch do not prioritize the development and prosperity of national economies nor do they seem to generate the conditions for that. Such clarity regarding the purposes of their actions would enable the construction of a healthier interaction between these actors and the democratic processes in which they try to interfere through changes in risk classification or even through discursive means.

Another, less feasible alternative would be the effective participation of agencies in the construction of a more balanced global economic order between the roles delegated to the financial market and to national States. This would take advantage of part of the already existing institutional architecture in the financial system, but with the inevitable overcoming of neoliberal orthodoxy, so that agencies could propagate the norms, practices and institutions that will prove necessary for the reconstruction of the post-pandemic world – which, in parallel , would demand a reconfiguration of the very conception of risk that guides them and of the policies they advocate.

The failure of neoliberalism as a path to economic development has been revealed in varied and indisputable ways. It remains, then, to learn how to deal with the institutions responsible for its resilience, seeking to neutralize them or possibly take advantage of them in favor of changing towards policy concepts favorable to a less excluding socioeconomic development. Such is, after all, the pressing need posed by the pandemic, but which has already been evident for many years.

* Luiz Fernando de Paula is a professor at the Institute of Economics at the Federal University of Rio de Janeiro (IE/UFRJ). author of Financial system, banks and finance of the economy (Campus).

*Pedro Lange Netto Machado is a doctoral candidate in Political Science at IESP/UERJ.

 

[I] https://valor.globo.com/financas/noticia/2020/03/30/agencias-de-rating-cobram-disciplina-fiscal-de-longo-prazo.ghtml

[ii] https://valor.globo.com/financas/noticia/2020/04/03/moodys-rebaixa-rating-da-argentina-para-ca-e-muda-perspectiva-para-negativa.ghtml

[iii] https://www1.folha.uol.com.br/mercado/2020/04/sp-reduz-perspectiva-do-brasil-de-positiva-para-estavel-devido-ao-coronavirus.shtml

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