By FERNANDO NOGUEIRA DA COSTA*
No one has yet presented and made viable an alternative model to the North American capital market economy.
Critics of “financialization” argue that the great financial crisis of 2008 exposed the weaknesses of the corporate governance model based on maximizing shareholder value. They are wrong to ignore that the great financial crisis was caused by the bursting of the real estate bubble in the United States – and not by problems in the corporate governance of transnational companies established in various countries.
They say a new model is needed to balance the interests of all stakeholders, including shareholders, employees, customers and society in general. However, no one has yet presented and made viable an alternative model to the North American capital market economy, capable of coordinating the global interests of institutional investors (investment funds, pension funds, sovereign funds, etc.) through stock exchange listings in large financial centers, outside the jurisdiction where transnational companies are located.
This new model, critics say, should promote long-term investment, quality job creation, and environmental and social sustainability. Once again, they practice normative economics—what should be—rather than positive economics—what is. The former leads to sterile idealization; the latter fosters realistic and pragmatic analysis.
Regarding the need for a new corporate governance model to promote a more sustainable and inclusive approach to business, critics have yet to answer the following questions: Quid? Did you? When? Ubi? Cur? Quomodo? Quibus auxilliis? [What? Who? When? Where? Why? How? By what means?]. They should follow the method to detail the fact, the person, the time, the place, the reasons, the way, the means… of overcoming the capitalist system.
Critics of “financialization” generally ignore the three key functions of the financial system: financial leverage, management of the money of all clients (including workers) and enabling a real-time online payment system on a global scale, i.e. with currency hedging.
They should know that financial instability is inherent to capital markets and that debt crises are recurrent. Thus, throughout the expansion and recession cycles, the global market economy self-regulates with the support of multilateral and/or governmental institutions. They are not decisive.
Those who say that financialization leads to a regressive redistribution of income and a reduction in productive investment, which harms long-term economic growth, have not proven that this is happening on a global scale. They ignore Asian economies. They do not measure investments in technological services such as IT and telecommunications. Nor do they know that a large group of individuals have become richer in the 21st century.
It is common for the dichotomy between “real” and “fictitious” to be confused with that between “productive” and “unproductive”. Critics should recognize the relative evolution of the production of intangible services compared to the production of tangible goods.
The denouncers of the capitalist system converge in criticizing the possibility that financialization can be presented as an institutional process – and even beneficial to workers who need financial reserves for their retirement. They only attribute negative consequences to “financialization” for income distribution, productive investment and financial stability.
However, they do not demonstrate that these problems are radically different from those that occurred under capitalism in the past. They “sugarcoat” industrial capitalism. Do they believe in the reversibility of time?!
What is the alternative to the evolution of the capitalist system other than a gradual systemic re-evolution, based on institutional and technological evolution, in addition to the conquest of new citizenship rights? Is “financialization” part of this systemic re-evolution? Its critics do not answer this key question for discussing the systemic phenomenon.
They contribute more positively to the debate when they identify two main demand regimes, both of which have emerged in advanced economies under the influence of financialization.
The debt-driven demand regime is characterized by a high level of household debt, driving consumption and investment in real estate. The export-driven demand regime is characterized by a high level of net exports, with domestic demand playing a smaller role. This regime is less susceptible to financial crises, as is the other, but leads to global imbalances and political tensions.
They then empirically analyze the evolution of demand regimes in six groups of countries:
(i) Anglo-Saxon countries (United States, United Kingdom, Canada, Australia): characterized by a debt-driven demand regime, with high household debt for consumption. (ii) Southern Europe (Portugal, Spain, Italy, Greece): also characterized by a debt-driven demand regime, but with a tree credit-driven real estate. (iii) Northern Europe (Germany, Austria, Netherlands, Belgium, France): characterized by an export-driven demand regime, with low household debt and persistent trade surpluses.
(iv) Eastern Europe (Poland, Hungary, Czech Republic, Slovakia): in transition from a consumption-driven to an export-driven demand regime. (v) Scandinavian countries (Denmark, Sweden, Finland): hybrid model, with elements of both debt-driven and export-driven demand regimes. (vi) Japan: unique case, with an investment-driven demand regime, but with low growth and persistent deflation.
The different demand regimes in advanced economies are interdependent. The export-driven demand regime depends on the demand for imports from countries with debt-driven demand regimes. This interdependence generates global imbalances and increases the risk of financial crises.
The key question is: how can there be international coordination of policies to avoid global imbalances and financial crises by rival nation states? They all reject a global economy under central control. Therefore, self-regulation is carried out by oscillating prices in the main stock markets between market values and intrinsic values.
Financialization in emerging capitalist economies is not simply a replica of the process observed in advanced capitalist economies, but rather a subordinate form of financialization. They rely heavily on capital flows from developed countries, making them vulnerable to sudden changes in stock market sentiment.
Institutional investors from advanced capitalist economies would exert pressure on companies in emerging capitalist economies to adopt policies capable of maximizing shareholder value, even at the expense of productive investment. Given the need to finance the participation of emerging capitalist economies in global value chains, led by transnational corporations, this would drive subordinated financialization.
Dependence on volatile capital flows makes emerging capitalist economies more susceptible to financial crises and unstable economic cycles. The pressure to maximize shareholder value would lead to premature deindustrialization because it is more profitable for transnational corporations to import from their industrial plants elsewhere.
Discussing alternatives to subordinated financialization, emphasizing the need for policies to promote sustainable and inclusive economic development, is a commonplace that is “easy to say and difficult to do” without flows of direct investment into the country (DFI) by transnational companies holding patents for cutting-edge technologies such as AI, IoT, Big Data, Blockchain, 5G Networks, 3D Printing, Nanotechnology, etc. Is it prudent to oppose DFI (Direct Investment in the Country), even though it is necessary to balance the current account balance?
What developmental state is left? Is it still possible to have a “command economy” in an emerging capitalist economy? Do G7, G20, BRICS, etc. meetings have the power to impose a geopolitics that is contrary to global geoeconomics?! Isn’t this counterproductive? Critics should be careful with “magic words” that have become worn out by overuse… and empty in the practice of normative economics.
*Fernando Nogueira da Costa He is a full professor at the Institute of Economics at Unicamp. Author, among other books, of Brazil of banks (EDUSP). [https://amzn.to/4dvKtBb]
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