May 7, 2014 - This paper explains the process of financialization and its relation to productive capital accumulation and offshoring/outsourcing. It seeks to ...
Financialization of Global Economy & Overaccumulation of Chinese Economy Mohammad Alauddin Faculty of Economics
South Asian University 5/7/2014
This paper explains the process of financialization and its relation to productive capital accumulation and offshoring/outsourcing. It seeks to answer the question: What role did it play in inducing the current economic crisis and its after-effects in the core and the peripheries? It also discusses the problem of overaccumulation in the global economy, and links it to the ongoing processes of ‘primitive’ accumulation and ‘accumulation by dispossession’. It addresses the probable linkage between overaccumulation and Chinese economy.
Electronic copy available at: http://ssrn.com/abstract=2444470
Introduction The time has gone when the employees used to feel their Institutions as an inseparable part of their personal life. Maintaining a trustworthy and family bondage between the employees and employers was a best practice among the industries. However, the perception of employee-employer relationship has changed dramatically. Short term returns gain and switch to new firm has become the dominant force of corporate culture. This spirit is very much related to the financialization of an economy where gaining return instead of expanding real production volume get the sole priority. With the advent of new phase of globalization, goods and services have become more free and mobile though the migration is not allowed by different state policies. But in the Golden Age of Capitalism, nation-states remained focused on domestic production, involving restrictions on flow of capital, labor and goods. Financialization is a recent term in economic literature which is defined in various ways. Epstein (2005) defined it as “The increasing role of financial motives, financial markets, financial actors and financial institutions”. According to Crotty (2007), “The effects of financial markets on nonfinancial corporations in particular and on national and global economic activity in general” .For Stockhammer (2004), “Increased activity of non-financial businesses on financial markets”. In other words, “A pattern of accumulation in which profits accrue primarily through financial channels rather than through trade and commodity production” Krippner (2005) So we can define financialization as, the shifted focus of business activities from real economic sector to the financial sector.1
1
By real sector here I want to mean agricultural production, manufacture production and commodity and service trade
Electronic copy available at: http://ssrn.com/abstract=2444470
The Financialization Process In an ideal economic environment, the profit of bank and other financial institutions depend on the production of real sector. The main role of bank and financial corporations is to help the real business to grow by facilitating credit through which they earn service charges and dividends. Financialization is related to mass expansion of financial market, especially when the base of financial market approaches or in some extent exceeds the base of real economy. The beginning of mass scale financialization started in the late 1920s, when almost all banks were drawn into financial speculative activities. The unleashed activities by all major financial companies and banks led to the 1929 great depression in the capitalist history.2 The unpleasant experiences of 1929 led the WW-II era to go for strong regulations followed by Keynes.3After the long term embeddedness of the economy, regulation of the financial sector was boosted during 1980-82 as the financialization tendency became a dominant phenomenon again. Economic historians demarcate the capitalism by dividing pre 1980s and post 1980s where they call the earlier as ‘managerial capitalism’ and the later as ‘shareholder capitalism’ led by excessive centralization.4 The financialization process can be depicted through the creation of surplus. The dominance of specific route of capital is: Industrial capital: M-C-C’-M’ Merchant capital: M-C-M’ 2
Dholakia, Nikhilesh, Finanzkapital and Consumers: How Financialization Shaped 20th Century Marketing (November 24, 2012). Journal of Historical Research in Marketing, Vol. 4, No. 3, pp. 453-461, 2012. Available at SSRN: http://ssrn.com/abstract=2180354 3
John Manard Keynes, in his historical book The General Theory of Wage, Unemployment and Money(1936) suggested state regulation in financial sector and state involvement in creating effective demand to save economy from recession. 4 Greta R. Krippner, The financialization of the American economy’ Socioecon Rev (2005) 3 (2): 173208 doi:10.1093/SER/mwi008
Interest bearing capital: M-M’ Here, M stands for Money and C stands for Commodity where M’ and C’ indicates secondary stage. In the circuit, we see the path gets tighter over the stages for creating surplus. In the last path, whole surplus creation is dependent on complete finance. So the increase of surplus raises the shareholder returns through dividend payments, share buy-backs and mergers and acquisitions. In this process non-financial firms also act like financial holding companies with a range of financial services and financial investments overwhelming production in terms of their contribution to company revenues. The disintegration of production base, offshoring, global value chains strongly contribute to the financialization. Though trade of intermediary raw materials and commodities are well accepted in most of the cases the core capitalists only put the label and tags in the finish product. In this process almost all Giant brands become depended on the subcontracting local firms. Many expensive brands like NIKE, GAP even don’t have any manufacturing plant except the logo and design arrangement. They are earning profit only using their ‘brand value’, controlling value chain and huge amount of finance capital.
Financialization and Current Economic Crisis The current economic crisis began with the crush of US capital market where the prime accused cause was identified as subprime mortgage in housing market which created a huge bubble thus burst after the collapse of the two financial institutions: Funnie May and Fredde Mac.5 The Federal Reserve president Alan Greenspan introduced a populous policy to support the middle class citizens so that everybody can own residential house.6 In the ground as no or little mortgage was needed everybody went to buy a house and soon started reselling in the secondary market. Various types of
5 6
See: http://www.investopedia.com/articles/economics/08/fannie-mae-freddie-mac-credit-crisis.asp See: http://www.theguardian.com/commentisfree/2013/oct/28/alan-greenspan-housing-market-crisis
highly speculative financial instruments were developed based on the housing market. As a result, it was seen that a house has been resold more than five times even! That implies financial markets were developed unparalleled with the real economy which consequentially collapsed. This is the common explanation of the crisis. But it can be related with our earlier discussion of offshoring, global value chain and subcontracting of global economy. The surplus value can be appropriated into three ways: fundamental class process, subsumed class process and non-class revenues. As the financialization happened globally and more and more firms gave up direct manufacturing, the circuit of finance changed and the non-class and subsumed class’s revenue expanded more rapidly than the fundamental class process. This upward distribution of wealth formed a new type of imperialism which is based on finance capital that seeks profit out of no production.
Effects on the Core and Peripheries The current global financial crisis has affected almost all the countries of the world in different extent based on their participation in the global market. The worst affected countries of financial crisis are obviously the advanced core countries. The collapse of financial institutions affected the real sector of the economies by lowering the economic growth, accelerating unemployment rate, deflationary pressure, under consumptions and so on. The so called Arab Spring which has jerked the world by collapsing all major persistent regimes in the Arab countries also started from a selfemployed young man Mohammad Bouazizi’s self-immolation in Tunisia.7 The on-going Occupy WallStreet movement began in September 17, 2011 with the slogan ‘we are the 99%’ is one of the radical
7
See http://www.nytimes.com/2011/01/22/world/africa/22sidi.html?pagewanted=1&_r=2&src=twrhp&
responses from the commons against inequality which has been recurrently persisted by the economic crises.8 The most obvious areas of impact on developing economies have been exports and equity markets. 9 The first effect comes from the falling product demand of developed countries where mainly developing countries’ production depends on the export to the developed countries. The second effect comes directly through financial market. The East Asian Crisis started with the BOP problem in South Korea which subsequently affected all emerging markets by responding withdrawal of capital which indeed worsened the situation10. The third effect comes from the FDI inflow in the developing economies. According to UNCTAD (2009), due to the impact of the ongoing worldwide financial and economic crisis, FDI flows are estimated to have declined by 15% in 2008 and 54% in the first quarter of 200911. Bangladesh economy has observed a mixed effect in this crisis. On one side, the foreign fund in grants and loan has been coming down while on the other side export demand has increased since the country export cheaper apparel products in international market whose demand increased during the recession. (Islam, M E, Sultana, M and Kamal, ASM M, 2013)
Problem of Overaccumulation in the Global Economy Capitalist accumulation is the capitalization of surplus value created in the capitalist fundamental class process. The capitalist’s overaccumulation is an extreme point of accumulation where no
8
“Intellectual Roots of Wall St. Protest Lie in Academe-Movement’s principles arise from scholarship to anarchy” The Chronicle of Higher Education. Archived from the original on July 7, 2012 (Available at: http://chronicle.com/article/Intellectual-Roots-of-Wall/129428/ ) 9 See http://www.adbi.org/research.global.financial.crisis/ 10 See: http://www.chathamhouse.org/sites/default/files/public/International%20Affairs/Blanket%20File%20Import/int a108.pdf 11 Available at: http://unctad.org/en/Docs/diaeia20093_en.pdf
return can be generated with further reinvestment. This condition happens due to lack of effective demand and in that situation the domestic currency of an economy devalues12. The production process has been historically done by both labor and capital. The land capital and other form of capital once considered to be asset can be achieved through hard labor where the value of human labor almost overlooked especially in the colonial enclosure process. Marx in this regard argues that capital accumulation does not have to depend on natural population growth for its supply of laborers. Even it doesn’t require disposition to ‘free’ laborers from non-capitalist class processes. According to Marx, in each next period a part of current period’s surplus value or profit is converted into additional constant and variable capital thus leading to expansion of production. But the primitive accumulation is the appropriation of existing means of production previously employed in non-capitalist production.
Accumulation by dispossession and Primitive Accumulation The basic idea of accumulation by dispossession is that the capital needs an outside market for profitable investment to solve the problem of under consumption. This theory doesn’t recognize the need to external source to solve the problem of effective demand. According to Harvey, ‘surpluses of capital (in commodity, money, or productive capacity forms) and surpluses of labor power lies side by side.’ So the suggestion comes from the accumulation by dispossession is similar to the idea of primitive accumulation as it also emphasizes the geographical expansion and invest in long term project so
12
See at: Harvey, D. (1990). The Condition of Postmodernity. Malden, MA: Blackwell Publishing. p. 180
that the accumulation process happens slowly. So in no way the capitalist accumulation process can avoid the idea of an ‘outside’ non-capitalist source which necessarily leads to imperialism.13
Concluding Remarks The Chinese economy has been facing the problem of over accumulation. The economy has the largest stock of US Treasury bond which always keeps it busy thinking of alternative currency beyond dollar. The devaluation of Chinese currency led to the currency war in the onwards of current recession. The economy has already started investing in large infrastructural project inside the economy. On the other hand, china is the world largest land buyer in African land market which is also a phenomenon which matched with the earlier predictions. But china is still a developing country whose income and consumption level is much lower. The domestic mobilization of consumption can help china to continue growing but that will create a huge environmental problem which is a separate question.
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13
Skouras, A. // Journal of Post Keynesian Economics; Spring80, Vol. 2 Issue 3, p430
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