Financialisation and the Financial Crisis - on Shifts in Governance of Global Finances - Essay Example

?Financialisation and the Financial Crisis: On Shifts in Governance of Global Finances Introduction This paper is an attempt to trace the linkage between financialisation and the financial crisis and the degree to which the former is implicated in the latter. Rather than provide a country-specific analysis, it will look at trends and patterns in global financial governance systems and the underlying structural deficiencies in the IMF-driven neoliberal framework. A recent headline of the British newspaper The Guardian regarding the recent Greek crisis brings up a question that has long been asked by several movements and institutions worldwide: “What makes the IMF think it’s right (…)” about the economy? (Baker 2011). In spite of the different symptomatic origins of the Greek crisis and the previous financial turmoil of 2007, the discussion brings once again the underlying, and somewhat ever-present, discussion of who makes the decisions regarding economic policies in regional and global scales. The unemployment explosion and the number of businesses folding up have caused governments to sit up and notice, but have they looked far enough to trace the origins of the crisis? What’s the reason for the same economists and institutions that failed to predict the 2007 financial crisis still be in the “driving seat”, prescribing very much similar remedies to economic crisis in spite of criticisms coming from all over, both from inside financial institutions and outside them? There still is no consensus as to the origins of the crisis. To quote Goodhart: There have been many facets to the current financial crisis. It is difficult for a single person to put together a completely coherent story of everything that has happened, unless they have been working for one of the banks at the centre of the storm. Rather like the blind men who feel aspects of the elephant, commentators, like myself, are likely to have a personal view; it may take quite a long time before a comprehensive history of this crisis can be written, and this is not such a complete history. This essay is generally interested in understanding how global governance mechanisms in finance emerge, persist and change. There may be issues of corporate governance (see for instance, Meckling 1976, Lazonick 1992, Lazonick 2000, Lewis 1992, Sullivan 1997, Sullivan 1999) contributory to the crisis, but it is imperative to look at the bigger picture. Specifically, it aims to speculate on why the financial crisis, a situation produced by the inability of markets to regulate themselves and the failure of existing regulating mechanisms (Leyshon and Thrift 1997) is not opening up to long established alternative solutions present in alternative epistemic circles with different paradigms about economy and regulation of markets. The hand-wringing has led to more questions than answers. To quote Jickling (2009): To what extent were long-term developments in financial markets to blame for the instability? …. Was there too much reliance on computer models of market performance? Did those models reflect only the post-WWII period, which may now come to be viewed not as a typical 60-year period, suitable for use as a baseline for financial forecasts, but rather as an unusually favourable period that may not recur? This paper draws upon Claus Offe’s concept of selectivity (Offe 1984) and the structural dependence of International Financial Organisations on the same groups it is supposed to regulate. The following pages are structured as follows: first, the work analyses the emergence and consolidation of financial global governance structures and how these spaces have reached the critical juncture they now face. Alongside with the study of the arenas, the second section provides a narrative of the actors behind the contentious creation of these spaces. The third part of the work addresses the new political opportunity structure that has emerged after the financial crisis, and how previously marginalised actors have tried to take advantage of this window to push for reforms. Finally, the last section provides an analysis on why have these new actors have only been, at the very best, partially successful in furthering their claims. Financialisation: consequences for the politics of financial global governance Broadly understood, financialisation is a process whereby financial markets, financial actors and institutions gain greater influence over economic policy. (see Boyer 2000, de Goede 2005, Dodd 1994). Even though “the movement of purchasing power between actors in the economy” (Kotz et al. 2009: 4) - i.e. finance - has been an ever-present tendency in corporate capitalism, it has gained a significant weight along the neoliberal years, after the decay of the previous Social Structure of Accumulation (SSA) (Epstein 2005; Palley 2007; Kotz et al. 2009). The crisis of the fordist regime of accumulation (Boyer 2010, Amin 2008, Tickell 1992, Jessop 1994, Schoenberger 1988, Albertsen 1988) and the emergence of finance-led capitalism1 as a regime of accumulation in the end of the 1970s has manifested the big grievances not only within academic debates between Keynesianism and Neoclassic economics, but also in the interests of fractions of capital in accommodating the regulation and governance mechanisms of the system of production to their interests. As a consequence of the prevalence of financial groups over other fractions within capitalist class, major changes in the governance structure of the economy have seen the light of day. These changes were manifested mostly in two ways. First, by the reform of pre-existing institutions and the attributions of new weights to existing actors such as the state, industries and banks within national boundaries and international institutions. Second, by the creation of different institutions and actors, including a new managerial class (Bresser-Pereira 2010) and more recently “Embedded Knowledge Networks” (Sinclair 2000). In terms of the reforms of the existing governance institutions, International Financial Institutions such as the World Bank and the IMF serve as good examples of the changes taking place in the end of the 1970s and beginning of the 1980s. With the shifts in the regime of accumulation, it is possible to identify a strong market shift in the policy profile of both the IMF and the World Bank from more straightforward banking and lending policies to explicit steering domestic state building through the tenets of good governance. As a consequence, a wide array of countries have been included in the global financialised market, following the lead of neoliberal reforms in the US and the UK, in a re-orientation of global governance arenas where closely aligned with neoliberal understandings of de-regulation of markets and liberalisation of international capital flows (Stockhamer 2010). The consequences of de-regulation and of the decreasing role of the state in economy and society are plentiful (Skott 2007, Stockheimer 2007). The implementation of de-regulatory policies and the over-reliance of markets as mediating mechanisms of social life bring along a reconfiguration in the terms of discussion and also actors entitled to engage in public debates and reach decisions. Within this (not so) new scenario, the array of relevant actors for the decision making process changes substantially, bringing to the fore not only states and business, but also banks, stockmarkets and debt rating agencies (Thomas & Sinclair 2001). Furthermore, the management imperatives of this new international regime calls for the emergence of a new bureaucracy – highly skilled technically and mostly located inside International Financial Institutions - to account for the different process, therefore reinforcing the institutional setting by reproducing institutional settings and spreading de-regulation worldwide. In that sense, finance-led capitalism, with its neoliberal expression of values and prescriptions, allows for the emergence and centrality of a different array of institutions and actors, both within and outside existing institutions. Through its overly technical speech, and their constricted arenas of debate, it renders engagement extremely costly and demands the familiarity with a set of intellectual tools that allows only very limited array of groups and individuals to participate (Kregel et al. 2007). As a consequence of this decision making regime, the neoliberal international financial architecture has produced a system where a few people come up with decisions over processes that are increasingly pervading states and economies all over the world. In the face of the recent crisis and another sign of weakness and unsuitableness of this mode of regulation, alternative paradigms of how to regulate the international political economy have seen the possibility of coming to the fore and promote long waited reforms. The democratic deficit of IFIs and challenges from the borders If the discussions over neoliberalism, the goods and harms of the Washington and Post-Washington Consensus are represented by different more optimistic or pessimistic perspectives on the policies it prescribed, it is rather common ground to say that that the financial crisis in 2007 provides a shift in the contemporary debates on international financial architecture and balance of power within the decision making arenas. It has forced a major re-evaluation on most tenets of mainstream political economy, and also has, once and for all, brought finance-led capitalism into attack by a vast universe of discontents both from within and outside mainstream circles. No single approach in IPE argues against the negative nature of the crisis at least on the short run. The ones to blame, the measures to take to overcome it, and the theoretical implications of this shock, however, are subject to varied debates within not only IPE, but also among activists and policy-makers. This section focuses on the emergence of a criticism coming from the outside, heterodox scholars, and the epistemic networks revolving around them. Although the rise and eventual increase of importance of global civil society organisations and networks is part of a wave generated in the beginning of the last decade, it can be argued that the increase in importance of non-state actors is in fact a consequence of the same process of aforementioned change in the regime accumulation of the late 1970s. “The last three decades have seen a paradigm shift in the way political scientists and others have looked at transnational politics” (Tarrow 2001: 3). John Keohane and Joseph Nye, in their seminal work Transnational Relations and World Politics (1971), addressed the issue of how contacts, interactions and coalitions were made across state boundaries without direct intervention of state structures and bureaucracy. By countering the realist perspective in International Relations and by coining the concepts of “transgovernmental actors” – subunits of governments acting with relative independence in international politics – and international organisations – defined as “multilevel linkages, norms, and institutions between governments prescribing behaviour in particular situations” (Keohane & Nye 1974: 41) the authors captured the dramatic increase in the amount and importance of private international interactions as a consequence of the augmentation of economic exchanges across borders. The unveiling of the mechanisms undergoing beyond state regulations have provided, at the same time, new theoretical tools and followed a pattern, coming along with the re-rise of International Political Economy, and a narrowing effect in international political analysis (Tarrow 2001). Since most scholars focused on transnational economic relations and in particular, multinational corporations, these terms ended up becoming the centre of the debate on international politics, relegating the rise of civil society organisations, for instance, to the margins of the field, usually framed as a branch of transnational economic relations that focused on understanding the resistance to transnational economic penetration. If on the one hand the centrality of economic actors in analysis within international relations and International Political Economy make sense, especially if one centres the analysis on the formal institutional understanding of politics, the overreliance on economic aspects of international relations leaves aside societal and even political dimensions that are equally important to the analysis. As a matter of fact, the excessive focus on economic interactions, mostly justified by the resistance to state-centred realist perspectives, have not only relegated social movements and civil society organisations to the margins, but also the state itself. Drawing upon the pluralist turn in political science debates in the United States during the seventies (Dahl 1971), there was a general feeling that interactions of rational actors and groups accounted for the explanation of local, national and international phenomena. States and social movements, in that sense, were thus considered as organisations – with different levels of influence measured in terms of resources - within this broad set of different organisations. Sidney Tarrow argues that it was the waning of the cold war and the undeniable diffusion of this so-called resistance to transnational resistance to transnational economic penetration (Tarrow 2001) that allowed for the broadening of the field of transnational politics beyond political economy and the exploration of new directions. However accurate this may sound and be, it is also possible to account for the expansion analytical perspectives in terms of the shortcomings of purely economic analysis to account for the variety of processes taking place in the world, a so called institutional turn in the field of economics, a structurational turn in the field of sociology and a constructivist turn in the field of international relations. In that sense, closer analysis of transnational contention, with a broader category of actors relating to each other dynamically has started to gain shape. The epistemic networks formed around the resistance to finance-led capitalism and globalisation has as its central node the opposition to extreme de-regulation and its consequences, stemming from the realization of the perverse effects of the neoliberalism around the world, but mostly in Latin America. The reason for the concentration on this particular region of the world is twofold: on one account Latin America has had a long tradition of neoliberal-like policies and it has directly suffered the severe consequences of flights of capital. Secondly, the material, political and institutional conditions – especially in the Southern Cone and Mexico - for the emergence of resistance were relatively more solid than, for instance, African nations torn by ethnical conflicts and low institutional consolidation2. Some examples of alternative policy communities that counter IFIs are the “Financial Liberalisation and Global Governance”3 initiative - coordinated by the Brazilian NGO IBASE and composed by academic and policy institutions from 15 different countries -, the French-based ATTAC, network now present in 32 countries claiming for the taxation of financial flows worldwide. Along with these two major initiatives, it is also possible to identify less connected but also fairy important Britain-based Bretton Woods Project4 - at present hosted in the British ActionAid branch -, and the South Africa based Global Transparency Initiative5, oriented towards the promotion of accountability of global financial institutions. The argument’s underlying criticisms to the neoliberal approaches to the regulation of the regime of accumulation relates to the constant and rising instability involved with the little-regulated financial activity worldwide6 and the likeliness of self-regulation to lead to the cartelisation and consequent increase in distance between economic imperatives and the public interest (Kregel et al. 2007). In addition of criticising mainstream assumptions that inform policies, alternative epistemic networks also invest in producing knowledge and policy prescriptions in order to engage in global debates regarding international financial architecture and advocate for changes in international financial governance. In this sense, the claims built around these networks can be summarized in three main areas of concern: transparency, accountability and democracy/participation (Likoskya 2007). More recently, the aftermath of the recent financial crisis has opened a window of opportunity for networks to contest the impact of conditionalities placed upon IFI financial packages (Likoskya 2007). Nonetheless, the repeated crises happening not only in the developing world, but also in the heart of the financial system – the European Union being its most current site of appearance – does not seem to have produced substantial changes in the global governance architecture so far. The reason behind this stalemate is the topic of the remainder of this paper. Challenges on pushing a critical agenda: debates on selectivity By bringing into play Claus Offe’s (1984) concept of selectivity, which was originally formulated to explain the relationship between capitalism, social classes and the state, I would like to argue for the usefulness of this analytical tool for understanding continuities and changes within the international financial governance structure. Although Offe’s concern is more related to the legitimacy and structural relationship between Capital and the state, I argue that the same mechanism of selectivity operates within IFIs, at the same time organizing scattered interests of fractions of capital and preventing the accumulation process from its own destruction. Given this original function of IFIs, this may help to signal an explanation on why such a crisis might not lead to the democratisation of international financial governance. Before diving further on speculating why a structured alternative perspective, that finds resonance in academic circles and is supported by strong economic interests such as industrial fractions of capital, it is important to lay down some conceptual clarifications on the origins of selectivity in institutions. Claus Offe posits that the concept of selectivity relates to the interests attached to the need of capitalist accumulation. Although recognising the class domination character of the modern state, most Marxist theories of the state7 tend to underemphasize the role of factors external to the state apparatus and its organisations. The common interest of the ruling class is expressed in the managerial and legislative strategies of the state apparatus, which emerge not from spontaneously generated articulated interests, but from routines and formal procedures of state organisations (Offe 1984). In that sense, the state should not be simply considered as an instrument of ruling classes to perpetuate class divisions and ensure capital reproduction. Through its own embedded autonomy, it ensures the reproduction of capital by regulating individual interests of firms and fractions of capital, generating an aggregated class interest and therefore securing the perpetuation of capitalism. Selectivity is here understood as the establishment of institutionalised exclusionary rules by appointed legitimate actors, and has two purposes. First, structuring a particular class interests that are compatible with the global interests of capital – letting aside particular, ephemeral and contradictory interests of fractions of the capitalist class. Second, protecting global capital against anti-capitalist interests and conflicts. What can be taken from Offe’s analysis of the nation-state and transferred to International Political Economy and institutional change/continuity? If one understand states as an assemble of institutions and organisations with particular interests and dynamics that end up serving the bigger purpose of capitalist accumulation, then it would be possible to transfer the analytical apparatus of how institutions dynamically selects sets of prescriptions and marginalise others. In terms of its value added to current debates in IPE and International Relations, it offers a process-based and active account of institutional persistence, where a new managerial class – composed not only of bureaucrats, but also experts in specific positions of the international bureaucratic structure - actively engage in the process of promoting changes and continuities in international financial institutions by selecting the set of policies they judge more “appropriated”. Consequently, they end up reinforcing capital accumulation and sometimes giving way to claims of deepening accountability and pluralising decision-making processes in order to ensure legitimacy of their acts, not by providing welfare as in the case of nation states, but by offering voice in arenas, which does not necessarily brings as consequence the democratisation of financial institutions. Claus Offe, by structuring an analysis of capitalist reproduction through a bureaucratic apparatus, not only argues for the structural embeddedness of economy and institutions, but also relates the existence of the former to the well functioning of the later. Consequently, when neoliberal accounts of governance argue for the decreasing role of the state and regulation, the underlying assumption, in Offean terms, is that they are arguing for the destruction of the capitalist mode of production, and hence their own existence on the long run. Regulatory institutions in financial global governance, thus, would face changes in policy prescriptions not only in order to improve accountability or procedures, but for the underlying reason of accommodating interests in order not to face destruction. Given the spatiotemporal extension of institutions, that is, specific times and specific places they control, resist or transform, agents may strategically pursue and modify the selective impact of them upon themselves. Consequently, this implies that although actors and agents are constrained by institutions and opportunities (Kendall 2004), their agency may conduct to changes in structural patterns and thus in the set of broad rules that constrain their behaviour (Jessop 2001), building a virtuous cycle that culminates on institutional change. Differently from post-structural accounts on global governance (Peoples et al. 2008; Radakrishnan 2007) - and also traditional (neo) Marxists such as the young Claus Offe (1984) - defending the primacy of a pervasive governmentality or class domination that would lead activists to a sort of epistemic dead end or the choice between overthrow of capitalism or eternal exploitation, Jessop elegantly allows for the emergence of strategy and agency within those apparent insurmountable constraints. Although the accounts of potential material or ideational dead ends might not be wrong in terms of the prescription for solutions - that is, profound change in the substance and the terms of production and social mediation within the international public sphere and institutions - it is hard to see the potential of incremental change inside this broader ambitious objective, whereas in Jessop’s perspective on change accounts for a greater set of dimensions and thus more numerous spaces for agency and incremental change. Final Remarks This essay has tried to bring about the discussion of the democratic deficits within recent attempts in international financial reform. It has showed that the whole discussion has emerged from the demise of the fordist regime of accumulation and the rise of finance-led capitalism as the main driving force of the world’s economy. Along with the rise of a new regime of accumulation, changes in the modes of regulations within international financial institutions gave rise to a new managerial class of highly specialized employees that relied on the tenets of neoclassical economics to push for policies that ensured the reproduction of the current capitalist regime of accumulation through its own institutional apparatus. In the face of the recent financial crisis, this regime of accumulation has been put into question by movements and heterodox scholars, who pushed for a bigger role of the state in the economy, but mostly for the democratisation of international financial arenas and the end of neoliberal hegemony within financial global governance. Nonetheless, however solid are the demands, and however weak are the remaining premises of neoliberal-like policies, they somehow managed to prevail. One of the assumptions that this work attempted to elaborate on is that this persistence is connected to the selectivity of the institutions that are part of the current governance mechanisms, which in order to preserve their own existence, end up also ensuring the persistence of finance-led capitalism. (Lavoie 2007, Levy 2007). Given the recentness of the latest crisis, it is still hard to identify shifts in the way policies are being set and prescriptions are being made. As a consequence, it would seem inappropriate to speculate on an overthrow of the current regime of accumulation. Nonetheless, the increasingly repeating and short-distanced cycles of crisis indicate that inertia, rather than ideological bulk, is sustaining the status quo. The neoliberal hydra is on the verge of a cliff, but it turns out that she is heavier than one would expect. It takes more than gravity and time to push it down. Innovation and political will and sound strategy are now more needed than ever. 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