DOMINANT FINANCE AND STAGNANT ECONOMIES
Sunanda Sen
Oxford University Press
384 pages; Rs 1,200
This book is an excellent treatise on finance, seamlessly blending the discussion from Lenin to the principles of modern finance. In keeping with the recent trend of remixing old songs and themes in Bollywood, the book does an excellent job of updating the 17 published articles that cover nearly half a century until March 2013.
Sunanda Sen has been successful in revealing the darker side of global finance. The book, though written with much conviction, is dense and difficult to read. But the persistent reader is rewarded with extensive knowledge of national and international finance.
Ms Sen takes an alternative view of modern instruments of finance, mainly through the lens of output and labour. To illustrate her point, she observes that derivatives were invented with the tacit connivance of the authorities. She also argues that labour-displacing technology is responsible for many woes of the advanced and developing countries. She even cautions that financial reforms instituted by international institutions, such as the International Monetary Fund and the Bank for International Settlements, offering a trade-off between financial stability and growth with distributive justice are also cause for concern.
The book has four sections. The first part focuses on the aspects of the financial system when bilateral and multilateral official aid and grants were the main source of finance for developing countries. The analysis in chapter 1 can be summarised as follows: a predominance of tied credit, difficulty in raising export rates, rising import content of domestic production, and rising costs of foreign capital for borrowers. In chapter 2, the Indian balance of payments situation of 1990-91 is sketched rather briefly; it concludes with a cautious observation to make a distinction between "own" and "borrowed" resources, and between short- and long-term capital flows that finance the balance of payments.
In section 2, three chapters discuss issues concerning global flows of finance. Chapter 3 details the "lenders' paradox" of the 1970s and 1980s. The author argues that the swings that were witnessed by lending were symptoms of problems embedded in the functioning of international capital markets, leading to excess accumulations in lender economies. A clear distinction is made between "trade effects" and "rentier effects" of overseas investments in lending countries. Chapter 4 has some useful and rare historical information on off-balance sheet activities of American banks and the flow of capital from non-oil developing countries to rich industrial countries. The focus is on financial fragility and the failure of the pattern of capital flows prevailing then to generate growth in borrower or lender countries.
Chapter 5 discusses the Lenin-Luxemburg-Hilferding notion of finance capital as a "fusion" of industrial and bank capital. The rise of European involvement in international finance against the US' super-imperialism and blend of Euro-American ultra-imperialism rests on the assumption of a hegemonic order in international finance world, which even the IMF could not escape.
The five chapters in section 3 focus on deregulated global finance in its new form of equity and portfolio capital. The focus of discussion in chapter 6 is that the "shareholder value of the corporation is preached as the sole legitimate target to achieve", thus defeating the purpose of growth or stability in lending or borrowing countries. And global financial markets, which are dominated by short-term flow of funds mainly from institutional investors, chasing high returns and causing boom-bust swings, do not help promote real activity. Chapters 7, 8 and 10 are about the now-famous "Minsky" point and dwell on the recent global meltdown, mortgage securities and the phenomenon described as a "random walk along Wall Street". Chapter 9 describes the historical evolution of treatment of uncertainty and speculation in economics; it argues for regulation in the stock and commodities market.
Asia is the focus of discussion in the fourth section. A refreshingly non-mainstream explanation of the Southeast Asian crisis, again cast in the boom-and-bust hypothesis, is convincingly offered in chapter 11. The next four chapters focus on the evolving aspects of the integration of the Chinese economy with the global economy. Of the role of three legs supporting the economy, government spending is functioning better than property markets and exports.
Chapter 16, a case study of India that was written in October 2010, offers an alternative, nay opposing, view of the financial sector reforms of 1991. Finally, chapter 17, as expected, argues financial liberalisation has led to immiserisation of labour in India. The author seems to ignore the fact that gradual and sequentially calibrated financial sector reforms with high regulatory standards helped the financial system withstand the global meltdown.
The author is successful in proving the futility of the efficient growth doctrine in high finance - the gem-studded book is genuinely a reader's delight. The timing of the book is appropriate, given that the basic premise of modern international finance, deregulation, is being globally re-examined. The serious work in the book provokes rethinking of the paradigms of modern finance, especially after the release of Inside Jobs in May 2010 and The Wolf of Wall Street in December 2013. After a careful reading of the book, the general feeling is that, given the greed and grease of modern finance, the writings of Marxists could have been taken more seriously by policymakers.
The reviewer is RBI chair professor of economics at the Indian Institute of Management, Bangalore
