Beyond market ideology

Sunanda Sen's new book challenges financial liberalisation, arguing that volatile capital flows can constrain policymaking and undermine industrial development in emerging economies

Subordination and Development: Emerging Market Economies of Asia and Latin America

by Sunanda Sen

Published by 

Tulika Books

205 pages ₹900

 Developing countries dependent on official development assistance were supposed to buy goods from creditor countries, making settling of debts in hard currencies perpetually difficult in the early eighties. Subsequently, relying on International Monetary Fund loans with conditionalities attached to liberalising capital markets pushed developing countries to a subordinated status such that autonomy of policymaking became constrained by financial flows. Sunanda Sen’s monograph Subordination and Development: Emerging Market Economies of Asia and Latin America, aligning with the Keynesian and post-Keynesian tradition, offers a robust critique of the mainstream theory of “efficient income hypothesis” and refers to Marx’s concept of “fictitious capital” in explaining the dominance of finance. Drawing evidence from three Latin American countries — Argentina, Brazil and Mexico — and two Asian economies — India and China — Professor Sen’s analyses show how asset inflation driven by short-term inflow of speculative capital ultimately leads to subversion of autonomous policymaking. 

 

Neoclassical theory on “efficient capital markets” claims that financial instruments are nothing but vehicles transforming current consumption into future investments. Investors can make rational choices since financial markets provide adequate information of economic fundamentals. Professor Sen underlines Keynes’s fundamental rejection of the assumption that financial markets can optimise inter-temporal choice by converting uncertainty into calculable risks. Instead, the capitalist economy is continuously moving from an irrevocable past to an unpredictable future. The core thesis of Professor Sen’s observations on developing economies focuses on the impossibility of simultaneously managing desirable exchange rate, interest rate and foreign exchange reserves because of free flow of capital. 

Deregulation of finance triggers short-term capital flows that causes exchange rate appreciation and pushes up prices of financial assets. Currency appreciation hurts domestic exporters. Also, managing a desirable exchange rate through sterilisation increases credit supply. Monetary authorities with their overarching concern for potential inflation respond by restricting credit by raising lending rates. Professor Sen further argues that developing countries hold official reserves above the required level for precautionary reasons, and because of the hierarchy of currency, park reserves in low-yield US treasury bonds, effectively causing a reverse flow of funds from developing countries to the US. 

Fund-imposed austerity and capital market liberalisation manifested through net portfolio inflows, rising interest rates and official reserves restricted industrialisation opportunities in Argentina despite its abundant natural and energy resources. The IMF’s policy of cofinancing through structural adjustment programmes led to deindustrialisation in Brazil. Although high interest rates and a tight fiscal policy attracted foreign inflows and increased price of financial assets, they eventually led to deindustrialisation in Mexico. The chapter on India shows how the introduction of capital adequacy ratios in  accordance with the Basel norms restricted developmental credit. China did face currency speculation as an immediate effect of reforms but interest rates in China has never been linked to global interest rates, nor has monetary policy been motivated by inflation targeting. 

Professor Sen offers an incisive critique of the architecture of dominance; however, her idea of “subordination” defined as the market controlling the transfer of surpluses through surveillance of overseas capital and the state over subservient countries demands a closer look. Her convincing account of declining autonomy reveals that economic decisions are conditioned by forces external to domestic interests. But does this hegemonic finance necessarily invoke a divide between the developed and developing economies where the former group subordinates the latter? Or has global finance attained autonomy where it can subordinate the interests of any nation-state be it developed or developing? In fact, the global architecture of finance imposes a governance structure of the transnational class, which nation states internalise — including the US, despite having “exorbitant privilege”. 

Secondly, the book highlights finance’s repression of the real economy. However, the surplus generated by exploiting labour and natural resources of the Global South represents the real divide. Surplus produced in production and appropriated through financial channels also explains the remarkable coincidence between deregulation of finance and deregulation of labour market, as high interest costs is translated into repression of wages. 

Thirdly, Professor Sen’s analysis deploys the Marxian notion of “fictitious capital” in passing. Fictitious capital is defined here as a detachment from real capital, an excess of value that is not backed by existing use values. But fictitious capital in Marx is something more than that; it reifies capitalist production relations when necessary mediations of valorisation disappear. It is capital sui generis  that converts future streams of income into a given capital value in the present ownership title — a progression from interest-bearing capital as any money assumes a capital value and every capitalist becomes a shareholder of the total social capital. Consequently, the allocation of resources in capitalism is conditioned by the prices of financial instruments that incorporate risk-adjusted expected income flows. Hence, finance dominates the production and allocation of resources. This is not to be seen as a departure from canonical capitalism but a logical outcome of the inherent tendency of capital toward s dematerialised self-augmenting value, which is tendentially inclined to subvert all the concrete conditions of value creation. The book is a must read for anyone who is open to critically reviewing the liberalisation policies based on hard facts and is not insanely committed to the ideology of market.       

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The reviewer is associate professor, Institute for Studies in Industrial Development