Subordinated Financial Integration and Financialisation in Emerging Capitalist Economies: The Brazilian Experience

ABSTRACT

This paper analyses the recent changes in financial practices and relations in emerging capitalist economies (ECEs) using the example of Brazil. It argues that in ECEs these financial transformations, akin to the financialisation phenomena observed in Core Capitalist Economies (CCEs), are fundamentally shaped by their subordinated integration into a financialised and structured world economy. To analyse this subordinated financialisation, the paper draws on the framework of international currency hierarchies. It shows by means of two specific processes how the existence of a hierarchic international monetary system has changed the financial behaviour of domestic economic agents, and with it the structure of the financial system. The first process highlights the phenomenon of reserve accumulation and the changing behaviour of domestic banks. The second points to ECEs’ sustained external vulnerability and its impact on the operations of Brazilian non-financial corporations. The paper also shows that not only were these financial transformations shaped by ECEs’ subordinated financial integration, but also that it was these financialisation tendencies themselves which contributed to cementing existing hierarchies and further deepened existing asymmetries between ECEs and CCEs.

KEYWORDS:

• Financialisation
• financial integration
• emerging capitalist economies
• Brazil
• reserve accumulation
• external vulnerability

Acknowledgements

We thank Brett Christophers, Johannes Jaeger, Terry McKinley, Malcolm Sawyer, and the participants of the 2014 Annual SPERI conference for their helpful suggestions and comments on earlier drafts of this paper, and Terry McKinley and Daniel Sills for their thorough proof reading. All remaining mistakes remain ours. The views expressed in this article are those of the author and do not necessarily reflect those of the Banco Central do Brasil (BCB).

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes on contributors

Annina Kaltenbrunner is lecturer in the Economics of Globalisation & The International Economy at Leeds University Business School. She obtained her MSc and PhD in Development Economics from the School of Oriental and African Studies (SOAS), University of London.

List of main publications:

Kaltenbrunner, A. (2016) Stemming the Tide: Capital Account Regulations in Developing and Emerging Countries. In: Arestis, P.; Sawyer, M. (2016): Financial Liberalisation: Past, Present, Future. Annual Edition of International Papers in Political Economy, Palgrave Macmillan, Houndsmills, Basingstoke, pp. 265–308

Kaltenbrunner, A.; Karacimen, E. (2016) The contested Nature of Financialisation in Emerging Capitalist Economies. In: Subasat, T. (2016) : The Great Financial Meldtown of 2008: Systemic, Conjunctural or Policy Created? Edward Elgar, Cheltenham, pp. 287–307

Kaltenbrunner, A; Lysandrou, P. (2017) The US Dollar Supremacy as an International Currency: A Double-Matrix Analysis. Development and Change, 48(4), pp. 663–691

Kaltenbrunner, A. (2015) A Post Keynesian Framework of Exchange Rate Determination: A Minskyan Approach. The Journal of Post Keynesian Economics, 38(3), pp. 426–448

Kaltenbrunner, A.; Painceira, J.P. (2015) Developing Countries’ changing Nature of Financial Integration and New Forms of External Vulnerability: The Brazilian Experience. The Cambridge Journal of Economics, 39(5), pp. 1281–1306

Kaltenbrunner, A.; Painceira, J.P. (2017) The Impossible Trinity: Inflation Targeting, Exchange Rate Management and Open Capital Accounts in Emerging Economies. Development and Change, 48(3), pp. 452–480

Kaltenbrunner, A. (2015) Financial Integration and Exchange Rate Determination: A Brazilian Case Study. International Review of Applied Economics, 29(2), pp. 129–149

Lapavitsas, C.; Kaltenbrunner, A.; Lindo, D.; Michell, J.; Painceira, J.P.; Pires, E.; Powell, J.; Stenfors, A.; Teles, N. (2012) Crisis in the Eurozone. Verso

Kaltenbrunner, A. (2010) International Financialization and Depreciation: The Brazilian Real in the International Financial Crisis. Competition and Change, 13 (3-4), September-December 2010, pp. 294–321.

Lapavitsas, C.; Kaltenbrunner, A.; Lindo, D.; Michell, J.; Painceira, J.P.; Pires, E.; Powell, J.; Stenfors, A.; Teles, N. (2010) Eurozone Crisis: Beggar thyself and thy Neighbour. Journal of Balkan and Near Eastern Studies, 12 (4), pp. 321–373.

Juan Pablo Painceira is the head of Consultancy of Studies and Research on Open Markets (CONEP/DEMAB), which is the main responsible for the advanced research on monetary policy implementation, focusing on open market operations, and their transmission mechanisms, mainly on the Brazilian financial institutions, at the Open Markets Operations Department (DEMAB). He is the Brazilian representative in the BIS ECC working group on Central Bank Monetary Policy Operating Frameworks and Current Regulatory Initiatives.

Major publications:

Kaltenbrunner, A.; Painceira, J.P. (2015) Developing Countries’ changing Nature of Financial Integration and New Forms of External Vulnerability: The Brazilian Experience, The Cambridge Journal of Economics, 39(5), pp. 1281–1306

Kaltenbrunner, A.; Painceira, J.P. (2017) The Impossible Trinity: Inflation Targeting, Exchange Rate Management and Open Capital Accounts in Emerging Economies. Development and Change, 48(3), pp. 452–480

Painceira, J.P. (2012) Financialisation, Reserve Accumulation and Central Bank in Emerging Economies: Banks in Brazil and Korea, RMF Discussion Papers, n.38, July.

Lapavitsas, C., Kaltenbrunner, A., Lambrinidis, G., Lindo, D., Meadway, J., Michell, J., Painceira, J.P., Pires, E., Powell, J., Stenfors, A., Teles, N. (2012) Crisis in the Eurozone, Verso Books, London.

Painceira, J.P. (2010) “The Financial Crisis of 2007-09 and Emerging Countries: The Political Economy Analysis of Central Banks in the Brazilian and Korean Economies”, Competition and Change, vol.14, No. 3-4, December, pp. 271–95.

Forthcoming book:

Painceira, J.P. (2018) Financialisation in Emerging Countries: Changes in Central Banking, Routledge, London.

ORCID

Annina Kaltenbrunner http://orcid.org/0000-0003-3519-5197

Notes

1. Although our analysis differs from that of Christophers. Rather than analysing the global interconnection of supply and demand and international flows of value, we set out how national economic and financial structures are conditioned by their asymmetric integration into financialised capitalism. Our focus is primarily on the financial system itself (the circulation sphere), rather than also the creation of value.

2. Some authors have pointed to the role of rising exchange rate volatility to spur economic agents’ increased articulation into financial markets (e.g. Helleiner 1994, Belluzzo 1998, Braga 1998). However, these are not embedded into a more systematic analysis of how international financial integration shapes domestic financialisation processes.

3. This then, however, raises questions about the novelty of the process (e.g. Hirst et al. 2009). Moreover, treating financial globalisation as a merely quantitative phenomenon neglects the crucial qualitative changes in financial markets highlighted by the financialisation literature.

4. The only exception we are aware of is D'Arista (2005). She, however, does not write about ECEs.

5. One exception is Akkemik and Özen (2014), who investigate explicitly the determinants of financialisation in Turkey and show the important role of the highly uncertain macroeconomic environment. However, they do not link this result to ECEs’ asymmetric position in the global capitalist system.

6. This is an extensive literature which cannot be treated satisfactorily in this article. For excellent overviews and critical engagements, see, for example, Chilcote (1978), Palma (1978), Vernengo (2006), Amaral (2012), and Fischer (2015).

7. Although this literature does not always use the term financialisation, many phenomena it describes are akin and often precede those set out in the financialisation literature. Braga (1998), drawing on the work by Chesnais, and Coutinho and Belluzzo (1998) explicitly use the term financialisation (financeirização).

8. According to Vernengo (2006), Tavares was the first one to realise that rather than technological dependency, financial dependency, reflected in the financial power and hegemonic position of the US Dollar and, as its counterpart, ECEs’ inability to borrow in their own currency and recurrent debt crises, was the real constraint on ECEs’ autonomous development. Tavares (2002) refers explicitly to a new dependency. For a series of articles in the tradition of Tavares’ seminal work, see Tavares and Fiori (1998). For a review of her work, see also Andrade and Silva (2010).

9. For example, Tavares (1998) argues that the Volcker shock in the early 1980s restored US hegemony through maintaining the attractiveness of the US Dollar and plunging large parts of the rest of the world into recession. Financial power was, among others, exercised through the extremely liquid US government debt market, the expansion of American banks and multinationals, and a strategic financial and military vision which became dominant across the globe.

10. A related literature which pays attention to the interplay between international power relations and financial transformations is that on US imperialism (Panitch and Konings 2009, e.g. Harvey 2003, Panitch and Gindin 2012). However, this literature is not primarily concerned with the impact on ECEs, but rather with the way recent financial transformations have been shaped by and reinforced American imperial power. Rude (2009) is an exception, though he does not analyse ECEs’ recent financial transformations.

11. The determinants of a currency's international monetary position vary in the IPE literature. Whereas market-based approaches highlight the attractiveness of a currency through its value stability (primarily due to sound macroeconomic fundamentals) and liquidity and transactional networks (Helleiner 2008, Helleiner and Kirshner 2009b), instrumental and geopolitical approaches stress the economic and political decisions of foreign governments (Minh 2012). Institutional approaches (e.g. Eichengreen 2010) place the spotlight on the willingness and ability of a currency's issuer to safeguard its market-based attractiveness.

12. There is some discussion of ECEs’ ‘original sin’, that is, their inability to borrow in their own currency, in the IPE literature (Eichengreen et al. 2003). This phenomenon is not directly linked to the literature on monetary hierarchies though.

13. For example, Guttmann (2008) notes that having much of the world's financial capital denominated in U.S. Dollar helps the US to maintain the deepest and most liquid financial markets in the world.

14. Post Keynesian’ focus on fundamental uncertainty makes them more prone to concentrate on the store of value and unit of account functions of money, rather than that of medium of exchange. As in the IPE literature, the determinants of currencies’ international liquidity premia vary. Whereas de Paula et al. (2017) highlight ECEs’ ability to run sustainable current account surpluses, De Conti (2011) and Kaltenbrunner (2015) stress the important role of market-institutional factors. Kaltenbrunner (2015) also highlights the importance of currencies’ position in international debtor–creditor relations.

15. This is also reflected in the fact that many scholars in the dependency theory tradition have their roots in Marxist political economy.

16. The world market, which is the universal sphere of circulation of capital and enables the relation between national markets, is structurally different from the domestic market. It has fewer homogenising mechanisms of law, institutional practice, custom, and regulation than the domestic market and it incorporates relations of power and national exploitation (Lapavitsas 2006). Consequently, the role of money in the world market has a pronounced weight, significance, and meaning.

17. In this regard, the process of capitalist development can be directly connected to this aspect of the credit system at the global scale. Based on Marx's new material (MEGA), Pradella (2013) argues that the capitalist competition at the global level and the trend for uneven development can be inferred directly from Marx's writings. In this sense, capitalist accumulation and the category of capital ‘reflect the tendency of the capital of the leading states towards universal dominance’, which is the base for Marxist imperialism theory developed in the beginning of the twentieth century (particularly Lenin and Hilferding). This imperialism theory was, in turn, the major background for the development of Latin American dependency theory.

18. The term quasi-world money (instead of world money) is used to describe the US Dollar because there is no formal agreement, as there was in the era of gold, for the US Dollar to be the global store of value. Furthermore, there is no clear mechanism of international adjustment as there was under the gold regime which has increased financial instability (McNally 2008). According to Itoh (2006), one of the main challenges for political economy has been, in fact, to fully explain the role of the US dollar as world money.

19. This process was related to Brazil's continued capital account liberalisation which started in the 1990s and consolidated further in the 2000s (see, e.g. Goldfajn and Minella 2005).

20. The procyclical nature of capital flows, which are driven by ‘push’ rather than ‘pull’ factors, has been discussed extensively in the literature, including by mainstream economists (e.g. Agénor 1998, Stiglitz 2004, Cerutti et al. 2015)

21. In Brazil, this last cycle of capital flows has been much more pronounced in banking than in portfolio flows. This has been due to two reasons. First, portfolio investors have increasingly hedged their exchange rate risk on the domestic market rather than withdrawing funds. Second, banking flows have been exacerbated by the positions of domestic banks, which have increased their international operations over recent years.

22. The changing nature and increased complexity of international capital flows raises the question whether we are observing a distinct ‘international’ financialisation process which goes beyond a mere increase in cross-border capital flows.

23. Reserve accumulation can originate from the current account or the capital account, or both. In contrast to what would be advocated by neoclassical economic theory, recent capital flows to ECEs have gone far beyond these countries’ needs to finance current account deficits. To the contrary, the strongest recipients were those with current account surpluses, leading to excess reserves in many ECEs. This has changed since 2013 when the combination of monetary tightening in CCEs, lower commodity prices, and the slowdown in China has led to capital outflows.

24. In these sterilisation operations, the central bank offers the banking system public debt securities (with a commitment of future repurchase) against cash. Operating under the institutional framework of an Inflation Targeting Regime (ITR), the BCB is institutionally bound to engage in these sterilisation operations to reduce the inflation pressures stemming from the expansion in the money supply from its FX purchases. Thus, one could argue that an ITR institutionalises the financialisation dynamics described in this paper.

25. During this time, repos have replaced Selic-indexed public bonds (LFTs) as the main short-term asset on banks’ balance sheets. The share of LFTs in the Brazilian domestic public debt fell from more than 50 per cent in the early 2000s to only 7 per cent by the end of 2014. Before reserve accumulation, LFTs were crucial for banks to mitigate their interest rate risk. Similarly to LFTs, repos have very low interest rate risk due to their very short maturities. However, they offer some additional benefits to their holders. First, holders of repos have direct access to central bank liquidity, which becomes particularly important in times of crises. Second, they can obtain capital gains through short selling the debt securities, which act as collaterals in these repo transactions.

26. Figure 3 shows bank data at level 2 of disaggregation and represents the four major asset classes on Brazilian banks’ balance sheets. Repo positions can be seen through level 3 of the disaggregated bank data, which is the last level publicly available. For more details, see BCB (2016b).

27. For more details on those interventions in a comparative perspective with South Korea, see Painceira (2010).

28. The latter category can be considered a type of time deposit though.

29. Obviously, the change in banks’ funding structure was not the only reason for the increase in consumption lending. Some policy measures, such as the payroll lending operations (creditos consignados), which lowered the interest rates for a relevant share of households, and Brazil's traditionally high interest rates, which constrain productive sector borrowing, have also influenced this shift from productive to consumer loans. Economic growth, the rising real minimum wage, and the profitability of these loans also contributed to this trend. However, without the expansion of banks’ balance sheets through the BCB's sterilisation operations and the shortening of their funding structure, accommodating the rising demand for household credit would have been much more difficult for banks.

30. Indeed, ECEs are ultimately very limited in how they can use these international reserves, given the need of central banks to match, as much as possible, the foreign reserve assets on their balance sheets with their domestic liabilities (debt securities, included) that they have to issue (or use) in order to purchase these reserves (Fischer, 2015). This is exacerbated by the fact that in many cases, these reserves are ‘borrowed’ reserves, that is, accumulated largely from capital inflows which can be reversed anytime (Carvalho, 2009).

31. Of course, these swings could have been even bigger without the accumulation of FX reserves and deeper domestic financial markets. However, if the aim was to reduce, or potentially even eliminate, the volatility of capital flows, these measures were arguably of limited success.

32. This maturity difference indicates that there are some specificities in Brazil which have reinforced the very short-term nature of its assets. The first specificity is Brazil's hyperinflationary history which saw the development of an institutional arrangement which linked most financial assets to government bonds remunerated at the Selic rate. This meant that these government bonds faced no interest rate risk, which has ‘crowded out’ the development of other asset classes (in particular fixed income securities) with a longer maturity (normally the longer the maturity of an asset, the higher its interest rate risk). While the maturity of domestic public debt has increased since, this institutional structure has remained in place (although not the subject of this paper, it is important to note that this institutional structure has also created severe complications for Brazilian monetary policy (see, e.g. Lopreato (2008), Oliveira and Carvalho (2010)). Second, the existence of an active repo market, 95% of which is traded overnight (BCB 2016c), has had a similar effect as the liquidity and attractiveness of this market have weighed on the development of longer maturity assets. Finally, Brazil's high interest rates, in particular on the short end of the yield curve, have maintained the attractiveness of short-term assets.

33. Another reason that Brazilian NFCs tap international capital markets is closely related to monetary subordination itself. Due to the high interest rates and short-term nature of Brazilian domestic-currency assets, NFCs resort to borrowing on international financial markets predominantly in foreign currency.