The Nature of Capitalist Money and the Financial Links Between Debt-Led and Export-Led Growth Regimes

ABSTRACT

The aim of this article is to develop a consistent theoretical approach to the financial links between the so-called debt-led (DLG) and ‘export-led’ (XLG) growth regimes. Assuming the endogenous supply of money and the unstable dynamics of financial markets, the leveraging process of DLG regimes is taken as an inherent dynamic of developed domestic financial systems, without the need of any external capital inflow. Foreign inflows are not a requisite for such expansions; however, attracted by high expected returns, they can play a key role in fueling DLG cases. Alternatively, current-account imbalances are not an indicator of the international financial flows but rather a side effect stemming from the productive, financial and trade links between DLG and XLG countries. Based on this approach, we study the relationship between changes in credit and current-account balances in several countries before and after the crisis of 2008. Both the observed general relationship of these variables for most of the countries, as well as some specific national cases ‘out of the norm’ are fundamental for understanding the national and international financial links between DLG and XLG models.

KEYWORDS:

• Functional distribution
• endogenous money
• global imbalances
• financialised growth models

JEL CLASSIFICATION:

• E25
• E51
• F43

Acknowledgments

The author would like to thank two anonymous referees for their helpful and valuable suggestions. He would also like to thank Jazmin Otaduy Ramirez for her careful reading and for improving the English editing. All remaining errors are the author's.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes on contributor

Juan Barredo-Zuriarrain is interim teacher and researcher at the University of the Basque Country. He is also research associate of the Center of Economic Research of Grenoble (France). His main fields of research are international macroeconomics and monetary regulation.

Notes

1 Unlike the equation in Stockhammer and Onaran (2012), we have also introduced an independent variable on consumption and on public spending in order to take into account the role the debt level in the financialized models of growth.

2 Other researchers have found more than two financialized growth models. For example, Hein (2012) adds the ‘domestic demand-led’ as an intermediate model between the XLG and DLG growth models, in which he includes countries like Portugal, France and Italy. For our purpose, we will only take the extreme cases, that is, the DLG and XLG models.

3 As Lane and Milesi-Ferretti (2006) point out, this kind of operations can lead to changes in prices, exchange rates and market interest rates of the stocked assets and liabilities, thus provoking indirect changes in the net position of every country.

4 In any case, it should be stated that changes in the stock of the IIP liabilities are not sufficient for a consistent study of foreign investment in a country. An attractive national asset can be sold and purchased among non-residents thousands of times during a year – thus contributing to the development of a speculative bubble in a country – but the net change in stock of external liabilities would only record the stock resulting from the last operation. To this, the effect of changes in stock prices, exchange rates, interest rates, etc. on the total stock of IIP liabilities and assets must be added (Lane and Milesi-Ferretti 2006).

5 The ways by which increases in credit levels influence the net current-account balance are complex and heterogeneous. Here are only three factors that have an impact on the trade balance. Some other factors may also affect this and other elements of the current-account. For an interesting research on this issue, see Unger (2015).

6 See Hume and Sentance (2009) for similar cases in other periods.

7 2015 is the first year in which the Euro Area as a whole does not record any quarter with negative growth rates.

8 The United States, with a growth in credit ratio of 25 points (from 142 per cent to 167.9 per cent of GDP) in that period, recorded a deterioration of its external deficit until 2006 (from 4.1 per cent to 5.8 per cent of GDP) and then it recovered until 2013.