The Impacts of Subordinated Financialisation on Workers in Peripheral Countries: an Analytical Framework and the Cases of Brazil and Colombia

ABSTRACT

The paper examines the effects of subordinate financial integration on workers in peripheral countries. The objective is to link the financial, productive and social reproduction spheres, taking into account the centre-periphery dynamic in the global process of capital valorisation. In this sense, the main contribution is the proposition of an analytical framework on the subject, based on Marxist and post-Keynesian inspired literature. Considering the asymmetric international relations within the hierarchical monetary system, the dynamics of capital cycles and the external imbalances of peripheral economies, five transmission channels are proposed concerning: (i) the burden of wealth transfer, (ii) the rise in household indebtedness, (iii) the effects of exchange rate volatility on real wages, (iv) the increased pressure for fiscal discipline which contributes to labour and social security reforms, and (v) the regressive specialisation of the productive structure and its impacts on employment. The secondary contribution refers to the comparative analysis of the cases of subordinate financialisation of Brazil and Colombia. The results of this analysis reveal the relevance of the proposed channels in terms of the dynamics of workers’ social reproduction in a contemporary context, particularly with regard to wages, employment, household indebtedness and labour and social security rights.

KEYWORDS:

• Financialisation
• financial globalisation
• centre-periphery
• labour economics
• worker conditions

JEL:

• Codes: F6
• F36
• J01

Acknowledgements

The authors wish to thank Alex W. A. Palludeto, Bruno De Conti and journal's editor and referees, who contributed with their comments to improve this paper with useful comments, although they are not responsible for any remaining errors. Financial support from CNPq (Brazil) and Capes (Brazil) is also gratefully acknowledged.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 Akyüz (2021) proposes a threefold methodology: (i) capital gains and losses, where assets and liabilities are added to net current account plus capital inflows, (ii) return on gross assets and liabilities, i.e. the ratio of income flows received and paid on foreign stocks, and (iii) total return on foreign assets and liabilities, where capital gains and losses, expressed as a percentage of gross assets and liabilities, are included.

2 For a broad discussion on the ‘optimal’ level of reserves, see BIS (2019).

3 The effect depends on nominal wages that remain rigid or only partially adapt and after some delay. Haluska (2016) suggests that the nominal wage growth rate will depend on: (a) the degree of inertia in relation to past inflation, (b) the sensitivity of the nominal growth rate to the unemployment rate, (c) the bargaining power of workers which is determined by political factors and institutions of a more structural character.

4 The more general idea of price competitiveness, according to Medeiros (2016), is based on the unit cost of labour (UCL). The UCL can be expressed by a ratio between the wage bill (W) and the value added (VA), multiplied by the ratio between the GDP deflator (p) and the exchange rate (e): UCL=(W/VA)(p/e). The first W/VA ratio is the accounting wage share. Assuming this ratio to be constant, competitiveness can increase (fall) with the devaluation (appreciation) of the real exchange rate. As the nominal exchange rate has a strong effect on prices, a devaluation of the real exchange rate implies a fall in the real wage W/p (considering the hypothesis that the consumer price index is similar to the GDP price index).

5 In this regard, there is an important difference in terms of public external debt between our two countries: in Colombia the proportion of external debt to GDP is three times higher than in Brazil, 22.8 per cent and 7 per cent, respectively, implying greater vulnerability for the former.

6 In Brazil, the expansion of directed credit, mainly housing and agriculture, assumes considerable relevance in the 2008 post-crisis period, led by public banks in the form of counter-cyclical policies (de Oliveira and Wolf 2016).

7 High household indebtedness implies greater default rates, which can be perceived by looking at the quality of the banking system's credit portfolio, measured by the share of non-performing loans over total loans. In fact, according to data available from the World Bank, between 2010 and 2019, the average of this indicator was 3.3 per cent for Brazil and Colombia, while the average for Germany, France, the US and the UK was, taken together, 2.6 per cent, representing a difference of 27 per cent between the two groups of countries.

8 For a broad discussion on the difference between the traditional Dutch disease and the financial Dutch disease, see Botta (2015).

9 The exchange rate appreciation negatively affects the external competitiveness of the industry and, at the same time, the exchange rate devaluation impacts real wages. What is decisive is the time horizon of exchange rate movements. While the high volatility of the exchange rate and the abrupt devaluation of the national currency generate an immediate deleterious effect on real wages, this does not imply an instantaneous reorientation of the industrial sector towards increasing export capacity, since this would require a competitive exchange rate that is stable over time to alter the expectations of agents in developing countries (Missio et al. 2015).

Additional information

Funding

This work was supported by CAPES; CNPq.

Notes on contributors

Manuel Martínez

Manuel Martínez is a PhD student of Development Economics at Institute of Economics, Unicamp (Brazil),with research interest in subordinate finacialisation in Latin American economies.

Pietro Borsari

Pietro Borsari is a PhD student of Development Economics at Institute of Economics, Unicamp (Brazil),with research interest in subordinate finacialisation in Latin American economies.