Input to SANPAD Conference on State and Social Transformation

13 November 2013

Neil Coleman

COSATU

The Politics of Financialisation

The Challenges

Three challenges

1. Understanding the theoretical implications of financialisation, and the global economic crisis.

2. Addressing the political and strategic implications of financialisation and the crisis

3. Elaborating coherent policy alternatives to roll back financialisation

Politics of financialisation

Financialisation goes way beyond the powerful role of finance sector in the economy

It is really about the financialisation of the entire economy, society, and the polity

Interpenetration of different capitals with finance as a centre of power

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Examples of how financialisation penetrates all areas of society:

It not only sees the domination of finance’s interests/ concerns in terms of inflation, banking regulation etc, but in the entire macro economic policy of countries.

In SA, commitment to a restrictive monetary policy (& MEP) relates to the desire of all large-scale and monopoly capital to diversify from SA economy, internationalise etc. High interest rates & a strong currency enable this apparently irrational policy, which is damaging to productive sector of economy, sustainability of growth etc.

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Further examples:

Political role of finance in Treasury and State as a whole. Dominate economic policy- see below.

Domination of finance in media discourse and ‘ cultural values’ of society. Excessive coverage and focus on financial markets, and neglect of real economy.

Finance and monopoly capital

So financialisation is not just about the interests of the financial sector. In a financialised economy all major elements of (big) capital have a direct or indirect interest in the finance sector. At same time they are undermined by finance in various ways.

Monopoly and large capital in various sectors embark on investment strikes, and manipulate speculative investment, rather than invest in productive sector, where this will secure greater rate of profit. Even where high profit rate in productive sector, reluctance to have capital tied down [see Krugman]

Implications for theories of capitalism

Why does capital, and the state, act in a way which is so contrary to capitalisms long term interests- see ‘regulatory failures’ in 2008 crash?

Goes to theories of capital, and the state.

But does era of financialisation raise a qualitatively new dimension to previous theories of capitalism and its contradictions? Are we in a new phase?

David Harvey: financial crisis a crisis of investing huge surpluses?

David Harvey -the financial crisis is a symptom of a problem of how to invest massive capitalist surpluses.The disproportionate growth of the financial sector and speculative activity is a function of this problem: “absorbing capital surpluses has got more and more problematic over time. … By 1950, the value of the total output of goods and services was $4 trillion in constant values. By 2000, it’s $40 trillion. It’s now (2009) around $50 trillion. .. It’s going to double over the next 20 years, to $100 trillion by 2030…Less and less of it is going into real production, and more and more into speculation on asset values, which accounts for the increasing frequency and depth of the financial crises we’ve been having since 1975 or so; they are all crises of asset value.”

The explosion of finance’s role

Ben Fine: over the past thirty years, the ratio of global financial assets to global GDP has risen three times, from 1.5 to 4.5. The Financial Times(February 6 2008), states “The US itself looks almost like a giant hedge fund. The profits of financial companies jumped from below 5 per cent of total corporate profits, after tax, in 1982 to 41 per cent in 2007.”

The contradictions of finance

Major contradictions have emerged for the role of the finance sector, and broader implications for economic policy, arising from the financial crisis. How are these resolved?

Different modes of response- US vs Europe vs Japan etc, show that these are addressed differently depending on a range of factors.

The Contradictions of Finance

European austerity, and inter alia the Greek story, shows how whole economies, including major sections of capital, can be sacrificed at the altar of financial interests.

Marxism historically recognises that there are ‘secondary contradictions’ within capital.

But what weight is given to this, in relation to the supposed ‘general interest’ of capital, when financialisation, and the financial sector, leads to the destruction of whole sections, or at least elements of capital?

A new path of accumulation?

An alternative view could be that what we are seeing eg in Europe is a process of ‘creative destruction’ in which a degree of destruction of value is tolerated, in order to reassert a new path of accumulation, based on the destruction of working class organisation, and rolling back of historic gains

While there is certainly some truth in this, if understood too mechanically, it will underestimate the significance of these contradictions within capital, and the space for the working class to assert a different agenda for resolving the crisis, including through navigation of these secondary contradictions.

Brazil

Left political economists on Brazil have precisely argued that the Lula Moment was constituted by an identification of these contradictions, and the building of an alliance with important elements of productive and national capital vs. financial interests who were advancing a pure neoliberal agenda.

This is argued by various papers of Alfredo Saad Filho & my chapter on Brazil & SA. Promotion of national champions/ productive capital & tentative measures to discipline finance.

Financialisation and South Africa

In SA too, there are significant contradictions between the financialisation agenda, and that of elements of productive capital, although this is far less developed than Brazil.

Demonstrated by interesting accord negotiated between COSATU and Manufacturing Circle calling for:

measures to stabilise the currency at a competitive level

reduction in real interest rates and the introduction of concessional finance

preferential procurement by the state and all SOEs and DFIs to promote local industries

deploying the infrastructure investment programme to develop new local capacity

state interventions to revive and promote the manufacturing sector.

Financialisation and South Africa

But organised big business in SA is dominated by financialised capital

National manufacturing/ productive capital lacks weight as a force in itself (& certainly as a force for itself)

Requires an agenda driven by the state, labour, and the progressive movement

Financialisation and South Africa

But we are paralysed, & stuck between 2 paradigms- Gear and Ipap; NDP & NGPetc.

This political and policy paralysis has a material basis in political economy of state and capital, and the role of finance: Dominance of finance is combined with BEE, which locks the elite into a pact with finance & mining capital. This prevents a realignment of policy to meet the needs of the real economy.

Financialisation and South Africa

Sustained pressure from below, especially by the labour movement, and contestation within state and party, has led to cautious advances and some significant compromises post Polokwane- Ipap, a negotiated NGP, infrastructure etc. These advances founded on policies from Polokwane, Manifesto, and now contradictory Mangaung Resns.

But these advances not decisive. Remain imprisoned within neoliberal macro economic policy parameters, which continue to be driven by finance.

How did we get here?

Financialisation of politics, the movement and the state:

There was a class struggle 1990-96, and to paraphrase Warren Buffet, financialised capital won.

The formula: financial deregulation & diversification of SA capital outside of the country, plus BEE bankrolled by finance and mining.

How did we get here?

The policy matrix to give effect to this: the neoliberal macroeconomic package in the 1995 ‘six pack’ (privatisation etc); and Gear, as the culmination of the political settlement, and commitments made in the TEC.

The domination of a Treasury tied to finance capital in SA, and the adoption of Gear constituted a decisive victory for those promoting financialisation of the state and society. Treasury shameless & clinical in promoting this agenda.

Treasury as the engine of financialisation of the transition

Has pursued agenda, together with SARB, to drive neo liberal macro economic policy, in all areas. Gear, NDP etc, a broad ranging agenda, not limited to areas of financial policy or regulation. Includes trade, industrial policy, social policy, labour market policy, local government etc.

Open contestation within state on host of issues. Treasury uses leverage to undermine, redirect, or if necessary to veto, adopted policies of government and ruling party.

Treasury

This anti-democratic role of Treasury is well known within state and movement, but needs to be properly documented. It includes:

Role of technocrats in political processes- in state, alliance etc. Conservative or vague formulations on macroeconomic policy e.g Mangaung allow Treasury & finance to contest this space

Intervention in many social policies, such as NHI, social and grants/ BIG, HIV funding etc. Labour Market, youth wage subsidy, UIF, skills levy. Retirement funds & funding & investment of GEPF. Education policy. Land and agriculture. Industrial policy, procurement. Policy regulating SOEs etc etc.

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Treasury can intervene directly when there is a tax or fiscal policy dimension- ievirtually everywhere

In addition to these policy interventions, various institutional mechanisms are used to direct logic of development. Logic of commercialisation, the slim state, privatisation etc. is pursued through agenda/ levers to ‘lower cost of doing business’; Regulatory Impact Assessments; PPPs; the rules in the PFMA etc.

NDP

Given the gradual movement in economic policy away from Gear paradigm, NDP is a major victory for financialised interests in economy and state. Like Gear (vis a vis RDP) this apparently snatches victory from the jaws of defeat.

The NDP proposes a macro economic stance which promotes financialisation

• Despite shattering of economic orthodoxy by the global economic crisis, NDP suggests an orthodox business as usual macro economic strategy: fiscal restraint & budget surpluses; floating (market- driven) exchange rates,& non-intervention in financial markets; a major focus on price stability, including inflation; cutting back of ‘consumption expenditure’ including implied cuts to public sector wages & the size of the public sector

• There is no talk of the need for an aggressive, systematic programme of macroeconomic stimulus, despite the financial crisis. NDP implies support for current line in ANC for greater fiscal restraint, combined with limited monetary policy easing.

• NDP does recognise that volatility, & overvaluation of currency, is a problem, but is against open intervention, and is unclear how to combat these problems with the currency.

There is an alternative

It can be argued that post- crisis, there is increased room to manoeuvre, but there is a limited window of opportunity.

Brazilians have shown that it is possible to make systematic, if relatively cautious (and not yet systemic) interventions, which favour the productive sector, & counter financialisation:

Economic policy stance progressively asserts the role of state, against resistance of finance;

State intervention in provision of credit on a massive scale;

Huge ramping up of expenditure and taxes;

Limited capital controls

Recent interventions in central bank & interest rate policy

International alternatives

Host of proposals internationally to regulate finance, capital flows etc in a way which could decisively reorient MEP.

The UNCTAD 2013 Trade and Development Report contains a coherent analysis of the issues at stake- and proposes a range of policy interventions to address the challenge of channeling investment into the real economy.

Alliance considering drawing on their expertise

COSATU Congress

Congress Declaration calls for “decisive state intervention in strategic sectors of the economy, including through strategic nationalisation and state ownership, and the use of a variety of macro-economic and other levers at the states disposal, which can be deployed to regulate and channel investment, production, consumption and trade to deliberately drive industrialisation, sustainable development, decent employment creation, and regional development, and to break historical patterns of colonial exploitation and dependence.”

COSATU Congress II

“The radical economic shift requires that institutionally, the Treasury, which constitutes the biggest obstacle to the government`s economic programme, needs to be urgently realigned; a new mandate needs to be given to the Reserve Bank, which must be nationalised; and the National Planning Commission must be given a renewed mandate, to realign the national plan, in line with the proposed radical economic shift . Aspects of the New Growth Path also need to be realigned in line with the proposed new macro-economic framework. All state owned enterprises and state development finance institutions need to be given a new mandate.”

“Urgent steps must be taken to reverse the current investment strike and export of South African capital. There is currently R1,2 trillion lying idle in social surplus which employers are refusing to invest. These measures need to include capital controls and measures aimed at prescribed investment, and penalising speculation.”

Alliance on finance

Directly in line with COSATU’s Congress calls, the discussion paper on the economy at the Alliance Summit proposes that:

• “The Summit needs to consider proposals for greater regulation and direction of capital, particularly finance capital, through the use of prescribed assets, capital controls to combat speculation and capital flight, the creation of a state owned bank, and radical transformation of existing state Development Banks, or Development Finance Institutions.The Summit needs to consider various proposals which have been put on the table in this regard by Alliance partners, and progressive intellectuals; and consider measures used to regulate capital by other states, particularly in the Global South.”

Alliance on finance II

• “We need to reflect on the analyses by progressive and all other relevant economists on the impact that financialisation has had on our economy, the extent of capital flight, and speculation, and the ‘output gap’ which has resulted from the lack of investment in the productive part of the economy; as well as measures which could be introduced to counter these forces, which are essentially holding our economy hostage.”

• The Alliance Paper also states that the “Summit needs to consider what should be the Alliance’s proposals for financial sector regulation, access of investors to affordable credit, channelling of productive investment etc.

Alliance on finance III

“Concrete interventions are needed to

- promote affordability of credit, including through accelerating the roll out of reduced interest rates through the DFI’s, and measures to compel banks to reduce the differentials between the repo rate, and their lending rate

- increase competition in the banking sector

- require financial institutions to make a specified level of credit available for productive investment

- require retirement funds and other financial sector players to invest a specified proportion of investments in stipulated vehicles, such as government reconstruction bond, in the form of legislated prescribed asset requirements.”

Alliance on finance IV

“The challenge of raising the current low levels of investment will only be met if decisive measures are taken by the state to address these issues, including through legislative and policy interventions. A number of proposals have been made, particularly by COSATU and the SACP to this end, and some early steps have been taken by government and the public sector in this direction, in the NGP, the GEPF etc.

But far bolder action is required. An input should be solicited from progressive economists who have done extensive work in this area. We need to promote a financial sector which plays its role as a services sector much better, by servicing the needs of businesses, communities, and households.”

Alliance on finance V

• Mangaung calls for “Financial regulation and control, including through a state owned bank.”

• The 2013 Alliance Summit resolution calls for discussion of :

“The role of the financial sector in dominating large parts of our economy, the challenge of ensuring productive investment, and the management of short term capital flows, are interrelated challenges which are critical to resolve, if we are to achieve our objective of industrialising our economy, and generating decent work on a large scale. On all these issues, there is significant space to discuss heterodox economic alternatives, outside of the traditional economic orthodoxy. This includes interventions used in various parts of the world around regulation of the financial sector, and capital management techniques or capital controls. We need to ensure we conduct proper research on these alternatives.”

Alliance on finance VI

The Task Team set up by the Summit was mandated to focus inter alia on

• “Challenges facing macro economic policy in the current global crisis, and the relationship between macro economic policy and industrialisation.

• Measures to address management of the exchange rate, currency volatility and capital flows.”

The Challenge

The challenge now is to urgently place progressive and coherent policy alternatives on the table; and mobilise political support for the necessity of taking these forward