Transcript The Road to Financialization in Central and Eastern Europe

The Road to Financialization in
Central and Eastern Europe
Daniela Gabor
Bristol Business School
University of the West of England
The background: two distinctive phases
of transition (Fabrizio et al, 2009)
• ‘First transition’: post-plan disruptions - industrial
contraction, volatile inflation, high unemployment
(roughly up to 1995)
• ‘Second transition’ – harnessing globalization with
well- defined development model:
• International financial integration
• benign tolerance of real exchange rate appreciation
• Post-Lehman: vulnerabilities of ‘second transition’
growth model – briefly subprime
– Bank foreign-ownership: exposure to cross-border
lending and funding distress
This paper will argue…
• ‘First transition’ matters: financialization as
standpoint, contested policy narratives as
epistemological approach
• Travelling excess demand narratives - the
stabilization ‘problem’ - from shortage vs.
disequilibrium debates to the translation into IMF
policy advocacy (and conditionality)
• Excess demand narratives and financialization of
banking activity
• An alternative account of stabilizing transition
Financialization
• An interdisciplinary pursuit: critical
accounting, sociology (French et al, 2011)
• Political economy: increasing importance of
financial actors and practice (Esptein, 2005;
D’Arista, 2005), in inflation targeting regimes
(Vernengo, 2008)
• Impatient finance (Crotty, 2003) or short-term
trading of risk (Hardie and Howarth, 2009) in
currency markets or banking (Gabor, 2010)
Financialization and narratives
• Narratives: mobilizing accounts that frame a
‘crisis’ and legitimate a response that serves
sectional interests
– Engelen et al (2011): narratives of governing finance
or Aalbers et al.(2011): narratives of securitization
• Policy terrain, hegemonic and counter-narratives
– Monetary policy – contested terrain (Epstein, 1992)
The macroeconomic policy problem in
transition
• Polish flirtations with limited marketization:
macroeconomic stabilization first (Wolf, 1991)
• The stabilization problem (Bruno, 1992; IMF et al,
1992, Wolf, 1990):
1. Soft budget constraint (Kornai, 1982)
2. Excess household liquidity (monetary overhang)
3. Misaligned exchange rates
• The excess demand narrative: price liberalization in
the presence of excess demand (monetary overhang +
soft-budget constraints) will lead to inflationary spiral
in the absence of tight monetary+ fiscal + income
policies
The consensus in ‘transition’ debates and the
debates in macroeconomics of planning
• The sequencing debate - ‘shock-therapy’ vs. gradualism:
how to stabilize/liberalize/privatize(Kolodko, 1998)
• Post-Keynesians: debating outcomes not diagnostics
– ‘the moral crusade of market fundamentalists’ (Amsden et al,
1994) vs. full employment (Marangos, 2002) but accepted
repressed inflation: ’rising excess liquid balances in the hands
of the population with respect to what they would wish to hold
if markets cleared at official prices’ (Nuti, 1986: 38)
• Consensus on excess demand overlooks the pre-transition
debates: disequilibrium vs shortage schools
The disequilibrium approach
(Portes, 1980)
• Disequilibrium models: quantity rationing + price
rigidities (Barro and Grossman, 1971)
• Disequilibrium models of CPEs (Portes and Winter,
1978, 1980):
– Two agents (HH and planners), two markets (L+ CG)
– ‘intercompany money’ passive, reflects planning
decisions, may mutate in ‘active money’ in HH sector
• Disequilibrium in CPE: a temporary state of the
consumer market arising from planners’ inability to
reach targets
Two controversial assumptions
1. No systematic tendency towards imbalances
–
Unintended planning /production errors, correctable in new planning
period
2. Disequilibrium in consumer markets
–
Planning errors - industrial sector – demand for consumer goods or
labour (higher wage bills)
• Quantity rationing in the consumer goods market may
lead to forced savings (a wealth /monetary overhang,
Cottarelli and Blejer, 1992)
• Empirical testing: CPE switching between excess
demand and excess supply states (Portes and Winter,
1980; Portes et al., 1987)
The shortage school (Kornai, 1982)
• Disequilibrium analysis misrepresents socialist
production: pervasive, chronic shortages – incentives in
socialist production
– Capitalist firm: profit-driven, constrained by demand,
disciplined by market
– Soviet firm: quantity-driven, constrained by shortages and
political negotiations with planners, overfullfilment
incentives (politics of planning)
– Soft budget constraint: costs ‘validated’ by central planners
to stimulate output
• Discrete switching from excess demand to excess supply
states impossible!
– Disequilibrium approaches theoretically and
methodologically problematic (impossible to identify an
aggregate supply/demand)
Disequilibrium vs. shortage
• Disequilibrium approach: disequilibrium a macro
phenomenon, empirically testable
• Shortage approach: managerial decisions at
micro-level
• ‘There are few tenets of the economics of
centrally planned economies which are more
likely to cause disagreement than the notion that
centrally planned economies suffer from chronic
excess demand or shortages of goods and
services’ (Kemme, 1989, p. 345)
Constructing the consensus (1)
• IMF’s standard stabilization approach: financial
programming (Mussa and Savastano, 1999)
– Crisis and austerity: inflation/bop problems narrated as
an excess demand phenomenon
– Exchange rate devaluations and contractionary
quantitative criteria for domestic (central bank) credit
and spending + floors for international reserves.
Calculated as residuals by setting a target for money
supply (Easterly, 2004).
• Translating policy models to the post-plan context
– Disequilibrium treatment of money + shortage treatment
of state production
As IMF economists put it...
‘There were few monetarists in transitional economies, at least in the
beginning [...] The idea that prices were related to money was often
not intuitive. Rather, the price formation process was viewed as a
complex process that involved many technical elements and many
factors outside the authorities’ control, especially external factors. In
fact, tight monetary policy was precisely designed to make the
traditional cost-plus-mark up pricing policy impossible. This meant that
the same situation IMF economists would see as inflationary would
often be viewed as too tight a monetary policy setting by the local
authorities. They frequently argued that the “monetary coefficient”
(that is, the reciprocal of velocity) was too low, and the level of activity
required more—not less—money to support it [..] there was always a
local variant of the real bills doctrine—namely, credit expansion is not
inflationary if it is issued for productive purposes, typically
construction or agriculture.’ Allen and Haas (2001)
Constructing the consensus (2)
1. Disequilibrium treatment of money: excess liquidity
– ‘passive’ enterprise money - ‘active’ through the wage
channel, feeding excess demand (disequilibrium). Excess
HH liquidity even in the absence of aggregate excess
demand a la Portes (shortage)
– Monetary overhang estimates: M2/GDP ratios – around
50% of liquid balances involuntarily held
2. Shortage treatment of state-owned firms:
– Discipline SOEs into hard-budget constraints: tight
monetary policy to prevent banks from feeding softbudget constraints (McKinnon, 1991) + floating ER
Framing the stabilization problem (1)
1. Inflationary pressures: demand vs cost-push
– Contesting the unspent purchasing power approach:
pervasive informal markets (Alexeev, 1988), M2/GDP
ratios indicative of voluntary savings (Cotarelli and
Blejer, 1992), money as store of wealth – liquidity
preference under uncertainty (Dow, 2004)
– Cost push pressures: the organization of socialist
production – complex networks of vertically integrated
large firms
Proposition 1. Cost-push pressures, and consequently
exchange rate policies, were essential to
macroeconomic stability defined in terms of both the
price level and the balance of payments.
Proposition 1: implications
• ‘Multifaceted price systems’ (Zhukov and
Vorobyov, 1992) instead of across the board
liberalization
• Exchange rate stabilization rather than money –
based stabilization
– Currency stabilization funds (Poland – Sachs, 1996)
– Successful exchange rate stabilization (Schadler,
1995) – overshooting monetary targets
Proposition 1. Cost-push pressures and exchange rate policies were essential to
macroeconomic stability
Framing the stabilization problem (2)
2. CPE – wage led system
– disequilibrium model emphasis on labour as main
input in production)
– restrictive incomes policy to maintain SOE costs
under control (IMF ‘heterodox’ stabilization,
Winiecki 1993) but wages: 10-25% of production
costs
• Proposition 2. In formerly planned economies,
income policies could not make as important a
contribution to stabilization as in countries with
commodified social provisioning.
Proposition 2: policy implications
• Questions magnitude of monetary overhang
• Income policies to contain inflation costs?
– Labour bargaining power gradually developed with
development of labour market institutions
– Narrowing the argumentative terrain around costpush pressures to wages
Proposition 2. income policies could not make a significant contribution to
stabilization
Framing the stabilization problem (3)
3. Excess liquidity: redefine relationship banking –
state owned enterprises
– a la McKinnon (1991): immediate impossibility of
market-based bank credit allocation (information
asymmetries)
– Instead of state development bank, credit ceilings to
redirect SOE’s to capital markets
– The ‘myth of the west’ (Mayer, 1989): banks, not asset
markets, as main source of external finance
Proposition 3. Prioritizing, and not restricting, the
provision of liquidity to industrial firms by strengthening
the links with the financial sector should have been
central to monetary policy narratives.
Proposition 3: policy implications
• Money and monetary economy of production (Keynes)
• The excess demand narrative - industrial restructuring
– pervasive liquidity shortages, high interest rates
– a ‘transition’ version of endogenous money, inter-enterprise arrears
– liquidity problems into solvency problems, industrial collapse,
banking crisis
• A question of coordination: central bank liquidity policies and
industrial policies (Anderson et al, 1996)
– ‘[W]e strongly opposed the approach that claimed that the best
industrial policy is not having one at all. We in the government have
actively and deliberately supported the restructuring of Polish
enterprises’ (Kolodko, 1998, p. 3)
– Central banks often aligned to excess demand explanations
Proposition 3. Prioritizing the provision of liquidity to industrial firms
by strengthening the links with banking sector
Financialization of banking (1)
• Recurring bank failures = political validation of soft
budget constraints and vested industrial interests
• Hesitant financial reform - the Great Divide (Berglof and
Bolton, 2001) : cycles of unpaid debt, arrears and
pressures for monetization – deterioration of banks’
balance sheet – necessary privatization
• Two discursive effects:
– Sideline the link btw excess demand narratives and liquidity
shortages although credit activity under financial
disintermediation conditional on central bank provision of
reserves
– Posit state owned banks passively (re) produced the soft
budget constraint, despite well-documented difficulties for
even SMEs to access long-term financing in transition
(Klapper et al., 2002)
Financialization of banking (2)
• Or the puzzle of financial development in transition
(Berglof and Bolton, 2001)
– Widely different approaches resulted in a remarkably
similar financial architecture even on the successful side
of the Great Divide.
• In the ‘second transition’ financial systems
dominated by commercial banks, increasingly
foreign owned and lending primarily to
governments, short-term.
• Enterprise financing came from retained earnings,
while highly illiquid and volatile stock markets left
foreign direct investment as the only external
source for financing long-term capital investment.
To conclude
• Excess demand narrative crucial for translating the
priorities of financialization, defined as shifting
relationship between banking and industrial
production, into (monetary) policy goals and practices
• IMF + central banks – key institutional carriers of the
excess demand narrative, constructed through
disequilibrium assumption of money neutrality +
shortage emphasis on managerial aspects of industrial
production
• A competing narrative: privileging industrial
restructuring through bank provision of long-term
capital investment, carefully designed to avoid moral
hazard