Fiscal Policy in Financialized Times: Investor Loyalty, Financialization and the Varieties of Capitalism
Paper co-authored with Daniela Gabor (Bristol Business School) and Cornel Ban (Boston University)
Abstract: This paper argues that scholarship on the varieties of capitalism could provide a more complete understanding of fiscal policy convergence in the Eurozone after 2010 if it better examined the interdependencies between banks and sovereigns. According to recent research, the interaction between coordinated and liberal capitalisms, and their distinctive macroeconomic policy preferences, generates global imbalances and instability. Rebalancing can only occur if the incentives governing national polities change dramatically.
In Europe’s case, sudden stops in capital inflows from coordinated capitalisms triggered an asymmetric response, forcing deficit (liberal and mixed) economies to address such imbalances. As wage-setting institutions could not restore real exchange rate competitiveness a la Germany, governments were compelled to adopt the conservative macroeconomics of the coordinated economies in an institutional setting ill adapted to such policies. In contrast, our account highlights the constraints that financial actors in sovereign bond markets place on the conduct of fiscal policy. Drawing on recent contributions in the literature on financialization, we introduce the concept of the ‘collateral motive’ – investors’ demand for government bonds to meet their funding needs – and show how this becomes a pivotal mechanism for fiscal consolidation as the singular response to the ongoing Eurozone crisis. Without analyzing the process through which the collateral motive ignited a run on peripheral sovereign bond markets, which in turn and compelled states to stabilize these markets through austerity, a complete account of the ongoing Eurozone crisis cannot be provided.
My forthcoming piece in East European Politics and Societies (2013)
Sovereign Debt, Austerity, and Regime Change:
The Case of Nicolae Ceausescu’s Romania
Historically, high sovereign debt and austerity policies have coincided with regime- changing popular uprisings. Nicolae Ceausescu’s Romania was no exception. Why, when faced with a sovereign debt crisis in the 1980s, did his regime choose to pay its foreign debt as early as possible, at the cost of economic recession and dramatically compressed consumption? How did these choices relate to the regime’s failure to survive the end of the decade?
The article argues that while exogenous shocks shattered the economic bases of the regime, it was the ideas with which the regime understood development and interpreted the crisis that shaped government policy responses in the 1980s. When the price of oil and development finance went up abruptly in 1979, the low energy efficiency of Romanian industry pushed the country into a situation where debt levels became unsustainable. Committed to a view of development that blended nationalist and Stalinist ideas, but with a focus on policy sovereignty, Ceausescu diagnosed the crisis as evidence that debt-financed development and policy independence were incompatible.
Consequently the regime decided to pay off foreign debt through a mix of austerity, import substitution, and export-led accumulation of dollar reserves. By the time all debt was paid off in 1989, the regime’s economic sources of legitimacy were exhausted. In the external environment of 1989, this policy regime change contributed to political regime change even in the absence of an organized civil society. In addition to casting a new light on the causal mechanisms of the Romanian revolution of December 1989, the findings of this article contribute to emerging scholarship that stresses the nexus between debt-induced economic crisis and popular uprisings.
The paper is here:
Sovereign Debt_ban_sept 16 edits
Brazil’s Liberal Neo-Developmentalism is an interesting answer to the crisis of the Washington Consensus
My 2012 piece in Review of International Political Economy:
Is Brazil’s economic policy regime a mere tinkering of the Washington Consensus? The evidence suggests that Brazilian governments institutionalized a hybrid policy regime that layers economically liberal priorities originating in the Washington Consensus and more interventionist ones associated with neo-developmentalist thinking.
To capture this hybridity, the study calls this regime ‘liberal neo-developmentalism’. While defending the goal of macroeconomic stability and sidelining full employment, Brazilian governments also reduced reliance on foreign savings and employed a largely off-the-books stimulus package during the crisis. Brazil experienced important privatization, liberalization and deregulation reforms, but at the same time the state consolidated its role as owner and investor in industry and banking while using an open economy industrial policy and a cautious approach to the free movement of capital. Finally, while conditional cash transfers fit the Washington Consensus, Brazil’s steady increases in the minimum wage, industrial policies targeted at high employment sectors and the use of state-owned firms to expand welfare and employment programs better fit a neo-developmentalist policy regime.
In sum, while the main goals of the Washington Consensus were not replaced with neo-developmentalist ones, Brazil’s policy regime saw an extensive transformation of policy orthodoxy that reflects Brazil’s status as an emerging power.
The full text is here