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Transcript of Financialization...Unctad_Chapter 2 (2015)
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UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT
GENEVA
TRADE AND DEVELOPMENT
REPORT, 2015
UNITED NATIONS
New York and Geneva, 2015
Chapter II
FINANCIALIZATION AND ITSMACROECONOMIC DISCONTENTS
Making the international nancial
architecture work for development
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Financialization and Its Macroeconomic Discontents 27
Th grwng nunc f nanca markts and
nsttutns, knwn as “nancazatn”, affcts hw
wath s prducd and dstrutd (UNCTAD, 2011).
Cnsqunty, th ncrasng ntgratn f dvp-
ng and transtn cnms (DTes) nt th gananca systm, and th accratn f capta ws
nt ths cuntrs snc th turn f th mnnum,
hav fud dscussn aut th nks twn pn-
nss, nanca dpnng and cnmc dvpmnt.
incrasng nanca ntgratn has th ptnta t
nhanc accss t xtrna nancng fr dvp-
mnt. Hwvr, ths chaptr argus that thr has
n ny a wak nk twn th ntgratn f mst
DTes nt ga nanca markts and thr ng-
trm dvpmnt. Ths nk has xprncd furthr
strans n rcnt yars du t vraundant qudtygnratd y cntra anks n dvpd cuntrs.
Wh svra DTes hav xhtd strng grwth
and currnt accunt surpuss (r wr dcts) vr
th past dcad, accumuatng, n aggrgat, cnsd-
ra xtrna rsrv assts, thr gratr pnnss
t ncrasngy arg and vat ntrnatna capta
ws, spcay shrt-trm spcuatv ws, has
xpsd thm t th rsks f nanca m-and-ust
cycs.1 Ths chaptr dtas th mpcatns f such
rsks frm a macrcnmc prspctv.
Fnanca ws t DTes n th prd snc th
2008–2009 crss rct a prvusy stashd
pattrn f macrcnmc drvrs that startd t
mrg n many cuntrs gnnng n th 1980s:
a ng-trm dtrratn n th ga wag shar
and rducd puc sctr spndng n th dvpd
cnms, whch hav cntrutd t th dampn-ng f ga dmand. Ga grwth has n asd
many n xpandng fnanca qudty and th
gnratn f crdt and asst ms. Aftr th crss,
dvpd-cuntry pcs f quanttatv asng,
cupd, aftr a rf xpansnary ntrud, wth
sca austrty, hav argy prptuatd ths pat-
trn.2 Th prms f hghr rturns n nvstmnts
n DTes, and prcptns that thy psd wr rsks
than fr, mad thm an attractv atrnatv
fr ntrnatna nvstrs. Hwvr, an ncrasng
prprtn f th rsutng nanca ws nt thscuntrs has tndd t shrt-trm r f a mr
spcuatv natur, and thy ar arady xhtng
th typ f vatty rmnscnt f cndtns that
prcdd nanca crss n a numr f DTes n th
1980s and 1990s.
Ths chaptr rst cnsdrs nancazatn n
DTes at an aggrgat v, and hghghts th ra-
tnshp twn capta ws and factr ncm
paymnts, and th rsutng prssurs n trad a-
ancs. Th hghr aggrgat rats f rturn n DTes’
ats ratv t ths arnd n DTes’ assts
ar an nsufcnty acknwdgd and ptntay
Chapter II
FINANCIALIZATION AND ITS
MACROECONOMIC DISCONTENTS
A. Introduction
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Trade and Development Report, 201528
prmatc aspct f ths ratnshps. exstng
pattrns pnt t unsustana trnds fr th cur-
rnt accunt, thrfr adng t gratr nanca
fragty. Mrvr, n th currnt cntxt f sug-
gsh rcvry frm th crss, whch rqurs strng
cntrutns t ga dmand, spcay y surpus
cuntrs, th prssur t mtgat th ffct f nt
factr ncm sss n th currnt accunt s cun-
trprductv fr ga wfar.
Ths chaptr thn dscusss th mpcatns
f fnancazatn fr dmstc macrcnmc
pcy. it argus that xcssv nanca ws atr
prcs and nunc pcy n ways that cmprms
th ptnta fr sustana grwth and dvp-
mnt. Wth fuy pn capta accunts, mntary
authrts cm mr xpsd t th prssurs andxpctatns f xtrna nanc. in partcuar, arg
capta nws gnrat prssurs fr xchang-rat
apprcatn, whch s xacratd y a wdsprad
cmmtmnt t mantanng xtrmy w rats f
natn as a ga n tsf. Th rach f sca pcy
s smary mtd y a cmpusn t mantan a
nanc-frndy puc pcy stanc, whch dscur-
ags pcy ntrvntn n th th xpndtur and
rvnu sds. Th rsut s a tndncy twards a
datnary macrcnmc nvrnmnt, cupd
wth structura fragts n th systms f nancand prductv nvstmnt. A f ths dscurags
th th grwth f rust aggrgat dmand and th
dpnng f prductv capacty.
Th xpctd rprcussns f ths fragts
n dmstc aggrgat dmand ar thn dscussd
y rvwng th hstry f svra nanca crss
n trms that nk surgs n spcuatv nanc wth
prvat sctr rsk-takng and susqunt puc sc-
tr sss. Ths sss ar ncurrd as gvrnmnts
vntuay and unvrsay assum th rsks and csts
gnratd y prvat spcuatn and prductn fa-
urs. A radr, styzd framwrk thn juxtapss
dmstc and xtrna surcs f cnmc grwth,
mphaszng hw past cndtns para ths that
prva tday.
Th chaptr cncuds wth a dscussn f a
numr f pcy rspnss that dvpng cuntrs
cud cnsdr n th ght f ths fragts. Such
rspnss wud am at bttr managng nanca-
zatn and ts macrcnmc ffcts, as w as
strngthnng th nk btwn sca and mntary
pcs and dvpmnt gas. Strng dmstc
nanca rguatn nds t b at th cr f ffrts
t harnss th bnts f ntrnatna nanc. instad
f ryng n narrwy cncvd natn targtsand hgh ntrst rats t manag capta nws and
th baanc f paymnts, a judcus cmbnatn
f capta cntrs and xchang rat managmnt,
ncudng by nuncng th amunt and cmps-
tn f capta nws, wud hp mantan accss
t prductv xtrna nanc wh as ncuragng
dmstc nvstmnt. Practv sca and ndustra
pcs ar as ssnta fr gnratng th structurs
and crcumstancs that supprt dmstc prductvty
grwth and th xpansn f aggrgat dmand. Gvn
th xtnt f nancazatn and th arg sz fgba capta ws, hwvr, macrcnmc man-
agmnt at th natna v must b suppmntd
by gba masurs that dscurag th prfratn
f spcuatv nanca ws. Furthr supprt can
prvdd at th rgna v y mans f mr
sustanta mchansms fr crdt supprt and shard
rsrv funds. Pcy crdnatn shud as xtnd
t dmstc macrcnmc managmnt. And such
masurs hav a gratr chanc f succss f thy ar
mpmntd rgnay and, utmaty, gay.
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Financialization and Its Macroeconomic Discontents 29
1. Liquidity expansions before and
after the crisis
inadquat ga dmand s a prmary prm
rsutng frm th Grat Rcssn that has yt t
rsvd. in part, ths rcts an ngng faur
t r-nk nanc t sustana ncm gnratn
and spndng. in th run-up t th nanca crss f
2008–2009, ffctv dmand n majr cnms
was nt supprtd y a sustand grwth f wag
ncm, whch s th man factr drvng hushd
dmand, nr, n mst cass, was t supprtd y rsng
puc sctr spndng. Frm th 1990s, sca stancswr thr mdratng r ng sujct t dwnward
adjustmnts n mst f th majr cnms. Th
xcptn was th Untd Stats twn 2001 and
2004, whr xtrardnary sca njctn hpd ft
th cnmy aftr th dt-cm crash. in th asnc
f ths tw man drvrs, GDP grwth was asd n
qudty cratn, ntay y mntary authrts
and thn y prvat nanca nsttutns (s chaptr
iii). in sm f th majr cnms, ths succdd
n stng dmand thrugh asst apprcatns
and rrwng, adng t cnsumptn ms and
prvat nvstmnt us. Th cuntrpart drvr
n thr cnms was nt xprt dmand. Ths
hazardus cnguratn f nanc and dmand was
vry dffrnt frm th prcss f crdt cratn
that sustans prductn and mpymnt gnratn.
lkws, n th rcvry frm th 2008–2009
crss, th faur t rvrs th ng-trm dt-
rratn f th wag shar, whch gan n many
cuntrs n th 1980s, was cmpundd y a gnra
shft t sca austrty y mst dvpd cnms
aftr th rf xpansnary psd f 2009–2010.Ths ft rcvry amst xcusvy dpndnt n
rnwd qudty xpansn. Hwvr, thr ar
sm mprtant dffrncs twn th pr- and
pst-crss prds that hp xpan th rcnt cn-guratn f grwth and nanca pstns acrss
th ga cnmy.
Th rst and mst vus dffrnc s th
pst-crss rs f puc sctr dcts n dv-
pd cnms, an nvta anagu f th
unprcdntd aanc sht adjustmnts f anks,
usnsss and hushds. Th scnd dffrnc s
that ths tm qudty cratn has n ngnrd
y cntra anks, unk durng th pr-crss prd
whn th man trggr fr qudty cratn wasxcssv vragng y th prvat (and shadw)
ankng sctr.3 A thrd dffrnc, a cnsqunc
f th rst tw, s that qudty xpansn has n
channd thrugh nanca sctrs as prtf
assts, ncudng n dvpng cuntrs, and s
thrfr msty dtachd frm th ra cnmy.4
Th attr cam apparnt n th rs f crss-
asst crratns amng ga quts, cmmdty
markts and currncs n th ary 2000s (TDR 2011,
UNCTAD 2012a). Prtf acatns twn
quty and currncy markts rctd msty rsk-
n/rsk-ff prcptns, wh prcvd nts
frm dvrscatn drv cmmdty nvstmnt
and rducd th nk twn asst prcs and th
prfrmanc f th undryng ra assts, spcay
twn md-2008 and md-2013. Ths cntrutd
t a ntca rs n vatty acrss a markts.
Snc 2013, fundamntas hav n mr sgncant
n xpanng prc mvmnts fr mst prmary cm-
mdts (s chaptr i). in ths cntxt, th changng
dgrs f mprtanc f drvrs f prc frmatn
n ra, nanca and frgn-xchang markts havcnsdray undrmnd th aty f pcs t
B. The chaenes of oba iquidit expansion
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Trade and Development Report, 201530
nunc ra cnmc prfrmanc r mtgat
xtrna shcks.
As far as DTes ar cncrnd, thr prfr-
manc, th n th pr- and mmdat pst-crss
prds, has gnray n charactrzd y a cm-
natn f supprtv dmstc dmand and xprt
uyancy. As a grup, thy hav as njyd gratr
dmstc nanca staty than dvpd cuntrs,
dspt ncrasd razatn f nanca ws and
pnng up that has awd a gratr prsnc f
frgn anks and nvstrs n thr dmstc markts.
Hwvr, ga nancazatn n th asnc f
sufcnt rguatn f dmstc nanca markts
has ft DTes mr xpsd t th cnsquncs f
m-and-ust cycs f capta nws, as ntd
n arr TDRs and thr studs (Akyüz, 2008 and
2011). expsur t any shck manatng frm xtr-
na nanca cycs cud qucky rd th strngth
f dmstc dmand n svra DTes, wth ptnta
rprcussns fr th staty f th ga cnmy.
in Chna, whr mntary pcy strzatn
and rsrv accumuatn hav argy mdratd th
mpact f capta nws, vrndtdnss n sctrs
nkd t th cnstructn m s cmng a grw-
ng cncrn fr pcymakrs (Chandraskhar and
Ghsh, 2015; Magnus, 2014).5 Athugh a swdwn
f nvstmnt can xpctd, f ths cncds wth
a sharp dcn n husng cnstructn and nfra-
structur udng, t cud cntrut t a rvrsa
f th arg shrt-trm and quty capta nws
(as dtad w). in thr DTes, scay mr
ncusv pcs hav payd a ratvy ffctv
r n supprtng dmstc dmand y mpmntng
cuntrcycca sca masurs, advancng stratgc
pans fr xprt dvrscatn away frm prmary
cmmdts (wth mtd succss), scazng
gans frm cmmdty xtractn, and mdratng
th ffcts f xcssv capta nws va rsrv
accumuatn r dffrnt frms f capta cntrs.
Nvrthss, thr rmans a strng pssty that
th scp and mpact f such pcy masurs cud
nsufcnt t cuntr th cnsdra sz and
cnsqunt nunc f ga nanca markts.
indd, th “tapr tantrum” f 2013, whch gnratd
sustanta shcks t prfrmanc and datnary
pcy ractns n svra dvpng cuntrs,
cud prv a (md) harngr f pss capta
rvrsas t cm (Ny, 2014; UNCTAD, 2014).
Th andscap may mr changng n DTes that
hav nt mpmntd any cuntrvang pcs t
manag nancazatn.
2. The rise and aggregate risks ofcapital inows to DTEs
Cmprhnsv rcrds f xtrna ws and
stcks fr a arg numr f DTes cnrm that thr
xpsur t xtrna surcs f nancng has cntnud
t rs (Chandraskhar, 2007; Gaaghr, 2015).6 Grss
annua dbt ws (nt ws pus dbt rpaymnts)
t DTes rachd nary $1 trn n 2013. Ths s
abut v tms mr than n 2002, th ast sgn-
cant trugh aftr th squnc f nanca crss nth at 1990s and th dt-cm crash n 2001, whn
grss dbt ws t DTes amuntd t $204 n.
it shud ntd that a rsng shar f grss annua
dt ws s n accunt f dt rpaymnts, whch
grw prprtnay t th vum f accumuatd
ats vr tm. Hwvr, thr was as a hug
rs n net dt ws (.. grss nward ws mnus
rpaymnts), frm $3.5 n n 2002 t $535 -
n n 2013. Nt quty nws nt DTes, whch,
accrdng t th Wrd bank’s International Debt
Statistics 2015, cmprs prtf quty as w asdrct nvstmnt, rs mr than furfd durng that
prd, frm $152 n t $637 n (chart 2.1).
Ths ncrass f xtrna fws t DTes
d nt sm s staggrng cnsdrng that ths
cnms xprncd a prd f nary unntr-
ruptd rapd cnmc grwth aftr 2003, dspt
ng affctd t varyng dgrs y th ga
nanca crss. Cmparsns f th sam w var-
as ntd av as a pr cnt f aggrgat grss
natna ncm (GNi) ar capturd n chart 2.1. byths masur, thr was a cnsdra rs f grss
and nt dt ws frm 2002 t 2007, rsumng agan
n 2010. Partcuary fr grss ws, th pattrn s
smar t th m cyc f th 1990s, thugh nt
as dramatc as that f th 1970s whch d t th dt
crss f th ary 1980s. Nt quty nws as a pr
cnt f GNi xprncd uctuatns as w, ut
frm a cnsstnty hghr v frm th md-1990s
nwards. As a prprtn f GNi, th surcs f
xtrna nws t DTes tgthr (dt and quty)
ncrasd frm 2.8 pr cnt n 2002 t 5 pr cnt n
2013, aftr havng rachd tw hstrca rcrds f
6.6 pr cnt n 2007 and 6.2 pr cnt n 2010.
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Financialization and Its Macroeconomic Discontents 31
Ths aggrgat pattrns ar nt unqu t th
argr DTes, whch hav ratvy mr dvpd
nanca and capta markts. lwr-ncm DTes7
may hav asrd a cnsdray smar vum
f capta ws, ut thr pattrns ar smar t ths
f th grup as a wh, shwng a car rs frm
2002 t 2013, wth paks n 2007 and 2010. As a
prprtn f GNi, th surcs f xtrna ws
t ths sugrup f DTes tgthr (dt and quty)
ncrasd frm 2.5 pr cnt n 2002 t 5.1 pr cnt
n 2013, aftr havng rachd a hstrca rcrd f7.7 pr cnt n 2007.
Ratv t arr prds, frm 2003 nwards
mst DTes xprncd strng grwth and currnt
accunt surpuss r wr dcts, suggstng that
nancng nds fr dvpmnt may nt hav n
th man drvr f th m n capta nws. 8
Rathr, “push” factrs k mntary cndtns and
rsk prcptns f dvpd-cuntry nvstrs, n
tandm wth stck markt apprcatns n DTes,
may hav n th dmnant drvrs (s TDR 2013,chap. iii fr a dtad cnmtrc xrcs). Nt
unratd s th fact that DTes as a wh, partcuary
th argr cnms f ths grup, accumuatd cn-
sdra amunts f xtrna rsrv assts durng
ths prd (chart 2.2).9 Undr ths crcumstancs,
rsrv accumuatn prmary rcts an xcss f
nws vr th amunts that wud nrmay
cnsstnt wth dmstc spndng and nvstmnt
pattrns. by 2013, vr 40 pr cnt f th rsrvs
hd y DTes wr “rrwd”, n th sns f nt
drvng frm a currnt accunt surpus, ut rathr
st asd frm capta nws (Akyüz, 2014: 11).
Wh pcy makrs ftn s rsrv accumua-tn as a prcautnary masur, thr ar mts t
ths stratgy. Gvn th vs f nws and rsrv
accumuatn, an mprtant qustn s whthr ths
pattrns ar cnsstnt wth nanca staty and
sustand ga dmand.
Whn cnsdrng th aanc f paymnts,
th fcus s ftn n trad dcts and surpuss,
n th assumptn that nt factr ncms10 w
smpy rct a nutra pattrn f capta ws. but
th dtrmnatn and mpcatns f th factrncm aanc nvv a fw cmpxts. Frst,
factr ncms dpnd n th vum f assts and
Chart 2.1
FOREIGN CAPITAL INFLOWS INTO DEVELOPING AND TRANSITION ECONOMIES
By COMPONENTS, 1970–2013
(Billions of dollars and percentage of GNI)
Source: UNCTAD secretariat calculations, based on World Bank, International Debt Statistics (IDS) database.
0
200
400
600
800
1 000
1 200
1 400
1 600
1 800
1 97 0 1 97 5 1 98 0 1 98 5 1 99 0 1 99 5 2 00 0 2 00 5 2 01 0
$ b i l l i o n
Total capital inflows
Net debt inflows
Inflows used to repay principal on outstanding debt
Net equity inflows
2013
0
1
2
3
4
5
6
7
8
9
10
1 97 0 1 97 5 1 98 0 1 98 5 1 99 0 1 99 5 2 00 0 2 00 5 2 01 0
P e r c e n t a g e o f G N I
2013
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Trade and Development Report, 201532
ats, as w as n thr rats f rturn. in turn,
assts and ats ar accumuatd frm th ut-
ward and nward ws rspctvy. Scnd, a currnt
accunt surpus, y dntn, quas a net utw
f funds n th “capta and fnanca accunt”
(hraftr rfrrd t as th “capta accunt”).11
Cnvrsy, a currnt accunt dct w qua netnws f capta. but ths ds nt man that an
cnmy w rcv prcsy th amunt f grss
nws that match th currnt accunt dct, r hav
grss utws that xacty qua th currnt accunt
surpus. Rathr, nws and utws ar party th
autnmus rsut f nvstrs’ prcptns, adng
t msmatchs twn nanc and th ra cnmy.
As ntd av, capta nws n xcss f ths
rqurd t nanc a currnt accunt dct nd
up as rsdnts’ prvat capta utws r rsrv
accumuatn y a cntra ank. lkws, surpus
cuntrs whch, n addtn t thr arnd frgn
xchang frm trad, rcv arg amunts f prvat
nws nd up accumuatng “rrwd” rsrvs.
Takng nt cnsdratn that rats f rturn
pad t frgn nvstrs ar usuay gratr than
ths tand y prvat rsdnts r cntra anks
f dvpng cuntrs, th nd rsut s that th a-
anc f factr ncms ftn may hav a tndncy
t wrsn th currnt accunt.12 Fr xamp, rsng
nt (pstv) nvstmnt pstns f surpus DTes
cud vntuay cxst wth dcnng nt factr
ncms. Ths dsadvantags ar magnd fr
DTes wth prngd currnt accunt dcts, whr
th accumuatd rsrvs ar msty “rrwd”.
Thus, wth wrsnng nt factr ncm maancs
and trad dcts, ths DTes w fac grwng nt
aty pstns. if dct DTes d nt succd nmprvng thr trad prfrmanc, thy must dpnd
n capta nws t fu thr xtrna gatns.
by mpcatn, ths ar xtrmy frag “Pnz
nanc” schms, whr currnt ats can ny
mt y gratr rrwng, and any sma chang
n crcumstancs r sntmnt, ntrna r xtrna,
can dstaz th th nanca systm and macr-
cnmc cndtns (Mnsky, 2008).
DTes gnray am at mprvng trad prfr-
manc fr a varty f rasns ratd t grwth, andtchnca prgrss, amng thrs. but th prspcts
f vr argr nt factr paymnt utws du t
th accumuatn f nhrtd ats and unqua
rats f rturn may ntnsfy th sarch fr cnmc
stratgs t ncras nt xprts, ncudng y rduc-
ng mprts.13
in sum, th mprca vdnc rvas that
nancazatn s asscatd wth a cntnung rs
f ga capta ws t DTes.14 Furthrmr, DTes
fac unvn rats f rturn n thr assts ratvt thr ats. Frm a ga prspctv, ths
pattrns cmnd may prmatc n ways that
hav nt n suffcnty acknwdgd. Frst,
cnms may nd thmsvs n a stuatn whr
a dtrratn n thr factr ncms accunt ads
t ncrasng ats n Pnz-nanc-typ trms.
Scnd, n th currnt crcumstancs f suggsh
rcvry frm th crss, whn ffrts nd t
mad t st ga dmand, spcay y surpus
cuntrs, th am f achvng trad surpuss n
rdr t mtgat nt factr ncm sss crats a
cntractnary as.
Chart 2.2
FOREIGN RESERVE STOCKS IN DEVELOPING
AND TRANSITION ECONOMIES, 1970–2013
(Percentage of GNI)
Source: UNCTAD secretariat calculations, based on World Bank,
IDS database.
a The major economies excluded are Argentina, Brazil,
China, India, Mexico, South Africa and Turkey. Also
excluded are Algeria, Egypt, Libya, Morocco and Tunisia.
The Russian Federation is not in the IDS sample.
0
5
10
15
20
25
30
1970 1975 1980 1985 1990 1995 2000 2005 2010
Total for developing and transition economies
Developing and transition economies
excluding major economiesa
2013
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Financialization and Its Macroeconomic Discontents 33
3. Greater nancial integration and
increasingly unstable capital ows
Manstram vws n nanca ntgratn strssthat t w nca fr th nvstrs and rcp-
nt cuntrs, prvdd that t taks pac wthn a
“sund” macrcnmc framwrk. Rcmmndd
pcs fr DTes ncud rducng gvrnmnt ntr-
vntn (cratng a crrspndngy ggr r fr
nanca nsttutns such as prvat anks and pn-
sn funds) and ncrasng cmpttn and structura
rfrms n prduct and aur markts (Caruana,
2011; Mkn insttut, 2014a; oeCD, 2011).
by cntrast, th anayss hr adpts a radr
and mr crtca apprach t nancazatn y
mphaszng hw th push and pu factrs hav
nuncd th r-mrgnc f rsks fr DTes snc
th nanca crss. Ths gratr rsks stm frm
xtrna as w as dmstc cndtns. extrna cn-
dtns ncud xcssv ga qudty, drvn mst
rcnty y quanttatv asng n dvpd cuntrs
that was nsufcnty matchd y an xpansn f
dmand caus f sca austrty.15 Wthn DTes,
rsks hav tndd t stm frm macr-fnanca
pcs that dsrgard th mprtanc f dmstc
nanca rguatn and undrstmat th ptntaydtrus ffcts f spcuatv us. Thrfr
ths sctn strsss th cmpstn f prtf
ws as a gud t an assssmnt f ptnta rsks.16
Durng th curs f th past 10 yars, th
wght f prvat, nn-guarantd, shrt-trm spcu-
atv ws has ncrasd sgncanty n th xtrna
prtfs f many f th argr DTes (chart 2.3) as
w as fr a th DTes takn tgthr, xcudng th
cuntrs ustratd ndvduay.17 Chart 2.3 tracs
pattrns f mr spcuatv capta nws ratvt tta nws as a shar f GNi; th dffrnc
ncuds msty ng-trm r pucy-guarantd
ans t puc sctr nsttutns and frgn drct
nvstmnt (FDi). Admttdy, thr ar sgncant
dffrncs n trms f nta cndtns, havur
and thr factrs amng such a vard grup f cun-
trs. Chandraskhar (2015), fr xamp, strsss th
nunc f prvus and rcnt nanca crss n
th drctn f cuntrs’ pcy rspnss. A cas
n pnt s indnsa, whr r-rguatn and capta
cntrs n th aftrmath f th 1997–1998 Asan
nanca crss hp xpan why capta nws dd
nt rcvr unt w nt th md-2000s. Anthr
cas s that f Argntna, whr th amunt f nt
capta ws rmand mdrat aftr th 2001–2002
crss.18 othr authrs, such as Gaaghr (2015),
prps a mappng f crss-rdr nanca rgua-
tns n th wak f th 2008–2009 nanca crss,
hghghtng th cass f braz, Pru, th Rpuc f
Kra and Thaand, whch mpmntd scnd- and
thrd-gnratn masurs, prc-asd cntrs and
frgn-xchang rguatns rspctvy.
osrvatns n dvrsty ntwthstandng,
th st f cuntrs prsntd n chart 2.3 shws a
cnsdray arg prprtn f typcay unsta
r unra ws n th tta, strngy drvng
upswngs and dwnswngs, whch, n sm cass,
hav n dramatc. Wthn prds f n r twyars, n amst a f ths cnms th sz f nt
nws has vard y mr than 5 pr cnt f GNi n
thr drctn, apparnty drvn y uctuatns n
th cmnatn f prvat, nn-pucy-guarantd
dt, shrt-trm dt and prtf quty (.. unsta-
) ws. in sm cuntrs such as Suth Afrca and
Turky (as w as Ukran unt th crss f 2013),
such unsta ws rprsnt amst th ttaty f
nws, whch, cmnd, can add up t fary sg-
ncant prprtns f mr than 6 pr cnt f GNi.
Ths ws ar vn argr fr thr cuntrs suchas inda, Maaysa and Thaand. Amng th sctd
samp, ny Chna, indnsa and Mxc rct
stuatns whr mst f th nws may nt f a
shrt-trm r unsta natur. Ths can xpand,
at ast party, y th gratr r f rguatn n th
tw frmr cuntrs.
Ths pattrns rprsnt ncrasng vunrab-
ts fr DTes, nt ny bcaus f thr sz ratv
t GNi, but n partcuar bcaus f th fact that sm
markts, such as stck markts, frgn-xchangmarkts and n sm cass vn ra stat markts,
prat n sphrs ratvy bynd th rach f pubc
pcy. Ths markts ar typcay unstab and hghy
crratd wth n anthr, whch xacrbats th
ptnta fr dstabzng c-mvmnts. And wh
t may dfcut t masur th sz f frgn-
xchang markts frm th prspctv f a sng
cnmy, dmstc captazatn masurs f stck
markts ar tng: fr ths samp f DTes prsntd
n chart 2.3, dmstc captazatn s gnray cn-
sdra, n sm cass gratr than 100 pr cnt f
GDP (Akyüz, 2014; Mkn insttut, 2014).
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Trade and Development Report, 201534
Chart 2.3
COMPOSITION OF CAPITAL FLOWS, SELECTED DEVELOPING
AND TRANSITION ECONOMIES, 2002–2013
(Percentage of GNI)
Source: UNCTAD secretariat calculations, based on World Bank, IDS database.
Net portfolio equity inflows
Short-term net debt inflows Long-term, private non-guaranteed net debt inflows
Total net inflows
-10
-8
-6
-4
-2
0
2
4
6
8
10
2002 2004 2006 2008 2010 2012
Argentina
2013
-4
-2
0
2
4
6
8
10
12
14 Mexico
2002 2004 2006 2008 2010 2012 2013
-10
-5
0
5
10
15
20
25
30
2002 2004 2006 2008 2010 2012
Ukraine
2013
-4
-2
0
2
4
6
8
10
2002 2004 2006 2008 2010 2012
India
2013
-4
-2
0
2
4
6
8
10
2002 2004 2006 2008 2010 2012
Brazil
2013
-4
-2
0
2
4
6
8
10
12
14 Thailand
2002 2004 2006 2008 2010 2012 2013
-4
-2
0
2
4
6
8
10
2002 2004 2006 2008 2010 2012
South Africa
2013
-6
-4
-2
0
2
4
6
8
10
2002 2004 2006 2008 2010 2012
Indonesia
2013
-4
-2
0
2
4
6
8
10
2002 2004 2006 2008 2010 2012
China
2013
-4
-2
0
2
4
6
8
10
12
14 Turkey
2002 2004 2006 2008 2010 2012 2013
-4
-2
0
2
4
6
8
10
2002 2004 2006 2008 2010 2012
Other DTEs
2013
-10
-5
0
5
10
15
20
25
30
2002 2004 2006 2008 2010 2012
Malaysia
2013
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Financialization and Its Macroeconomic Discontents 35
in many cuntrs and n th DTe sugrup,
th gap twn th tta and th cmnatn f
unsta ws ncuds FDi and nn-prtf quty
nws (chart 2.3). FDi n prductv actvts,
spcay n ndustra sctrs that undrpn dv-
pmnt, can pstvy cntrut t dvpmnt.19
Ths s partcuary th cas whn FDi n th frm f
grnd nvstmnts s apprpraty asrd at
th natna v. Hwvr, FDi data n aggrgat
shud ntrprtd wth cautn. Fr xamp, th
casscatn f FDi typcay rfrs t th sz f th
wnrshp stak (10 pr cnt r mr, accrdng t
th iMF), and nt t th qudty f th nvstmnt.
indd, nanca nnvatn and th dpnng f
f nanca markts can mak arg wnrshp staks
mr apparnt wthut sgncant changs n th
qudty f nvstmnts. Anthr xamp s th factthat ra stat, a hghy qud and vat sctr,
attractd th mst grnd FDi n 2014, and f th
tp 20 rcpnts, a but 4 wr dvpng cuntrs.20
Furthrmr, th ptnta magntud f factr
ncm paymnts ratd t FDi nds t cn-
sdrd. in 2014, th vau f ga FDi ncm
xcdd that f a FDi nws.21 ecnms that
ar majr rcpnts f FDi may xprnc th
srts f aanc-f-paymnts nstats dscussd
av, snc mantanng a sustana grwth pathrqurs gnratng sufcnt frgn xchang t
cvr xtrna paymnts, partcuary n th cntxt
f arg prt utws (TDR 1999). if FDi nws
wr t sw dwn, th prm f cvrng vn a
mdst rpatratn f prts cud qucky cm
acut, spcay whn a arg prprtn f FDi
nws cnssts f rnvstd arnngs and may
hav mr k prtf ws than ng-trm ws
(Krg, 2014).22
Ths pctur f unsta capta ws chs th
xprnc f many dvpng cuntrs n th at
1980s and th 1990s (as dscussd w). Athugh
th cmnd shar f prvat, shrt-trm and quty
capta ws as a prcntag f GNi s nw argr
than t was n ths tw dcads, at th tm, many
dvpng cuntrs startd t ry n such frms f
nancng, snc dt markts rmand vrtuay dry
aftr th dt crss that ruptd n 1982. Sngh and
Wss (1998), n a crtca anayss f th ntractns
twn spcuatv capta ws and stck markts
n dvpng cuntrs, cncudd that th rsut-ant vatty, khd f macr-nanca shcks,
msacatn f rsurcs, and svr dsruptns
t ng-trm dvpmnt gas cad nt qustn
th argumnt that dvpng cuntrs shud turn
t stck markts as a way f mzng rsurcs
fr sustana dvpmnt.
Cmbnng ths pnts n vatty arsng frm
th structur f gba capta ws wth th aggr-
gat fragts stmmng frm cuntrs’ baanc f
paymnts, ths sctn argus that th xpansn funstab, shrt-trm and spcuatv ws prsnts a
chang fr usng such xtrna nanc n ways that
cud nhanc dvpmnt. Th nxt sctn taks
up th qustn f th changs and pprtunts
fr dmstc macrcnmc managmnt.
C. The macroeconomic costs of nanciaization
1. Effects of unfettered nancial
integration on prices and policy
in addtn t th macr-nanca rsks dnt-
d av, unsta nanca ws t DTes hav
ffcts n ky prcs, such as xchang rats, and atth sam tm thy cnstran mntary and sca p-
cs. S-cad “aanc-f-paymnts-cnstrand”
grwth framwrks prvd a ass fr undrstandng
th myrad cnnctns and ns f causaty twn
xtrna ws and cnmc grwth. Thy ar asd
n th nsght that t achv sustand grwth t s
ncssary t aanc mprts and nt factr ncm
paymnts wth xprts n a sustana mannr.23 Fr
nstanc, th sz f th currnt accunt dct rxtrna dt ratv t dmstc ncm can mt
pathways t sta grwth. Pcymakrs may chang
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Trade and Development Report, 201536
curs y thr rducng dmstc xpndtur, and
thus mprts, r supprtng nvstmnts that trggr
fastr utput grwth, such as y ncrasng xprts
(Mrn-brd, 1998). Atrnatvy, accrdng t
ths apprach, cndtns n ntrnatna nanca
markts can dtrmn th xtnt f frgn nanc-
ng avaa, whch n turn affcts mprts and xd
nvstmnts, vntuay dtrmnng th trad aanc
and th grwth trajctry (barsa-Fh, 2001).
Ths ratnshps ar prhaps mst mm-
daty apparnt n trms f hw nanca ws, n
cmnatn wth mntary pcy ractns, affct
prcs. inuncng th ra xchang rat t mantan
cmpttvnss and ncurag th prductn f
tradas rprsnts a chang fr pcymakrs n
DTes. excssv nmna xchang rat dprcatnw tnd t xacrat dmstc prc natn du
t th hghr cst f mprtd capta and cnsump-
tn gds. Cnvrsy, xcssv nmna xchang
rat apprcatn, whn nt sufcnty cmpnsatd
y wr dmstc natn, may crat a tndncy
twards ra xchang rat apprcatn that has a
prngd ffct n th currnt accunt. Navgatng
wthn ths cnstrants s dfcut fr cntra ank
pcy n dvpng cuntrs.
intrvntns n th frgn-xchang markt tavd an apprcatn f th dmstc currncy ad
t mntary xpansn, whch cntra anks usuay
try t strz y sng gvrnmnt scurts n
mny markts. Hwvr, ths pratns may nt
ncssary rsut n ntrst rats that ar sta and
cnsstnt wth ra dmand; gnray, th ntrst
rat tnds t vrsht and s fwd y a drastc
fa. A hghr ntrst rat xrts furthr upward prs-
sur n th xchang rat as frgn nvstrs rspnd
y ngagng n ntrst rat artrag. evn assumng
that xchang-rat managmnt and rsrv accumu-atn may hpfu n th cntxt f capta nws,
ftn, ths pcy s nt symmtrca. Authrts
usuay hav gratr dfcuty cpng wth capta
rvrsas. Usng a arg amunt f rsrvs t mt
dmand fr frgn currncy can rsk vntuay
mptyng th cffrs.24 Usuay, mny markt pra-
tns amd at rasng th ntrst rat ar actvatd.
indpndnty f whthr th cntra ank s
ngagd n xpct xchang-rat managmnt, f th
havur f th cntra ank s drvn y a narrw
natn targt ru, thr w a tndncy twards
nmna apprcatn (fr furthr xpanatn, s
barsa-Fh, 2012). inatn-targtng framwrks
typcay tnd t cnfrm t narrw mntarst das
aut th xstnc f an xgnus suppy f mny
and ts mpact n natn. Thus, fwng surgs f
capta nws, mntary authrts may cnsdr t
crtca t avrt an natnary spra rsutng frm
th ncras n mny suppy. but capta utws
adng t xchang-rat dprcatns can as trg-
gr natnary prssurs va th pass-thrugh ffcts
f mprt prcs. in th cntxt f natn-targtng,
ndpndnty f th surc f natnary prssurs,
th crtca nstrumnt t tam th natn rat s th
ntrst rat, whch ftn rngs wth t prssur fr
nmna apprcatn. if ths ffct s strngr than
th prsumd ffct f rducng th natn rat,
a ra-xchang-rat apprcatn fws, wth th
ptnta f a currncy crss f th currnt accuntdtrrats sgncanty. As a mattr f fact, hgh
ntrst rats hav prvrs ffcts n prc frma-
tn, as prducrs tnd t pass n th hghr cst
f rrwng y rasng prcs (lav, 2001). Th
dstazng ffct f spcuatv capta mvmnts
n nmna xchang rats, cmnd wth natn
targtng rgms that am at hgh ntrst rats, may
nt ny crat aanc-f-paymnts prms n th
shrt run, rsutng frm an vrshtng and succs-
sv crrctns f ntrst rats; t may, n th ng
run, as transat nt swr grwth, caus raxchang rats tnd t rman apprcatd n rdr
t avrt nanca shcks, ffctvy damagng th
currnt accunt (Frnk and Raptt, 2009).
Chart 2.4 ustrats sm f th mntnd
ntractns twn capta ws, xchang rats
and shrt-trm pcy rats fr th sam cuntrs
shwn n chart 2.3. in sm cass, th suggstd
nuncs f xtrna capta n th macrcnmc
nvrnmnt sm unamguus. incrass n cap-
ta nws n xcss f what s ndd t nancra dmand tnd t xrt upward prssur n th
xchang rat. Ths nunc may magnd
durng cmmdty prc ms fr nt cmmdty
xprtrs. braz, Maaysa, Ukran and t sm
xtnt inda appar t rprsntatv f ths pat-
trns, wh Chna s an xcptn, as th authrts
hav managd a stady apprcatn f th xchang
rat. Fr th ntr grup f DTes, th ratnshp
hds qut w dspt th hgh v f aggrgatn.
in thr cass (.g. Suth Afrca and Turky), th
crratn apps ny fr sctv yars, wh n
Thaand th varatns n th xchang rat sm t
nuncd y th pac f capta nws vr th
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Financialization and Its Macroeconomic Discontents 37
Chart 2.4
NET CAPITAL INFLOWS, NOMINAL EXCHANGE RATES AND NOMINAL INTEREST
RATES IN SElECTED DEvElOPINg AND TRANSITION ECONOMIES, 2002–2013
Source: UNCTAD secretariat calculations, based on World Bank, IDS database; IMF, World Economic Outlook , April 2015; and IMF,
International Financial Statistics database.
Total net inflows (percentages of GNI) Short-term interest rate (per cent)
Exchange rate ($ per local currency, 2000 = 1) (right scale)
0.0
0.5
1.0
1.5
-10
0
10
20
2002 2004 2006 2008 2010 2012
Indonesia
2013
0.0
0.5
1.0
1.5
0
5
10
15
20
2002 2004 2006 2008 2010 2012
Malaysia
2013
0.0
0.5
1.0
1.5
0
5
10
15
2002 2004 2006 2008 2010 2012
India
2013
0.0
0.5
1.0
1.5
0
5
10
15
2002 2004 2006 2008 2010 2012
South Africa
2013
0.0
0.5
1.0
1.5
-5
0
5
10
15
2002 2004 2006 2008 2010 2012
Thailand
2013
0.0
0.5
1.0
1.5
0
5
10
15
2002 2004 2006 2008 2010 2012
Mexico
2013
0.0
0.5
1.0
1.5
0
10
20
30
40
2002 2004 2006 2008 2010 2012
Ukraine
2013
0.0
0.5
1.0
1.5
0
5
10
15
2002 2004 2006 2008 2010 2012
Other DTEs
2013
0.0
0.5
1.0
1.5
-10
0
10
20
30
40
2002 2004 2006 2008 2010 2012
Turkey
2013
0.0
0.5
1.0
1.5
0
10
20
30
40
2002 2004 2006 2008 2010 2012
Brazil
2013
0.0
0.5
1.0
1.5
0
5
10
15
2002 2004 2006 2008 2010 2012
China
2013
0.0
0.5
1.0
1.5
-10
0
10
20
30
40
2002 2004 2006 2008 2010 2012
Argentina
2013
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Trade and Development Report, 201538
mdum trm, wth cntra bank ntrvntn actng
vr th shrt trm. Argntna shws a stady currncy
dprcatn n nmna trms, rsutng nt frm cap-ta mvmnts (whch rmand subdud), but rathr
rctng ts natn rat and practv xchang-rat
managmnt. in ths mr ambguus cass, t sms
that thr drvrs, ncudng sm dgr f practv pcy managmnt, may b th caus f xchang rat
uctuatns. indnsa, as ntd arr, has fr svra
yars mantand varyng rgms f xchang-rat
managmnt, wh th rsumptn f capta nws
sms t hav rspndd t th cmmdty m that
startd n 2003–2004.
Typcay, th crratns twn capta ws
and xchang-rat cycs ar mr prnuncd n
th shrt trm. indd, drastc capta w rvrsasccurrd n md-2013 n many f th cnms
dscussd hr fwng th annuncmnt y th
Untd Stats Fdra Rsrv that t wud rduc
th pac f quanttatv asng. Sharp dprcatnsfwd, and n sm cnms t tk spcc
mntary pcy rspnss t hat th turnarund.
Fars that nstabts f ths knd, and prhaps f a
gratr magntud, w mrg fwng a tghtnngf Untd Stats mntary pcy ar justab n vw
f such xprncs. Sm shrt-trm mntary pcy
rspnss t changs n capta ws ar dscrnb n
th annua ws shwn n chart 2.4, whr dcra-
tns n th pac f capta nws ar fwd byntrst rat ncrass – a pattrn that s ftn qucky
rvrsd. in ths cass, ntrst rat uctuatns can sharp frm n yar t th nxt. Ths vatty
may hav damagng ffcts n nanca staty and
n th nvrnmnt fr prductv ng-trm nvst-
mnt. What s mr, caus hgh ntrst rats arftn nt sufcnty ffctv, r may vn hampr
ffrts t cntr nfatn, a rsutng tndncy
twards apprcatn f th ra xchang rat w
hav astng ffcts n th currnt accunt.
T sum up, t appars that, fr th mst part, th
cnms shwn n chart 2.4, as w as many thrs,
hav n advrsy affctd y th gazatn fnanc as a rsut f prvrs ffcts n xchang
rats, and vat and ftn hgh ntrst rats. in
sm cuntrs, sm dgr f capta cntrs may
hav hpd mtgat ths ffcts (Gaaghr 2015;ostry t a. 2010).
exchang rats, th aanc f paymnts and
mntary pcy ar th mst frqunty dscussdaspcts f th macrcnmc cnsquncs f
nanca ws. Hwvr, nancazatn as may
xrt gnra dfatnary prssurs n natna
cnms, party as a rsut f th cnstrants thatpn capta accunts mps n sca pcy (Patnak
and Rawa, 2005; Patnak 2006).25 As ntd av, n
an nvrnmnt charactrzd y fr and typcayunsta nanca ws, pcymakrs cd cntr
vr th dmstc ntrst rat, wth th rsut that th
rat that prvas s gnray hghr than what wud
apprprat t supprt dmstc capta frmatn,
dampnng cnmc actvty and wrng GDP. inaddtn, nancazatn and pn capta accunts
xrt macrcnmc prssurs that tnd t rstrct
sca pcy. intrvntnst pcs and xpansn-
ary sca stancs, n mattr hw mprtant thy arfr dvpmnt, may a cncrn fr ntrnatna
nanc. Whthr ths sntmnts stm frm a farf unsustana dt accumuatn r natn, r
a dsr t xpand th scp fr prvat nvstrs y mtng th rach f th puc sctr, r smpy
frm rsstanc t a practv r fr th puc
sctr, th rsut tnds t th sam: pcymakrs
cm apprhnsv that gvrnmnt spndng maydrv nanc away (Krugman, 2000; Patnak, 2006).
Rcnt dats aut sca austrty and grwth
rct th ths cncrn and th prvanc f th
da that puc dcts and dt ar unquvcay ad fr grwth, vn whn th mprca vdnc
shws thrws (Hrndn t a., 2013).26 on th
rvnu sd, tax rcpts may dcn fr tw ratdrasns: rst, du t wr vs f cnmc actvty
asscatd wth wakr puc stancs; and scnd
du t ngng prssurs t ffr ntrnatna nvs-
trs favura tax rats st thy mv swhr.Th upsht s ss gvrnmnt actvty, whch drcty
rducs natna ncm as a rsut f mtd gvrn-
mnt spndng, ut as ndrcty wrs prductv
capacty y rstrctng th typs f puc nvstmntsn physca and human capta that supprt prvat
nvstmnt and prductvty grwth.
Furthrmr, pnnss f th capta accunt, y strngy atrng ratv prcs and dmand pat-
trns, may hav ngr trm ffcts as w, ncudng
y cratng dndustrazatn prssurs n DTes.
Gvn ths rsk, t s mprtant t cnsdr th ntr-actn twn, and squncng f, razatn f
th capta and currnt accunts. Ths has n, n
partcuar, th xprnc n parts f latn Amrca
and su-Saharan Afrca (datng ack t th at 1970sn sm cuntrs), whr capta accunt drgua-
tn, whch ntay d t massv capta nws
and currncy apprcatns, tk pac at th sam
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Financialization and Its Macroeconomic Discontents 39
tm as ncrasd pnnss t trad. Th wr cst
and gratr varty f ndustra mprts cnsttutd
a gan fr cnsumrs and a surc f mprtd nputs
nt prductn; but thy as dprssd th ratv prcs f trada gds and srvcs (th mprtdand xprtd), squzng dmstc prt margns
and wags, and wrng dmstc nvstmnt and
mpymnt.
Rcnt mprca vdnc shws hw, n cn-
ms wth ss dvpd manufacturng ndustrs,
ths cndtns can hw ut ca capacts
(TDR 2003; Rdrk, 2015).27 Ths has mant st
pprtunts fr grwth and fr an xpansn fhghr quaty mpymnt, snc ndustra grwth
s ssnta fr th. indd, n such cass, thr has
n an ncras n ftn nfrma, wr prductvtysrvc sctr js.
Thus, nancazatn and pn capta accunts,
and th hghr ntrst rats thy ftn rqur t
mantan staty, cmprms dmstc nvst-mnt and th aty f gvrnmnts t supprt t,
ndpndnty f whthr any nws r utws
hav takn pac (Patnak and Rawa, 2005; Krg,
2014c). Whn nws r utws d ccur, thycan hav dtrus ffcts n ndustrazatn and
dvpmnt n varus ways. As dscussd av,
capta nws xrt prssurs fr ra xchang rat
apprcatn and vat th prmacy f shrt-trmrturns n spcuatv markts vr ng-trm prj-
cts that ras prductv capacty (Patnak, 2003).
Ths maks t mr dfcut t cnduct th typ fstructuray transfrmatv nvstmnts rqurd fr
dvpmnt. on th thr hand, suddn stps r
capta w rvrsas can turn datnary tndncs
nt cntractnary crss, rsutng n substanta racnmc and human csts and rgatng sca pcy
t srvcng dbt rathr than supprtng dvpmnt.
Th nxt sctn uss th rcnt hstry f nancacrss n DTes as a gud t dtrmnng th cns-quncs f such vrxpsur t spcuatv nanc.
2. Learning from the past: Public sectornances and economic developmentafter nancial crises
As dscussd av, nanca razatn
and drguatn prvd an pnng fr a surg f
capta ws as w as dmstc ndng, addng t
th khd f us n stck markts and ra
stat markts. Such arg nws ar ftn magn-
d by th way sca and mntary pcs adapt t
nvstrs’ xpctatns. Th cnsqunt bud-up n
nanca fragty, drvn by argy prvat spcuatnand rsk-takng, s ftn swfty unwund by a crss,
wth substanta ngatv ra ffcts and a sharp rs
n pubc dbt. Tab 2.1 sts cuntrs and th dats
f thr currncy, svrgn dbt r bankng crss,grupd by th fur wavs f nanca crss dntd:
varus dbt crss n th 1980s, th Mxcan crss n
1994–1995 and ts s-cad tqua ffcts, th Asan
nanca crss n 1997–1998, and ts rpp ffcts
n cuntrs utsd th Asan rgn.28 it s nt a
cmpt st f a f th nanca crss that ccurrddurng ths prds, ut rathr a rprsntatv
samp dctatd y data avaaty and cr thms.
Amst a f ths crss psds std (31 utf 33) wr prcdd y a “capta w nanza”,
dnd as an unusuay arg ngatv surg n th
currnt accunt aanc.29 Smary, dmstc crdt
ms prcdd crss nary 75 pr cnt f th tm
(24 ut f th 33 psds std). in th ta,mnmum ra pr capta GDP grwth rfrs t th
mnmum grwth rat wthn fur yars f th start
f th crss (ncudng th crss yar, rcrdd as
th arst yar that any f th thr typs f crss gan, and s rfrrd t as tm T ). its ntnt s t
mak nfrncs, hwvr rugh, aut th utput
sss rsutng frm ths crss. Th ast tw
cumns ndcat th csts f th nanca crss ntrms f th grwng puc dt, th t dmstc
and xtrna crdtrs. Cmparng puc dt as
a shar f GDP th yar fr th nanca crss
gns (T-1) ratv t tw yars aftr (T+2) fr thntr grup f crss std, th mdan (avrag)
ncras n tta grss cntra gvrnmnt dt s
85.9 (124.3) pr cnt, wh th mdan (avrag)
ncras n xtrna gvrnmnt dt s 42 (60.5) pr
cnt. intrstngy, athugh sca msmanagmnt sa frqunt rfran n manstram accunts f nan-
ca crss, t s typcay th puc dng f th
prvat ust, and a th csts asscatd wth t (.g.natnazng prvat dt, rcaptazng anks, and
th mpact f currncy dvauatn n th vau f
frgn currncy ats), that run up puc dt.
(a) Lessons of the 1980s
Th latn Amrcan dt crss f th 1980s
caught many nvstrs and anaysts y surprs.30
Th wrd had nt wtnssd a majr fnanca
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Financialization and Its Macroeconomic Discontents 41
crss snc th 1930s, cmmdty prcs wr hgh
and ra ntrst rats w. Fush wth ptrdars,
many dvpd-cuntry anks prvdd nancng
t (msty prvat) rrwrs n dvpng cn-
ms as an atrnatv t th ackustr nvstmnt
pprtunts at hm. Th fact that th ans wr
vrsn y anks (and nt asd n nds) was
suppsd t nhanc nfrmatn and vrsght, add-
ng t th gnra sns f cndnc and ptmsm
that prvad (Rnhart and Rgff, 2009). Many
dvpng cuntrs usd ths funds t cp wth
prc shcks, mantanng grwth n th fac f
muntng aanc-f-paymnts cnstrants; vn
xprtrs rrwd havy, drawn n y ntrnatna
ndrs agr t xtnd ans (Pama, 2003). At th
pcy v, a numr f latn Amrcan cuntrs
ntrducd nanca drguatn and trad ra-zatn n th 1970s, spcay ths n th Suthrn
cn (Argntna, Ch and Uruguay).
bgnnng n 1979, thr was a srs f ga
cnmc shcks nvvng ra ntrst rat hks.
Ths wr a cnsqunc f Untd Stats ffrts
t tam natn, ntnsd rcssn n dvpd
cuntrs and a fa n nn- cmmdty prcs. As
a rsut, ptmsm swfty gav way t panc. Th
cut-ff n ndng, aanc-f-paymnts crss and
dvauatns that nsud d t a cascad f dfauts(s ta 2.1 fr a parta st). in rspns t th
aarmng spctr f wdsprad ankruptcs, latn
Amrcan gvrnmnts natnazd what had n
argy prvat dt, wth rngtatn and srvcng
rchstratd y ntrnatna nanca nsttutns
n th cndtn f mpmntng stazatn and
structura adjustmnt prgramms (Díaz-Ajandr,
1985; Yungr, 1993; Dam t a., 2013).
lkng ack at ths prd, thr wr svra
rasns t crtca f dmstc pcy chcs, suchas razng dmstc nanca markts wthut
mpmntng adquat vrsght, r undrstmatng
th dtrus ffcts f ra-xchang-rat apprca-
tn n th cntxt f trad razatn. but DTes’
dmstc pcs and cnmc structurs vard
much mr than crtcs typcay mphaszd. Fr
nstanc, sm Gvrnmnts had ratvy ntr-
vntnst mds f cnmc gvrnanc (.g. as
n braz), wh thrs ngagd n mr fr markt
rfrms, ncudng nanca razatn (.g. as n
Argntna, Ch and Uruguay). A thrd st had pn
capta accunts ut mpsd mts n prvat sctr
accss t xtrna nanc (.g. as n Mxc and th
bvaran Rpuc f Vnzua) (Díaz-Ajandr,
1984). What ths cuntrs dd shar wr th sam
xtrna cnmc cndtns that gnratd capta
w nanzas n th yars adng up t th crss,
a cnsqunt ud-up f nanca fragty, and th
nvta crash that fwd n th hs f cm-
mn cnmc shcks (Stgtz, 2003).31 expct
and mpct puc guarants f prvat dt thn
transfrmd th crss nt svrgn dt prms.
Prdctay, gvn th dmnant cnmc para-
dgm f th ra, ary cnmc mds that grw ut
f th xprncs f th 1980s dt crss fcusd
prmary n th changs f “sca sustanaty”,
and hw sca dcts and xpansnary pcs, fr
nstanc, mad cnms vunra t spcuatv
attacks n th cntxt f ffctvy xd xchangrat rgms (.g. Krugman, 1979; ostfd, 1994).
Accrdngy, gvrnmnt msstps cud gnrat a
ss f nvstr cndnc, nducng a sf-fung
prphcy as nvstr fars wud fu th currncy
dprcatn that had sparkd thr unas n th rst
pac (Krugman, 2014). Th cnvntna wsdm
that mrgd mphaszd gttng a cuntry’s s-
ca hus n rdr, and ttng markts d th rst
(Cav, 2005). Ths prspctv was as rctd
n th pcy prscrptns asscatd wth structura
adjustmnt, whch accrdd prrty t srvcng dtand rqurd razatn and prvatzatn.
(b) The return of capital ows to
Latin America
in 1989, Mxc sgnd n t th Untd Stats
Gvrnmnt’s brady Pan, whch was dsgnd t
furthr ncurag fr markt rfrms and as dt
urdns y cnvrtng gvrnmnt dt nt ndscatrazd y Untd Stats Trasury s. A
numr f thr cuntrs swpt up n th 1980s dt
crss sn fwd Mxc’s xamp. Ths marks
th gnnng, partcuary n latn Amrca, f th
ra whr th Washngtn Cnsnsus n cnmc
pcy dmnatd much f th thnkng n hw t
manag ga ntgratn and th dmstc cnmy,
ncudng strng cmmtmnts t nanca raza-
tn and prvatzatn (Dam t a., 2013). Ths
rfrms and dt rstructurngs asd cncrn vr
sca dt, agd as t th ky pcy mstak
f th 1980s, and rpnd accss t ntrnatna
capta fr dtr cuntrs.
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Trade and Development Report, 201542
Attractd y ratvy hgh rats f rturn,
and rassurd y dmstc pcy rfrms and th
prspct f a satsfactry cncusn f th ngta-
tns n th Nrth Amrcan Fr Trad Agrmnt
(NAFTA), prtf nvstrs hrdd nt Mxc,
drvng ms n dmstc crdt (hpd y th
prvatzatn f cmmrca anks) and stck prcs,
ut ths dd tt t st ra GDP grwth (Gra,
1996). in 1994, an ncras n ntrst rats n th
Untd Stats, as w as a srs f dstazng
ptca vnts, ndd th capta w nanza and
ncsstatd th drawng dwn f rsrvs n rdr
t nanc th sustanta currnt accunt dct
(Mrn-brd and Rs, 2004). intrnatna nvs-
trs cam cncrnd that Mxc’s xchang
rat, whch was ssntay pggd t th Untd
Stats dar, was hadd fr dvauatn. As thssf-fung crss typcay wrk, th cnsqunt
capta utws nducd th currncy crss that
nvstrs had fard. in th ad-up t th crss,
Mxc’s ncrasng ranc n dar-dnmnatd
dt nstrumnts cad tesobonos ntrducd add-
tna rsks, stkng nvstrs’ far f dfaut and
crss (lustg, 1995). Th Cntn Admnstratn
hpd scur a quck aut that gav prrty t
nd rpaymnt and furthrd nra rfrms
(FtzGrad, 1996; Gra, 1996).
Th Mxcan crss cratd dvauatn prssur
amng a numr f thr mrgng markts as wr-
rd nvstrs r-vauatd rsk n th cntxt f xd
xchang rats (th s-cad “tqua ffct”). Th
strngst mpact was ft n Argntna. in ary 1991,
Argntna had stashd a currncy ard, whch
mantand a xd pg f ts currncy t th Untd
Stats dar and stashd that th mntary as
wud ntry cvrd y ntrnatna rsrvs
(an arrangmnt that prsstd t 2001, whn th
crss that th schm hpd t ud nay ruptd).Wh th rgm was ffctv at curng hgh na-
tn, th razatn f trad and nanc d t an
apprcatn f th ra xchang rat, ncrasng
currnt accunt dcts and xtrna dt (Dam t
a., 2013). Whn th Mxcan crss struck, Argntna
as facd suddn capta utws, many frm
rsdnts’ dpsts n dmstc anks. Th prssur
n Argntna’s anks prvd t strng, frcng th
gvrnmnt t ngtat a aut agrmnt wth th
iMF n 1995. iMF supprt, whch was cndtna
n th Gvrnmnt tghtnng ts sca pcy y
ncrasng taxs, pnd th way fr sgncant fr-
gn nancng f gvrnmnt dt (Cacagn, 1997;
bughtn, 2012). braz avdd a smar fat argy
y rasng shrt-trm ntrst rats, whch ntrducd
thr fragts (.. prsstnty hgh ntrst rats,
ncudng n puc dt) that rndrd t suscpt
t crss atr n th dcad (Pama, 2011).
Thugh mtd n scp and ratvy shrt-
vd, ths crss changd sm f th cnvntna
wsdm n th dtrmnng rs f fundamntas
and razatn, as w as th rputatn f sm
f th “star studnts” that had fwd ths pcy
advc (bughtn, 2012: 487–488). Thr wr
sm ffrts t suggst th ack f dmstc savngs
as an nsufcnty rcgnzd vunraty, ut th
spctacuar savrs caught up n th Asan nanca
crss a cup f yars atr qucky undrmnd
that n f rasnng (Cav, 2005). A mr ndur-ng atrnatv xpanatn, fr what wud cm
a cmmn nra “xcptnasm” stry, ad
th am fr th crss squary n th Mxcan
Gvrnmnt fr cnmc msmanagmnt, ptca
vrrach and crruptn (Gra, 2006). echs f
ths rasnng wud rappar t try and xpan th
Asan nanca crss.
(c) The Asian nancial crisis and beyond
if th Mxcan crss caught many y surprs,
th Asan nanca crss cam as a vrta shck.
Mst f th rgn’s macrcnmc fundamntas
smd ndsputay sund: grwth and savngs
rats wr hgh, and snc sca pcy was gnr-
ay cnsrvatv, mst rrwng was prvat. in
1996, th yar fr th crss ht, currnt accunt
dcts n Maaysa and Thaand wr n th arg
sd,32 and th rgn’s vra grwth had dcnd
sghty, ut nn f ths ray justd th xtrm
aarm and cnsqunt dscatn that wud snfw (Krugman, 1999).
As wth thr crss, th pathway t th Asan
nanca crss gan wth nanca razatn,
th n th capta accunt and n dmstc nanca
markts (Mnts, 1998). Ths rfrms wr party n
rspns t prssur frm dmstc rms and anks,
whch wr agr t accss wr ntrst ans n
ga capta markts fr nvstmnts at hm; and
arg nsttutna nvstrs n dvpd cuntrs
wr happy t g (Wad, 1998). Suth-east
Asan gvrnmnts cavd n t th prssur, and,
n sm cass, had dvpd vstd ntrsts n
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Financialization and Its Macroeconomic Discontents 43
awng prprty us t grw (Wad, 2004).33
Th practca rsut was wdsprad xpansn f
prvat ndng, much f whch was nkd t shrt-
trm, hard-currncy-dnmnatd dt nstrumnts
(Gra, 1999). At th sam tm, capta nws
wr asscatd wth hghr rats f natn and
ra xchang rat apprcatn, adng t a ss f
ntrnatna cmpttvnss and wrsnng cur-
rnt accunts (Chandraskhar and Ghsh, 2013).
Ths changs drv vn mr nvstrs nt th
ra stat and stck markt us, spcay n
Suth-east Asa. Wth grwng sgns f waknss
n Thaand’s asst markts y 1995, and ga
capta startng t shft away frm mrgng markts
as th Untd Stats Fdra Rsrv rasd ntrst
rats n March 1997, nvstrs cam ncrasngy
wrrd that Thaand’s pggd xchang rat wudnt hd (Wad, 1998). Th Tha cntra ank, aftr
unsuccssfuy usng ts rsrvs t dfnd th aht
aganst spcuatv attacks, nay t th currncy
at n Juy 1997. Th aht’s cnsqunt dprcatn
spkd nvstrs, sttng ff cntagn rst t ngh-
urng cnms n Suth-east Asa (indnsa,
Maaysa and th Phppns), and thn t Hng
Kng (Chna), th Rpuc f Kra and Tawan
Prvnc f Chna.34 Th iMF swfty mvd n t
hp cntan th crss, pushng an agnda that has
snc n crtczd fr pssy wrsnng th cn-tagn and dpnng th crss (Radt and Sachs,
2000), as w as vr-rachng n ts mpstn f
markt-rntd structura rfrms (Crtty and l,
2004; Stgtz 2002).
outsd Asa, th Russan Fdratn was nxt
t pud nt a crss. Sn aftr razng
fnanc and awng mr frgn partcpatn
n ts stck and puc nd markts, th Russan
Fdratn facd an ncrasngy wdsprad rvrsa
f capta ws t mrgng markts – ntay d nth Russan Fdratn’s cas y th xt f nvstrs
frm braz and th Rpuc f Kra n rspns t
th Asan nanca crss (Pnt and Uatv, 2010).
Dcnng cmmdty prcs furthr cmprmsd
th aty f th Russan Fdratn t dfnd ts
xd xchang rat, rsutng n dvauatn and
dfaut n 1998. Th arg prvat sctr sss (th
dmstcay and amng ntrnatna nvstrs) gn-
ratd y th Russan crss nducd a suddn stp f
capta ws t latn Amrca, whch manfstd as
a srs f nanca crss and w grwth that cam
t dud th “st haf-dcad” f 1998–2002
(TDR 1999; Cav and Tav, 2005).
Th xprncs f Argntna and braz us-
trat ths dynamcs and thr nks wth vunr-
ats stashd n prr crss. braz’s systm
f puc nancng was svry waknd y ts
ffrts t wathr th tqua crss, whr n addtn
t rasng ntrst rats, a ankng sctr rstructur-
ng add th Gvrnmnt wth ts f addtna
dt. Th cnmc swdwn and vry hgh ntr-
st paymnts causd braz’s ntrna sca dt t
sar twn 1994 and 1998, wth ntrst n puc
dmstc dt amuntng t 3.4 pr cnt f GDP n
1994 and 7.3 pr cnt f GDP n 1998 (TDR 1999;
Sanz and Cacagn, 1999).35 Dfndng th currncy
pg n ght f th suddn stp n capta nws and
nsufcnt rsrvs cam qucky untna, and
currncy crss and dvauatn nsud n ary 1999.
in Argntna, wth unsustana xchang rats,any cnmc grwth ncrasd ts trad dct, ut
th ack f grwth d t a sca dct: nthr f
ths dcts was cnsstnt wth th cnvrtty
rgm. Ths cntradctn cud crcumvntd as
ng as xtrna nancng kpt wng. Hwvr,
whn that stppd, tugh sca austrty and iMF
assstanc cud nt prvnt an cnmc mpsn,
a run n dpsts and a parta dfaut n puc dt
(Cacagn, 2003; Cav and Tav, 2005; Dam t a.
2013; Gra, 2006). Ra avrag annua pr capta
GDP grwth n Argntna sank t -4.2 pr cnt dur-ng th st haf-dcad, wh th avrag fr latn
Amrca as a wh was 0.2 pr cnt.36
(d) Public sector nances in the context of
nancial liberalization and systemic risk
Ths rf rvw cary suggsts that th k-
hd f nanca crss ncrasd as DTes razd
thr capta accunts and dmstc nanca markts,
whch d ntay t surgs n capta nws andthn t th suddn stps r rvrsas that amst
aways nsu.37 And athugh capta w nanzas
ncrasd n tandm wth fr markt pcy stancs
n dvpng cuntrs, thy cntnud t sg-
ncanty drvn y crcumstancs xtrna t th
cnms that hstd thm, such as changs n g-
a cmmdty prcs r n Untd Stats ntrst rats,
r y th psychgca and cnmc cntagn
ffcts f crss swhr. Ths xtrna frcs
ntract wth dmstc macr pcy and structur n
ways that ras vra fragty and rsk. but dmstc
factrs ar ny sgncant whn thy xst wthn
a argr ga nanca systm charactrzd y
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t much qudty and nt nugh macrprudnta
rguatn, rdng n wavs f ptmsm, xcssv
prvat rsk-takng and vr-rrwng that prcd
th nvta crash – a dynamc that s ndmc t
th nanca systm tsf (Mnsky, 1992).
Th argy prvat rsk-takng asscatd wth
nanca razatn thn cms a puc dt prm. Th mst prxmat rasns nvv th
xpct and mpct guarants that gvrnmnts
prvd n prvat ats and th natnaza-
tn f ad prvat dts. but a nanca crss as
systmatcay rducs puc rvnus and wath
thrugh th ffcts f xchang-rat dprcatn n
puc assts and ats, ncrass n ra ntrst
rats, dcns n ra utput, and th addtna r-
rwng rqurd t da wth th csts f th crss
(d b t a., 2006). Athugh svrgn dfauts
ar a cmmn fatur f nanca crss n DTes,cntrary t th cmmn rhtrc arund dvpmnt
macrcnmcs, n th cass anaysd, arg puc
dt s mst ftn a cnsqunc, nt a caus.
evn amng cuntrs such as Argntna,
Mxc and th Russan Fdratn, whr puc
dt was dntd as a majr surc f th nan-
ca fragty that pushd thr cnms nt crss
n th 1990s, thr s amp rm fr quacatn.
Ta 2.2 taks a csr k at puc dt fr ths
thr cuntrs n thr rspctv pr- and pst-crss
yars. Rfrnc v rfrs t puc dt as a shar
f GDP thr yars prr t th crss dat (T-3), and
pr-crss grwth t th prcntag ncras n that
v vr th thr yars adng up t th crss. by
way f cmparsn, th grwth n puc dt aftr
th crss prsntd n ta 2.1 s rpatd hr.
Tta and xtrna puc dt as a shar f GDP
fr Mxc was actuay n th dcn fr th
crss, wh th pr-crss dt vs f th Russan
Fdratn and Argntna crtany dd nt prtndth crss that fwd. Hwvr, ths gurs d
nt captur hw th structur f dt maks DTe
gvrnmnts mr vunra than thr dt vs
suggst (.g. th xtnt f frgn-xchang-nkd
ats and shrt-trm maturts). evn thn, thr
ar argumnts t mad aut th rspctv rs
f sca prgacy vrsus havng t nd t th rus
f ga nanca markts.
3. Looming losses: Fiscal stance,macro policy and aggregate demand
Ths chaptr shws that xpsur t unrgu-
atd and arg nanca ws atrs macrcnmc
dvpmnts n ways that can ad t a swdwn
f GDP grwth as w as unsta ntrna dynam-
cs markd y suddn shfts f ncm and wath
twn th man sctrs (prvat, puc and
xtrna). A cnvnnt way t map ths shfts and
thr ratnshp wth cnmc grwth s y usng
th “dmand stancs” framwrk (s Gdy and
Crpps, 1983; Gdy and McCarthy, 1998; and
Table 2.2
FINANCIAL CRISIS AND PUBLIC DEBT IN MEXICO, THE RUSSIAN FEDERATION AND ARGENTINA
(Per cent)
Total gross public debt
as a share of GDP
Total gross external public debt
as a share of GDP
Country (crisis date)
Reference
level
Pre-crisis
growth
Post-crisis
growth
Reference
level
Pre-crisis
growth
Post-crisis
growth
Mexico (1994) 42.6 -29.2 26.4 37.3 -10.7 47.0
Russian Federation (1998) 30.2 34.1 39.5 31.0 4.0 96.4
Argentina (2001) 37.6 19.8 208.1 47.9 6.2 149.9
Source: UNCTAD secretariat calculations, based on data from Reinhart and Rogoff, 2010a.
Note: Time T refers to the crisis year in parentheses. The columns refer to the following:
Reference level is debt as a share of GDP at (T-3);
Pre-crisis growth refers to the percentage change between (T-3) and (T-1);Post-crisis growth refers to the percentage change between (T-1) and (T+3).
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Financialization and Its Macroeconomic Discontents 45
Tayr, 2001 and 2006). Ths framwrk rassrts th
Kynsan prncp that sustand grwth rqurs
cntnuusy ncrasng njctns (whch, n smp
macrcnmc trms, ncud prvat nvstmnt,
gvrnmnt xpndtur and xprts) nt th w
f ncm. Ths njctns, n turn, rqur a stady
grwth f akags (masurd y th prpnsty t
sav, th tax rat and th mprt prpnsty), whch
vr tm nsur nanca staty, as crdt rss
ang th crcuar w f ncm. Thus GDP grwth
can xpand as th grwth, ang sta nrms,
f njctns ratv t akags; ths vntuay
dtrmn nanca transfrs twn th man sc-
trs. Such rats f njctns t akags ar trmd
stancs and prvd a masur th f dmand drvrs
and nanca aancs.38
Thrfr, a usfu way t assss changs n
havur s t trac th pattrns f th thr stancs
(sca, prvat and xtrna) ang th path f grwth.
each f th thr stancs can srvd ratv t
GDP n rdr t s whch cmpnnts f aggrgat
dmand ar cntractnary and whch prvd stmu-
us t th cnmy. Wakr sca stancs (dcns
n gvrnmnt xpndtur ratv t th tax rat),
wakr prvat stancs (dcns n nvstmnt ra-
tv t th savngs prpnsty), and wakr xtrna
stancs (dcns n xprts ratv t th mprt prpnsty) advrsy affct th grwth path and may
gnrat nanca maancs that ncras nanca
nstaty.
Appyng ths framwrk t th crss dscussd
n th prvus sctn and std n ta 2.1, w nd
that n tw thrds f ths cass, th adng surc f
dmand shftd away frm th dmstc stancs (pr-
vat and gvrnmnt) fr th crss, and twards
th xtrna stanc aftr th crss.39 Ths rcts a
tndncy, pst-crss, fr xtrna accunts t g ntsurpus wh dmstc surcs f dmand tapr ff.
Structura trnds and cycca ffcts jnty cm nt
pay. Currnt accunt razatn prr t a crss,
ang wth nanca nws and strng xchang
rats, aw an xpansn f dmstc dmand wth
sustanta mprt akags. Aftr a crss, wag
cmprssn and wr prts, ang wth sca
cntractn and ntrst rat hks t attract capta
nws, wakn prvat sctr stancs and wr
mprts. Strngr xtrna stancs msty drv frm
a dcn n dmstc dmand and th cnsqunt
swft rductn f mprts. Rgardng th dmstc
sctrs, th trggrs ar a shft twards dvragng
f hushds (hghr savng prpnsts) and a
cntractn f gvrnmnt xpndtur whn austr-
ty s appd (partcuary aftr prvat sctr sss
ar transfrrd t th puc sctr and sca ma-
ancs grw as a rsut). Furthr, dprcatn f th
xchang rat can frqunty mak th frgn sctr
th adng surc f ffctv dmand wthut any
sustanta ncras n ra xprt capacty.
Tw addtna cnsdratns srv t hghght
th usfunss f th framwrk dscrd av t
trac dmand drvrs n sm DTes aftr th crss:
() th uffr r payd y cmmdty xprt rv-
nus, and () changng vws n cuntrcycca
sca pcy amng DTes. Rsng cmmdty prcs
(a trnd nw n rvrsa) hav sustand – at tms
narrwy – prvat sctr prtaty, prsrvngptmsm n th fac f ngng nanca vatty. in
addtn, whn grwth acrss th Suth dcratd n
2009 du t a cntractn f xprts t th Nrth and
th suddn stp f capta nws, cuntrcycca
pcy rspnss mad a rcvry pss n 2010
(Gra and Gaaghr, 2015). Dspt ths phm-
ra rvrsas n cuntrcycca pcy cnvntns,
pwrfu nanca markt nsttutns mantan thr
asd, shrt-trm prspctv whch hangs n th
mprtanc f nanca ratngs (s as chaptr iV).
A pcy avrsn t prvdng a strng sca stmuushas n th ru. Fsca rthdxy and an xcssv
ranc n mntary pcy hav gnratd nanca
fragty and xchang-rat nstaty n majr dv-
png cnms (Akyüz, 2013). Suscptty t
nanca prssurs s hghtnd thr whn puc
sctrs ncur dt drcty r, as s mr frqunty
th cas, crcutusy whn ncrasd qudty gnr-
ats prvat sctr dt that s utmaty takn n y
th puc sctr. intrst paymnts n dt, whthr
puc r prvat, furthr dampn dmstc stancs.
T summarz, th mst mprtant mnts
that wr prsnt n prvus crss and whch
prsst tday ar: pn capta accunts; ht mny
cycs wrsnd y mntary xpansn n dv-
pd cuntrs and a cnsqunt rs n xtrna
and ntrna dt (n partcuar shrt-trm dt); a
shft away frm dpnng ndustra dvpmnt;
and cnstrants n usng sca pcy as a t fr
structura transfrmatn and ndustra xpansn,
as mntary pcy cntnus t prmt th da-
tnary trnds favurd y ga nanca nvstrs.
Vry rady, ths faturs appy t many cuntrs
tday t varyng dgrs, dpndng n thr nanca
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Trade and Development Report, 201546
ws, stcks f dt, and mvmnts n xchang
rats and ntrst rats. Cary, th mst vunra
cnms ar ths whr dmstc actvts ar
hghy cncntratd n ny a fw sctrs.
Th anayss n ths chaptr has fcusd n
th rshapng f ga nanca markts, adng
t th Grat Rcssn and ts aftrmath t th pr-snt day. Th xtrardnary grwth f unrguatd
ga nanca markts, n tandm wth wakr
dmstc rguatn n mst DTes, has xacratd
th vunrats f ths cuntrs, rathr than
prvdng ncrasd fnancng fr dvpmnt
nds (dscussd n chaptr Vi f ths Report ).
Th chaptr has strssd that xcssv prvat
capta nws, partcuary ths f an unsta
r spcuatv natur, affct th cnguratn f
nt factr paymnts, xchang rats, ntrst rats
and thr prcs, and nunc mntary and sca pcy stancs n prvrs ways. Whn DTes fac
th thrat f suddn stps r capta w rvrsas
as cndtns n ga markts chang, th rsuts
can vn wrs. it s car frm th dscussn
that undr ths crcumstancs, pcymakrs’ sarch
fr atrnatvs t nsur mr sta utcms s
cmng ncrasngy changng.
A sgncanty mr sta macrcnmc
nvrnmnt fr dvpmnt s mpaus wthut
cctv ffrts t rfrm th ntrnatna mntaryand nanca archtctur, th sujct f chaptr iii.
Nvrthss, thr ar a numr f ptns that st
rman wthn th purvw f natna pcy. T
car, nn f th prpsd rcmmndatns ca fr
dnkng frm th ga cnmy n trms f thr
trad r nanc, ut rathr fr ttr managng th
nks t prmt dvpmnt.
on st f crtca pcy chcs rsts n th
aty t nunc th xchang rat. Wh avd-
ng “crnr sutns”, such as xd xchang rats
r fuy razd xchang rats, sm srt f
managd at rmans an attractv ptn (Ghsh,
2007; Dam t a., 2013). Th managmnt f th
xchang rat (as dscrd y ths authrs and
thrs) wth a vw t gudng ts vutn as a tfr dvpmnt ntas cmnatns f mntary
pcy, cntra ank pratns and ncms p-
cs. Hw ths s achvd n practc dpnds n th
partcuar crcumstancs n ach cuntry, ncudng
thr nsttutna dvrsty and thr aanc shts.40
As dscussd av, gudng th vutn f
th ra xchang rat n an nvrnmnt f arg and
drguatd ga nanc, and a ga xchang
systm dmnatd y a fw rsrv currncs,
w xtrmy dfcut wthut sm dgr fmanagmnt f th capta accunt. Th pss
us f capta cntrs as a t fr dvpmnt and
nanca staty has gand gratr accptaty y
many gvrnmnts and ntrnatna rganzatns
n rcnt yars. indd, UNCTAD has n a ng-
standng advcat f such a pcy: n th ary 1990s,
t suggstd that DTes shud cnsdr masurs that
“dscurag capta ws that wr nt ratd t ra
nvstmnt r t trad transactns ut wr mt-
vatd y shrt-trm gans” (UNCTAD, 2012: 50).
Ths and cmpmntary rcmmndatns amdat rstrng staty and avrtng systmc crss
ar vn mr rvant n tday’s cntxt, as as
vdncd y dvpd cuntrs svry ht y th
Grat Rcssn and ts aftrmath. Agan, th crcum-
stancs and scp fr actn dffr frm cuntry t
cuntry, as ds th dgr f rgna crdnatn
rqurd t nsur succss.
in an ffrt t avd th currncy and ntrst
rat rsks hstrcay asscatd wth xtrna dt,
DTes hav as shftd mr f thr rrwng
frm dt dnmnatd n frgn currncs t n
dnmnatd n dmstc currncy.41 but nt a
D. Concudin poic discussion
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Financialization and Its Macroeconomic Discontents 47
dvpng cuntrs can attract ntrnatna nvs-
trs t dmstc scurts markts. And vn whn
thy d, thr s th addtna rsk that argr shars
f dt, rgardss f currncy dnmnatn, w
hd y mr ntrnatnay m nvstrs.
Rcnt vdnc ars ut ths warnng: gratr
frgn partcpatn n dmstc currncy svrgn
nd markts has n asscatd wth hghtnd
vatty as a rsut f ncrasd xpsur t ga
nanca shcks (ek and Ky, 2015).
A smary mxd rsut s sn n th grwth
f ntrnatna rsrvs amng DTes. Th ud-up
f rsrvs s n prncp msty prcautnary, n
th sns that t s xpctd t guard aganst a hst f
s ntrducd y arg and spcuatv ntrnatna
capta nws and th ngatv cnmc and scacnsquncs f thr smtms suddn r sustan-
ta dpartur. Prcautnary rsrv uffrs as
hdg aganst th ss f pcy autnmy that ftn
accmpans iMF-typ auts r aganst prssurs
t prvd th macr pcy cndtns prfrrd y
ntrnatna nanca nvstrs (Gra, 2006). but
vn f rsrv accumuatn ds ffr sm prtc-
tn, prvdng sm pcy spac t cuntrs whs
currncs ar undr attack, thr s an pprtunty
cst t tyng up dvpmnt rsurcs n ths man-
nr. Furthrmr, whn pcymakrs try t cuntrcapta w rvrsas thrugh th us f rsrvs, thy
ftn nd up rsrtng t cmpmntary masurs,
such as ntrst rat ncrass, as th stck f rsrvs
dcns. Ths pcy rspnss utmaty wakn
th cnmy and rd cndnc vn furthr. As
ntd av, such trad-ffs ps a chang t
cntra ank pcy.
in cnsdrng pcy ptns, cntra anks
n DTes shud carfuy vauat th mpcatns
f narrwy appd nfatn-targtng rgms.Prssng t hard t achv natn rats dmd
dsra mr ftn n dvpd-cuntry cntxts
cud asy ad t hgh ntrst rats and appr-
catn f th ra xchang rat, th f whch
dscurag prductv nvstmnt and hnc dv-
pmnt. St, th wdsprad (frma and nfrma)
adptn f natn targtng y sm dvpng
cuntrs’ cntra anks rcts ra apprhnsn
vr any hnt f natn, gvn thr hstrs f
hgh natn. but pray mr mprtant s th
wdsprad f that natn targtng rgms gv
mr crdty t th cntra anks that mpmnt
thm, wrng xpctatns f natn and nang
hghr mpymnt rats fr a gvn v f natn.
Hwvr, th mprca vdnc ds nt supprt th
crdty argumnt (epstn, 2007). indd, sta
prc frmatn prcsss and sustand ncrass f
hgh-quaty mpymnt n a dvpng cuntry
cntxt ar cmpx gas that rqur attntn t
th vra staty f crdt and nanca ws.
but cntra anks can d mr than ny man-
tan prc staty r cmpttv xchang rats t
supprt dvpmnt, as attstd y th hstrca
rcrd. Aftr th Scnd Wrd War, cntra anks
n eurp and Japan usd ntrst rat cngs, su-
sdzd crdts and crdt acatn pcs t gud
rcnstructn and factat ndustra upgradng
(epstn, 2015). Smar pcs wr fwd y th
nwy ndustrazng cuntrs n th scnd haf fth twntth cntury, whr cntra anks prvdd
ky supprt t dvpmnt anks and thr gvrn-
mnts’ sca pcs (Amsdn, 2001; TDR 2013).
Prc staty gas can st hp gud ths typs
f pcy chcs, as whn targtd r susdzd
crdt ncurags prductvty and mpymnt
grwth rathr than actvts that gnrat natn-
ary prssurs (epstn and Ydan, 2009), r whn
ncms pcs nsur that wag grwth tracks
prductvty grwth.
Hwvr, as vdncd y th faurs f dv-
pd cnms t fuy mrg frm th rcnt crss,
mntary pcy an s nt sufcnt. Practv s-
ca and ndustra pcs ar ssnta fr gnratng
th structurs and cndtns that supprt dmstc
prductvty grwth and th xpansn f aggrgat
dmand. Mantanng strng and sta sca stancs
can hp ncras prductn and ncms, gnrat
hgh-quaty mpymnt, and ncurag a mr
gataran dstrutn f ncm (whch xrts a
furthr pstv ffct n aggrgat dmand). Pcsthat nsur that wag ncms ncras cncmtanty
wth prductvty grwth nhanc ths mchansms.
by xtnsn, trad pcy as nds t agnd
wth dmstc gas and pcs fr prductvty
and wag grwth, ncudng n ga, rgna and
atra trad ngtatns (s TDR 2014).
Ths crcumstancs hghght th nd fr mr
ffctv ntrnatna pcy crdnatn. Gvn
th shr sz f ga capta ws, ndvdua
cuntrs’ managmnt masurs, such as capta
cntrs, xchang rat managmnt, cntra ank
pcy cnsstnt wth stratgc dvpmnt nds,
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Trade and Development Report, 201548
and a tghtr rguatn f dmstc nanca systms,
may nt nugh. Dmstc pcy ptns shud
suppmntd y ga and rgna masurs that
dscurag th prfratn f spcuatv nanca
ws. in addtn, mr sustanta mchansms
cud stashd fr crdt supprt and shard
rsrv funds at th rgna v. At th sam
tm, mpmntng cuntrcycca macrcnmc
pcs, mprvng ncm dstrutn and xtnd-
ng sca spac fr dvpmnt purpss hav a
sgncanty gratr chanc f succss whn appd
as y partnr cuntrs, and ffctvy, th wrd at
arg. indd, dmstc pcy stmu, whn appd
y ny a fw cuntrs, ar cnsdray waknd
whn th nrta f macr pcy rthdxs prvas
n partnr cuntrs.42 Such cndtns can vn yd
prvrs ffcts f ga nvstrs and ntrnatna
nanca nsttutns rspnd n ways that gnrat
gratr vatty and uncrtanty. Ths aspcts ar
dscussd furthr n th nxt chaptr.
Notes
1 Athugh mdd-ncm cuntrs tnd t mr
ntgratd nt th ga cnmy, and as such,
smngy mr xpsd t th ffcts f nanca-
zatn, th magntuds f capta ws ratv t
GDP and thr macrcnmc ffcts dscussd n
ths chaptr appy t a DTes (s sctn b.2 frmr dta.)
2 Amng a grup f 26 dvpd cuntrs, a ut 4
(Franc, Japan, Swdn and Swtzrand) had cn-
tractnary sca stancs ratv t thr ng-run
trnd twn th scnd quartr f 2010 and th
furth quartr f 2013 (TDR 2014, chart 2.1).
3 S Chandraskhar (2007) fr an anayss f factrs
that d t an xpsn f ga qudty cratn
y prvat agnts aftr th 1997 Asan crss, whch
was transmttd t dvpng cuntrs thrugh th
pratns f hdg-funds, frgn drct nvstmnt
n th frm f prtf quty and ncrasd mrgrsand acqustns.
4 Thnk tanks prvdng anaytca nsghts fr ntr-
natna nvstrs trumptd th ptntay attrac-
tv rturns f dvpng cnms. S, fr
xamp, Accntur, 2012; back Rck, 2011; Crdt
Suss, 2011; ecnmst intgnc Unt, 2011;
UbS, 2012; and Ahmd and Zat, 2013, fr a mr
rgrus anayss f factrs dtrmnng th ra-
tv attractvnss f mrgng markt cnms
as nvstmnt dstnatns. (Th attr study as
vauats th nunc f th uncnvntna mn-
tary pcy f th Untd Stats as a factr n th
cmpstn f ws, a arg prprtn f whch
ar prtf acatns.)
5 Th crash n Chna’s stck markt n Jun–Juy
2015, and th Gvrnmnt’s rspnss t t, ch
ths wrrs ( Bloomberg Business, “Chna stcks
pung as Stat supprt fas t rvv cndnc”,
8 Juy 2015).
6 Th Wrd bank’s International Debt Statistics 2015 cntans rcrds f 125 cuntrs, f whch 121 ar
DTes accrdng t th Untd Natns casscatn.
Unss thrws spcd, th mprca dscussn
rfrs t ths grup f 121 DTes. eswhr n th
chaptr th trm DTes rfrs t a dvpng and
transtn cnms.
7 Ths ar dntd as a th 121 DTes mnus
Agra, Argntna, braz, Chna, egypt, inda,
Mxc, Mrcc, Suth Afrca, Tunsa and Turky.
8 Thr ar a fw xcptns amng DTes whr cur-
rnt accunt dcts n th 2000s wr sgncanty
argr than ths n th 1990s, ncudng, mst nta- y, inda, Suth Afrca and Turky.
9 evn cuntrs wth a currnt accunt surpus
tand addtna nancng t manag thr prt-
fs, ncras thr asst accumuatn uffrs n
vw f uncrtants, and cp wth ntrtmpra
ncnsstncs (snc xpctd xpndturs ar
dcdd n advanc f arnd ncm), r vn fr
nanca spcuatn purpss.
10 Th currnt accunt s th sum f th trad aanc
and th aanc n transfrs and nt factr ncms.
Nt factr ncms ar prmary th arnngs n
utward nvstmnts and ans ss paymnts mad
t frgn nvstrs and crdtrs. Rmttanc ws
frm rsdnts wrkng arad ar as accuntd
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Financialization and Its Macroeconomic Discontents 49
as factr ncms and fr sm DTes (.g. inda,
Mxc and th Phppns) th sz f such ws
s sustanta.
11 Any statstca rrrs twn th currnt and th
capta and nanca accunts n th aanc f pay-
mnts ar capturd y th “nt rrrs and mssns”catgry; ths tm s usd t prsrv th accuntng
prncp f quaty twn th currnt accunt and
th capta and nanca accunts.
12 Th dscussn that fws draws frm th anaytca
framwrk dvpd y Krg, 2014a.
13 in thry, th stuatn fr surpus cuntrs xpsd
t unfttrd capta ws wud prsnt smar
changs. evn thy cud fac dcnng trnds n
nt factr ncms, and thrfr dwnward prssur
n thr currnt accunts. Asd frm thr factrs
drvng thr xprt succsss, th prspcts f fa-
ng nt factr ncms mght gnrat prssur tcmpnsat y amng at vr gratr trad surpuss.
14 Wh th aggrgat prspctv takn n ths sc-
tn s crtca fr pnpntng th macrnanca
mpcatns f capta ws n th currnt cntxt,
th dtad anayss w shds a dffrnt ght y
dstngushng twn mr unsta and spcua-
tv shrt-trm ws and ths that ar ngr trm
and mr ky t ttr nkd t dvpmnt
nds.
15 Ths cnguratn f pcs s fund, fr nstanc,
n th Untd Stats, th urzn and th Untd
Kngdm, and ny partay n Japan whr quan-
ttatv asng was accmpand y sm dgrf sca raxatn. S TDR 2014 fr an xtnsv
anayss.
16 Ths prspctv s n n wth rcnt studs such
as ths y Gaaghr (2015), Katnrunnr and
Karacmn (frthcmng), Katnrunnr and
Pancra (2014) and Pw (2013).
17 Sm cuntrs f smar rvanc, such as th
Russan Fdratn, ar nt ncudd du t th ack
f dtad data n th Wrd bank’s International
Debt Statistics.
18 Th spk n prvat capta nws rcrdd n 2005
s n fact th way th Wrd bank rcrdd dtrf.
19 Fr a dscussn aut channng FDi fr th gd
f dvpmnt, s th jnt UNCTAD/ilo vum
n ndustra pcy (Saazar-Xrnachs t a., 2014).
20 S Financial Times, “Ra stat and Chna dm-
nat FDi ws”, 4 Jun 2015.
21 UNCTAD, 2015: 18, ta i.5.
22 btwn 2011 and 2013, nt FDi nws t DTes
cnsstd f, n avrag, rnvstd arnngs (45 pr
cnt) and ntra-rm ans (22 pr cnt); th rman-
ng 33 pr cnt cnsstd f quty, ncudng mrg-
rs and acqustns (UNCTAD, World Investment
Report dataas).
23 Fr a rcnt rvw, s Thrwa, 2011.
24 S Patnak (2007) fr an anaytca xpsé f th
mtd ffctvnss f prcautnary hdngs f
frgn-xchang rsrvs; and as Trja Zan
(2015), wth spca rfrnc t cntra anks n
latn Amrca.
25 Fr frma drvatns f th pnts mad hr, sPatnak and Rawa, 2005; and Patnak, 2006.
26 Hrndn t a. (2013) rpcat and mprcay
chang Rnhart and Rgff (2010 and 2010c),
whs wrtngs hav n wdy usd t supprt
sca austrty argumnts asd n th styzd nd-
ng that puc dt xcdng 90 pr cnt f GDP
rducs grwth. Hrndn t a. (2013) cncud that
Rnhart’s and Rgff’s sctv xcusn f data,
cdng rrrs and napprprat wghtng f sum-
mary statstcs undr th rsut n puc dt and
grwth. Whn ths rrrs ar crrctd, th rsuts
shw that th grwth cnsquncs f puc dtvary and th ffcts ar mdst.
27 in latn Amrca, th cntxt f vrvaud xchang
rats, xpandng dmstc dmand and a mr pn
trad rgm, “d t ncrasd mprts and a grw-
ng currnt-accunt dct, whch was nancd by
frgn nvstrs wh wr attractd by th prms
f hghr rturns. Hwvr, th cratv prcss f
tchngca prgrss and rstructurng rmand
t carrd ut, and th macrcnmc nvrn-
mnt f hgh ntrst rats, strng xchang rats
and vat capta ws dd tt t supprt th
nw nvstmnt rqurd fr such a transfrmatn.
Thus pcy rfrms wr unsuccssfu caus th‘cratv’ mnt n th ‘dstructn’ prcss fad
t rng aut ra transfrmatn f th prductv
structur thrugh hghr nvstmnt and tchng-
ca chang” (TDR 2003: 145–146).
28 Ths rpp ffcts ar grupd sparaty frm
th Asan nanca crss n rdr t dffrntat
twn th rgna cntagn f that crss and
hw ths csts manfstd n thr mrgng markt
cnms.
29 Ths data and th trm “capta w nanza” ar
frm Rnhart and Rnhart (2008), wh nt that,
athugh a ttr masur wud rsrv accu-muatn ss th currnt accunt aanc, th ngr
tm srs and gratr cnsstncy f data n th
currnt accunt mak ths a satsfactry susttut.
30 Ths sctn mts th dscussn t latn Amrca.
Many thr dvpng cuntrs wr swpt up
n th sam cyc f nanca crss, ut th latn
Amrcan xprnc s mmatc f th argr
cnmc frcs at wrk.
31 evn braz, whch had capta cntrs and dd nt
xprnc much capta ght, suffrd caus f
th gnra suspnsn f ndng t latn Amrca
(Díaz-Ajandr, 1984).
32 As a shar f GDP, th currnt accunt dcts
f Thaand and Maaysa that yar wr -8.1 and
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Trade and Development Report, 201550
-4.4 pr cnt rspctvy (iMF, World Economic
Outlook dataas, octr 2014).
33 Wad cnsdrs th Rpuc f Kra a dffr-
nt cas n th grunds that thr t was mr th
ndustra cngmrats that had nks wth nanc
thrugh thr accss t chap frgn capta, rathrthan vstd ntrsts n prprty.
34 Tawan Prvnc f Chna and Hng Kng (Chna)
succssfuy fndd ff spcuatv attacks, ut th
Rpuc f Kra was much mr xpsd caus
f shrt-trm dt.
35 by cntrast, gvrnmnt spndng n gds and
srvcs as a shar f GDP rs frm 19.2 pr cnt
n 1994 t 20.6 pr cnt n 1998, wth th uk f th
rs ccurrng n 1995 (whn t ncrasd t 21 pr
cnt) as a rsut f a n-tm pstv shck f
natn-ratd adjustmnt f wags and saars
(UNCTADstat ). 36 Surc: Wrd bank, World Development Indicators
dataas.
37 S as Dmrgüç-Kunt and Dtragach,1998;
Rnhart and Rnhart, 2008; and Wr, 2001.
38 in mathmatca trms, th man accuntng dntty
dns GDP as th sum f cnsumptn (C), prvat
nvstmnt (i), gvrnmnt xpndtur (G) and
xprts (X) mnus mprts (M). Smp assumptns
aw spcfyng th tax rat (t) and th savngs and
mprt prpnsts, s and m rspctvy, as:
T = t · GDP; S = s · GDP; M = m · GDP,
whr T stands fr tta tax rvnu and S fr prvat
savngs. Arrangmnts f ths quatns arund thaccuntng dntty yd th xprssn:
GDP = (G + i + X)/(t + s + m), r atrnatvy:
GDP = wt · (G/t) + w
s · (i/s) + w
m · (X/m)
whr wt, w
s and w
m ar th wghts f ach f
th akags (tax, savngs and mprt prpns-
ts, rspctvy). Ths quatn stashs that
grwth f GDP dpnds n th grwth f th thr
varas, G/t, i/s and X/m; dnd as sca stanc,
prvat stanc and xtrna sctr stanc, rspc-
tvy, ampd y th strngth f th rspctvmutprs, gvn th mntnd wghts, n th
macrcnmc cntxt. T avd cmpcatng
th prsntatn wth drvatn f th stady stat
cndtns, t s sufcnt t nt that ths stancs
rct nanca cndtns as w, whr a argr
numratr than th dnmnatr pnts twards a nt
rrwng pstn. Thus, a stady path f sustand
grwth and nanca staty rqurs that nn f
ths stancs grw at a prprtnay fastr pac
than th thrs fr a prngd prd f tm.
39 Th xtrna accunt cam th adng drvr n
40 pr cnt f ths cass, and cam sgncantymr mprtant n anthr 27 pr cnt f cass.
40 S Frnk and Tayr (2006) fr a dscussn f
th varyng crcumstancs and changs that ar
asscatd wth managng th xhang rat t supprt
dvpmnt.
41 Data frm th Wrd bank (2013) ndcat that at
th nd f 2012 th shar f nn-rsdnt hdngs
n ca DTe dt markts was 26.6 pr cnt, and
that t was as hgh as 40 pr cnt n sm cnms
(ctd n Akyüz, 2014: 20).
42 S TDR 2013, annx t chap. i, whr a ga
md smuatn prvds mprca ustratn
f th fact that pcs asd n mprvd aurncm and supprtv sca pcy yd wakr
rsuts, vn f st pstv, whn partnr cuntrs
tak an ppst stanc and prt n a typca “fr-
rdr” mannr.
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