DSA2016: Politics in Development
This panel examines the political economy of international finance in developing countries. Papers will focus on the role of the state, examining the ways in which developing country governments shape relations between domestic and global financial markets and financial sector development.
Since the 1980s, unprecedented capital mobility has linked the financial markets of developing countries into an ever more tightly interconnected global system. In many developing countries, including in sub-Saharan Africa, finance is undergoing rapid transformation and expansion, changing the architecture of domestic financial systems and redefining their links with global markets. Connections to global financial markets are evolving and deepening, and the majority of financial flows to developing countries now come through private rather than official channels. Integration brings opportunities but exacerbates vulnerabilities. Developing countries are having to navigate the end of the commodity super-cycle and the 'normalisation' of United States' monetary policy; questions about the sustainability of new sovereign debt issuances; and global financial standards are having unintended adverse effects, including on remittances.
Scholars have examined the liberalisation and integration of developing countries into global financial markets. The papers in this panel seek to go beyond this, examining the important role of the state in shaping the trajectory of financial sector development. Particular questions to be addressed include: to what extent, and in what ways does the international financial system structure the environment in which firms and governments in developing countries operate? How is the international and domestic political economy of finance shaping regulatory decisions? How and why does this vary across countries? What are the policy dilemmas and trade-offs that governments face, and how are they resolving them? What is the intersection between this debate and other debates on financialization or globalization and the state?
This panel is closed to new paper proposals.
An unlikely champion of global finance: Why is China exceeding international banking standards?
Rather than merely compliant with the new Basel III banking regulation, China voluntarily exceeds the global standard. This paper shows that low adjustment costs, factional politics, and an unusual alignment of domestic interests in the quest for international reputation drive this phenomenon.
As a G-20 member, China is engaged in financial reform since the end of the global financial crisis. A core piece of this reform is Basel III, the new prudential standard issued by the Basel Committee. Rather than merely compliant, China's banking regulation is stricter than the global standard, and it is implemented ahead of the international timetable. Why is China voluntarily subjecting itself to tougher regulatory standards than the rest of the world? This paper shows that low adjustment costs, factional politics, and an unusual alignment of domestic interests in the quest for international reputation drive this phenomenon. The troubled institutional history of China's financial system motivates all relevant stakeholders to seek external validation in order to address a credibility gap abroad, albeit for different reasons. The paper examines the power of reputation as a driver for regulatory positioning in the context of China's integration into international institutions.
The Political Economy Of Emerging Market Sovereign Bonds: Narrowing the policy space?
This paper looks at the importance of external factors in influencing international portfolio flows to developing country financial markets, and the impact of these flows on domestic development policy autonomy
The mechanisms of policy constraint imposed by international capital markets which are commonly written about in the International Political Economy literature are assessed, through trying to understand what factors actually determine financial markets' allocation of resources to developing countries. Utilising over 41 interviews and two and a half months of participant observation among sovereign bond market participants in Hong Kong, it was found that 'push' factors external to the capital receiving country (including international liquidity, market sentiment, and international interest rates) were fundamentally more important than 'pull' factors (country-specific factors such as economic policy and economic performance), in influencing financial market resource allocation. This was not only because financial market investors explicitly based their investment decisions on push factors, but also because push factors exerted an important influence on investors' interpretations of the pull factors themselves. This is further explored through a case study of portfolio inflows to emerging market sovereign bonds between 2008 and 2013. It was found that despite country-specific fundamentals remaining constant during this period, investors' interpretations of them changed dramatically according to changes in the push factors. If financial market prices do not reflect country specific policies in the first place, this means that it is less likely that they pose a constraint on government policy directly through the market mechanism as is implied in much of the literature on the topic.
Financial globalization and money: interrogating the link between monetary regimes, financial risk and formal financial participation in Pakistan
Based on extensive fieldwork in Pakistan the paper links changing risk management strategies in the everyday portfolios of ordinary people to shifting monetary regimes, showing how new strategies undermine efforts on the part of the state to establish broader financial inclusion and development.
This paper argues that monetary governance, by which the state mediates the national currency's exposure to global markets, has important implications for financial sector development. Based on extensive field-based interviews in Pakistan, the paper links changing risk management strategies in the everyday balance sheets of ordinary people, to the shift in monetary regimes undertaken since the late 1990s. The paper shows how the uptake of what are essentially new hedging strategies undermines concurrent efforts on the part of the state to establish broader financial inclusion and development. Here the liberalization of money and markets has exposed the national currency to global markets, generating instability not only in money and pricing patterns across the economy. Utilising a methodology based on portfolio theory, field interviews show how ordinary people are actively responding to this instability. The paper shows how stalling monetization and demonitisation, declining bank intermediation and growing barter-like transactions arise out of micro risk management strategies and how, due to the subsistence goods and informal transactions that are key to these strategies, the central bank has misread this behavioural shift as a series of disparate shocks and a steep rise in the propensity to consume. With important implications for formal financial sector development, the predicament poses a set of challenges to the central bank in its efforts to manage money and improve the financial sector's engagement with ordinary people. The paper thereby highlights the importance of money and its regime of governance in establishing an enabling environment for financial sector development in low-income countries.
Embrace, Adapt or Eschew? African Governments Navigating Global Banking Standards
This paper examines the varying responses of African governments to global financial standards and why it is that some governments have embraced them while others have been highly selective in adoption or largely eschewed them.
Since the 1980s, unprecedented capital mobility has linked national financial markets into an ever more tightly interconnected global system and African countries have been no exception. To help manage the risks associated with financial integration, governments from the world's largest financial centers have met regularly since the 1980s to agree common regulatory codes and standards, which have become 'international best practice'. African governments have not been represented in these international decision-making fora and they have responded in different ways to these international codes and standards.
This paper examines the varying responses of African governments to global financial standards and why it is that some governments have embraced them while others have been highly selective in adoption or largely eschewed them. Focusing on the banking sector, the paper draws on a range of primary and secondary sources to compare banking regulation in eight African countries and sub-regions. It argues that differences in regulatory approaches and hence degrees of convergence with global standards, are the product of interaction between domestic politics, particularly the ownership structure of the banking sector, the depth and nature of integration into international financial markets, and relations with key global financial institutions including the International Monetary Fund (IMF).
Regulatory harmonization between the Brazilian and the international financial systems: the drivers, the consequences and the effects on the accountability of the Brazilian Central Bank
This paper assesses the public policy objectives pursued by the Brazilian Central Bank in its efforts to align the national financial regulation with international standards. It explores the interplay between context-specific factors and the integration agenda, focusing on issues of accountability.
It is often said that a globalized financial system impinges on the democratic choices of developing countries. According to such narrative, market sanctions and other types of retaliation coerce States to harmonize their domestic regulations with the standards set by institutions regarded by many as non-democratic, illegitimate and unaccountable.
However, the domestic incorporation of international standards can serve multiples purposes, not necessarily linked to an agenda of integration and liberalization. In other words, the harmonization between domestic legal systems and supranational norms is driven by a myriad of factors that can only be explained through detailed case studies.
By drawing on the experience of the Brazilian Central Bank with crisis management, the paper will seek to identify the official and the concealed public policy objectives pursued by the authority in its efforts to align the national financial system's regulation and its own supervisory practices with the international standards.
The empirical analysis will cover three episodes of financial crises: 1) The structural "cleaning-up" of the financial system after the monetary stabilization (mid-90's); 2) The adverse impacts of the devaluation of the currency (late 90's); and 3) The failure of small and medium-sized banks in the aftermath of the 2008 global financial crisis (GFC).
As the pattern of the monitoring of domestic incorporation of supranational standards has changed since the GFC, and given that developing countries have become members of the main international regulatory bodies, the paper will also assess the effects of these changes on the accountability of the financial regulators.
This panel is closed to new paper proposals.