Volume 44, Number 173,
April-June 2013
Latin America. Between Financialization
and Productive Finance
Roberto Soto
WHO BENEFITS FROM THE FINANCIALIZATION PROCESS?

As in all capitalist systems, there are winners (the few) that take advantage of everything within their reach to achieve maximum profit, spreading the most risk possible. Innovation has allowed financial and non-financial conglomerates to use financial engineering to increase liquidity and reduce risk. Large companies face fierce competition, and consequently seek a new way to increase revenue through their finance departments, which manipulate their financial statements to achieve economic objectives. Both financial and non-financial (public and private) mega-conglomerates have thus adopted a process known as financialization, which refers to “…the growing role of financial motivations, financial markets, financial actors and financial institutions in domestic and international economic operations” (Guttmann, 2009). This process consists of the search for maximum share value. The objective of these corporations is to increase their short-term share value, making long-term objectives (associated with the productive part of the company) secondary.

Similarly, Krippner (2005: 174) defines financialization as “a pattern of accumulation by which profits primarily grow through financial channels rather than through commerce and the production of merchandise.” Palley (2007) believes that “…the structure and operation of financial markets have changed and they have become the heart of the financialization process. This reveals an urgent need to reestablish effective control over them.”3 The problem is aggravated when public entities adopt the same financial practices as private organizations, that is, the use of public resources in highly risky operations.

It is important to emphasize that these transformations have deepened since the 1990s, when public administrations began to adopt the principles of private management. In a context of financial deregulation, economies (especially those in Latin America, but also in many European countries) adopted the adjustment model suggested by the International Monetary Fund and the World Bank, where developing a market economy was one of the objectives, which was meant to be carried out through diverse strategies such as reducing the economic sway of the State.

Returning to Guerrero (2004), it is true that public administrations have shown inefficiency in their handling of private resources, which is why exo-privatization occurs, where the production of goods and public services is now carried out by private management. On the other hand, endo-privatization consists of substituting national interests for the public administration, by the principles of private management. In other words, the idea of the public good and solidarity are replaced by the search for revenue. As Guttmann (2009) would say, we live in a system dominated by finance.

So, who are the winners in this model? Galeano (2010: 18) believes the system is rational from the point of view of its foreign owners and our profit-seeking bourgeoisie…But the system is irrational for everyone else. The more development occurs, the more imbalances and tensions are aggravated, which is a key contradiction. In other words, we are talking about large financial and non-financial conglomerates, hedge funds and other institutional investors.

TRANSFORMATIONS TO THE FINANCIAL SYSTEM OF LATIN AMERICA

With financial opening, interest rates are no longer dependent on national productivity. Now they are partly fixed by taking into account international financial markets and the Fed rate, thus breaking the functional relationship between national interest rates and earning rates. These transformations, which occurred over 30 years ago, rested on the premise that financial repression had been influencing the financial markets. Competition for funds between the private and public sectors burgeoned, hindering the most dynamic sectors from obtaining financing from the market, distorting prices of financial and non-financial assets and affecting the free functioning of participating agents.

It is undeniable that structural reforms and their effects on Latin American countries were similar. In some cases, exchange currencies were established and there was financial and commercial liberalization, while increased inflation was attacked and privatizations occurred in all sectors. From a results point of view, we can say that there was significant external dependence, currencies were over-appreciated and profound crises with considerable social impacts have occurred. One of the most important transformations occurred in the banking system, which, due to a privatization-foreignization process, altered the financing pattern, whereby subsidiaries went from traditional practices (Figure 1) to using the same financial practices as their foreign headquarters.

3 Cfr. Chapoy and Girón, “Financialization and Securitization. A Minsky Moment,” in Economía unam, vol. 6, num. 17, Mexico, unam, 2009.

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 193, April-June 2018 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
CP 04510, México, D.F. Tel (52 55) 56 23 01 05 and (52 55) 56 24 23 39, fax (52 55) 56 23 00 97, www.probdes.iiec.unam.mx, revprode@unam.mx. Journal Editor: Moritz Cruz. Reservation of rights to exclusive use of the title: 04-2012-070613560300-203, ISSN: pending. Person responsible for the latest update of this issue: Minerva García, Circuito Maestro Mario de la Cueva s/n, Ciudad Universitaria, Coyoacán, CP 04510, México D.F., latest update: June 27th, 2018.
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