Abstract
Juan Pablo Painceira’s book Financialisation in Emerging Economies: Changes in Central Banking is a must-read for anybody who wants to understand the recent changes in emerging economies’ (EEs) financial markets. Based on an innovative Marxist theoretical framework, Painceira shows how the subordinate integration of EEs into international financial markets has fundamentally changed the structure of the EEs’ domestic financial markets through the process of reserve accumulation. The central argument of the book is that reserve accumulation, and their sterilization through short-term central bank/government debt securities, changes the balance sheet structure of the domestic banking system and tilts their lending operations towards (short-term) household lending. This is so because sterilization bonds offer the banking system liquid and return-generating financial assets, which the banks can use to raise their own liabilities through short-term market-based funding. Given the short-term nature of that funding, banks then prefer to commit their assets to short-term lending to the household sector. Reserve accumulation has been necessary to secure EEs’ integration into the world market and to protect them from the vagaries of international financial markets. Sterilization operations, in turn, have been institutionalized by the widespread adoption of Inflation Targeting Regimes, which—on the one hand—create a homogenizing device of macroeconomic regimes across the globe, and—on the other hand—commit central banks to intervene in foreign exchange and money markets to avoid inflationary pressures from strong capital inflows.
Painceira develops his novel and intriguing argument over seven chapters. After some brief considerations on the literature on financialization in chapter 1, chapters 2 and 3 set out the Marxist theoretical framework of central banking underpinning the empirical arguments of the book. Building on the work by Itoh and Lapavitsas (1999) that situates central banks on the pyramidal structure of money markets, Painceira highlights that in contemporary capitalism, central banks essentially have three roles: first, a private role, as the bank of banks, which manages the loanable capital emerging in the circuit of capital, and second, a public role as the bank of the state. The private role of central banks, which means central banks are primarily responsible for managing the health of money markets, is historically grounded and means that central banks are inherently related to the process of capital accumulation. It is historically grounded insofar as the first central banks in developed countries were initially private banks, which started to centralize banking reserves and sequentially took on the role of managing the money market.
This private role, Painceira argues, is the true essence of the nature of central banks and becomes particularly visible in the moment of crisis where central banks will prioritize maintaining the health of the banking system over all other policy goals (as lender of last resort). It is also in these moments when potential tensions with central banks’ second role, its public one, become most apparent. As bank of the state, central banks are “absolved from the necessity to compete,” which means it can “dedicate itself to its sole task: to defend the quality of national money” (38, quoting Harvey 1982: 248). This private dimension, as indicated above, becomes institutionally enshrined in an inflation targeting regime, which puts inflation control—that is, the control of the quality of money—above any other public policy goal. As such, Painceira’s book follows in the footsteps of Marxist theories of money and monetary policy that highlight the crucial role of loanable capital (interest bearing capital) in capitalist accumulation, but with a focus on the circulation sphere, which is an element arguably neglected in much of Marxist writings. In highlighting the peculiar role of the central bank as bank of banks—and thus an institution tightly connected to and committed to private financial markets—his work also makes a distinct contribution to post-Keynesian monetary thinking that largely emphasizes the public role of central banks. This different interpretation, in turn, has important implications for what a central bank can and cannot do when it comes to policy implications, such as prioritizing other public policy objectives (e.g., full employment).
Arguably the most novel aspect of Painceira’s book is his discussion of the third role of central banks: that of guardian of world money reserves, which is essential for countries to participate in the world market. In chapter 3, he writes: The Marxist theoretical understanding of central banks’ functions is based on the pyramidal structure discussed in chapter 2 in which central banks are at the top of the pyramid. This pyramidal structure shows only the domestic dimension of capital accumulation and, consequently, the domestic side of the central banking relations. However, central banks also have an international dimension: that of hoarding the foreign exchange reserves of the country, and through this function steering the domestic and international spheres of economic activity. (33)
As indicated above, the hoarding of foreign exchange reserves or world money is absolutely essential to partake in the world market. As Painceira highlights, quoting Marx: World money “serves as the universal means of payment, the universal means of purchase, and as the absolute social materialization of wealth as such” (47, quoting Marx 1976: 242). In Painceira’s words: “World money supports the world market and provides the organizing impetus in terms of the institutional structure that the world market lacks when compared with the domestic markets. For the same reason, world money crystallizes tensions present in the world market and is the focus of global crises” (47). Whereas, historically, gold has been the main world money, we are now living in a world of quasi-world money, the US dollar, which accords the issuer of that quasi-world money disproportional power and influence over the world economy.
Importantly, as with the central bank’s public and private functions, there are potential tensions between the imperatives demanded by the domestic and the international sphere. These tensions, as Painceira argues, have become particularly acute in the context of the rising financial globalization and cross-border capital movements over the last few decades. Further, according to Painceira, “in Marxist theory, there is a trend for central banks to operate in favor of the international sphere, as reserves of world money are important for the access of domestic capitalists to the world market, having impacts on domestic capital accumulation” (48). For Painceira, these tensions are particularly acute in the context of EEs, characterizing their subordinate integration in the world economy, and requiring a higher accumulation of foreign exchange reserves to protect from potential sudden capital outflows.
Reserve accumulation and its sterilization through the issuance of central bank instruments (reverse repos or bonds), however, have crucial implications for the structure of the domestic financial system and the financialization of the domestic economy. In chapters 4–6, using extensive graphical analysis and his detailed knowledge of central bank operations and the banking system, Painceira shows how Brazilian and Korean banks have used the sterilization bonds issued by their respective central banks to raise their own liabilities, which they have then used to expand their lending operations mainly to the household sector. On the macroeconomic level, these sterilization operations have resulted in a massive increase in public domestic debt.
Two—somewhat technical—mechanisms are key here: First, the nature of sterilization operations. Reserve accumulation by central banks provides extensive liquidity in domestic currency to the banking system (as the central bank buys foreign exchange with domestic currency). To avoid excess liquidity in the domestic banking system—and potential inflationary pressures—the central bank sells sterilization bonds to the banking system; these bonds are both interest bearing and can be sold quickly and easily back to the central bank, granting the banks the confidence and flexibility to issue liabilities against them, thus expanding their own balance sheets and contributing to the financialization of the domestic economy.
Given these effects, the question arises, What would happen if those monetary sterilization operations were not carried out? Painceira also addresses this crucial question. He writes: Apart from the possible effects on the exchange rate, there would be an increase in banks’ reserves, causing an expansion in the money supply, which in turn would put a higher pressure to lower the money markets rates, causing an expansion of the monetary base. More important is the fact that an increase in cash reserves does not allow an easier expansion of banking liabilities like the holding of public debt securities does. This is because banks cannot issue their own interest-bearing liabilities based on assets positions yielding zero interest rates such as bank reserves. Otherwise, interest rates received on banking assets would be lower than rates paid on liabilities. (132)
The need to avoid an expansion in the monetary base and thus any inflationary pressures, in turn, are institutionalized in an inflation targeting regime, which prioritizes inflation control over any other public policy goals.
The second technical mechanism is the connection between rising bank liabilities and domestic financialization. Here, Painceira argues convincingly that the short-term nature of banks’ own liabilities translated into asset positions that were also more short-term, in particular household lending. In addition, the holding of liquid and safe financial assets in the form of public debt securities allowed banks to use them as collateral in other financial operations, in particular the expansion of derivatives.
In sum, central banks—as the pivot between the international and national sphere and in their dual role as bank of banks and bank of the state—have played a key role in translating the rise of financial integration into substantive changes in the domestic financial system and the financialization of the domestic economy. As Painceira shows, these mechanisms were present both in Brazil and Korea, though somewhat more pronounced in the former. In Korea, because of the country’s higher level of financial integration, the relations are somewhat more complex as the central bank is not only dealing with substantial capital inflows, but also outflows. However, the role of the central bank as the bank of banks and manager of loanable capital became evident in both countries during the global financial crisis of 2008, where central banks showed their true nature and did everything to support the domestic financial system (and indeed nonresident investors) through the provision of nearly unlimited foreign exchange and domestic liquidity.
In his final chapter, Painceira shows that these dynamics have also been present in other EEs (India, Indonesia, Malaysia, Poland, Russia, Turkey, Mexico, and South Africa). Though of course subject to national variations, many of these countries have experienced substantive reserve accumulation and an increase in household lending over the last decades. Though each of them would warrant detailed case studies, this points to the generality of Painceira’s argument and the importance of his work for a large range of countries. It is, however, also in that attempt for generalization where the book of Painceira falls somewhat short. Whereas the detailed case studies of Brazil and Korea provide convincing technical evidence and explanations of the mechanisms underpinning the nexus between reserve accumulation and domestic financial system structure, these detailed insights are missing for the generalization leaving them at risk of being unsubstantiated. Future research will need to address that gap.
In sum, Painceira’s book is a must-read for anybody keen to understand the peculiar nature of macro-financial dynamics in EEs. It skillfully weaves together a convincing theoretical understanding of central banking in Marxist political economy, with a detailed, technical understanding of central banking and banking in EEs. In that sense, he achieves what only very few authors can do: He allows us to understand the intricacies of financial markets and central bankers and “what is really going on,” while developing a higher-level political economy argument that is seminal and essential to understanding the political economy of financial integration and financialization in EEs. Methodologically, his book shows us the power of detailed institutional and balance sheet analysis and the analytical importance of “digging deep.” This has been facilitated by Painceira’s day job as Senior Advisor in the Open Market Operations Department at the Brazilian Central Bank. However, it is a methodology that is in principle open to us all through forensic document and balance sheet analysis and qualitative expert interviews. I hope that many will read Painceira’s important book, and not only gain a new understanding of the power and importance of central banks but also take methodological inspiration and help us understand what is really going on in the dark boxes of finance and central banking.
