Money Power and Financial Capital in Emerging Markets: Facing the Liquidity Tsunami 2019044859, 2019044860, 9780367276478, 9780429297106

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“An engaging book that makes a distinctive contribution to understanding the dynamics and contradictions of financial capital in emerging markets. Drawing upon research from the cases of South Africa and Brazil, the author asks important questions about the impact of the expansion of financial capital flows to states in the Global South. Alami challenges the assumption that state financial management practices are shaped by top-down processes of policy diffusion – rather, they are multidirectional circuits of policy design and practice that nonetheless serve to reinscribe the racialized, gendered and class based relations of subordination and domination that are embedded in contemporary global financial markets. An accomplished piece of work that will no doubt make an important theoretical and empirical contribution to the study of the politics of global finance.” – Juanita Elias, Professor in International Political Economy, Warwick University, UK. “This is a highly innovative, theoretically astute and timely intervention in debates concerning the place of emerging markets within the changing global financial order. By drawing on a range of literatures in a geographical political economy tradition, Alami clearly shows how and why geography matters in the production of cross border finance for emerging markets and the important implications of this for state policy making. By combining theoretical work from a range of disciplines with in-depth case studies of Brazil and South Africa, it is a must read analysis for researchers and practitioners concerned with understanding the changing political economy of global finance as it relates to emerging markets.” – Sarah Hall, Professor of Economic Geography, University of Nottingham, UK. “Drawing upon extensive fieldwork, this book offers a rich and original approach to cross-border financial management in ‘emerging markets’. It focuses on the politics of money and its power to influence governments and the balance of social forces in favour of capital: this is the terrorism of money. The study examines in detail the financial development and cross-border financial policies and outcomes in Brazil and South Africa, especially after the Global Financial Crisis. This book is essential reading for students and scholars working in the field.” – Alfredo Saad-Filho, Professor of International Development, King’s College London, UK. “Theoretically sophisticated, historically grounded and politically alive, Alami’s study of the ongoing struggles of Brazil, South Africa and other Global South states to manage volatile cross-border flows of financial capital in the face of fractured local class relations is a razor-sharp contribution to the burgeoning critical literature on relations of money, power and space.” – Brett Christophers, Professor of Social and Economic Geography, Uppsala University, Sweden.

Money Power and Financial Capital in Emerging Markets

This book provides a comprehensive investigation of the messy and crisis-ridden relationship between the operations of capitalist finance, global capital flows, and state power in emerging markets. The politics, drivers of emergence, and diversity of these myriad forms of state power are explored in light of the positionality of emerging markets within the network of space and power relations that characterises contemporary global finance. The book develops a multi-disciplinary perspective and combines insights from Marxist political economy, post-Keynesian economics, economic geography, and postcolonial and feminist International Political Economy. Alami comprehensively reviews the theories, histories, and geographies of crossborder finance management and develops a conceptual framework which allows unpacking the complex entanglement of constraint and opportunities, of growing integration and tight discipline, that cross-border finance represents for emerging markets. Extensive fieldwork research provides an in-depth comparative critical interrogation of the policies and regulations deployed in Brazil and South Africa. This volume will be especially useful to those researching and working in the areas of international political economy, contemporary geographies of money and finance, and critical development studies. It should also prove of interest to policy makers, practitioners, and activists concerned with the relation between finance and development in emerging markets and beyond. Ilias Alami is a postdoctoral researcher at Maastricht University. His research and teaching interests are in the areas of the political economy of money and finance, development and international capital flows, the geographies of global finance and financialisation, state capitalism, and race/class/coloniality. He has published peer-reviewed research articles in Geoforum, New Political Economy, Review of Radical Political Economics, Review of African Political Economy, and Development and Change. Prior to joining Maastricht University, he was a lecturer in International Politics at the University of Manchester. He also held visiting positions at the Getulio Vargas Foundation in São Paulo and the University of Johannesburg.

RIPE Series in Global Political Economy Series Editors: James Brassett (University of Warwick, UK), Susanne Soederberg (Queen’s University, Canada) and Eleni Tsingou (Copenhagen Business School, Denmark).

The RIPE Series published by Routledge is an essential forum for cutting-edge scholarship in International Political Economy. The series brings together new and established scholars working in critical, cultural and constructivist political economy. Books in the RIPE Series typically combine an innovative contribution to theoretical debates with rigorous empirical analysis. The RIPE Series seeks to cultivate: • • • •

Field-defining theoretical advances in International Political Economy Novel treatments of key issue areas, both historical and contemporary, such as global finance, trade, and production Analyses that explore the political economic dimensions of relatively neglected topics, such as the environment, gender relations, and migration Accessible work that will inspire advanced undergraduates and graduate students in International Political Economy.

The RIPE Series in Global Political Economy aims to address the needs of students and teachers. The European Periphery and the Eurozone Crisis Capitalist Diversity and Europeanisation Neil Dooley State-permeated Capitalism in Large Emerging Economies Andreas Nölke, Tobias ten Brink, Christian May and Simone Claar Japanese Resistance to American Financial Hegemony Global versus Domestic Norms Fumihito Gotoh Money Power and Financial Capital in Emerging Markets Facing the Liquidity Tsunami Ilias Alami For more information about this series, please visit: www.routledge.com/RIPESeries-in-Global-Political-Economy/book-series/RIPE

Money Power and Financial Capital in Emerging Markets Facing the Liquidity Tsunami Ilias Alami

First published 2020 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 52 Vanderbilt Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2020 Ilias Alami The right of Ilias Alami to be identified as author of this work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Names: Alami, Ilias, author. Title: Money power and financial capital in emerging markets : facing the liquidity tsunami / Ilias Alami. Description: Abingdon, Oxon ; New York, NY : Routledge, 2020. | Series: RIPE series in global political economy | Includes bibliographical references and index. Identifiers: LCCN 2019044859 (print) | LCCN 2019044860 (ebook) | ISBN 9780367276478 (hardback) | ISBN 9780429297106 (ebook) Subjects: LCSH: Finance—Developing countries. | Capital market— Developing countries. | Capital movements—Developing countries. Classification: LCC HG195 .A456 2020 (print) | LCC HG195 (ebook) | DDC 332/.0415091724—dc23 LC record available at https://lccn.loc.gov/2019044859 LC ebook record available at https://lccn.loc.gov/2019044860 ISBN: 978-0-367-27647-8 (hbk) ISBN: 978-0-429-29710-6 (ebk) Typeset in Times New Roman by Apex CoVantage, LLC

For Ahmed Alami (1922–2016)

Contents

List of figures List of tables Acknowledgements List of abbreviations

Introduction: Emerging markets in a world awash with liquidity

PART 1

xi xii xiii xv

1

Theory, history, and geography

17

  1 Managing cross-border finance: key theoretical debates and policy prescriptions

19

  2 The politics of managing cross-border finance in emerging markets

35

  3 Conceptualising cross-border finance management

53

  4 The specificity of cross-border finance management in emerging markets

69

PART 2

Case studies

91

  5 Capitalist development and cross-border finance in Brazil

93

  6 Capitalist development and cross-border finance in South Africa

110

x  Contents

  7 Class relations and post-crisis financial vulnerability in Brazil and South Africa

130

  8 The uneven formulation of cross-border financial policies in Brazil and South Africa

153

PART 3

Towards a unified theory

175

  9 Continuity, change, and diversity in cross-border finance management

177

10 Postcolonial landscapes of cross-border finance management in emerging economies

197



Conclusion: Money-power in ‘Third World countries with First World financial systems’

216

Appendix Index

230 232

Figures

5.1 Net capital account and composition of inflows (1970–2014). 5.2 Composition of debt flows (1970–2000). Net flows received by the borrower during the year are disbursements minus principal repayments. 5.3 Accumulation of the three ‘elementary forms’ of fictitious capital (% of GDP). 5.4 Brazilian real – real effective exchange rate (1994–2014) (Monthly averages; 2010 = 100). 6.1 Net capital account and composition of foreign capital flows to South Africa (1985–2014) (R million). 6.2 Rand – real effective exchange rate (1994–2014). 6.3 Accumulation of the three ‘elementary forms’ of fictitious capital in South Africa. 7.1 Average annual change in prices of a series of key Brazilian agrarian and mining commodities (2000–2015). 7.2 Net capital account and composition of inflows in Brazil (1999–2014). 7.3 Net capital account and composition of inflows in South Africa (1999–2014). 7.4 Average annual change in prices of a series of key South African mining commodities (2000–2015). 7.5 Real exchange rates Brazilian real and South African rand (1994–2013). 8.1 Nominal daily exchange rate and key policy interventions (September 2008–May 2014). 9.1 The problematic of variegation in cross-border finance management in emerging markets.

99 99 101 102 116 117 121 132 133 136 138 147 160 193

Tables

2.1 The politics of cross-border finance in emerging markets: key arguments. 7.1 Turnover of over-the-counter foreign exchange instruments, by currency ­“Net-net” basis, daily averages, in billions of US dollars. 7.2 Turnover of exchange-traded futures, by currency. Notional principal, in billions of US dollars. 7.3 Over-the-counter foreign exchange turnover by instrument. Daily averages in April 2013, in billions of US dollars. 7.4 Volatility of major emerging market floating currencies.

47 143 143 144 146

Acknowledgements

Researching and writing this book has been a wonderful experience, largely due to the people I met over the past few years, in Manchester, Brazil, and South Africa. Chapter drafts or versions of the argument in some form were read and commented upon by Stuart Shields, Adrienne Roberts, Greig Charnock, Brett Christophers, Ian Bruff, Carl Death, Martín Arboleda, Nina Kaltenbrunner, Patrick Bond, Alfredo Saad Filho, and Adam Dixon. I am very grateful for their help, and I apologise to those I have mistakenly omitted. All errors remain mine. I also thank the members of the Global Political Economy research cluster at the University of Manchester to whom I owe a huge intellectual debt. The research was informed by trips I have made to Brazil and South Africa between June and December 2016, and I would like to thank the Brazilian and South African people for their extraordinary generosity and cheerfulness. Their warm welcome, irrespective of their ‘character masks’ and of the contradictions that operate ‘behind their backs’, was absolutely instrumental in my fieldwork research. Both countries were going through a period of political effervescence, which made it a particularly exciting time to be there. In Brazil, the coup d’état that removed Dilma Rousseff from power was dismally unfolding, leaving the Left stunned and divided, but historically large demonstrations were organised against the interim government and the deepening of austerity (‘Fora Temer!’). In South Africa, the #FeesMustFall protests were escalating, to which then Minister of Education (and head of the Communist Party) responded that free higher education for all was ‘a cheap populist call’ and sent the police to shoot the protesting students with rubber bullets. Trying to make sense of those events, as well as of how they related to the particular research conducted for the present book, was a fascinating experience, and I  consider that this was integral to the research process. I  would like to express my gratitude in particular to Pedro Chadarevian for his help and friendship, and to Kurt von Mettenheim, who kindly welcomed me at the Getulio Vargas Foundation in São Paulo. In South Africa, my thanks go especially to Sam Ashman and the members of the SARChI chair in Industrial Development at the University of Johannesburg for their warm welcome.

xiv  Acknowledgements For permissions to use material from work previously published in their journals, I thank the following: Elsevier – ‘On the terrorism of money and national policy-making in emerging capitalist economies’, Geoforum (2019) 96: 21–31. Sage (on behalf of the Union for Radical Political Economics) – ‘Post-Crisis Capital Controls in Developing and Emerging Countries: Regaining Policy Space? A Historical Materialist Engagement’, Review of Radical Political Economics (2019), online first. Taylor and Francis  – ‘Capital accumulation and capital controls in South Africa: a class perspective’, Review of African Political Economy (2018) 45(156): 223–249. John Wiley & Sons (on behalf of the International Institute of Social Studies, The Hague) – ‘Taming Foreign Exchange Derivatives Markets? Speculative Finance and Class Relations in Brazil’, Development and Change (2019), online first. I also would like to thank the Union for Radical Political Economics (URPE fellowship 2017–2018) and the University of Manchester (President Doctoral Scholar Award 2014–2017 and School of Social Sciences fieldwork bursary) for generously funding this research. And of course, my sincere gratitude to my family, Khadija, Myriam, and Rachid Alami, for their enthusiasm, continuous support, and affection. Ilias Alami Maastricht, The Netherlands September 2019

Abbreviations

ANC BCB BEE BIS BNDES BRICS BRL CMN CNI COSATU CUT CVM DTI EDD FDI FED FIESP FX GDP GEAR GMS GNI HMPA IFC IFF IMF IOF IPE IPEA ISI JSE MEC

African National Congress Banco Central do Brasil Black Economic Empowerment Bank for International Settlements Banco Nacional de Desenvolvimento Econômico e Social Brazil, Russia, India, China, South Africa Brazilian real Conselho Monetário Nacional Confederação Nacional da Indústria Congress of South African Trade Unions Central Única dos Trabalhadores Comissão de Valores Mobiliários Department of Trade and Industry Economic Development Department Foreign Direct Investment Federal Reserve of the United States of America Federação das Indústrias do Estado de São Paulo Foreign Exchange Gross Domestic Product Growth, Employment, and Redistribution Global Monetary System Gross National Income Historical Materialist Policy Analysis International Finance Corporation Institute for International Finance International Monetary Fund Imposto Sobre Operações Financeiras (Tax on Financial Operations) International Political Economy Instituto de Pesquisa Economica Aplicada Import-Substituting Industrialisation Johannesburg Stock Exchange Minerals-Energy Complex

xvi  Abbreviations MERCOSUR Mercado Común del Sur (Southern Common Market) MST Movimento dos Trabalhadores Sem Terra (Landless Workers’ Movement) MTST Movimento dos Trabalhadores Sem Teto (Homeless Workers’ Movement) NT National Treasury of South Africa NUMSA National Union of Metalworkers of South Africa OECD Organisation for Economic Co-operation and Development PAC Programa de Aceleração do Crescimento PT Partido dos Trabalhadores (Workers’ Party) QE Quantitative Easing SACP South African Communist Party SADC South African Development Community SARB South African Reserve Bank SELIC Sistema Especial de Liquidação e Custodia (BCB’s overnight rate) TNC Transnational Corporation UNCTAD United Nations Conference on Trade and Development WTO World Trade Organisation ZAR South African Rand

Introduction Emerging markets in a world awash with liquidity

In April 2012, at the White House on her first visit to the United States since her election in 2010, Brazilian president Dilma Rousseff scolded advanced capitalist economies for unleashing a ‘tsunami de liquidez’, a ‘liquidity tsunami’, onto the developing world. At the time, massive volumes of largely unregulated private financial capital flows were pouring into Brazil and many other developing and emerging economies. Many of these countries had weathered the 2007/8 global financial crisis relatively well. While the crisis erupted in the heartland of the world economy, the post-crisis economic recovery in these peripheral spaces was swift, growth prospects looked better than in advanced capitalist economies, and asset prices were booming. Large volumes of financial capital flooded in, amongst much enthusiasm in the global financial community. This enthusiasm was shared by Managing Director of the International Monetary Fund (IMF) Christine Lagarde, who praised Brazil and others such as Mexico and Peru for finding the ‘enviable sweet spot’ between sustained growth and reduced external vulnerability, allowing them to develop into ‘some of the world’s leading emerging markets’ (2011). More generally, it seemed that emerging markets were becoming the new engine of global economic growth.1 Commentators connected these developments to a broader pattern of geographical power rebalancing in the world economy and to the consolidation of new forms of state-led capitalist development in emerging markets. But the tide quickly turned. A  combination of factors, including the end of the commodity boom (which was largely driven by China’s hunger for iron ore, copper, and other primary commodities to support its fast-paced industrialisation and urbanisation), the worsening of the Eurozone crisis, the United States Federal Reserve ‘taper tantrum’, and a looming crisis in China led to a deterioration in global economic conditions and rapidly changing global risk aversion from 2013 onwards. Emerging markets were badly hit, and the tragically familiar sequence of ‘manias, panics, and crashes’ returned (Kindleberger, 1978). Financial capital inflows slowed down sharply or reversed completely, in a context of sovereign credit rating downgrades, falling currencies, and financial distress. State authorities implemented violent bouts of austerity, in desperate attempts to restore international investor confidence, often dramatically worsening domestic socio-political crises. Brazil and South Africa, which we will discuss in great detail in this book, are key exemplars. Brazil has been experiencing a profound

2  Introduction economic malaise since 2015, a judiciary-parliamentary coup removed Dilma Rousseff from power, and a dangerous fascist has been elected president in 2018. The fragile social gains achieved under the Workers’ Party’s rule are rapidly being eroded. In South Africa, government debt has been downgraded to junk status by credit rating agencies, and there is no end in sight to the profound political and unemployment crisis. Exacerbating social tensions have manifested in a number of ways, including in the reactionary form of a recrudescence of xenophobic attacks in 2019. Many other emerging economies did not fare much better. At the time of writing, Turkey is experiencing its worst financial and monetary crisis in 15 years, and Argentina is looking set to default yet again. The hype about the rise of the BRICS and other emerging market groupings has now largely died down. This drastic reversal has surprised many commentators in academic, activist, practitioner, and policy-making circles. Why the sudden change? Despite ­extensive – and to a large extent, successful – policy efforts which aimed at building large foreign exchange reserve accumulation as a ‘war chest’ against financial instability, developing deep, liquid, and sophisticated financial markets, enforcing tight banking supervision and regulation, and overcoming the ‘original sin’ (Wade, 2011; Helleiner, 2010; Grabel, 2015), why do emerging economies still remain so highly financially vulnerable to changing global liquidity conditions and global patterns of financial capital flows?2 What role did cross-border finance precisely play in the temporal and geographical unfolding of this historical sequence? How to explain the severity of the impacts of the financial capital flow reversal? Are emerging markets condemned to regularly face violent financial crises, with farreaching implications for the lives of ordinary people? Can there be real prospects for progressive social change under such conditions? The premise of this book is that thinking through these fundamental questions is arguably crucial if we are to design more progressive and development-friendly forms of financial governance. While it does not aim at producing policy-oriented material, the book was written with the objective of making a ‘strategic intervention’ in the political debates about cross-border finance management in emerging markets and beyond.3 The book takes its title from Dilma’s poignant expression, because it encapsulates many of the research puzzles explored in this book. The first is about the multifaced contradictions of financial capital in emerging markets and the challenges that they represent for cross-border finance management. The second concerns the emergence across the developing world of a remarkable variety of policy designs, instruments, and state institutions in relation to the operations of capitalist finance, and particularly, in order to mediate speculative cross-border financial flows. The third puzzle relates to the peculiar position that emerging markets occupy in global financial and monetary relations, and the implications of this position in terms of the global distribution of financial gains, risks, and fragility. Let us discuss these three key themes in turn.

1. ‘Too much of a good thing?’ The expression liquidity tsunami suggests that the sheer scale and volume of financial capital flows to emerging markets had become an issue. It indicates that

Introduction  3 these quantities were overwhelming and could trigger devastating damages. This in itself is puzzling. Have we not been told by development economists and practitioners that financial capital flowing into the poorer areas of the world economy is something good and desirable? That one of the main causes of underdevelopment is actually the lack of capital and domestic savings in developing countries, and that this should be compensated with foreign capital inflows? That capital insufficiently flowing into (or flowing out of ) poorer countries and regions is a key reason why these remain underdeveloped? Economists even have a term for this, the ‘Lucas paradox’, which refers to the fact that capital does not flow enough from rich to poorer countries, or at least, less so than mainstream economic theory would predict. We will further discuss this paradox in the next chapter. For now, the point is that, based on this line of reasoning, vast swathes of financial capital flowing into emerging markets surely should be seen as a boon. And there was some truth to that. As we will see in this book, the capital flow bonanza from the mid-2000s to late 2013 (coupled with the primary commodity super-cycle) did deliver some benefits to Brazil, South Africa, and other emerging markets. It helped governments fund themselves at better conditions. It provided the material basis for significant redistribution via a number of social policies. Moreover, it contributed to economic growth performances much higher than over the previous decade. Coincidentally, it also made a minority of people much richer in a very short period of time. In sum, the capital flow boom temporarily helped deliver some economic and social gains, and this was instrumental in consolidating social contracts between governments and their populations. Yet, as Gill Marcus, the South African Reserve Bank governor at the time, put it in a Financial Times op-ed, ‘One can have too much of a good thing’ (Marcus, 2012). The irony of this statement will not be lost to the reader: South Africa, ­Brazil, and many other emerging markets had made considerable efforts and deployed extremely costly policies for years in order to attract financial capital flows and build their reputation as attractive and profitable investment destinations. The very same countries were now complaining that they were receiving too much financial capital. As it turned out, the blessing of financial capital did not come without significant costs. Given the sheer scale of the flows circa 2011, these costs were becoming increasingly problematic for governments in emerging markets. Not only were volatile cross-border financial capital movements (often associated with speculative financial operations) a serious factor of macroeconomic instability and financial fragility, contributing for example to strong currency appreciation, the formation of asset bubbles, and the build-up of various forms of external vulnerability, they also constituted a major mechanism through which financial and monetary crises which originated elsewhere in the world economy (for instance, in the Eurozone) were transmitted to emerging markets. It became clear that economic development in the latter was increasingly dependent on and subordinated to global liquidity conditions and market sentiment. Furthermore, as noted earlier, the end of the financial capital flow boom post-2013 played a decisive role in the profound political crises that unfolded recently in many emerging markets, by worsening economic conditions and prompting state authorities to implement deflationary adjustment policies, at huge social and human costs. In

4  Introduction other words, from a scenario where financial capital inflows were experienced as too much, there was then an extremely fast and brutal transition to a configuration where they were experienced as too little, and this was equally, if not more, harmful to emerging markets. Much of the economics literature, whether mainstream or more critical, tends to think of this puzzle as a technical question. If only emerging markets attracted the right amount of financial capital (neither too little nor too much) with the right quality-mix (a healthy balance between long-term and short-term flows), then the aforementioned issues could be avoided. What is at stake for emerging markets, then, is to implement the right policies, regulations, and institutions. Economists of different stripes, scholarly traditions, and political inclinations would of course disagree as to how to define the right amounts and qualities of financial capital and about what constitute the right policies, regulations, and institutions, but the question of financial capital in emerging markets is essentially addressed in the same manner. This book provides a radically different perspective. There is no doubt that the questions asked by the economists are extremely important, yet the temporal sequence previously described tells us much more: whether it is experienced as too much or too little in emerging markets, the movement of financial capital across the world market has the capacity to powerfully determine the prospects of entire regions and the fate of their populations. This is what ­Christian Marazzi has aptly called the ‘terrorism of money’ (1996; see Alami, 2018a, 2018b), the abstract and impersonal power of capitalist discipline under the form of money and finance over social life. Accordingly, and by contrast with the aforementioned economics literature, this book does not engage with the question of financial capital in emerging markets as if it were an issue of technical rationality. Rather, it is primarily concerned with the particular configuration of this social power in emerging markets. It proposes to dissect its social constitution, its class nature, its mode of expression, and crucially, its implications for the lives of ordinary people in emerging markets. It scrutinises how this forceful form of social regulation subjects emerging markets to the discipline and logic of capital, that is, to the money-power of capital. In particular, it is concerned with how this ‘seemingly transcendental power’, to borrow an expression from Marx (1857/1993), as expressed through the cross-border movement of money and financial capital, encapsulates a complex entanglement of opportunities and constraints, of growing integration and tight discipline, which present states in emerging markets with a series of challenges that are particularly difficult to manage. The book is concerned with the configuration of money-power in emerging markets in two specific ways. On the one hand, it offers to identify its social determinants, locate its root and the historical conditions that have produced it, and shed light on its multifaceted manifestations and the concrete challenges that it poses for the management of cross-border finance in emerging markets. The book investigates these questions from both a theoretical lens and an empirical one, by focussing on two case studies, Brazil and South Africa. On the other hand, the book explores how states in emerging markets have mediated this messy and complex entanglement of opportunities and constraints by developing specific

Introduction 5 policy designs, regulations, instruments, and forms of interventions in the postcrisis environment (2008–2014). This leads us to the second key research theme explored in the book.

2. State power and the operations of capitalist finance One of the main objectives of Dilma Rousseff’s scathing remark was in fact to provide justification for the variety of policy tools that the Brazilian state was putting in place at the time in order to deal with the liquidity tsunami. As a matter of fact, facing ‘a wall of money’ in the post-crisis environment, many countries across the global South responded by deploying a remarkable array of policy responses in order to tame some of the destabilising impacts of cross-border finance. For instance, different forms of capital controls (on both portfolio flows and bank loans), macroprudential regulations, foreign exchange derivatives regulations, unconventional monetary policy tools, and ‘aggressive’ foreign exchange market interventions were implemented in countries as diverse as Brazil, South Korea, Indonesia, China, Costa Rica, Uruguay, the Philippines, Peru, Taiwan, Colombia, Argentina, and Thailand (Grabel  & Gallagher, 2015; Grabel, 2015). While the significance of these measures should not be overstated, their scope and diversity are remarkable, given that from the 1980s until recently such measures were largely considered as ‘heresy’ by the international finance establishment, comprising advanced capitalist states, financial market actors, the IMF, and credit rating agencies, and a strong ‘policy stigma’ was associated with them (Abdelal, 2007; Chwieroth, 2009; Moschella, 2010). As Grabel and Gallagher put it, ‘From a precrisis vantage point, the boldness, range, and creativity of the policy interventions deployed in capital and currency markets across a large number of economies were, in a word, unexpected’ (2015, p. 2). This book provides an in-depth exploration of the drivers of this outstanding diversity in the contemporary landscapes of cross-border finance management in emerging markets.4 This research started with a simple empirical observation: facing relatively similar patterns of cross-border financial capital movements and comparable financial challenges after the global financial crisis, two leading emerging markets, Brazil and South Africa, implemented radically distinct policies. Brazil implemented a number of restrictions on the inflow of financial capital: it deployed and fine-tuned (more than 11 times) capital controls on inflows and foreign exchange derivatives regulations between 2009 and 2012 (Gallagher, 2015b, pp. 83, 88). By contrast, and despite a nationwide debate about how to respond to volatile financial capital flows in 2009–2010, state managers in South Africa opted for much more conventional cross-border financial policies: they further accumulated reserves and continued liberalising the outflow of financial capital. The response in terms of monetary, fiscal, and foreign exchange reserve accumulation policy was also markedly different. Why the variation? What were the drivers of this diversity in the policies that aimed at managing speculative cross-border finance? Put differently, a fundamental research theme explored in the book is that of the uneven emergence of specific forms of state power in

6  Introduction emerging markets in relation to the operations of capitalist finance, and particularly, in relation to speculative cross-border financial flows. At least two influential bodies of literature have recently provided some answers to these important questions in the context of developing and emerging economies. On the one hand, International Political Economy (IPE) scholars have sought to explain policy differentiation amongst emerging markets by looking at the influence of ideological factors (such as ideational change in the global political economy, the establishment of global norms, the intellectual background of key policy-makers) and in terms of power politics between different interest groups (e.g. Gallagher, 2015a). On the other hand, the Comparative Capitalism scholarship has explained policy diversity in terms of the specific institutional variations of individual (peripheral) capitalisms (e.g. Becker, 2013). Although the book acknowledges that these factors bear some importance on policy processes, the perspective adopted here is distinct in at least two respects. First, the book foregrounds class relations as a fundamental analytical category in its critical interrogation of diversity in the management of cross-border finance in emerging markets.5 This is important because it allows uncovering a number of specific features related to the form, nature, and class character of the state in capitalist society, which powerfully determine processes of financial policy-making. It also allows highlighting the multiple class-based relations of domination and exploitation that underpin both the movement of cross-border finance and the various institutional and political forms of state power in emerging markets that mediate this movement. Put differently, a focus on class allows conceiving of the social relations of capitalist production and the limits set by the dynamic process of capital valorisation as crucial determinants of cross-border financial policy processes and outcomes. Second, the book develops an original approach to the question of policy diversity. The IPE and Comparative Capitalism literatures on the topic tend to conceive of policy diversity as differentiated outcomes to similar pressures, such as the global diffusion of neoliberal ideas or the structural power of global financial markets. Policy diversity is seen to result from the mediation of these (global) common pressures by different configurations of domestic institutions and ­political-economic dynamics of support and contestation. Policy diversity is therefore primarily conceived as a matter of empirical variation. By contrast, the book seeks to explain diversity as historically and geographically constituted difference. Put differently, it seeks to locate the generative processes and relations (themselves the product of specific geographies and histories) which are at the root of policy differentiation. In particular, the book argues that differentiation in cross-border financial management policies is a process shaped by the specific position of emerging markets in global financial and monetary relations. This leads us to the third key research theme explored in the book.

3. Emerging markets in the uneven geographies of money and finance Let us return once again to the expression with which we opened the chapter. Just like the source of a tsunami is an earthquake often happening in a place far

Introduction  7 away from the coastlines which suffer the damages, the expression liquidity tsunami suggests that while emerging markets were severely hit by massive waves of financial capital, the epicentre of the phenomenon was geographically located elsewhere in the world economy. In fact, that Dilma chose the White House to voice her critique was of course no coincidence. Her statement referred to the fact that the unconventional and expansionary monetary policies conducted by central banks and governments in advanced capitalist economies (such as the various programmes of Quantitative Easing) were having unintended consequences for developing and emerging economies. Such policies of easy and cheap money primarily aimed at mitigating the effects of the global financial crisis at the centre of the world economy. Yet, many of what economists call the negative spillovers of the policies were actually felt in peripheral spaces. This points to a deeply geographical process, whereby the contemporary operations of capitalist finance unevenly distribute financial gains, risks, and fragility across the world market, at the expense of developing and emerging economies and their populations. As a result, emerging markets face an additional set of difficulties when it comes to managing cross-border finance. One of the central arguments of this book is that questions of space and geography crucially matter for understanding the specific power relations and processes involved in cross-border finance management in emerging markets. This is because the latter occupy a subordinate position in the geographical organisation of financial and monetary relations on a planetary scale, or what the book calls the relational geographies of money-power. More precisely, the book argues that unpacking the complex entanglement of constraint and opportunities, discipline and integration that cross-border finance represents for emerging markets requires shedding light on the subordinate positionality of emerging markets within these relational geographies. This book constitutes one of the first attempts to systematically characterise the subordinate position of emerging markets in the geographies of money-power from a multi-disciplinary perspective, combining insights from Marxist political economy, post-Keynesian economics, economic geography, and postcolonial and feminist IPE. While the approach offered in this book is resolutely grounded in geographical political economy, it also draws upon each of these perspectives in order to scrutinise various aspects of the network of space and power relations that characterises contemporary global finance. These include the geographical organisation of the circuits of financial capital (the financial system), the functional/spatial configuration of convertibility between different currencies (the global monetary system), the concentration of money-power in a limited number of world financial centres and institutions, and the gendered and racialised imaginaries involved in the construction of emerging markets as an asset class. The book shows that patterns of cross-border finance in emerging markets are considerably shaped by these geographical features, with far-reaching implications for state policy-making, the dynamics of capital accumulation, and prospects of progressive social change in these countries. Most of the theoretical heavy-lifting in that regard is offered in chapters 3, 4, 9, and 10, while the empirical analysis conducted from chapters 5 to 8 provides flesh to the bone of this argument. As

8  Introduction such, the book contributes to an emerging research agenda concerned with uncovering the global relations of power, value, and exploitation which underpin the subordinate financial integration of developing and emerging economies into the world market, and how this contributes to the reproduction of inequalities on a global scale (e.g.  Kaltenbrunner  & Painceira, 2018; Bonizzi, Kaltenbrunner,  & Powell, 2019; Koddenbrock  & Sylla, 2019). It makes an original contribution addressing this question from a perspective centred on the classed, raced, and gendered geographies of money-power.

4. Why comparing Brazil and South Africa? Brazil and South Africa are interesting cases to compare for at least two reasons. First, these two countries show similarities at the current historical juncture. Importantly, both countries are characterised by a high degree of financial openness and deep, liquid, and sophisticated domestic financial markets. Yet, as argued at length in the book, they have retained a subordinate position in global financial and monetary relations. In other words, Brazil and South Africa are ‘Third World countries with First World financial systems’.6 Recently elevated to the status of ‘emerging markets’ (along with other BRICS), they have generated much excitement in the international financial community. They have been major recipients of global financial capital flows in the pre- and post-crisis period (respectively, the largest recipients in Latin America and Africa). The surges of inflows have had close similarities, in terms of their nature (large flows going into local currency markets, a concentration of portfolio debt flows in longer-term securities, etc.) and their effects (upward pressures on the exchange rate, formation of asset price bubbles, etc.) (IMF, 2011a). Both countries have also weathered the 2008 global financial meltdown relatively well and experienced a relatively quick recovery, at least in comparison with advanced capitalist countries. However, since mid-2013 or so, they have entered a period of severe recession, characterised by a drastic slowdown of financial capital inflows, the return of inflation, intense social unrest (workers’ strikes, student movements, struggles for the ‘right to the city’, but also powerful conservative and reactionary forces), and a deep political crisis. Second, their long-term capitalist trajectories exhibit striking similarities. In both countries, capital accumulation since colonial times has been characterised by a structural dependence on the appropriation of a portion of surplus and rents generated in the primary sector (in agriculture or in mining and energy) and on the inflow of foreign financial capital. The Brazilian and South African working classes have been profoundly fragmented along racialised and gendered lines. Extremely high rates of income and wealth inequality have also been pervasive features of capital accumulation in the two social formations. Capitalist elites in both countries implemented Import-Substituting Industrialisation strategies in the post-war period, resulting in significant productive capital accumulation and growth rates amongst the highest in the world. Both countries experienced a severe capitalist crisis in the 1980s, in the context of intense social struggles and a difficult transition from authoritarian rule to democracy. Capitalist responses to

Introduction  9 this crisis, under the form of neoliberal restructuring of class relations, involved a deep process of financial liberalisation and opening in the 1990s and 2000s, which attracted large financial capital inflows, and resulted in several financial and monetary crises, poor economic performance, and remarkably low rates of capital accumulation. Regardless, financial liberalisation has been deepened and accompanied by the growing institutionalisation of monetarist imperatives throughout the period (the shift to inflation targeting and floating exchange rates in the early 2000s is a case in point). For these reasons, understanding why recent policy choices regarding the management of cross-border finance diverged so much in these countries is particularly relevant. The objective of the comparative approach that underpins the research conducted in this book is to capture the diversity of Brazil and South Africa’s policy experiences in terms of cross-border finance in a unified understanding. For that purpose, the book draws upon the method of ‘incorporated comparison’ (McMichael, 1990). Incorporated comparison fundamentally differs from mainstream techniques of case comparison in two ways: how cases are conceptualised, and what the comparison hopes to achieve. Mainstream comparative methods tend to reify the cases studied: the comparable social phenomena are conceptualised as self-evident, discrete, and uniform social units, assumed to be unrelated in time and space, constituting parallel cases to be compared. They are abstracted from their place/time-specific dimensions and conceived as ‘historically and theoretically unaffected by the changing organisational principles and structure of the world economy’ (McMichael, 1990, pp.  391–393). Mainstream techniques of case comparison then aim ‘to disclose cross-case covariations so that hypotheses may be evaluated’ (Jackson, 2011, pp. 69–71). This is because it is assumed that covariation, defined as ‘the systematic observation of some set of objects or factors co-occurring’, implies that a causal relationship exists (ibid). By contrast, incorporated comparison aims at uncovering the underlying processes that shape change and differentiation across different spatial contexts. Comparable social phenomena are seen as ‘differentiated outcomes or moments of an historically integrated process’ (McMichael, 1990, p.  392). Incorporated comparison acknowledges that these outcomes, or instances, ‘may appear individually as self-evident units of analysis, but in reality are interconnected processes’ (p.  396). Consequently, the units of analysis are not ‘parallel, more or less uniform cases’ (p.  386), but ‘distinct mutually-conditioning moments of a singular phenomenon posited as a self-forming whole’, which is precisely the reason why they are interesting to compare (p. 391). The objective of comparison, then, is not to ‘establish a causal logic that is generalizable outside time and space relations’ (p. 395). Rather, comparison is an ‘internal’ feature of inquiry, meaning that it relates apparently separate processes (in time and/or space) as components of broader relational processes in space that unfold in and through time (McMichael, 1990, p. 389; Silver, 2003, p. 30). The point, then, is to develop a historically grounded reconstruction of such changing relational processes in time and space. In the case of this book, this means that the units of analysis, cross-border financial policies in Brazil and South Africa, are seen as differentiated instances

10  Introduction of the same process of development of geographically and historically specific forms of state power in emerging markets in relation to the uneven expression of the money-power of capital across the world market. Critically interrogating and learning across the two case studies allows the book to explore the drivers of diversity in the contemporary landscapes of cross-border finance management in emerging markets. The book combines logic, history, and empirical research in the same movement in order to ‘reproduce the concrete [reality of cross-border financial management in emerging markets] in thought’, as Marx famously put it in the Grundrisse (1857/1993). The empirical component of the research was informed by more than 85 semi-structured interviews with state managers in various government ministries and central banks, financial regulators, financial journalists, trade unionists, academics, activists, as well as economists at business organisations. With a few exceptions, all the interviews were conducted in Brazil (in São Paulo and Brasília) and South Africa (in Johannesburg, Tshwane-Pretoria, and Cape Town) between June and December 2016. A full list of the interviewees cited in the book is provided in the Appendix. In addition to qualitative research interviews, a range of analyses of secondary data were conducted, including quantitative data from national accounts and other official sources, and descriptive data on policies and regulations from documents released by the Brazilian and South African financial authorities.

5. Outline of the book The book is made of three parts. The first part comprehensively reviews the theories, histories, and geographies of cross-border finance management and develops an alternative conceptualisation of cross-border finance management in emerging markets. Chapter 1 starts with an analysis of the history of economic thinking and practice about the management of cross-border finance in developing and emerging economies, in order to demonstrate its inherently political nature. While often framed in highly technical and allegedly neutral terms, the chapter  shows that cross-border finance management is at the heart of a number of political issues, including the relationship between state policy autonomy in developing countries and the discipline enforced by global financial markets; the politics of financial crises and who benefits from them; power relations and income distribution between different social subjects; and the question of what policies and institutions are considered ‘legitimate’. Chapter 2 continues with an exploration of the politics of managing cross-­border finance in emerging economies, by surveying and critically engaging with five distinct types of IPE perspectives. This diverse literature has made a highly valuable contribution to our understanding of the multiple power relations involved in cross-border finance management, emphasising the structural power of global finance, the role of unequal power relations between nation states, political conflicts between interest groups, the significance of domestic institutional configurations, the influence of economic ideas, and the importance of class, discipline,

Introduction  11 and imperialism. The chapter  nonetheless argues that this literature leaves two important questions unanswered: how is cross-border finance policy-making in emerging markets determined by capitalist social relations and by the limits set by the dynamic process of capital valorisation? How is cross-border finance management profoundly shaped by the specific position of emerging economies in a geographically uneven world market? The next two chapters of this part of the book are therefore dedicated to developing an alternative theoretical conceptualisation of cross-border finance management which allows tackling these two questions. Chapter 3 provides the first step in developing this alternative theoretical conceptualisation. Based on a systematic Marxian social form-analysis of the categories state, money, financial capital, and their contradictory relationship, it offers an analysis of the political nature and class character of cross-border finance management grounded in the social relations of capitalist production and the limits set by the dynamic process of capital valorisation. This provides us with tools to study cross-border finance management from a radically different angle than the conventional national accounting type of definitions which are widely used in the economics and IPE literature. The chapter argues that cross-border finance management consists in the deployment of (national) institutional and political forms through which the capitalist state mediates the complex entanglement of opportunities and constraints constituted by financial capital, that is, financial capital as a source of social wealth that can be distributed to various social subjects, and financial capital as the expression of the disciplinary power of capital. This is a constraint that all nation states necessarily face when managing cross-border finance, by virtue of their very existence as states in capitalist society. To the best of my knowledge, this chapter is the first attempt at developing a conceptualisation of the political nature and class character of cross-border finance management grounded in the social relations of capitalist production and the limits set by the dynamic process of capital valorisation. Chapter  4 then continues developing the alternative theoretical conceptualisation by focussing on the specific case of emerging economies. It unpacks the additional social constraints that emerging economies face in managing crossborder finance due to their subordinate positionality in the relational geographies of money-power, but also due to the raced and gendered components of contemporary financial and monetary relations. The chapter argues that because of these factors, the contradictory relationship between the state, money, and financial capital takes a particularly acute form of realisation in emerging markets, making the management of monetary and financial affairs considerably more difficult for the capitalist state. This constitutes an additional layer of social determination on cross-border finance management in emerging markets. The chapter scrutinises the concrete material manifestations of this process, both in terms of patterns of financial capital flows and in terms of the specific challenges that emerging markets face when managing cross-border finance. Part 2 of the book consists of case studies. Based upon extensive fieldwork research, it provides an in-depth comparative critical interrogation of the policies and regulations deployed in Brazil and South Africa in order to manage

12  Introduction cross-border finance. Chapters 5 and 6 offer critical analyses of the historical trajectories of cross-border finance management in Brazil and South Africa, in light of the historical-geographical specificity of capital accumulation and class relations in both countries, from the 1930s to the eve of the 2008 global financial crisis. These chapters show that in both countries, various cross-border financial policies have been deployed, adjusted, and scaled back to attract financial capital flows and to facilitate the crisis-led reproduction of money and the state. However, within this broad, common logic, the policies that regulated cross-border finance have had variegated strategic objectives, depending on their articulation to broader modes of managing class relations and fostering capital accumulation. The long-term trajectories of cross-border finance management consisted of cumulative rounds of policy-making, where crises have been critical moments. Each round has been driven by the necessity to find new forms of mediating contradictions, depending on contextually specific forms of resistance and struggles, and the availability of global liquidity on the world market. The chapters also show that repeated financial and monetary crises have sparked processes of legal and institutional innovation and policy experimentation in the realms of money and finance, reshaping the contours of inherited institutional landscapes and legislative frameworks. Chapter  7 examines the historical-social context in which post-crisis crossborder financial policy choices were made, in order to situate and contextualise the political agency of Brazilian and South African state managers. It provides a brief account of the unfolding of the global financial crisis in both countries, of the main issues associated with financial capital flows between 2008 and 2014, and of the evolution of the balance of forces between state, capital, and labour during the period studied. The chapter shows that the post-crisis capital flow boom catalysed financialisation processes and led to uneven configurations of financial vulnerability, which presented policy-makers with differentiated challenges for cross-border finance management, notably due to different structures of portfolio assets and liabilities and to the different institutional structures of currency markets. The ways in which state managers came to grapple with these new forms of vulnerability and assessed their political importance is absolutely central to understanding the nature of post-crisis policy choices in terms of cross-border finance management. Chapter 8 offers a detailed reconstruction of the post-crisis cross-border financial policy-making process (2008–2014). The chapter  locates key institutions, agencies, sites of decision-making, and political struggles, with reference to the objective material conditions identified in the previous chapter. The analysis extensively relies upon qualitative semi-structured interviews conducted with a number of Brazilian and South African experts, including many of the policymakers who were directly involved in the design and implementation of the measures discussed. The chapter draws attention to the messy, textured, and contested nature of post-crisis financial policy formulation and implementation in Brazil and South Africa: it highlights the sequencing of events, problems, decisions, and other contingencies, as well as the multiplicity of social actors, their ambivalent ideas, and concrete strategies to shape the policy-making process.

Introduction  13 The third part of the book then returns to broader theoretical considerations in order to deliver a unified understanding of diversity in cross-border finance management in emerging markets. Chapter 9 discusses the dynamics of continuity and change with respect to the longer-term trajectory of cross-border finance management in Brazil and South Africa. The main argument developed is that the post-crisis policy response in the two countries involved the creation, enhancement, and adaptation of financial and monetary regulatory capacity (involving both drastic innovation and more subtle forms of change) to continue with the differentiated capital account management strategies started in the previous decade, while mitigating their (perceived) worst consequences and vulnerabilities. Next, the chapter  addresses the question of similitude and unevenness between these forms of re-articulation of state power and reflects on the production of underlying commonalities and continual processes of (re)differentiation in cross-border finance management in the two countries and in other emerging markets. The chapter identifies a number of relatively similar forms of policy designs, institutions, and regulations, which shape and pattern the contextually embedded forms of cross-border financial policies in emerging markets. Chapter 10 then draws upon economic geographical studies of policy diffusion, enriched with a postcolonial sensitivity, in order to explore the drivers of constitution and spatial diffusion of the aforementioned relatively similar forms of policy designs. The chapter  makes a number of arguments. First, grasping the nature of the contemporary landscapes of cross-border finance management in emerging markets requires a keen appreciation of the interspatial circulatory systems through which the policy designs are constituted and circulated. In that regard, the diffusionist models of policy diffusion which underpin much of the IPE literature are ill-equipped, inasmuch as they tend to focus on the unidirectional flow of idealised forms of policy-making from the North/West into the geographically and institutionally bounded spaces of emerging markets, where they are then translated by local actors. Yet, the movement of economic ideas, practices, policy designs, and policy-making circuits is much more multi-directional than these diffusionist models assume. Second, diversity must be conceived neither as empirical variation from standards/ideal-types of policy-making nor as a form of policy hybridity, but as historically constituted difference. The root of this difference resides in the historically constituted geographies of money-power and the specific positionality of emerging markets in these geographies. Third, by drawing attention to policy-making circuits that span North/South lines and by uncovering the spatial processes of interdependence, inter-referentiality, co-evolution, and cross-border learning involved in the circulation of policy designs, the chapter highlights the role and agency of local actors, not only as translators of ideas and policies conceived elsewhere, but as active contributors in the production, negotiation, and circulation of thinking and practice about cross-border finance management. Managing cross-border finance in emerging markets is increasingly becoming a global affair. A concluding chapter discusses the implications of the central arguments developed throughout the book, particularly in terms of what they teach us about the

14  Introduction relation between state, money, and financial capital in emerging economies. The chapter also makes the case for ‘transformative’ cross-border financial policies, that is, policies that empower labour in the short-medium term with a view of transforming social relations and bringing about meaningful social change.

Notes 1 There is no single definition of ‘emerging’ markets. The expression usually designates a specific type of large developing economies with developed and deep financial systems and which concentrate the bulk of financial capital flows to the global South. Over the period 2005–2014, according to the IMF, emerging markets included China, Brazil, Mexico, Turkey, India, South Africa, Indonesia, Malaysia, Poland, Indonesia, Thailand, and Russia. 2 The ‘original sin’ refers to the inability to borrow in local currency, which proved so problematic for emerging markets in the 1990s and early 2000s. 3 The Autonomous Geographies Collective provides a useful definition: ‘Making strategic interventions means orienting our educational and research agendas in ways that will decisively help those on the front line of campaigns and struggles (Chatterton, Hodkinson, & Pickerill, 2010, p. 265). 4 When studying cross-border finance management, economists tend to focus on the set of official, legal, and quasi-legal regulations which affect the transactions registered in the capital account of the balance of payments, such as various forms of capital controls on portfolio flows, bank loans, and foreign direct investment. In some cases, economists adopt a broader definition. For instance, former IMF staff Olivier Jeanne refers to capital account policies ‘as the accumulation of foreign assets and liabilities by the public sector plus all the policies that affect the private sector’s access to foreign capital’ (Jeanne, 2012a, p. 3). We will return to these complex questions of definition in chapter  3, where a critical engagement with these national accounting types of definition will form the basis for the alternative conceptualisation of cross-border finance management developed in the book. For now, as a working definition, let us simply say that we will not only be concerned with the management of the capital account, but with the broad ensemble of policies, regulations, and institutions which influence the crossborder movement of money and finance, including currency convertibility and exchange rate policy, macroeconomic policy (fiscal and monetary policy), various forms of capital controls, macroprudential regulation and the regulation of domestic financial systems, and foreign exchange reserve accumulation. 5 Class is analytically defined in this book, in Marxian fashion, as the fundamental divide of capitalist society. It is worth clarifying at the outset that with this analytical framing, the intention is not to exclude from and/or subsume other social relations within that category. This is also not a call for an analysis that privileges specific social groups and their struggles at the expense of others. While class is the fundamental divide of capitalist society (and as such, can be analytically distinguished), it is not conceived as something which exists distinctly from other social relations, such as sexuality, gender, race/ ethnicity, religion, and so on. Class is in fact constituted in and through these relations (Bannerji, 2011; McNally, 2015, p. 143). As will be discussed at length in the book, such a conceptualisation is particularly important to understand cross-border finance policymaking in emerging economies. 6 This perceptive expression is borrowed from Prof. Lumengo Bonga-Bonga (personal communication).

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Introduction  15 Alami, I. (2018a). Money power of capital and production of “new state spaces”: A view from the global South. New Political Economy, 23(4), 512–529. Alami, I. (2018b). On the terrorism of money and national policy-making in emerging capitalist economies. Geoforum, 96, 21–31. Bannerji, H. (2011). Building from Marx: Reflections on “race”, gender, and class. In S. Mojab & S. Carpenter (Eds.), Educating from Marx: Race, gender, and learning (pp. 41–60). New York, NY: Palgrave Macmillan US. Becker, U. (2013). The BRICs and emerging economies in comparative perspective: Political economy, liberalisation and institutional change. London: Routledge. Bonefeld, W. (1992). Social constitution and the form of the capitalist state. In W. Bonefeld, R. Gunn, & K. Psychopedis (Eds.), Open Marxism, vol. I: Dialectics and history (pp. 93–132). London: Pluto Press. Bonizzi, B., Kaltenbrunner, A., & Powell, J. (2019). Subordinate financialization in emerging capitalist economies. Greenwich Papers in Political Economy, University of Greenwich, GPERC 69. Chatterton, P., Hodkinson, S.,  & Pickerill, J. (2010). Beyond scholar activism: Making strategic interventions inside and outside the neoliberal university. ACME: An International e- Journal for Critical Geographies, 9(2). Chwieroth, J. M. (2009). Capital ideas: The IMF and the rise of financial liberalization. Princeton, NJ: Princeton University Press. Gallagher, K. P. (2015a). Ruling capital: Emerging markets and the reregulation of crossborder finance. Ithaca: Cornell University Press. Gallagher, K. P. (2015b). Countervailing monetary power: Re-regulating capital flows in Brazil and South Korea. Review of International Political Economy, 22(1), 77–102. Grabel, I. (2015). The rebranding of capital controls in an era of productive incoherence. Review of International Political Economy, 22(1), 7–43. Grabel, I., & Gallagher, K. P. (2015). Capital controls and the global financial crisis: An introduction. Review of International Political Economy, 22(1), 1–6. Helleiner, E. (2010). A Bretton-Woods moment? The 2007–2008 crisis and the future of global finance. International Affairs, 86(3), 619–636. IMF. (2011). Recent experiences in managing capital inflows: Cross-cutting themes and possible policy framework. IMF Paper prepared by Strategy, Policy, and Review Department, Washington, DC: International Monetary Fund. Jackson, P. T. (2011). The conduct of inquiry in international relations: Philosophy of science and its implications for the study of world politics. London: Routledge. Jeanne, O. (2012a). Capital-account policies and the real exchange rate. In NBER international seminar on macroeconomics 2012 (pp. 7–42). Chicago: University of Chicago Press. Kaltenbrunner, A., & Painceira, J. P. (2018). Subordinated financial integration and financialisation in emerging capitalist economies: The Brazilian experience. New Political Economy, 23(3), 290–313. Koddenbrock, K., & Sylla, N. S. (2019). Towards a political economy of monetary dependency: The case of the CFA Franc Zone (Maxpo Discussion paper No 19/2). Max Planck Sciences Po Center on Coping with Instability in Market Societies, Paris. Kindleberger, C. P. (1978). Manias, panics, and crashes: A history of financial crises. New York: John Wiley & Sons. Lagarde, C. (2011, November 25). Latin America – taking the helm. IMF Blog. Retrieved September 4, 2019, from https://blogs.imf.org/2011/11/25/latin-america-taking-the-helm/ Marazzi, C. (1996). Money in the world crisis: The new basis of capitalist power. In W.  Bonefeld  & J. Holloway (Eds.), Global capital, national state and the politics of money (pp. 69–91). London: Palgrave Macmillan.

16  Introduction Marcus, G. (2012). Consider the small nations caught in the central bank crossfire. Financial Times. Retrieved October 17, 2016, from www.ft.com/content/ddf25aea-9521-11e1ad38-00144feab49a Marx, K. (1857/1993). Grundrisse, foundations of the critique of political economy (M. Nicolaus, Trans.). New York: Penguin Books. McMichael, P. (1990). Incorporating comparison within a world-historical perspective: An alternative comparative method. American Sociological Review, 385–397. McNally, D. (2015). The dialectics of unity and difference in the constitution of wagelabour: On internal relations and working-class formation. Capital & Class, 39(1), 131–146. Moschella, M. (2010). Governing risk: The IMF and global financial crises. Basingstoke: Palgrave Macmillan. Silver, B. J. (2003). Forces of labour: Workers’ movements and globalization since 1870. Cambridge: Cambridge University Press. Wade, R. (2011). Emerging world order? From multipolarity to multilateralism in the G-20, the world bank and the IMF. Politics and Society, 39(3), 347–378.

Part 1

Theory, history, and geography

1 Managing cross-border finance Key theoretical debates and policy prescriptions

According to a prominent contemporary economic historian, ‘capital account liberalisation . . . remains one of the most controversial and least understood policies of our day. One reason is that different theoretical perspectives have very different implications for the desirability of liberalising capital flows’ (Eichengreen, 2004, p. 49, emphasis added). This observation raises a number of important questions. Why is capital account liberalisation so controversial? What is desirable, or not, about liberalising financial capital flows? Why are theoretical perspectives on the capital account and cross-border finance so different, and what policy prescriptions did these theoretical perspectives provide justification for? How and why did a certain form of ‘orthodoxy’ in both theory and practice in terms of cross-border finance emerge and consolidate? How did it evolve over time? There are four main reasons why the analysis conducted in this book starts with an exploration of these fundamental questions. First, it is necessary to critically unpack the theoretical debates on the management of the capital account and cross-border finance in order to uncover how a number of economic theories and ideas have been instrumental in constructing the question of cross-border finance as a specific development problem. These economic theories and ideas, the chapter emphasises, must be understood in light of material developments in the world capitalist economy. In particular, various rounds of theory-making and adjustments have been profoundly shaped by the syncopated rhythms of global financial capital flows to developing economies and the multiple financial and monetary crises they catalysed. Second, the influence of these economic theories and ideas has been long lasting, and they still significantly frame the terms of the debates about managing cross-border finance in developing and emerging economies. As such, critically scrutinising these theories and ideas is essential to understanding the ideational context in which the recent policy choices regarding the management of cross-border finance were made, in Brazil, South Africa, and beyond. Indeed, as discussed at length in chapters 8 and 9, Brazilian and South African state managers extensively relied upon these theories and ideas as they attempted to justify and provide legitimacy to their policy choices in the postcrisis environment. Third, the theories and ideas discussed in this chapter have provided the ideological basis for a set of policy prescriptions regarding the management of cross-border finance. The emergence and diffusion of these policy

20  Theory, history, and geography prescriptions has profoundly shaped policy-making in developing and emerging economies over decades. The contemporary landscapes of state intervention in cross-border finance must be understood against the backdrop of these dominant policy prescriptions and located within the longer historical trajectory of capital account management in developing and emerging economies. As the book demonstrates, this is key to grasping the nature of the contemporary landscapes of cross-border finance management in emerging markets and the broader transformations of state power of which they are a part. Finally, carefully dissecting these theoretical and policy-oriented debates allows highlighting a number of political issues at the heart of the management of the capital account and cross-border finance. This is despite attempts by the international financial establishment to frame debates about cross-border finance management in highly technical and allegedly neutral terms. The chapter proceeds as follows. It starts by charting the development of an ‘orthodox’ view on the management of the capital account within neoclassical economics in the 1970s, and how this view provided theoretical legitimacy for widespread capital account liberalisation across the global South in the 1980s and early 1990s. The chapter then discusses how this view – and the associated set of policy prescriptions – evolved in the 1990s and 2000s in reaction to a series of catastrophic financial crises in developing and emerging economies. Next, it provides a review of the critical arguments that were put forward by a variety of ‘heterodox’ schools, including neo-structuralism, post-Keynesianism, statistdevelopmentalism, neo-developmentalism, and Marxism. Finally, and in light of this analysis, the chapter examines the extent to which there has been a change in thinking and practice about cross-border finance management since the 2008 global financial crisis.

1. The theoretical case for capital account liberalisation in developing countries The emergence of an ‘orthodox’ view on the management of the capital account can be traced back to a series of theoretical arguments formulated within neoclassical economics in the 1970s. Before outlining these arguments and associated policy prescriptions, it is important to first briefly introduce some key elements of the material context in which they were formulated. Development strategies of Import-Substituting Industrialisation (ISI), widespread across the developing world since the 1940s, extensively relied on a range of policies of tight financial and monetary regulation and interventionist policies with respect to managing cross-border finance: pegged currencies, differential exchange rate regimes, tight capital controls on both inflows and outflows, administrative price and quantity controls on credit and interest rates, and functional specialisation of financial institutions. Theoretical and ideological justification for those policies, which would later be pejoratively termed ‘financial repression’ (as further discussed later), was provided by both Keynesian and development economics. For the former, these policies contributed to the ‘euthanasia of the

Managing cross-border finance  21 rentier’ in order to favour productive capital accumulation and were key tools for the demand-led management of the economy; for the latter, those policies were instrumental for the purpose of carefully allocating scarce domestic savings and resources (Lapavitsas, 2013, pp. 308–309). However, between the late 1960s and early 1970s, a series of dynamics associated with uneven capitalist development on a world scale put those policies under growing pressure. First, the global reorganisation of production, accompanied by the unfolding of a new international division of labour, led to growing imbalances in international payments, which were financed by massive expansion of international credit (Charnock & Starosta, 2016; Clarke, 2001). Second, international credit creation was compounded by mounting global conditions of capital overaccumulation and by the collapse of the Bretton Woods system of fixed exchange rates, resulting in speculative movements of liquidity across the world market. In that context, growing volumes of overaccumulated financial capital flowed into developing countries under the form of syndicated bank loans and public bond issues on Euromarkets (Vasudevan, 2008). This provided both a constraint and opportunity for national states in developing countries. On the one hand, this made some of the ‘financial repression’ policies previously mentioned, such as pegged exchange rates, more and more difficult to manage (Eichengreen, 1996/2008, pp. 178–179). On the other hand, as ISI growth strategies were increasingly reaching their limits (including a slowdown of economic growth, balance-of-payments problems, inflation, and intense social unrest), national states across the developing world increasingly resorted to large financial capital inflows in order to sustain productive capital accumulation and finance the brutal repression of working-class struggles (Clarke, 1988; Cleaver, 1989). In order to tap into abundant and cheap international liquidity, they started liberalising their financial markets and capital accounts (Eichengreen, 2004; Dunn, 2009). As is well known, this ‘bout of uncontrolled lending in the 1970s and early 1980s’ (Corbridge & Thrift, 1994, p. 13) catastrophically ended up with the Third World debt crisis after the huge hikes in interest rates triggered by the Volcker shock in 1979–1982. Against this background, a burgeoning neoclassical economics literature set out to theoretically justify the policies of financial liberalisation in developing countries. The seminal contributions of McKinnon (1973), Shaw (1973), and Fry (1982) are particularly important in that regard. Drawing upon the ‘efficient market hypothesis’ (Fama, 1970),1 they argued that financial repression policies distorted the optimal functioning of financial markets, resulting in the misalignment of financial prices such as interest and foreign exchange rates, the underdevelopment of domestic financial markets, and the inhibiting of domestic savings. While those arguments initially concerned state intervention in domestic financial systems, they were rapidly extended to the management of cross-border capital flows (Painceira, 2012) and would quickly become what can be termed the ‘orthodox’ view on capital account liberalisation. According to this view, the opening of the capital account and the liberalisation of cross-border finance would bring a series of economic welfare benefits (see

22  Theory, history, and geography Studart, 1995; Eatwell, 1996; Nissanke & Aryeetey, 1998; Singh, 2003; Eichengreen, 2004 for useful summaries of such arguments). First, it would facilitate the efficient allocation of savings across the world economy. Savings, driven by highest returns, would go to those regions, states, sectors, and companies most able to use them productively, which would maximise social and economic welfare. Accordingly, it was assumed that developing countries with high productivity growth would receive large flows, enhancing economic development. This would also increase competitive pressures and allow individuals and firms in developing countries to raise capital at lower costs on global capital markets, diversify their portfolio, and increase risk-adjusted returns. Second, it would lead to the development and ‘deepening’ of domestic financial systems in developing countries, which would provide better funding to the ‘real’ economy. Third, capital account liberalisation and global financial integration would enforce a ‘healthy discipline’ on profligate states in developing countries, because the ‘threat of exit’ would ensure that they implement ‘sound and transparent’ policies. By rewarding ‘good’ policies and punishing ‘bad’ ones, global capital markets would enhance longterm growth and reduce the likelihood of crises.

2. Policy prescriptions about cross-border finance in the 1980s–2000s These theoretical arguments were then used to justify sweeping financial opening and deregulation in developing countries throughout the 1980s and 1990s, despite early signs of their detrimental effects, as evidenced by repeated financial crises (see for instance Díaz-Alejandro, 1985; Akyüz, 1993/2012 for discussions of crises that happened in Uruguay, Argentina, and Chile). A series of policy prescriptions were pushed by the Bretton Woods institutions (the IMF and the World Bank) in the context of the structural adjustment plans associated with the Third World debt crisis resolution and often welcomed by local ruling elites (Soederberg, 2005). These policies included full convertibility of the current account, a unified exchange rate system, the lifting of capital controls on both inflows and outflows, non-discrimination between local and foreign investors, the opening of banking systems to foreign banks, and domestic financial liberalisation.2 While capital flows to developing countries recovered in the early 1990s  – net capital flows reached more than 4% of GDP in 1994 (IMF WEO, 2016, p. 64) – two features of the flows did not fit with what the aforementioned theory predicted, generating puzzlement in orthodox academic and policy-making circles. First, why did so little capital flow from advanced capitalist to developing countries? This question, termed the ‘Lucas paradox’, became the object of intense debates in the neoclassical economics literature (e.g. Lucas, 1990; Alfaro, Kalemli-Ozcan, & Volosovych, 2008; Gourinchas & Jeanne, 2013; see also introductory chapter). Second, why did dramatic financial crises keep happening?3 Those questions did not challenge much the dominant thinking about the benefits of capital account liberalisation, but they did trigger some adaptation of the orthodox policy prescriptions regarding cross-border finance in the mid-1990s. If

Managing cross-border finance  23 capital account liberalisation did not yield the expected results, it was claimed, this was due to high corruption levels, the lack of political stability and robust institutions for the protection of property rights, and poor monetary and fiscal management in developing countries. Those views were epitomised by a World Bank report, which argued that for capital account liberalisation to be successful it needed to be accompanied by appropriate supervision and regulation, institution building, and ‘stabilisation and adjustment’ policies (Cottani & Cavallo, 1993). Capital account liberalisation went apace in the aftermath of the late 1990s crises in East Asia, Russia, Brazil, Argentina, and Turkey, but orthodox prescriptions were further amended. According to the new policy orthodoxy, exchange rates must be allowed to freely float to adapt to economic fundamentals and ‘absorb shocks’, independent central banks must adopt ‘transparent’ inflation-targeting frameworks to maintain price stability and enhance ‘credibility’ and ‘confidence’, and foreign exchange reserves must be accumulated to ‘self-insure’ against sudden capital flight. Nonetheless, some voices within the mainstream increasingly started to challenge the case for capital account liberalisation, especially after the speculative attacks against the European Monetary System in 1992, the Tequila crisis in 1994, and the late 1990s’ emerging market crises. These voices included high-profile economists like Stiglitz (2000), Rodrik (1998), and free-trade apologist Bhagwati (1998). They pointed out that the case for capital account liberalisation was shaky on both theoretical and empirical grounds. There was little evidence that unregulated capital flows contributed to economic growth. Besides, short-term capital flows were destabilising and often triggered financial crises, even when the ‘right’ institutions and policies were in place, because they were ‘subject to asymmetric information, agency problems, adverse selection, and moral hazard’ (arguments summarised in Singh, 2003, p. 196). A series of large-N cross-country studies by other influential neoclassical economists also showed that there was no correlation between net capital inflows and productivity growth (e.g. Prasad, Rajan, & Subramanian, 2007; Gourinchas & Jeanne, 2006, 2013). Others argued that the case for capital account liberalisation had largely underestimated the financial difficulties and vulnerabilities that developing countries confront, as well as the volatility, boom-and-bust, and pro-cyclical nature of capital flows (Calvo, 2005). This led some of these scholars to endorse specific forms of tax-based and market-friendly capital controls on inflows so as to discourage short-term capital flows and lengthen investor horizons (e.g. Dornbusch, 1997; Helleiner, 1997) or as emergency measures during crises (as various IMF country teams occasionally recommended). Unsurprisingly, the reaction of the orthodoxy was to challenge the efficacy of capital controls and other forms of capital account management interventions, arguing that they can be easily circumvented and they distort markets, hinder competition, weaken market discipline on governments, give too much power to bureaucrats, and open the door to rent-seeking behaviours (Eichengreen, 2004, p.  50). The debates, however, intensified as capital flows to developing countries increased considerably in the early 2000s, driven by large volumes of liquidity on international financial markets and by the primary commodity boom,

24  Theory, history, and geography but exhibited ‘the type of volatility reminiscent of inflows that preceded financial crises in the 1980s and 1990s’ (UNCTAD, 2015, p. v). After initial attempts to deal with those flows with conventional policies such as large foreign exchange reserve accumulation, some developing countries, including Brazil, Colombia, and Thailand, then deployed some ‘timid’ capital controls in order to discourage the more speculative flows (Kaltenbrunner, 2017). The Brazilian experience with these policies is discussed in great detail in the second and third part of this book and compared with the experience of another emerging economy, South Africa.

3. Heterodox critiques of capital account liberalisation Deeper critiques of orthodox policy prescriptions about cross-border finance and their implications have been formulated by various theoretical traditions. The main arguments, despite a lot of overlap between the different schools, can be summarised and grouped as follows. First, neo-structuralist economists have argued that while capital account liberalisation has brought some benefits, it has also had considerable costs such as volatile asset prices, poor economic performance, a tendency for exchange rates to be driven by speculative expectations and ‘conventions’ in markets (in the Keynesian sense) rather than economic fundamentals, and the potential for widespread contagion of market instabilities and crises (Eatwell, 1996; Eatwell & Taylor, 2001). Developing countries have also been forced to maintain high interest rates to sustain inflows and prevent capital flight, resulting in a loss of monetary policy autonomy. The strong pro-­cyclicality of flows has also resulted in the loss of ‘policy space’ to adopt autonomous ­counter-cyclical macroeconomic policy (Ocampo, Kregel,  & ­Griffith-Jones, 2007; Ocampo & Palma, 2008).4 Financial markets are incomplete and only efficient when thoroughly supervised and regulated, and a key challenge for developing countries is to limit the speculative and pro-cyclical impacts of financial capital flows on their economy. International organisations such as UNCTAD are broadly supportive of this view (e.g.  UNCTAD, 2015; for a critique, see Saad Filho & Tomkinson, 2017). Drawing upon Minsky’s ‘financial instability hypothesis’ (1992), which contends that financial crises are endemic in capitalism because there is a tendency for overborrowing and lending in periods of economic boom, postKeynesian/Minskian scholars have shown that capital account liberalisation also has highly negative consequences for productive investment and in terms of ­macroeconomic stability (e.g. Grabel, 1996; Palma, 2000; Arestis & Glickman, 2002; Agosin & Huaita, 2011). Volatile exchange rates and high interest rates encourage speculation and excessive risk-taking, redistribute income in favour of financial elites (‘the return of the rentier’), and participate in the formation of asset price bubbles and booms in domestic credit. Short-term volatile capital flows exacerbate the business cycle and contribute to the build-up of external financial fragility such as large stocks of external debt, currency and maturity mismatches in balance sheets, and large stocks of short-term foreign investment in ­domestic-currency financial assets, which make financial crises likely to be

Managing cross-border finance  25 deeper when they occur (Grabel, 1996; Akyüz, 2014; Kaltenbrunner  & Painceira, 2015; Kaltenbrunner, 2017). Furthermore, the impact of speculative capital flows on the exchange rate and the constraint imposed on policy-making is more severe in developing countries because their currencies are at the bottom of the international monetary hierarchy (De Conti, Biancarelli, & Rossi, 2013; de Paula, Fritz, & Prates, 2017). This is a crucial point to which we will return and discuss at length in chapter 4. Neo-developmentalists have criticised the argument that developing countries need to compensate low domestic savings with foreign savings to grow (Bresser Pereira & Gala, 2009; Bresser Pereira, 2010). Growth through foreign savings, they argue, does not increase the investment rate, because foreign savings largely substitute for domestic savings. In addition, this growth path causes exchange rate appreciation, hurting industrial competitiveness and encouraging consumption, and it contributes to the building-up of financial fragility, often resulting in financial crises. It also gets governments caught up in ‘regressive confidence building games’. By encouraging developing countries to finance current account deficits with foreign savings, rich countries are actually encouraging a form of ‘economic dependency’ (Bresser Pereira, 2010, p. 183). Statist-developmentalists have emphasised that capital account liberalisation has empowered domestic rentier classes and transnational corporations at the expense of workers, resulting in a decreased share of productive income going to labour and forcing national states into a ‘race to the bottom’ (Crotty & Epstein, 1999; Epstein, 2005). Deploying policies to actively manage the capital account and cross-border finance is crucial for bucking this trend, in order to generate space for macroeconomic policies aiming at full employment, real wage growth, and other progressive social policies. Furthermore, statist-developmentalists have underlined that a variety of interventionist policies (such as capital and exchange controls, foreign exchange market interventions, etc.) have been extensively used during the developmental trajectory of advanced capitalist countries. They were crucial tools for industrial policy and the broader aim of piloting the economy (Amsden, 1989; Wade & Veneroso, 1998a; Chang & Grabel, 2004). Finally, Marxist scholars have argued that capital account liberalisation has had a poor impact in terms of growth and productive capital accumulation, has contributed to unsustainable patterns of financialisation and rising inequalities, has rendered developing economies extremely dependent on financial capital inflows, has generated deep financial fragilities and vulnerabilities, and has exacerbated uneven development.5 Those arguments have been illustrated with a series of country-specific analyses (e.g. on India, Chandrasekhar, 2016; Ghosh, 2005; on Mexico, Powell, 2013; on Brazil, Saad Filho & Mollo, 2006; Paulani, 2010; on South Africa, Bond, 2013a; Ashman & Fine, 2013). The analysis of the management of the capital account and cross-border finance in Brazil and South Africa conducted from chapters 5 to 8 of this book takes inspiration from these important Marxist contributions. In the next chapter, we will further explore a number of key Marxist arguments related to the politics of cross-border finance in emerging markets.

26  Theory, history, and geography Based on these various points of critique and drawing upon the experience of countries that maintained or redeployed capital controls throughout the 1990s (such as Chile, Colombia, China, Malaysia, India, etc.), scholars from those various heterodox traditions have formulated the argument that the liberalisation of the capital account across the global South should come to an end, and that active cross-border financial policies can play a key role in enhancing policy space for long-term developmental and socially progressive policies (e.g.  Ocampo, Spiegel, & Stiglitz, 2008). The argument is that by curtailing volatile cross-border movements of financial capital, interventionist policies can help: • • • • •

Maintain financial stability and reduce the vulnerability of domestic financial systems; Facilitate counter-cyclical macroeconomic management; Ease the constraint on monetary policy that is imposed by cross-border capital flows; Assist in harnessing capital flows and channelling them towards the ‘real’ economy; Control the modality of a country’s integration into global financial markets.

Nonetheless, these arguments failed to challenge the dominant thinking and practice about cross-border finance management, at least until the 2008 global financial crisis.

4. Post-crisis debates: a historical change in thinking and practice about cross-border finance? After a brief episode of brutal capital flight when the global financial crisis burst in 2008, private financial capital flows to developing countries rapidly recovered between 2009 and mid-2012. Historically large but volatile inflows were driven by better economic dynamism in developing countries than in advanced capitalist countries, or what economists have termed the ‘two-speed’ economic recovery. In addition, large interest rate differentials between emerging economies and advanced capitalist countries provided a highly lucrative opportunity for ‘carry trade’ operations (interest rates in the latter group of countries being close to zero or negative in the context of Quantitative Easing).6 This encouraged ‘excess liquidity in developed economies to spill over to emerging economies’, resulting in inflows increasing from 2.8% of gross national income in 2002 to 5% in 2013, after having reached two historical records of 6.6% in 2007 and 6.2% in 2010 (UNCTAD, 2015, p. iv). These sharp swings of financial capital sparked off an array of unorthodox policy responses across the developing world. Examples included Brazil, South Korea, Indonesia, Costa Rica, Uruguay, the Philippines, Peru, Taiwan, Colombia, and Thailand deploying different forms of capital controls, foreign exchange derivatives regulations, and ‘aggressive’ foreign exchange market interventions (Grabel  & Gallagher, 2015).7 State managers also became

Managing cross-border finance  27 increasingly vocal about the fact that emerging economies were suffering from the international spillovers associated with Quantitative Easing in advanced capitalist countries and the cycles of ‘beggar-thy-neighbour’ exchange rate policies that they triggered. For instance, in 2010, then Brazilian Finance Minister Guido Mantega complained that the world had entered an ‘international currency war’ (Wheatley, 2010). As noted in the previous chapter, in 2012, then president of Brazil Dilma Rousseff used the expression ‘liquidity tsunami’ to describe the wall of money that Brazil and other emerging economies were facing. In chapters 7, 8, and 9, we will discuss and compare in great detail the reaction of Brazilian and South African state managers to this unprecedented international scenario. In this specific international context, while heterodox scholars reiterated their arguments about the need for policies across the global South in order to actively manage cross-border finance (e.g. Gallagher, Griffith-Jones, & Ocampo, 2012), mainstream economists and policy-oriented circles (including policy-makers in central banks, finance ministries, the IMF, and the international financial community) faced three significant issues with implications for both thinking and practice on cross-border finance: how to officially recognise that unregulated cross-border financial capital flows could considerably disrupt capital accumulation, without at the same time deeply undermining the theoretical case for capital account liberalisation and free capital mobility, i.e. the orthodoxy that had emerged and consolidated over the previous three decades? How to adapt the orthodox prescriptions in terms of cross-border finance, so that they could accommodate policy instruments dealing with the most disruptive effects of financial capital flows without challenging the long-term commitment to an open capital account? How to explain that some of the unorthodox policies recently deployed by developing and emerging economies, such as capital controls on speculative portfolio inflows, had actually been relatively successful? Moreover, many developing and emerging markets were seeking assurances that the cross-border financial regulations they deployed in the post-crisis environment would be condoned or at least tolerated by the IMF (Gallagher, 2015a). A two-pronged strategic endeavour was made in response to these challenges. First, on the theory side, significant efforts were made to develop a theoretical framework – within mainstream neoclassical economics – that could accommodate the potential gains associated with some capital controls. In 2012, one of the world-leading figures on the topic of international capital flows to developing countries, former IMF chief economist Olivier Blanchard declared, ‘We have entered a brave new world. The economic crisis has put into question many of our beliefs. We have to accept the intellectual challenge’ (Blanchard et al., 2012, p. 225, cited in Grabel, 2015, p. 25). Olivier Jeanne, another key figure and former IMF researcher, made explicit the objectives of the new theoretical project: theoretical justification for such policies [capital controls such as the ones deployed in Brazil 2009–2012] can be found in the new welfare economics8 of prudential capital controls . . . [which] essentially transposes to international

28  Theory, history, and geography capital flows the closed-economy analysis of the macroprudential policies that aim to curb the boom-bust cycle in credit and asset prices. (Jeanne, 2012, p. 203, emphasis added) Influential contributions in this literature included Stiglitz (2010), Korinek (2011), Aizenman (2011), Jeanne, Subramanian, and Williamson (2012), and Rey (2015). The key argument is that capital controls can be modelled as ‘Pigouvian’ taxes, that is to say, taxes that force market agents to internalise externalities associated with large capital inflows in order to increase welfare and restore efficient market equilibria (Kaltenbrunner, 2017, p. 272; also Gallagher, 2015a, p. 65; Grabel, 2015, p. 28). As such, theoretical justification was effectively provided for temporary, targeted, transparent, and market-friendly capital controls as tools to maintain financial stability and secure the efficient functioning of financial markets (ibid). Second, on the policy-prescription side, the orthodox view on the management of the capital account was slightly altered. The IMF released in 2012 an ‘institutional view’ officially recognising the legitimacy of certain capital controls in particular circumstances (IMF, 2012). According to IMF researchers, capital controls now constitute a ‘legitimate part of the policy toolkit’ (Ostry et al., 2010, 2011). Capital controls were also renamed for the occasion ‘capital flow management techniques’ or ‘capital account regulation’, which are seemingly more neutral, technical terms, and ‘rebranded’ as macroprudential measures (Grabel, 2015). Furthermore, the IMF was now ‘officially charged with making recommendations regarding the management of capital flows under its surveillance functions’ (Gallagher, 2015, p.  125). This new orthodox position has been interpreted by critics as an attempt by the IMF to domesticate and retain some control over the recent policy-oriented debates on cross-border finance and the management of the capital account, and the set of measures endorsed has been criticised for being way too restrictive and ill-adapted to the issues faced by developing and emerging countries (e.g. Grabel, 2011, 2015; Gabor, 2011; Fritz & Prates, 2014; Kaltenbrunner, 2017). Overall, there was a strategic attempt on the part of the international financial establishment  – comprising high-profile economists and key policy-makers in central banks, finance ministries, and the IMF – to provide both theoretical justification and political endorsement for some very specific forms of capital controls. According to the newly produced doxa, developing and emerging economies can deploy a number of regulations on financial capital inflows, provided that those measures are targeted, temporary, and last resort. Those measures must also be market-friendly, preferably tax-based, and must not discriminate against foreign investors. Their objective must be to correct market imperfections and cope with the worst excesses of cross-border financial capital flows, without challenging in any way the alleged long-term benefits of maintaining an open capital account and free capital mobility. Cross-border financial regulations on financial outflows are also acceptable in crisis contexts. In other words, the orthodoxy in terms of thinking and practice about cross-border finance management has only slightly

Managing cross-border finance  29 evolved in the post-crisis environment. Interestingly, but perhaps unsurprisingly, even these small changes have been intensely resisted by the mainstream economics profession. Consider the avalanche of empirical studies recently produced which allegedly prove the ineffectiveness of capital controls (e.g.  Prati, Schindlerand, & Valenzuela, 2012; Klein, 2012). Nonetheless, as we will discuss in the next chapter, a number of critical IPE scholars have argued that these relatively limited changes have still made room for more experimentation with unorthodox policies across the global South than there was before the crisis.

Conclusion Let us now return to the quote with which we opened this chapter: ‘capital account liberalisation . . . remains one of the most controversial and least understood policies of our day. One reason is that different theoretical perspectives have very different implications for the desirability of liberalising capital flows’ (Eichengreen, 2004, p. 49, my emphasis). In light of the analysis conducted in this chapter, we can now nuance this observation in two important ways. Let us start with the second part of the statement. It is indeed true that many theoretical perspectives on the management of the capital account and cross-border finance exist, and this chapter has reviewed the key arguments which these perspectives have put forward. There is also no doubt that these diverse theoretical perspectives articulate very distinct views on the desirability of liberalising cross-border financial flows. Nonetheless, this picture is largely incomplete: these different theoretical perspectives do not exist and compete in a vacuum. By contextualising these economic theories and ideas within broader material dynamics of capital accumulation, and in particular, by locating their emergence in relation to successive waves of financial capital flows to developing and emerging economies, the chapter has emphasised the role that those theories have played in framing policy-oriented debates on cross-border finance and the management of the capital account. Tremendous power has been exercised in the shaping of those debates and in providing ideological justification for a specific set of policy prescriptions. Both orthodox theory and practice in the matter have evolved, in order to push for the liberalisation of the capital account and cross-border finance across the global South, despite recurring and devastating crises. Which leads us to the second point of nuance: the existence of diverse theoretical perspectives is not a sign that the management of cross-border finance and the capital account are little understood topics but of their inherently political character. Accordingly, arguing that these issues are ‘controversial’ is insufficient, if not potentially misleading. By contrast, the brief history of thinking and practice about cross-border finance in developing and emerging economies offered in this chapter  demonstrates that despite being framed in highly technical and allegedly neutral terms, those debates are in fact deeply political. Several political themes have emerged from the previous discussion, which draw attention to conflicts and contradictions in the management of cross-border finance. These include the relationship between state policy autonomy in developing countries

30  Theory, history, and geography and the discipline enforced by global financial markets; the question of what policy measures, instruments, and institutions are considered legitimate; the politics of financial (in)stability, crises, and who benefits from them; and the impact of cross-border finance liberalisation on power relations and income distribution between different social subjects. This points to the need to further investigate the power relations involved in the politics of cross-border finance management in developing and emerging countries, which is what we turn to in the next chapter.

Notes 1 According to this view, ‘prices are a collective outcome of actions of a multitude of individual economic agents whose behaviour is assumed to be based on utility maximisation and rational expectations. This price formation process is thought to lead to efficient prices in these markets’ (Singh, 2003, p. 196). 2 Needless to say, this is a highly stylised account, and the degree to which these policies were implemented varied greatly across the global South. 3 A recent IMF study finds that there were ‘124 banking crises, 208 currency crises, and 63 sovereign debt crises between 1970 and 2008’ (Leaven & Valencia, 2008). 4 Space is here used in a figurative sense. Policy space refers to the scope for domestic policies that is available for each country at a particular point in time in order to implement its national development strategy and manage its integration into the global economy (UNCTAD, 2002). A key premise is that ‘the policy space a country possesses, exercises enormous influence on its ability to achieve economic development’ (Chang, 2006, p. 627). 5 We will use in this book Ben Fine’s Marxist political economy definition of financialisation as ‘the intensive and extensive accumulation of fictitious capital or, in other words, the increasing scope and prevalence of interest-bearing capital in the accumulation of capital’ (2013, p. 55). The theoretical discussion offered in chapter 3 further explicates the different conceptual elements of this definition. 6 Carry trade operations are investment strategies which consist in borrowing in low-interestrate currencies in order to invest in currencies that yield higher interest rates. 7 And three ‘more advanced’ capitalist economies, Iceland (see Sigurgeirsdóttir & Wade, 2015), Cyprus, and Greece. Switzerland also aggressively intervened in foreign exchange markets and introduced an exchange rate ‘floor’ (see Moschella, 2015). 8 This branch of mainstream microeconomics ‘attempts to define and measure the “welfare” of society as a whole. It tries to identify which economic policies lead to optimal outcomes, and, where necessary, to choose among multiple optima’ (Feldman, 2008).

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Managing cross-border finance  31 Alfaro, L., Kalemli-Ozcan, S., & Volosovych, V. (2008). Why doesn’t capital flow from rich to poor countries? An empirical investigation. The Review of Economics and Statistics, 90(2), 347–368. Amsden, A. (1989). Asia’s next giant: South Korea and late industrialization. Oxford and New York: Oxford University Press. Arestis, P., & Glickman, M. (2002). Financial crisis in Southeast Asia: Dispelling illusion the Minskyan way. Cambridge Journal of Economics, 26(2), 237–260. Ashman, S., & Fine, B. (2013). Neo-liberalism, varieties of capitalism, and the shifting contours of South Africa’s financial system. Transformation: Critical Perspectives on Southern Africa, 81(1), 144–178. Bhagwati, J. (1998). The capital myth: The difference between trade in widgets and trade in dollars. Foreign Affairs, 7–12. Bond, P. (2013a). Historical varieties of space, scale and speculation in South Africa: The uneven and combined geographical development of financialised capitalism. Transformation: Critical Perspectives on Southern Africa, 81(1), 179–207. Bresser Pereira, L. C. (2010). Globalization and competition. Cambridge: Cambridge University Press. Bresser Pereira, L. C., & Gala, P. (2009). Why foreign savings fail to cause growth. International Journal of Political Economy, 38(1), 58–76. Calvo, G. A. (2005). Emerging capital markets in turmoil: Bad luck or bad policy? Cambridge, MA: The MIT Press. Chandrasekhar, C. P. (2016). Finance capital and the nature of capitalism in India today. Real-World Economics Review, 30. Chang, H. J. (2006). Policy space in historical perspective with special reference to trade and industrial policies. Economic and Political Weekly, 627–633. Chang, H. J., & Grabel, I. (2004). Reclaiming development: An alternative economic policy manual. London: Zed Books. Charnock, G.,  & Starosta, G. (2016). The new international division of labour: Global transformation and uneven development. London: Palgrave Macmillan. Clarke, S. (1988). Keynesianism, monetarism and the crisis of the state. Aldershot: Elgar. Clarke, S. (2001). Class struggle and the global overaccumulation of capital. In R. Albritton, M. Itoh, R. Westra, & A. Zuege (Eds.), Phases of capitalist development: Booms, crises and globalisations (pp. 76–92). London: Palgrave Macmillan. Cleaver, H. (1989). Close the IMF, abolish debt and end development: A class analysis of the international debt crisis. Capital & Class, 13(3), 17–50. Corbridge, S., & Thrift, N. (1994). Money, power and space: Introduction and overview. In S. Corbridge, R. Martin,  & N. Thrift (Eds.), Money, power and space (pp.  1–25). Oxford: Blackwell Publishing. Cottani, J.,  & Cavallo, D. (1993). Financial reform and liberalization. In R. Dornbusch (Ed.), Policymaking in the open economy. Oxford: Oxford University Press for the World Bank. Crotty, J., & Epstein, G. (1999). A defense of capital controls in light of the Asian financial crisis. Journal of Economic Issues, 33(2), 427–433. De Conti, B., Biancarelli, A., & Rossi, P. (2013). Currency hierarchy, liquidity preference and exchange rates: A Keynesian/Minskyan approach. Congrès de l’Association Française d’Économie Politique, Université Montesquieu Bordeaux IV. de Paula, L. F., Fritz, B., & Prates, D. M. (2017). Keynes at the periphery: Currency hierarchy and challenges for economic policy in emerging economies. Journal of Post Keynesian Economics, 40(2), 183–202.

32  Theory, history, and geography Díaz-Alejandro, C. F. (1985). Goodbye financial repression, hello financial crash. Journal of Development Economics, 19(1–2), 1–24. Dornbusch, R. (1997). Cross-border payments taxes and alternative capital account regimes. In UNCTAD, International monetary and financial issues for the 1990s (Vol.  VIII). New York and Geneva: United Nations. Dunn, B. (2009). Global political economy: A Marxist critique. London: Pluto Press. Eatwell, J. (1996). International capital liberalization: The impact on world development. CEPA Working Paper Series 1. New York: New School University. Eatwell, J., & Taylor, L. (2001). Global finance at risk: The case for international regulation. New York: The New Press. Eichengreen, B. (1996/2008). Globalizing capital: A history of the international monetary system (2nd ed.). Princeton, NJ and Oxford: Princeton University Press. Eichengreen, B. (2004). Capital flows and crises. Cambridge, MA: MIT Press. Epstein, G. (Ed.). (2005). Capital controls in developing countries. Cheltenham and Northampton: Edward Elgar. Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. Journal of Finance, 25(2), 383–417. Feldman, A. M. (2008). Welfare economics. In S. N. Durlauf  & L. Blume (Eds.), The new Palgrave dictionary of economics (Vol. 6, pp. 7077–7087). Basingstoke: Palgrave Macmillan. Fine, B. (2013). Financialization from a Marxist perspective. International Journal of Political Economy, 42(4), 47–66. Fritz, B., & Prates, D. (2014). The new IMF approach to capital account management and its blind spots: Lessons from Brazil and South Korea. International Review of Applied Economics, 28(2), 210–239. Fry, M. J. (1982). Models of financially repressed developing economies. World Development, 10(9), 731–750. Gabor, D. (2011). Paradigm shift? A critique of the IMF’s new approach to capital controls. Journal of Development Studies, 48(6), 714–731. Gallagher, K. P. (2015). Ruling capital: Emerging markets and the reregulation of crossborder finance. Ithaca: Cornell University Press. Gallagher, K. P., Griffith-Jones, S., & Ocampo, J. A. (Chairs). (2012). Regulating global capital flows for long-run development. Pardee Center Task Force Report, Boston University. Ghosh, J. (2005). The social and economic impact of financial liberalisation: A primer for developing countries. In J. A. Ocampo, K. S. Jomo & S. Khan (Eds.), Policy matters. London: Zed Books. Gourinchas, P. O.,  & Jeanne, O. (2006). The elusive gains from international financial integration. The Review of Economic Studies, 73(3), 715–741. Gourinchas, P. O., & Jeanne, O. (2013). Capital flows to developing countries: The allocation puzzle. The Review of Economic Studies, 80, 1484–1515. Grabel, I. (1996). Marketing the third world: The contradictions of portfolio investment in the global economy. World Development, 24(11), 1761–1776. Grabel, I. (2011). Not your grandfather’s IMF: Global crisis, productive incoherence, and developmental policy space. Cambridge Journal of Economics, 35, 805–830. Grabel, I. (2015). The rebranding of capital controls in an era of productive incoherence. Review of International Political Economy, 22(1), 7–43. Grabel, I., & Gallagher, K. P. (2015). Capital controls and the global financial crisis: An introduction. Review of International Political Economy, 22(1), 1–6.

Managing cross-border finance  33 Helleiner, G. K. (1997). Capital account regimes and the developing countries. In UNCTAD (Ed.), International monetary and financial issues for the 1990s (Vol. VIII). New York and Geneva: UN Publications. International Monetary Fund. (2012, November 14). The liberalization and management of capital flows: An institutional view, IMF Staff position note. Washington, DC: International Monetary Fund. International Monetary Fund. (2016). World economic outlook. Washington, DC: International Monetary Fund. Jeanne, O. (2012). Capital flow management. The American Economic Review, 102(3), 203–206. Jeanne, O., Subramanian, A.,  & Williamson, J. (2012). Who needs to open the capital account? Washington, DC: Peterson Institute for International Economics. Kaltenbrunner, A. (2017). Stemming the tide: Capital account regulations in developing and emerging countries. In P. Arestis  & M. Sawyer (Eds.), Financial liberalisation: Past, present, future (pp. 265–308). Annual Edition of International Papers in Political Economy. Houndmills and Basingstoke: Palgrave Macmillan. Kaltenbrunner, A.,  & Painceira, J. P. (2015). Developing countries’ changing nature of financial integration and new forms of external vulnerability: The Brazilian experience. Cambridge Journal of Economics, 39(5), 1281–1306. Klein, M. W. (2012, Fall). Capital controls: Gates versus walls. Brookings Papers on Economic Activity, 317–355. Korinek, A. (2011). The new economics of prudential capital controls: A research agenda. IMF Economic Review, 59(3), 523–561. Lapavitsas, C. (2013). Profiting without producing: How finance exploits us all. London: Verso Books. Leaven, L.,  & Valencia, F. (2008). Systemic banking crises: A new database. Working Paper WP/08/224. Washington, DC: International Monetary Fund. Lucas, R. E. (1990). Why doesn’t capital flow from rich to poor countries? The American Economic Review, 80(2), 92–96. McKinnon, R. I. (1973). Money and capital in economic development. Washington, DC: The Brookings Institution. Minsky, H. P. (1992). The financial instability hypothesis. In P. Arestis & M. Sawyer (Eds.), The handbook of radical political economy. Aldershot: Edward Elgar. Moschella, M. (2015). Currency wars in the advanced world: Resisting appreciation at a time of change in central banking monetary consensus. Review of International Political Economy, 22(1), 134–161. Nissanke, M., & Aryeetey, E. (1998). Financial integration and development: Liberalisation and reform in Sub-Saharan Africa. London: Routledge. Ocampo, J. A., Kregel, J., & Griffith-Jones, S. (2007). International finance and development. London: Zed Books. Ocampo, J. A., & Palma, G. (2008). The role of preventive capital account regulations. In J. A. Ocampo  & J. E. Stiglitz (Eds.), Capital market liberalization and development. New York: Oxford University Press, chapter 7. Ocampo, J. A., Spiegel, S., & Stiglitz, J. E. (2008). Capital market liberalization and development. In J. A. Ocampo & J. E. Stiglitz (Eds.), Capital market liberalization and development. New York: Oxford University Press, chapter 1. Ostry, J. D., Ghosh, A. R., Habermeier, K., Chamon, M., Qureshi, M. S., & Reinhardt, D. (2010). Capital inflows: The role of controls. IMF Staff Position Note No. 4. Washington, DC: International Monetary Fund.

34  Theory, history, and geography Ostry, J. D., Ghosh, A. R., Habermeier, K., Laeven, L., Chamon, M., Qureshi, M., & Kokenyne, A. (2011). Managing capital inflows: What tools to use? IMF Staff Position Note No. 11. Washington, DC: International Monetary Fund. Painceira, J. P. (2012). Developing countries in the era of financialisation: From deficit accumulation to reserve accumulation. In C. Lapavitsas (Ed.), Financialisation in crisis. Leiden: Brill. Palma, G. (2000). The three routes to financial crises: The need for capital controls. SCEPA Working Paper Series III. Working Paper No. 18. New York, NY: The New School for Social Research. Paulani, L. M. (2010). Brazil in the crisis of the finance-led regime of accumulation. Review of Radical Political Economics, 42(3), 363–372. Powell, J. (2013). Subordinate financialization: A study of Mexico and its non-financial corporations (PhD dissertation), SOAS, University of London. Prasad, E., Rajan, R., & Subramanian, A. (2007). Foreign capital and economic growth. Brookings Papers on Economic Activity, 1, 153–230. Prati, A., Schindlerand, M., & Valenzuela, P. (2012). Who benefits from capital account liberalization? Evidence from firm-level credit ratings data. Journal of International Money and Finance, 31(6), 1649–1673. Rey, H. (2015). Dilemma not trilemma: The global financial cycle and monetary policy independence (No. w21162). Cambridge: National Bureau of Economic Research. Rodrik, D. (1998). Who needs capital-account convertibility? Essays in International Finance, 55–65. Saad Filho, A., & Mollo, M. (2006). Neoliberal economic policies in Brazil (1994–2005): Cardoso, Lula and the need for a democratic alternative. New Political Economy, 11(1), 99–123. Saad Filho, A., & Tomkinson, J. K. (2017). Walking the tightrope: UNCTAD, development and finance-driven globalisation. Development and Change, 48, 1168–1181, Forum. Shaw, E. S. (1973). Financial deepening in economic development. Toronto: Oxford University Press. Sigurgeirsdottir, S., & Wade, R. H. (2015). From control by capital to control of capital: Iceland’s boom and bust, and the IMF’s unorthodox rescue package. Review of International Political Economy, 22(1), 103–133. Singh, A. (2003). Capital account liberalization, free long-term capital flows, financial crises and economic development. Eastern Economic Journal, 29(2), 191–216. Soederberg, S. (2005). The transnational debt architecture and emerging markets: The politics of paradoxes and punishment. Third World Quarterly, 26(6), 927–949. Stiglitz, J. E. (2000). Capital market liberalization, economic growth, and instability. World Development, 28(6), 1075–1086. Stiglitz, J. E. (2010). Contagion, liberalization, and the optimal structure of globalization. Journal of Globalization and Development, 1(2). Studart, R. (1995). Investment finance in economic development. London: Routledge. UNCTAD. (2002). Trade and development report 2002. New York and Geneva: United Nations Publication. UNCTAD. (2015). Trade and development report 2015: Making the international financial architecture work for development. New York and Geneva: United Nations Publication. Vasudevan, R. (2008). Finance, imperialism and the hegemony of the dollar. Monthly Review, 59(11). Wade, R., & Veneroso, F. (1998a). The gathering world slump and the battle over capital controls. New Left Review, 231, 13. Wheatley, J. (2010). Brazil in “currency war” alert. Financial Times. Retrieved May  8, 2017, from www.ft.com/content/33ff9624-ca48-11df-a860-00144feab49a

2 The politics of managing cross-border finance in emerging markets

The brief history of thinking and practice about the management of cross-border finance in developing and emerging economies offered in the previous chapter has drawn attention to questions of politics, conflicts, and contradictions. This chapter proposes to continue and deepen these reflections on the power relations and struggles involved in the politics of managing cross-border finance in emerging economies, by exploring the International Political Economy (IPE) literature on the topic. More precisely, it surveys and critically engages with five distinct types of perspectives:1 (1) IPE approaches that consider the extent to which global capital mobility and the structural power of global financial markets constrain national policy-making in emerging economies; (2) neo-realist perspectives on the question of international monetary power and financial globalisation; (3) approaches which examine the role of political conflicts between different interest groups and domestic institutions in the politics of cross-border finance; (4) constructivist perspectives which scrutinise the influence of economic ideas; and (5) Marxist perspectives concerned with how questions of capital accumulation, class dynamics, and imperialism shape the politics of cross-border finance. It is worth clarifying that the objective of this chapter is not to provide a comprehensive review of this extremely vast literature. One could not possibly do justice to it within the scope of a book, even less so in a single chapter. Rather, our more modest aim here will be to identify and critically engage with the central claims made by these five distinct IPE perspectives and discuss their specific implications for understanding the process of cross-border finance policy formulation and implementation in emerging economies. The critical engagement with this literature lays the groundwork for the alternative theoretical approach to the study of cross-border finance management which this book offers, and which is outlined in the next two chapters.

1. Global capital mobility and the structural power of financial markets An influential body of IPE literature has argued that global financial integration and enhanced capital mobility on a world scale have eroded the policy autonomy of national states (e.g. Strange, 1996; Germain, 1997; Cohen, 1998; Cerny, 1999). The ‘capital mobility hypothesis’, articulated by Andrews (1994), is particularly

36  Theory, history, and geography representative of this view. According to Andrews, ‘the relative absence of friction on financial flows across borders’ gives global financial markets a ‘structural power’ that constrains the policy options available to national states, including policy options concerning cross-border finance (1994, p.  195). In other words, their policy space is reduced. It is worth noting that there are intense debates about the extent to which policy space is reduced (e.g. Weiss’ Myth of the Powerless State 1998). Furthermore, while this extremely vast literature is mainly concerned with advanced capitalist countries (e.g. Oatley, 1999), some contributions have focussed on developing countries (e.g. Grabel, 1996; Mosley, 2003, 2015; Sobel, 2002; Wibbels, 2006; Akyüz, 2010). Those commentators argue that ‘in the developing world . . . the influence of financial markets on government policy autonomy is more pronounced’ (Mosley, 2003, p. 3).2 For Mosley, this is because developing countries are capital scarce, and therefore have greater needs to attract financial capital flows. Besides, ‘the risk of default in developing nations renders financial market participants more likely to consider a wide range of government policies when making investment decisions’ (ibid). Others have argued that this is because of the particular form of integration of developing countries into global financial markets. For instance, Wibbels (2006) argues that the constraint on policy autonomy is more pronounced in developing countries because of their limited capacity to borrow on global financial markets, especially in times of financial distress, which reduces space for counter-cyclical policy response. For others, this is owing to the various forms of external financial vulnerability identified by post-Keynesian/Minskian economists, which we discussed in the previous chapter (Grabel, 1996; Akyüz, 2010, 2014; Kaltenbrunner & Painceira, 2015). All in all, then, the management of the capital account and of cross-border finance is constrained by the structural power of global financial markets, even more so in developing countries which are more vulnerable due to their particular form of integration into the global financial system. A number of scholars have interpreted the recent resurgence of capital controls and other policies to actively manage cross-border finance across the global South in this light. For these commentators, the deployment of those policies must be seen as an attempt from developing countries to regain policy space (e.g. Gallagher, Griffith-Jones & Ocampo, 2012; Grabel, 2011, 2015; Chwieroth, 2014, 2015; Akyüz, 2014). Gallagher goes a step further in this argument with his theory of ‘countervailing monetary power’ (2015a, 2015b), formulated with specific reference to Andrews’ ‘capital mobility hypothesis’ previously discussed. Gallagher argues that the deployment of capital controls, foreign exchange derivatives regulations, and other interventionist policies in some developing countries was part of an endeavour to ‘countervail political pressure and sophisticated global capital markets in order to manage financial stability between 2009 and 2012’ (2015a, p. 17). This line of reasoning crucially draws attention to the structure of the global financial system and how it considerably shapes national policy-making in developing and emerging economies, even more so than it does in advanced capitalist economies. This is a fundamental question, and we will return to it several times throughout this book, both to further theoretically characterise this qualitative

Politics of managing cross-border finance  37 difference (in chapter 4), and to provide empirical flesh to it (in the case studies). For now, our concern will be with how this literature conceives of private financial capital flows as a constraint on policy space: private capital flows are conceptualised as a structural feature of the contemporary capitalist world economy, which constrains national state policy-making, and capital controls are seen as attempts from developmentally minded governing elites to better manage/control this constraint. As we will see, much of the IPE literature discussed later in this chapter also subscribes to some version of this view. The problem with this view is that it reifies states and markets as two intrinsically opposed social spheres of existence, and it conceives of their relation as some kind of mechanical zero-sum game scenario, whereby more capital mobility implies less policy space, or less policy autonomy. This is not the place to provide an extensive critique of such conceptualisation; suffice it to say here that the danger of this view is twofold. On the one hand, it tends to fetishise the power of global financial markets, as if they were operating somehow automatically, beyond human control. On the other hand, there is a risk of introducing a bias in the explanation of the resurgence of capital controls: if financial capital flows are seen as an exogenous force that externally constrains the policy space of states, then state policies that aim at regulating cross-border finance (such as capital controls) tend to be immediately interpreted as endeavours to enhance or maximise policy space.3 But what if, as we will discuss at length in chapter 3, the premise that states and markets are autonomous social spheres does not hold? What if, by contrast, they are seen as mutually constitutive and internally related social spheres? Now, this is not to deny that volatile and speculative capital flows have an important effect on state policies. They certainly do. The point is rather that there is a need for a more problematised view of the relation between the state and private capital flows, one that allows a better grasp of the messy and crisisridden relationship between the operations of capitalist finance and state power in emerging markets. The book will demonstrate that such a conception is necessary if we are to make sense of the landscapes of cross-border management in emerging markets.

2. The international monetary power of advanced capitalist economies Neo-realist IPE scholars accept to some extent the aforementioned ‘capital mobility hypothesis’ but contend that what most matter are power differentials between national states in the global political economy. This explains why not all national states face the structural constraint of global financial markets in the same way. Indeed, the most powerful states are capable of shaping international monetary phenomena to their advantage (Walter, 1993). Neo-realists therefore argue that ‘international monetary power’ is a key feature of world politics (Kirshner, 2003a, 2006; Andrews, 2006; Cohen, 2006). This refers to the unequal capacity of national states to avoid the burden of deflationary adjustment in cases of crises or global imbalances and to the unequal capacity to maintain macroeconomic policy

38  Theory, history, and geography autonomy. A key argument is therefore that ‘even though states have lost considerable power and autonomy to market forces in the past few years, the world is still a world of state actors with strong preferences and the power to advance their interests’ (Kirshner, 2003a, p. 656). States pursuing their interests ‘remain a key and probably most important purposeful force in shaping monetary phenomena’ (Kirshner, 2003b, p. 21). For neo-realist IPE scholars, then, financial globalisation is a process that takes place in the geopolitical context of ‘US preponderance and unipolarity’, and policies of financial opening (including capital account liberalisation), high financial capital mobility, and low inflation are pushed forward by the US and other advanced capitalist states. This is because they politically benefit from them, particularly during crises, since the risks associated with those crises are unevenly distributed across the world economy (Helleiner, 1994; Kirshner, 2006). Hence the aggressive attitude of the US towards developing countries which do not implement orthodox policies in terms of cross-border finance, such as when Malaysia deployed capital controls in the midst of the 1997 Asian financial crisis (Kirshner, 2006). The US and powerful financial interests exerted political pressure against Malaysia because it did not abide by the policies that served them. ‘Money rules’, Kirshner adds, ‘but those rules serve political masters’ (Kirshner, 2003a, p. 657). All in all, ‘monetary policy coordination takes place primarily on the basis of passive leadership by the strong . . . and unilateral adaptation by the weak’ (Andrews, 2006, p. 92). It is worth noting that while most neo-realist accounts focus on the structurally dominant role and hegemonic power of the US and the US dollar (Antoniades, 2015), some scholars within the same theoretical tradition have focussed on the agency of emerging economies in the global political economy of money and finance (Armijo & Katada, 2014, 2015). The main argument is that emerging powers (and particularly the BRICS) have recently made attempts ‘to reshape the major contours of the global political economy of money and finance’ in order to improve their relative position (Armijo & Katada, 2015, p. 56). The transformative potential of such attempts, which include the deployment of unorthodox and innovative policies to address cross-border finance, growing assertiveness in multilateral financial governance, and the build-up of financial capabilities, has however so far been limited (ibid; Huotari & Hanemann, 2014, p. 307). Overall, the central neo-realist argument is that the ability of emerging markets to manage cross-border finance autonomously is significantly constrained by both the structural power of financial markets and by the most powerful advanced capitalist states. This argument is fundamental to understanding the politics of cross-border finance, inasmuch as it draws attention to the fact that advanced capitalist economies benefit most from the current configuration of enhanced global capital mobility, at the expense of emerging economies. Nonetheless, it turns a blind eye to the multiple class-based relations of domination and exploitation that underpin both the movement of cross-border finance and the various institutional and political forms of state power that mediate this movement. By contrast, the approach developed in this book submits that it is both possible and necessary

Politics of managing cross-border finance  39 to dissect how international monetary power – to use neo-realist jargon – is not only the prerogative of hegemonic states, but also an essential medium of class struggle. As the book demonstrates, this is key to grasping the power relations and conflicts underpinning cross-border finance management, in emerging markets and beyond.

3. The role of domestic interest groups and institutions Another strand of IPE literature has sought to explain the diversity of capital account and cross-border financial policies across the developing world  – and in particular, exchange rate policies  – by looking at political conflicts between different domestic interest groups and by examining the nature of domestic institutions.4 The main argument is that different economic structures and domestic institutional and political settings can affect policy choices (Frieden, Leblang, & Valev, 2010; Broz, Frieden, & Weymouth, 2008; Leiteritz, 2012). This is because economic sectors have different preferences regarding cross-border finance, and are therefore likely to lobby policy-making accordingly. For instance, while both local and foreign financial interests often exert pressure for capital account liberalisation because they benefit from global capital inflows, the situation of other economic sectors, such as exporters and producers of tradable goods, is more ambiguous, particularly regarding the regime and level of the exchange rate: capital account liberalisation and large capital inflows can help exporters and producers of tradable goods finance themselves at a lower cost, but their competitiveness might be hurt by exchange rate appreciation. In addition, domestic institutional and political settings can affect policy choices. For example, scholars have claimed that countries with ‘highly independent’ central banks and a weak alliance between finance and industry were less likely to have interventionist policies in terms of cross-border finance than those with a subordinate central bank and a strong alliance between finance and industry (the argument is summarised in Gallagher, 2015a, p. 102). This literature provides a thought-provoking focus on the balance of power between interest groups with competing preferences as a determining factor in the politics of cross-border management in emerging markets. It suffers, however, from a number of theoretical, empirical, and methodological shortcomings. First, it assigns particular material interests and policy preferences regarding cross-­border finance to different social groups in a static and categorical manner. Yet, as we will see in the second part of this book, the ways in which different social actors in Brazil and South Africa (various segments of industrial capital, financial capital, labour, and so on) articulated their interests regarding cross-border finance were far from clear-cut – in fact, they were often ambiguous, and sometimes contradictory. Furthermore, when explicitly asked at interviews about their policy preferences with respect to cross-border finance management, representatives of these social groups often responded in even less of a definitive manner. Their interests and preferences also varied through time, just like the strategies they employed to advance them. For instance, while there were periods of relatively intense

40  Theory, history, and geography lobbying by manufacturers’ associations for more active policies to tame currency appreciation in both Brazil and South Africa, those efforts were neither consistent nor sustained through time.5 Chapter 8 will substantiate these arguments. Another shortcoming is theoretical. Broadly speaking, this literature tends to reduce the complexity of financial policy-making processes to the outcome of power politics between different interest groups with specific preferences. The issue here is that there is simply no reason why cross-border financial policy choices should reflect the preferences of the most powerful interest groups. The state, as we will discuss at length in the next chapter, is not a neutral terrain upon which conflicts between competing interests unfold. Nor is it an instrument that can be captured by the most powerful interest groups, or an apparatus which unproblematically channels their policy preferences. There are specific features related to the form, nature, and class character of the state in capitalist society which powerfully determine processes of financial policy-making. We will dissect these features and unpack their implications for understanding cross-border finance management in chapter 3. The other main argument of this literature is valuable too: domestic institutions importantly influence the politics of cross-border management in emerging markets. The case studies in the second part of this book will indeed show that institutional memory, inherited institutional landscapes, and legislative frameworks have crucially shaped post-crisis policy choices in Brazil and South Africa. These factors have also importantly contributed to policy differentiation between the two social formations in the post-crisis environment. In short, domestic institutions matter. But this does not answer a central question: why were these institutional and regulatory configurations there in the first place, and why are they so different in Brazil and South Africa? In other words, institutional diversity must be theorised and explained too. Chapters  5 and 6 will therefore provide theoretically informed historical accounts of cross-border finance management in Brazil and South Africa, emphasising the emergence of specific institutions and policy instruments in relation to cross-border financial flows and processes of institutional path dependency, but also dynamics of policy change at key historical junctures. Historical institutionalists, drawing upon the Comparative Capitalism literature, have provided a more nuanced and sophisticated argument about the role of institutions. Their main claim is that ‘different variations of capitalism’ choose different combinations of macroeconomic, exchange rate, and financial policies (Kalinowski, 2013). Policy preferences are always embedded in a specific ‘domestic politico-economic institutional context’, and in particular, in ‘a specific national model of capitalism and associated growth regime’ (Vermeiren, 2014, p. 192). The question of international monetary power, then, is not so much about ‘national egoisms’, as neo-realists would claim. Rather, it is a function of how integration in the global monetary system shapes national states’ ‘ability to pursue macroeconomic policies that are compatible with the domestic institutional logic of their model of capitalism’ (Kalinowski, 2013, p. 473; Vermeiren, 2014, p. 193).

Politics of managing cross-border finance  41 The historical institutionalist argument is important: institutions, including those involved in the management of cross-border finance, must be studied in light of their embedding into specific configurations of capitalism. A keen attention to the latter will indeed prove fundamental to grasping the nature of crossborder finance management in Brazil, South Africa, and more generally, emerging markets. What the book will show, however, is that the relationship between the prevailing configuration of capitalism and the set of institutions that develop out of it is much messier than what the historical institutionalist argument suggests. The process through which Brazilian and South African institutional landscapes of cross-border finance management have emerged is much better characterised by messiness, trial and error, and open-endedness than it is by coherence and compatibility. The process of institutional development was also profoundly shaped by often ad hoc policy-making, unintended policy outcomes, violent financial and monetary crises, and the contingent unfolding of wider social struggles. The story of institutional coherence and compatibility with a national variety of capitalism and associated growth regime that the historical intuitionalist literature tells is therefore ill-suited. Instead of concepts such as national variety of capitalism or national growth regime, we will therefore prefer in this book that of material conditions of capital accumulation, which refers to the historically and geographically specific form of capitalist social relations prevailing in the social formations studied.

4. The role of economic ideas in cross-border finance management Constructivist IPE scholars examine the historical role and power of ideas and norms in shaping interpretations and behaviours of policy-makers, financial markets, and credit rating agencies in relation to cross-border finance management. The main argument is that these ideas and norms are ‘political weapons’ used by powerful actors to depoliticise and naturalise the global financial order (Blyth, 2003). Of particular importance is the ‘norm of free capital mobility’, that is, the belief that ‘capital ought to flow across country borders with minimal restriction and regulation’ (Abdelal, 2007, p. 1; Chwieroth, 2009). Despite the risks associated with it, this norm has been codified and actively diffused because it served powerful interests: financial actors, the US, which had a comparative advantage in the matter (Helleiner, 1994; Blyth, 2003), and the European Union and the OECD (Abdelal, 2007). As the norm of free capital mobility became hegemonic in the 1990s, a ‘policy stigma’ became associated with the deployment of policy instruments that challenged it (such as capital controls, particularly on financial outflows) and a ‘reputational cost’ with the states that deployed them (Abdelal, 2007; Chwieroth, 2009; Moschella, 2010). Capital controls, for instance, while considered ‘orthodox’ policies under the Bretton Woods regime, became ‘heresy’ in the 1990s (Helleiner, 1994; Abdelal, 2007). This means that the use of capital controls and other ‘unorthodox’ policies would be interpreted as negative ‘signals’ by the international financial community, which includes international organisations,

42  Theory, history, and geography credit rating agencies, financial journalists, bankers, and investment funds, and punishment for deploying them would often come in the form of capital flight or credit rating downgrade (Abdelal & Alfaro, 2003). Constructivist scholars have also shown that norms and ideas, but also neoclassical economic theory (see the evolving orthodoxy examined in the previous chapter), have been mobilised to legitimise and depoliticise a number of policies and specific institutions, including inflation targeting, full currency convertibility, independent central banks, and open capital accounts (Grabel, 2000; Blyth, 2003). This was particularly important in the 1990s, where ideas have been crucial to make those policies and institutions appear as the only ‘credible policy options’ in developing and emerging countries (Grabel, 2000). Key actors in the diffusion of those norms and rules regarding cross-border finance management have been political institutions such as the IMF (Chwieroth, 2009; Moschella, 2010; Broome, 2010) and expert knowledge networks such as the ‘transnational financial policy community’ (Sinclair, 2005; Seabrooke & Tsingou, 2009; Tsingou, 2015), influencing processes of policy formulation and institutional design, thereby reducing the room for manoeuvre to deploy unorthodox policies. Constructivists have also made two further arguments regarding the recent deployment of a remarkable array of policy interventions to manage cross-border finance across the global South. The 2008 global financial crisis has ‘catalysed’ a variety of economic, political, and ideational changes in the global political economy (some of which had started after the late 1990s Asian financial crisis). Such changes have included power dispersion in the global financial architecture, a crisis of the financial globalisation project and of the Anglo-American brand of liberal capitalism, the rise and growing assertiveness of the so-called BRICS, as well as the increasing reliance of developing countries on ‘self-insurance’ financial strategies, such as large foreign exchange reserve accumulation as a ‘war chest’ against financial instability (Wade, 2011; Chin, 2010; Helleiner, 2010; Gallagher, 2011; Grabel, 2011, 2015). While the impact of such changes should not be overstated, largely because they have failed to challenge the existing structures of global governance and the structural power of advanced capitalist countries led by the US (Wade, 2013; Helleiner, 2014), they have nonetheless led to ‘an important turn in the direction of post-WWII support for capital controls [and more interventionist cross-border financial policies] by the economics profession, government officials and the IMF’ (Grabel, 2015, p. 11; Gallagher, 2011). According to constructivist scholars, this has resulted in a propitious setting for experimentation with capital controls and unorthodox policies to manage the capital account and cross-border finance, or what Ilene Grabel (2011) has termed an era of ‘productive incoherence’. If the moderate changes in thinking and practice about cross-border finance management (see the previous chapter for a discussion of these changes) have been ‘messy, uneven, and uncertain’ (Grabel & Gallagher, 2015, p. 3), they have nevertheless widened the policy space to more actively manage cross-border finance in the post-crisis environment. In that context, state managers in a variety of developing and emerging economies were

Politics of managing cross-border finance  43 able to deploy an array of ambitious policies, which in turn allowed room for counter-cyclical macroeconomic policies. The second argument that constructivist scholars have made in that regard is that the intellectual background of key state managers matters to understanding crossborder finance management. For instance, Kevin Gallagher (2015a) contends that the heterodox economic training of key Brazilian state managers is important to explain their policy choices. Gallagher argues that Guido Mantega (Brazilian Minister of Finance, 2006–2014), Nelson Barbosa Filho (executive secretary at the Ministry of Finance, 2011–2013) and Henrique Meirelles (head of the Brazilian Central Bank, 2003–2011) were trained in the ‘Minskian-­Developmentalist’ and ‘Structuralist-Keynesian’ traditions, which made them more inclined to use capital controls.6 By contrast, state managers in the South African Finance Ministry and in the South African Reserve Bank were primarily inspired by neoclassical and new Keynesian economic ideas, and accordingly considered ‘capital controls as heterodox and risky’ (Gallagher, 2015a, p. 117). The contribution of the constructivist IPE literature to our understanding of the politics of cross-border finance management in emerging markets is undoubtedly fundamental. Economic ideas about cross-border finance and how it should be managed are a recurrent theme in this book. These include ideas inspired by the general economic theories discussed in the previous chapter, but also the ideas that have developed out of the practical experience of managing cross-border finance in the specific contexts of Brazil and South Africa. The case studies will show that not only have these economic ideas crucially framed the views, understandings, and knowledge of Brazilian and South African policy-makers about cross-border finance management, they have also shaped the discursive practices and rhetorical tropes used by these policy-makers to justify and provide legitimacy to their policy choices. Although, as we will see, the role of economic ideas is often less straightforward than the literature seems to suggest. A number of caveats must therefore be considered here. The constructivist literature might be giving too much importance to the professional and intellectual backgrounds of state managers. In fact, the views about the management of the capital account and cross-border finance that key state managers and policy-makers expressed at interview were remarkably similar, irrespective of the economics tradition in which they were trained. For instance, in both Brazil and South Africa, policy-makers in the Ministry of Finance and the central bank clearly stated that capital controls were difficult to design and implement and could often easily be circumvented by market agents, they tended to create market distortions, they were politically risky and could deter long-term financing, and they could damage the financial reputation of Brazil and South Africa as attractive investment destinations. Brazilian and South African policy-makers also generally considered that external finance played a positive role and had very similar views on the potential risks that large-scale capital flows represented for their respective economies. As we will see in chapters 8, 9, and 10 in particular, similar economic ideas were in fact mobilised in highly flexible and contradictory

44  Theory, history, and geography ways, in order to justify often very different policy stances – fairly interventionist in the case of Brazil, and much more orthodox in the case of South Africa. What needs to be explained, then, is why economic ideas were mobilised in such particular ways.

5. Class, market discipline, and imperialism There has been a keen interest within Marxist scholarship with questions of international financial capital flows and their role in the reproduction of global capitalism, at least since the classical theories of imperialism of Luxemburg, Lenin, Bukharin, and Hilferding. Given the purpose of this book, we will be primarily concerned here with a set of recent contributions which have specifically focussed on the analysis of contemporary patterns of financial capital flows to developing and emerging economies and with the deployment of state policies to accompany these flows.7 To the best of my knowledge, no contribution has systematically dealt with cross-border finance management in emerging markets as defined in this book, that is, as the ensemble of policies, regulations, and institutions which influence the cross-border movement of money and finance, including currency convertibility and exchange rate policy, macroeconomic policy, diverse forms of capital controls, macroprudential regulation and the regulation of domestic financial systems, and foreign exchange reserve accumulation. Nonetheless, a number of these individual policies, instruments, and institutions have been analysed by Marxist scholars, yielding crucial insights into the politics of cross-border finance management in emerging markets. These arguments can be grouped into three categories. First, it has been argued that repeated financial crises over the past 30 years or so have been instrumental in disciplining states across the global South. The ‘resolution’ of those crises has often involved the imperialist imposition of a number of policies concerning cross-border finance: capital account liberalisation, full convertibility of the current account, non-discrimination between local and foreign investors, the opening of banking systems to foreign banks, and domestic financial liberalisation. Such policies have largely favoured the interests of large transnational capitalist firms often originating from advanced capitalist states as well as local comprador elites (e.g.  Soederberg, 2005, 2006; Toussaint, 2005). More generally, these policies have also contributed to facilitating the expanded accumulation and circulation of capital on a planetary scale (Harvey, 2010). By removing a variety of obstacles, such as capital and exchange controls, controls on credit flows and interest rates, and other financial and monetary regulations, they have considerably facilitated the movement of capital across territorial borders, regions, economic sectors, activities, and firms. Enhancing the mobility of capital in the form of money and finance has not only created more opportunities for profit-making via the extraction of surplus value, it has also considerably empowered capital vis-à-vis labour. Policies of cross-border finance management, then, are profoundly about transforming capitalist social relations of power. We will return to this fundamental point in the next chapter.

Politics of managing cross-border finance  45 Second, Marxist scholars have emphasised the political nature and class character of a variety of financial policies and institutions (e.g.  on capital controls, see Soederberg, 2002, 2004; Dierckx, 2015; on public banks and reserve accumulation, see Marois, 2012, 2014; on macroeconomic policy and state guarantees to safeguard financial systems, see Saad Filho, 2010, 2017; Fine & Saad Filho, 2017). The key argument is that those policies and institutions are not neutral, technical tools. They have highly unequal distributional impacts (in terms of risks and costs) between social classes, and they are instrumental in the reproduction of class-based strategies of capital accumulation. For instance, using the cases of Chile and Malaysia, Susanne Soederberg has demonstrated the role that diverse capital controls have played in reproducing particular neoliberal strategies associated with various configurations of economic and political elites in the 1990s (2002, 2004). It is therefore crucial to examine cross-border financial policies in light of their ‘political and historical dimensions’ and their embedding in the social relations of production prevailing in the social formation studied (2002, pp. 491–492; also Dierckx, 2015). Third, it has been argued that financial dynamics in developing and ­emerging economies are inseparable from their subordinate position in the world ­market. This subordinate position is ‘internalised’ within the various forms of state ­apparatus – including the policies, institutions, and instruments involved in crossborder finance management – often involving high social costs shifted unto the working class (Soederberg, 2005; Marois, 2011, 2012, 2015). Due to their position in the world market, developing and emerging economies also experience patterns of ‘peripheral’ or ‘subordinate financialisation’, which involve the extraction of a share of locally generated surplus which is then channelled to advanced capitalist states via the global financial system (Becker, Jager, Leubolt, & ­Weissenbacher, 2010; Painceira, 2012; Powell, 2013; Lapavitsas, 2009, 2013; Norfield, 2016). This is a contemporary manifestation of imperialism. Policies of foreign exchange reserve accumulation are a good illustration of the two previous arguments. In order to ‘self-insure’ against potential capital account reversals and financial crises, many developing and emerging economies have accumulated extremely large foreign exchange reserves since the late 1990s, often denominated in US dollars. Those resources, instead of being used to finance development and poverty alleviation policies, are overwhelmingly invested in extremely low-interest US treasury bonds and other US public debt securities, considered the safest assets in the world. As such, policies of foreign exchange reserve accumulation effectively socialise the risks and costs associated with financial openness: workers, peasants, and the poor in developing countries often benefit little from the liberalisation of the capital account and cross-border finance (the gains are largely captured by economic and political ruling classes), but they actively contribute to financing the policies to self-insure against financial crises, while simultaneously providing a handsome ‘subsidy’ to the US. Marxists see this as a key manifestation of contemporary imperialism. For Marxist scholars, then, class-based mechanisms and dynamics are fundamental to the politics of cross-border finance management in emerging markets.

46  Theory, history, and geography This is particularly important, since many of these dynamics are either under-­ theorised or largely neglected by the IPE literatures discussed earlier in this chapter. These literatures are particularly silent on the determinant role of working-class struggles in shaping the politics of cross-border finance management. Indeed, cross-border financial policies are portrayed as resulting from the decisions of state managers and other governing elites, while the working class is seen as a passive object of these policy choices. Labour occasionally appears in the analysis, in which case it is simply conceived as an interest group amongst others (as groups of ‘workers and consumers’ or unions). By contrast, this book will show that it is necessary to acknowledge the active role of both the ruling elites and the working class in shaping cross-border finance management, especially in terms of the former’s attempt at containing the resistance and insubordination of the latter.

Conclusion This chapter  has critically reviewed five distinct IPE perspectives in order to explore the politics of cross-border finance management in emerging economies. This diverse literature has made a highly valuable contribution to our understanding of the multiple power relations involved in cross-border finance, emphasising the structural power of global finance, the role of unequal power relations between nation states, political conflicts between interest groups, the significance of domestic institutional configurations, the influence of economic ideas, and the importance of class, discipline, and imperialism. The key arguments are summarised in Table 2.1. Many of these arguments will be useful for the comparative study of cross-border finance management in Brazil and South Africa provided in the second part of the book. We will also critically return to these theoretical arguments in chapters 9 and 10, in our attempt to offer a unified theory of post-crisis cross-border finance management in emerging markets. This chapter has nonetheless identified a number of shortcomings in the IPE literature. These include difficulties dealing with the influence of interest groups, domestic institutions, and ideas on cross-border financial policy-making and a highly problematic conceptualisation of the relation between global private financial capital flows and national state policy-making. The engagement with Marxist scholarship has also allowed emphasising the relative neglect in the IPE literature of the material conditions of capital accumulation and class relations prevailing in the countries studied. It is also worth noting that many of the perspectives and arguments reviewed in the chapter refer, more or less explicitly, to geographical processes. For instance, we have seen that many IPE scholars pointed out the particular form of integration of emerging economies into the global financial system, the diffusion of specific economic ideas and policies from advanced capitalist states to the global South, processes of ‘peripheral’ or ‘subordinate financialisation’, and so on. Clearly, questions of space and geography seem to matter for theorising cross-border finance management in emerging markets. And yet, the literature often falls short of thoroughly unpacking the geographical assumptions that underpin these arguments. Little is said, for instance, on the relations of space and power that characterise peripheral/

Politics of managing cross-border finance  47 Table 2.1 The politics of cross-border finance in emerging markets: key arguments Capital mobility and policy space

Neo-realism

Domestic interest group and institutionalism

Constructivism

Marxism

Structural power of global financial markets constrains national policy space to manage cross-border finance The constraint is particularly strong in developing countries This is due to capital scarcity and particular form of integration into global financial markets National states pursuing their interests is a crucial force in shaping global financial and monetary relations Capital mobility benefits advanced capitalist countries Promotion of orthodox policies in terms of cross-border finance management Growing assertiveness of BRICS in global finance, including through unconventional policies to address cross-border finance Different economic structures and domestic institutions and political settings affect cross-border financial policy choices Relative power of different interest groups with different policy preferences: finance, exporters and tradables producers, organised labour Institutional/legal configuration also affects policy choices: relationship between central bank and Finance Ministry Political power of ideas, rules, and norms about capital mobility influences cross-border finance management Some financial institutions and policies considered ‘orthodox’ and only credible policy options. Other policies and regulations are punished Role of the IMF, powerful capitalist states, transnational networks of financial experts, credit rating agencies in diffusing policy norms Financial crises as a mechanism which disciplines states across the global South Policies such as reserve accumulation, capital controls, and exchange rate regimes are not neutral, technical tools. They have class dimensions Cross-border finance management in developing and emerging countries must be understood in light of the imperialist global financial system

Source: Author.

subordinate financial integration, or on why emerging economies have remained in a subordinate position, despite being increasingly integrated into the financial world market. As a result, it remains unclear how geographical processes concretely shape cross-border finance management in emerging markets. One of the main contributions of this book is that it provides a comprehensive exploration of these questions. We can conclude, then, that the IPE literature on the politics of cross-border finance management in emerging markets leaves at least two important questions

48  Theory, history, and geography unanswered: how is cross-border finance policy-making in emerging markets determined by capitalist social relations and by the limits set by the dynamic process of capital valorisation? How is cross-border finance management profoundly shaped by the specific position of emerging economies in a geographically uneven world market? Answering these questions is necessary if we are to provide a fuller and more politically astute account of the diverse landscapes of cross-border finance management in emerging markets. There is therefore a need for an alternative theoretical conception of cross-border finance management which explicitly tackles these two questions. The next two chapters are dedicated to systematically outlining such an alternative theoretical conception. Chapter 3 develops a theoretical conception of the social determinations of cross-border finance management in general (that is, for all nation states). Chapter 4 then refines this conceptualisation by looking more closely at the specific case of emerging markets.

Notes 1 I propose this five-fold categorisation for analytical purposes only. Indeed, it is worth keeping in mind that there is significant overlap between those various IPE perspectives, though perhaps less so with the Marxian-inspired approaches. For instance, some authors, such as Ilene Grabel and Kevin Gallagher, creatively draw upon and combine those IPE perspectives. 2 This is in sharp contrast with a large chunk of the IPE literature which considers that the constraint on policy autonomy is the same for all states. Witness Randall Germain: ‘the constraining effect of financial market orthodoxy is most easily observed in developing nations, but is “equally at work” in industrialised countries’ (1997, p.  135, quoted in Mosley, 2003, p. 8). I will challenge this argument in chapter 4. 3 The very idea of maximising policy space is problematic, as it seems to suggest that the state can free itself from the imperatives that accumulation imposes on its particular form, i.e. that it can become (relatively) autonomous from the limits placed upon it by capitalist social relations and the dynamics of global capitalism (Clarke, 1991; Burnham, 2006). 4 Some scholars also emphasise the role of international institutions such as multilateral, regional, and bilateral agreements in the realms of trade and finance. These approaches underline that in many developing countries the policy space to manage cross-border finance is constrained by their commitments under such agreements, especially the type of agreements pushed by the US (with clauses for ‘investor protection’) and commitments under the WTO (particularly the clause concerning the liberalisation of trade in financial services under the General Agreement on Trade in Services) (Akyüz, 2010). The Pardee Center Task Force (2013) forcefully highlights the incompatibilities between policy space to manage cross-border finance and the trading system and advocates that the two be urgently reconciled. 5 Mainly the Federação das Indústrias do Estado de São Paulo (FIESP) in Brazil and the Manufacturing Circle in South Africa. 6 See previous chapter  for an account of these economics traditions’ views regarding cross-border finance. 7 Recently, lively debates about capital mobility have taken place within broader discussions of financialisation, neoliberalism, and imperialism. Influential arguments have included the following. First, it has been contended that high capital mobility is an essential aspect of financialisation conceived as an epochal change in capitalism (e.g. Arrighi, 1994; Bellamy Foster & Magdoff, 2009; Lapavitsas, 2013). Second, Marxist scholars have claimed that enhanced capital mobility has been part and parcel of the neoliberal capitalist response to the global crisis of overaccumulation that started in the late 1960s

Politics of managing cross-border finance  49 (e.g.  Duménil  & Lévy, 2011). Third, it has been argued that capital flows are a key mechanism through which capital finds new ‘spatial-temporal fixes’ in order to displace crisis contradictions, including through imperialist practices and ‘accumulation by dispossession’ in developing and emerging economies (e.g. Harvey, 2003, 2010; Soederberg, 2012, 2014).

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Politics of managing cross-border finance  51 Harvey, D. (2010). The enigma of capital and the crises of capitalism. London: Profile Books. Helleiner, E. (1994). States and the reemergence of global finance: From Bretton Woods to the 1990s. Ithaca: Cornell University Press. Helleiner, E. (2010). A Bretton-Woods moment? The 2007–2008 crisis and the future of global finance. International Affairs, 86(3), 619–636. Helleiner, E. (2014). The status quo crisis: Global financial governance after the 2008 Meltdown. Oxford: Oxford University Press. Huotari, M., & Hanemann, T. (2014). Emerging powers and change in the global financial order. Global Policy, 5(3), 298–310. Kalinowski, T. (2013). Regulating international finance and the diversity of capitalism. Socio-Economic Review, 11(3), 471–496. Kaltenbrunner, A.,  & Painceira, J. P. (2015). Developing countries’ changing nature of financial integration and new forms of external vulnerability: The Brazilian experience. Cambridge Journal of Economics, 39(5), 1281–1306. Kirshner, J. (2003a). Money is politics. Review of International Political Economy, 10(4), 645–660. Kirshner, J. (2003b). The inescapable politics of money. In J. Kirshner (Ed.), Monetary orders: Ambiguous economics, ubiquitous politics. Ithaca: Cornell University Press. Kirshner, J. (2006). Currency and coercion in the twenty-first century. In D. M. Andrews (Ed.), International monetary power. Ithaca: Cornell University Press. Lapavitsas, C. (2009). Financialisation embroils developing countries. Papeles de Europa, 19, 108. Lapavitsas, C. (2013). Profiting without producing: How finance exploits us all. London: Verso Books. Leiteritz, R. (2012). National economic identity and capital mobility: State-business relations in Latin America. Wiesbaden: VS-Verlag fuer Sozialwissenschaften. Marois, T. (2011). Emerging market bank rescues in an era of finance-led neoliberalism: A comparison of Mexico and Turkey. Review of International Political Economy, 18(2), 168–196. Marois, T. (2012). States, banks and crisis: Emerging finance capitalism in Mexico and Turkey. Cheltenham, UK: Edward Elgar Publishing. Marois, T. (2014). Historical precedents, contemporary manifestations: Crisis and the socialization of financial risk in neoliberal Mexico. Review of Radical Political Economics 2014, 46(3), 308–330. Marois, T. (2015). Banking on alternatives to neoliberal development. In L. Pradella  & T. Marois (Eds.), Polarizing development: Alternatives to neoliberalism and the crisis. London: Pluto Press. Moschella, M. (2010). Governing risk: The IMF and global financial crises. Basingstoke: Palgrave Macmillan. Moschella, M. (2015). Currency wars in the advanced world: Resisting appreciation at a time of change in central banking monetary consensus. Review of International Political Economy, 22(1), 134–161. Mosley, L. (2003). Global capital and national governments. Cambridge: Cambridge University Press. Mosley, L. (2015). Investment and debt. In C. Lancaster & N. van de Walle (Eds.), The Oxford handbook of politics of development. Oxford: Oxford University Press. Norfield, T. (2016). The city: London and the global power of finance. London: Verso Books.

52  Theory, history, and geography Oatley, T. (1999). How constraining is capital mobility? The partisan hypothesis in an open economy. American Journal of Political Science, 1003–1027. Painceira, J. P. (2012). Developing countries in the era of financialisation: From deficit accumulation to reserve accumulation. In C. Lapavitsas (Ed.), Financialisation in crisis. Leiden: Brill. Powell, J. (2013). Subordinate financialization: A study of Mexico and its non-financial corporations (PhD dissertation), SOAS, University of London. Saad Filho, A. (2010). Neoliberalism in crisis: A Marxist analysis. Marxism, 21, 235–257. Saad Filho, A. (2017). Monetary policy and neoliberalism. In D. Cahill, M. Cooper,  & M. Konings (Eds.), Sage handbook of neoliberalism. London: Sage. Seabrooke, L., & Tsingou, E. (2009). Revolving doors and linked ecologies in the world economy: Policy locations and the practice of international financial reform. CSGR Working Papers. Warwick: University of Warwick. Sinclair, T. J. (2005). The new masters of capital: American bond rating agencies and the politics of creditworthiness. Ithaca and London: Cornell University Press. Sobel, A. C. (2002). State institutions, private incentives, global capital. Ann Arbor, MI: University of Michigan Press. Soederberg, S. (2002). A historical materialist account of the Chilean capital control: Prototype policy for whom? Review of International Political Economy, 9(3), 490–512. Soederberg, S. (2004). Unravelling Washington’s judgement calls: The cases of the Malaysian and Chilean capital controls. Antipode, 36(1), 43–65. Soederberg, S. (2005). The transnational debt architecture and emerging markets: The politics of paradoxes and punishment. Third World Quarterly, 26(6), 927–949. Soederberg, S. (2006). Global governance in question: Empire, class, and the new common sense in managing North-South relations. London and Ann Arbor, MI: Pluto Press. Soederberg, S. (2012). The Mexican debtfare state: Dispossession, micro-lending, and the surplus population. Globalizations, 9(4), 561–575. Soederberg, S. (2014). Debtfare states and the poverty industry: Money, discipline and the surplus population. London: Routledge. Strange, S. (1996). The retreat of the state: The diffusion of power in the world economy. Cambridge: Cambridge University Press. Toussaint, E. (2005). Your money or your life. London: Pluto Books. Tsingou, E. (2015). Club governance and the making of global financial rules. Review of International Political Economy, 22(2), 225–256. Vermeiren, M. (2014). Power and imbalances in the global monetary system: A comparative capitalism perspective. Basingstoke and New York: Palgrave Macmillan. Wade, R. (2011). Emerging world order? From multipolarity to multilateralism in the G-20, the world bank and the IMF. Politics and Society, 39(3), 347–378. Wade, R. (2013). The art of power maintenance. Challenge, 56(1), 5–39. Walter, A. (1993). World power and world money: The role of hegemony and international monetary order. New York: Harvester Wheatsheaf. Weiss, L. (1998). The myth of the powerless state. Ithaca: Cornell University Press. Wibbels, E. (2006). Dependency revisited: International markets, business cycles, and social spending in the developing world. International Organization, 60(2), 433–468.

3 Conceptualising cross-border finance management

The critical engagement with the IPE literature provided in the previous chapter  concluded with the need for an alternative theoretical conception of crossborder finance management in emerging markets. Yet, before excavating what is specific about cross-border finance management in emerging economies, we need to establish in the first place what the social determinations of cross-border finance management are in general, that is, in the case of all nation states. But what is cross-border finance management? This question is much less straightforward than it seems. In fact, it immediately raises a number of closely related issues. A central actor in the management of cross-border finance is obviously the state: it designs and implements policies and regulations (or lifts them), which affect financial flows. But what exactly is the state? Cross-border finance management is about managing the flow of capital under the form of money and finance across territorial borders, but what are money and finance? What is driving their flow across space? What is the relationship between the state and the cross-border flow of money and finance? What are the opportunities and constraints that the state faces as it attempts to manage these flows? What are the limits set by the process of capital valorisation on the management of crossborder finance by the state? These are not simply questions of definition. These are thorny theoretical questions about the nature, constitution, and class character of complex social phenomena with far-reaching political implications, and they profoundly matter to conceptualise cross-border finance management. Many of the shortcomings that we have identified earlier in the economics and IPE literature are in fact owing to an underestimation and under-theorisation of these thorny issues. In other words, conceptualising cross-border finance management requires us to think through a number of social categories, or, as they are often called in critical theory, social forms: the state, money, and financial capital. In this chapter, thinking carefully and systematically through these social forms and their complex relationship will allow us to develop an understanding of the social determinations of cross-­ border finance management which is grounded in the social relations of capitalist production. In particular, the chapter  draws upon Marxism understood as the critique of political economy, which, as we will see, is uniquely positioned to provide a

54  Theory, history, and geography theoretical analysis of the social forms state, money, and financial capital and of the essential nature of their contradictory relationship. This contradictory relationship, the chapter argues, is central to understanding the form-determinations and the class character of cross-border finance management. Before starting the form-analysis of cross-border finance management, let us first briefly discuss some of the most commonly used definitions in mainstream economics and policy-making circles, but also largely in the heterodox economics traditions discussed in chapter 1 and in much of the IPE literature discussed in chapter 2. Highlighting some of the important shortcomings of these definitions will allow us to clarify what our alternative conceptualisation of cross-border finance management must be able to account for, as well as why we must break away from these commonly used definitions.

1. A critical point of departure: national accounting definitions As mentioned in the introductory chapter, cross-border finance management is primarily, for many commentators, about the management of the capital account. It is therefore useful to start with a simple national accounting definition of the capital account. National accounts, it is worth reminding, are ‘the calculative and representative apparatus dedicated to the formulation and publication of statistics designed to capture the overall level and composition of the economic activity of a nation-state’ (Christophers, 2013, p.  113). The capital account is the national account that registers changes in ownership (sales and purchases) of national assets and liabilities. As such, it is a component of the broader category that records all cross-border transactions between a country and the rest of the world over a specified period: the balance of payment. The other key category of the balance of payment is the current account, which refers to trade flows (imports and exports of goods and services, plus net incomes and transfers). This gives us the following equation defining the balance of payments: Current account + Capital account (+ net errors and omissions) = 0 The capital account is made up of several components: Capital account = net direct investment + net portfolio investment + net financial derivatives + net other investment + reserve assets Grouping the different types of capital flows together, we obtain: Capital account = net capital inflows + reserve assets Accordingly, the mainstream economics and policy-oriented literatures define the management of the capital account ‘as the accumulation of foreign assets and liabilities by the public sector plus all the policies that affect the private sector’s

Cross-border finance management 55 access to foreign capital’ (Jeanne, 2012a, p. 3). This definition is broad enough to encompass a wide variety of policies, including convertibility and exchange rate policy, macroeconomic policy (fiscal and monetary policy), the regulation of cross-border financial flows (including diverse forms of capital controls), macroprudential regulation and the regulation of domestic financial systems, and foreign exchange reserve accumulation. While these national accounting types of definition are useful for descriptive purposes, they are poorly suitable for studying the landscapes of cross-border finance management in emerging markets and their diversity. They make absolutely no mention of the state and of what it attempts to achieve when deploying policies and regulations to manage cross-border finance. As such, they do not allow studying cross-border management in relation to the other tasks that the state performs. The national accounting definitions also tend to portray cross-­border finance management as a neutral, technical task, thereby obfuscating its deeply political nature (see chapters 1 and 2). They draw our attention away from the social constitution and the class character of the policy-making process involved in the management of cross-border finance. Moreover, they say nothing about the forms of the flows, money and finance, suggesting that these forms bear absolutely no influence upon cross-border financial policy-making. Money and finance, their nature, properties, and capacities, are notoriously difficult to conceptualise, but if there is one thing we know about them is that they are the source of tremendous social power. Our discussion in the introductory chapter of the expression ‘liquidity tsunami’ suggested that money and finance can be experienced as ‘too much of a good thing’, as former South African Reserve Bank governor Gill Marcus put it. Recall also that the two previous chapters have underlined that money and finance can be disciplinary mechanisms too. Surely, this ambivalence, if not outright contradiction, matters to understanding the limits and constraints, but also the opportunities, that states face as they manage cross-border finance. An alternative theoretical conception must give us tools to unpack the implications of this contradiction for cross-border finance management. In sum, these shortcomings indicate that our alternative theoretical conception of cross-border finance management cannot start from the widely used national accounting definitions. It must depart from a radically different starting point. The remainder of this chapter suggests a wholly different approach, grounded in Marxism understood as the critique of political economy.1 It proposes to develop a conception of cross-border finance management based on a systematic examination of three capitalist social forms, namely, the state, money, and financial capital. The analysis starts from the state, and then works its way through by scrutinising the multiple facets of its contradictory relationship with money and financial capital. The overall objective is to provide a thorough characterisation of the essential determinations of cross-border finance management. We will aim to highlight two things in particular: on the one hand, the constraints imposed by the form of state on cross-border finance management, or what the chapter refers to as the form-determined constraints of cross-border finance management; on the other hand, the class character of cross-border finance management, that is, the

56  Theory, history, and geography class dimensions of what the state actually does when it manages cross-border finance. Let us depart from an examination of the capitalist state-form.2

2. The capitalist state-form Marxism understood as the critique of political economy emphasises the role of the state ‘in embedding the reproduction and accumulation of capital in lived social relations’ (Radice, 2008, p. 1161). From that perspective, the state is a historically specific political form assumed by antagonistic capitalist class relations (Clarke, 1991; Bonefeld, 1992). The class character of the state is evident in its role in capital accumulation, even though it is obfuscated by its fetishised appearance as an independent political form that guarantees public interest, formally separated from the process of surplus value production and from civil society. The state endeavours to organise the political hegemony of the bourgeoisie and secure the material conditions for capital accumulation within its territory. It acts to overcome the blockages to expanded capitalist reproduction, which are realised as monetary and financial crises (Burnham, 1996; Clarke, 1991). Through this process, it does not solve the contradictions that riddle capitalist reproduction, let alone crises, but merely displaces them. Capitalist class relations, it is worth insisting, are inherently global, and capital accumulation operates on a world scale.3 The production of relative surplus value, that is, the exploitation of the working class by the total social capital, is a global process.4 However, this global process is ‘self-differentiated into qualitatively specific national forms’, as the world is fragmented into nationally constituted political entities: national states (Fitzsimons  & Starosta, 2018, p.  116; Clarke, 2001; Milios & Sotiropoulos, 2009). Global capitalist exploitation is standardised within national territories, and the capitalist state plays an essential role in that process. Accordingly, national states must be seen as variegated modes of existence of global class relations (Clarke, 1991). It follows that securing conditions for domestic accumulation (which is necessary to provide a material basis for the political and ideological-cultural integration of the working class) is restricted by and subordinated to the conditions imposed by capital reproduction and class struggle on a global scale (Clarke, 1992, p. 136; Holloway, 1994; Burnham, 1996). The political constitution of the capitalist state on a national basis also has implications for the modalities through which its class character is expressed. As Gaston Caligaris puts it: [S]ince the total social capital is global in content and national in form, national states only represent total social capital through the representation of national total social capitals. That is, in the same way as individual capitals behave as aliquot parts of the total social capital, national total social capitals behave as aliquot parts of the global total social capital. The determination of national states as political representatives of national total social capitals is nothing more, then, than the mediated determination of national states as political representatives of global total social capital. (2016, p. 58, original emphasis)5

Cross-border finance management  57 As we will see later, this is a crucial point to understand the essential determination of cross-border finance management. Now, while this characterisation of the state-form remains at quite a high level of abstraction, it is worth insisting that the state-form only exists in and through the concrete institutional developments of the state apparatus, the activities of state agents, and other forms and practices of state power, which are an expression of the historical development of social relations (Holloway, 1991). The concrete variation in their perimeter, scope, and modalities – in other words, the boundary between the state and civil society – constantly change with the crisis dynamics of capital accumulation and social class struggles (Clarke, 1991; Gough, 2004; Alami, 2018a). Based on this analysis, a Marxian critique of political economy approach understands state policies as nationally differentiated political forms taken by the global unity of capitalist reproduction. At that stage, we can therefore offer a first characterisation of cross-border finance management: the management of crossborder finance consists in the deployment of (national) political, institutional, and regulatory forms to mediate the global movement of money and financial capital. A question, however, remains unanswered: what is the social content of this mediation? To further develop our form-analysis of border finance management in general, we must therefore investigate what the global movement of money and financial capital expresses, and what its relationship with the state is. This is what we turn to in the next sections. But we first need to establish what the money-form in capitalism is.6

3. The money-form From the perspective of the Marxian critique of political economy, despite appearing to ‘stand outside and above social conflict’, money is not neutral in capitalist societies (Bonefeld & Holloway, 1996). By contrast with bourgeois economic theory, which sees money as a neutral tool which facilitates the exchange of commodities between free and equal individuals, a critique of political economy approach emphasises that money is a social relation of power and inequality in capitalism (Negri, 1991). The argument is that money is the nexus rerum of capitalism, ‘the supreme encapsulation of [capitalism]’s social relations, which revolve around value’ (Marx, 1857/1993; Itoh & Lapavitsas, 1999, p. 55). Capitalist value, it is worth reminding, is the specific social relation that regulates the private labours of independent producers (Marx, 1857/1993). It expresses ‘the equal social validity of two [or more] completely different concrete acts of labour’ (Heinrich, 2004, p.  59). Money, Marx argues, is the socially necessary form of appearance of value. More precisely, money, as the ‘universal equivalent’, becomes the material expression of social value ‘independent of and external to particular production processes or specific commodities’ (Harvey, 1982/2006, p. 24; see also Marx, 1867/1991, p. 229;). It is therefore the ‘absolute social form of wealth’, bestowing social power. Yet, while money is the expression of an immaterial and invisible social relation, it ‘must always appear . . . as a thing’, an ‘external object’, which can be privately appropriated by individuals (Marx, 1867/1991; Harvey, 2014). In such

58  Theory, history, and geography case, ‘the individual carries his social power, as well as his bond with society, in his pocket’ (Marx, 1857/1993, p.  157). This provides a powerful incentive for hoarding money. As Marx puts it, ‘The hoarding drive is boundless in its nature’ (1867/1991, p. 230), because there is no limit to the social power that money confers. Therefore, the craving for social power impels the capitalist to the ‘Sisyphean task’ of accumulation (Marx, 1867/1991, p. 231). In David Harvey’s words, ‘The accumulation of money as unlimited social power is an essential feature of a capitalist mode of production’ (2010, p. 73). Accordingly, in capitalist society, ‘the circulation of money is not subordinated to the requirements of exchange, rather the possibility of exchange is subordinated to the demands of the expansion of money as capital’ (Clarke, 2003, p. 37). This points to the crucial distinction between money as money and as ­capital. As we will see later, this is particularly important to understand cross-border finance management. To clarify this distinction, it is useful to briefly examine what Marx calls the circuit of capital. The circuit of capital is a process through which capital takes three different forms with specific roles: money-capital (M), productive-capital (P), and commodity-capital (C). The process starts with money. The capitalist possesses money, the ‘original bearer of the capital value’ (Marx, 1885/1992, p. 112), which (s)he puts into circulation in order to make a profit, that is, in order to get more money. Therefore, the circuit of money-capital, M – C . . . P . . . C′ – M′, is ‘the self-evident form of the circuit of capital’ (1885/1992, p. 117). In the capitalist process of valorisation, that is, the process of value selfexpansion, ‘money not only retains its independent form, it also increases itself, so that it really does become the aim of the whole process’, the end in itself (Heinrich, 2004, p.  85). In this movement, money (as money) performs a series of socially necessary functions for capitalist valorisation, such as acting as a medium of circulation, a means of purchase and payment, a measure and store of value, and a standard of price. These functions ‘lubricate’ the metamorphoses M – C and C′ – M′ (Marx, 1885/1992). Money as money also encompasses the role of money as income, or purchasing power. But when money is put into circulation in the capital valorisation process, it also comes to express a particular social power. Money ‘as capital’ is ‘command over exploitation’ (Negri, 1991, p. 61). It expresses ‘capital’s ability to impose work’ and the associated ‘command of people’s lives as labour’ (Marazzi, 1996, p. 70; Cleaver, 1996, p. 142). It therefore embodies the essential social relation of power and inequality between those who possess money and those forced to sell their labour-power in order to get access to money and reproduce themselves. Money, or rather the lack thereof, endlessly coerces workers back into the act of market exchange and compels them to sell their alienated labour (Hampton, 2006, p. 142). Consequently, despite its appearance as a neutral object, money in capitalism is a key vector of class struggle (Bonefeld & Holloway, 1996). It is the most preeminent, abstract, and ‘autonomous’ social incarnation of class power (Clarke, 1988, p. 9; McNally, 2014). When money is converted into capital it stops being a ‘rational means to satisfying social needs’ and becomes a forceful and ‘irrational’

Cross-border finance management  59 form of social regulation, subjecting social reproduction to the discipline and logic of capital, that is, to the money-power of capital to appropriate surplus labourtime and extra-human natures such as land, natural resources, and biodiversity (Clarke, 2003; Smith, 2007; Arboleda, 2017). Importantly for the purpose of conceptualising cross-border finance management, this means that the contemporary movement of private financial capital across the world market (such as portfolio investment, bank loans, etc.) neither simply expresses the investment decisions of individual financial investors nor the power of a specific fraction of capital, such as a financial oligarchy or moneyed capitalists. From the form-analytical perspective developed here, while it is indeed the financial system that creates credit money, centralises large volumes of idle capital, transforms it in various forms of loanable financial capital, and largely controls its allocation across activities, firms, sectors, regions, and national territories (Harvey, 1982/2006; Itoh & Lapvitsas, 1999), this global movement of money and financial capital expresses the disciplinary power of the total social capital, ‘capital-in-general’ (Marx, 1894/1991). The global movement of money, financial capital, and their ‘concrete abstractions’ (such as prices, interest rates, credit ratings, etc.) powerfully ‘determine human life and the way in which it [is] lived’ (Neary & Taylor, 1998, p. 4; Harvey, 1989; Soederberg, 2014). Yet, as a moment of the class antagonism between capital and labour, this social power is constantly contested, challenged, and resisted. Consequently, as Harry Cleaver puts it, there can be many ‘obstacles to the successful uses of money in accumulation’ (1996, p. 144). Let us mention two obstacles here, given their importance for the analysis of cross-border finance management conducted in this book. First, given the widespread resistance and insubordination of labour in-and-beyond the point of production, there is no guarantee that putting money into circulation as capital will result in the successful production of surplus value. Second, given the fetishised appearance of the capital relation as ‘money that begets money’, there is a tendency inherent in the movement of capital for money to be invested in a variety of capitalised claims on future surplus value production (what Marx calls fictitious capital) instead of being converted into capital (Marx, 1894/1991; Lapavitsas, 2013; Durand, 2014). Both these obstacles mean that there is no guarantee that additional money creation will be converted into effective command over living labour and extra-human natures (Bonefeld, 1993). The case studies of Brazil and South Africa offered in chapters 5, 6, and 7 will provide ample examples of these two types of obstacles to the successful use of money in capital accumulation and of the crises associated with them. These chapters will show how they have profoundly shaped the cross-border movement of money and financial capital, and therefore, its management by the state. There is thus a ‘fraught and problematic link’ between value (the totality of social labour) and the way in which money represents it, which is an omnipresent source of monetary and financial crises (Harvey, 2014, p. 27; Marx, 1894/1991, p. 649). Consequently, ‘the other side of monetary instability is the insubordinate power of labour’ (Bonefeld & Holloway, 1996, p. 3). At the heart of the moneyform lies the contradictory unity between the imposition of work through money

60  Theory, history, and geography and the resistance to it, and as such, ‘money-as-command’ is always ‘commandin-crisis’ (Bonnet, 2002). Because of this fundamental instability, the crisis-ridden reproduction of the money-form has historically required the sustained action of the capitalist state. To pursue our form-analytical characterisation of cross-border finance management, we must therefore now turn to an examination of the relationship between the state and the money-power of capital.

4. The state and the reproduction of the money-power of capital Marxist theorists have emphasised that besides the elementary task of enforcing the rule of law and property rights, there have been two permanent and fundamental features of state intervention throughout the historical geographies of capitalism: the capitalist control of labour force and money (de Brunhoff, 1981; Cleaver, 1996).7 This is particularly important, since it allows conceptualising the question of state monetary regulation as not simply one of mediating the tensions between the various functions of money previously mentioned, but as one concerned with how the state enforces the social power of money in relation to labour within the wider dynamics of capital accumulation. Monetary regulation is therefore not a neutral, technical task. It must be conceived as the repressive use of state power to ‘contain the working class through imposing the elementary form of capital, money’ (Bonefeld, 1993, p. 65). Here the distinction previously outlined between money as money and money as capital is crucial. Indeed, as the state regulates and channels monetary flows across space, it not only allocates social wealth to various social subjects (by distributing money as income/purchasing power), but also strengthens or weakens the money-power of capital over them, thereby influencing how capitalist value relations impinge upon them (Hampton, 2003, 2006). In other words, the variegated manipulation of the class content of monetary flows across space is an essential aspect of the state’s attempt at managing class relations and fostering capital accumulation (Marazzi, 1996; Cleaver, 1996). While the set of policies, institutions, instruments, and practices that have been used for that purpose have greatly varied throughout the historical geographies of global capitalism, let us list a few of them in order to make the discussion more concrete, and link it more directly to our concern with conceptualising crossborder finance management. Drawing upon Marxist and economic geographical studies of money and finance, it is possible to group these policies, institutions, instruments, and practices into four categories (e.g. Alami, 2018a; de Brunhoff, 1981; Hall, 2011, 2012; Harvey, 1982/2006; Itoh & Lapavitsas, 1999; Thrift, Corbridge, & Martin, 1994; Martin, 1999; Roberts, 2016). The first category concerns the creation of money and the enforcement of its circulation within a specific territory. This includes the definition of the legal tender, the regulation of privately issued credit money (via interest rates policy, the function of lender of last resort, the legal and quasi-legal apparatus that regulates credit relations and enforces promises-to-pay, bank reserves and capital

Cross-border finance management  61 requirements, etc.), and the regulation of various forms of financial capital (the legal framework for domestic money and capital markets, the definition of their activities and the modalities of competition within them, etc.). The second category involves the regulation of the cross-border movement of money and financial capital. This includes national forms of regulation, such as the regulation of the capital and current accounts, exchange rate and convertibility policies, foreign exchange reserve accumulation, and interventions in currency markets, but also supranational financial and monetary arrangements, such as currency swap lines and reserve-pooling arrangement between central banks. The third category is about the state’s direct involvement in the circuits of financial capital. This includes the emission of state debt as fictitious capital8 and the state’s channelling of financial capital across space, between sectors, between classes, and between other social subjects. This is often done through public investment and subsidised credit, using tools such as national development banks and state-owned financial institutions, but also abroad via sovereign wealth funds and other strategic investment funds. The fourth category concerns the state’s involvement in processes of financial subjectification. This includes the ideological and cultural production of discourses and rhetorical tropes, and the production of ideas, meanings, knowledge, and worldviews, that shape financial subjectivities. This also includes the deployment of specific governing practices (including those involving the coercive apparatus of the state) that regulate the ‘inclusion’ of the working class in financial circuits and monetary relations, thereby contributing to the entrenchment of the money-power of capital over social life. It is clear, from the above list, that the policies, institutions, instruments, and practices that the state uses in order to manage cross-border finance (of which we find many in the first, second, and third category) are actually part of a broader logic of state intervention: the state manipulation of the class content of monetary flows for the purpose of managing class relations and fostering capital accumulation. We can therefore further characterise cross-border finance management in the following way. We have seen earlier that the management of cross-border finance consists in the deployment of (national) political, institutional, and regulatory forms to mediate the global movement of money and financial capital. We can now specify the social content of this mediation. As the state mediates global flows of money and financial capital, it channels these flows and manipulates their class content: it either strengthens or weakens the money-power of capital over particular social subjects, and allocates social wealth between them, for the broader purpose of managing class relations and fostering capital accumulation. At that stage, however, two questions remain unanswered, which suggests the direction we will now take to further nuance this characterisation of cross-border finance management. First, if, as argued earlier, the money-power of capital is a general form of social regulation, surely the state itself is also disciplined by it. What does this mean, then, for the aforementioned characterisation? Second, we have emphasised that the state plays a socially necessary role in the reproduction and enforcement of the rule of money. But what compels it to perform

62  Theory, history, and geography this task, and how does it matter in understanding the essential determinations of cross-border finance management? These questions, it will appear, are intimately related. Answering them requires further investigating the relation between the state and the money-power of capital, this time by approaching it from the other side of that relation.

5. The disciplining of the state by the money-power of capital A wealth of critical Marxist scholarship has shown that while the state is central to reproducing the rule of money, it is also disciplined by it. Indeed, the ‘fetishised form of the money relation’ is the form in which ‘the capital relation impinges most directly upon the state’ (Clarke, 1978, p. 65; Bonefeld, 1993). One essential aspect of this relation is expressed through the movement of what Marx calls ‘world money’, that is, the flow of money (as internationally recognised means of payment and hoarding) across the world market (Marx, 1867/1991, p.  240). World money, Marx argues, is the ‘ultimate determination’ of the money-form: ‘Only on the level of the world market, where money is divested of all local and particular determinations, can the complete “civilising activity” of money be understood’ (Marazzi, 1996, p. 72). It is the level at which ‘monetary terrorism’ operates (Marazzi, 1996, p. 85; also Alami, 2018b). The global movement of money and finance transmits the global conditions of capital accumulation and the competitive discipline of capitalist value relations to the various national spaces of valorisation and their respective states, through their balance of payment and exchange rate dynamics (de Brunhoff, 1981; Kettel, 2004). These two mediating mechanisms transform the deterioration in the present conditions (and future prospects) of labour exploitation and domination into monetary and financial crises (Bonnet, 2002). A sustained current account deficit and/or a capital account reversal lead to pressures on the exchange rate (and a drain on foreign exchange reserves) and, potentially, a financial crisis.9 As more and more speculative financial capital bets against the currency, this leads to a sharp devaluation of the exchange rate, resulting in a rapid increase in the cost of foreign-denominated debt, and an increase in the cost of key imports such as oil, technology, and capital goods, fuelling inflation (Koelble & Lipuma, 2006). The brutal devaluation of the currency can trigger a dislocation of domestic financial systems, endanger large companies exposed to exchange rate risk, and drastically increase state debt financing costs on global bond markets. In order to sustain the integration of their economy into the global circuits of capital, maintain the viability of their domestic financial systems, and defend their creditworthiness in government bond markets (necessary to roll over their debts), nation states must restore confidence by re-imposing what Harry Cleaver calls the ‘capitalist rules of the game’ (1989, p. 30). This involves the raising of interest rates in order to maintain the inflow of finance capital, and the deployment of austerity policies and ‘structural reforms’ in order to restore conditions propitious for capital accumulation, including the devaluation of locally operating capitals, and the disciplining of labour, a process that can turn into political crises as it is resisted by

Cross-border finance management  63 labour and various segments of capital. In other words, the movement of money and financial capital across the world market has the capacity to trigger bouts of state-enforced deflationary adjustment, at huge social, human, and environmental costs, and reinforce the abstract and impersonal power of capitalist discipline over social life. This highlights the mutually dependent yet contradictory relationship between the disciplinary power of capital, the reproduction of the money-form, and the reproduction of the state-form. The imperative that capital accumulation imposes upon the form of the state is expressed through the involvement of the moneypower of capital in the ‘inner workings of state finance’ (McNally, 2014, p. 15). Simon Clarke summarises this as follows: ‘the relation between money-capital and the state is realised through the state’s responsibility for the regulation of the monetary system’ (1978, p. 65). Accordingly, ‘the displacement of the antagonism of capital and labour in the form of monetary pressure involves the state because of the state’s responsibility for national currency as central banker’ (Bonefeld, 1993, p. 60). This analysis provides us with quite a different perspective from that put forward by the IPE literature discussed in chapter 2, especially regarding its view of the relation between the state and private financial capital flows: flows of money and finance across the world market do not reflect the structural power of global financial markets, which externally constrain the policy space of the national state for autonomous development. Rather, the global movement of money and financial capital expresses the disciplinary power of the total social capital (or capital-in-general), and it shapes the modalities through which the state politically contains and integrates labour within its national space of valorisation (Bonefeld  & Holloway, 1996). As the previous analysis has shown, this relation is not one of exteriority. The flow of money and financial capital is not a force intrinsically opposed and external to the state. The expression and reproduction of money-power and state power are deeply imbricated. Furthermore, the analysis has shown that a particular contradiction is at the core of the process through which the flow of financial capital shapes state intervention. Indeed, from the perspective of the capitalist state, there is a contradiction immanent in the form of financial capital as it flows across national territorial borders. On the one hand, inflows of financial capital constitute a source of social wealth that can be distributed to various social subjects through a variety of state policies for the purpose of managing class relations and fostering the accumulation of the (national) total social capital. On the other hand, the movement of money and financial capital across territorial borders also expresses the disciplinary power of the (global) total social capital, and it shapes the modalities through which the state politically contains and integrates the working class. As we will see throughout the book, this complex entanglement of opportunities, constraints, and discipline is absolutely fundamental to grasping the nature of cross-border finance management. The case studies of Brazil and South Africa will provide empirical evidence for this argument.

64  Theory, history, and geography

Conclusion We can now complete our form-analysis and refine our alternative conceptualisation of cross-border finance management. Cross-border finance management is a form of realisation of the mutually dependent yet contradictory relationship between the disciplinary power of capital, the reproduction of the money-form, and the reproduction of the state-form. More precisely, cross-border finance management consists in the deployment of (national) institutional and political forms through which the capitalist state mediates the complex entanglement of opportunities and constraints constituted by financial capital, that is, financial capital as a source of social wealth that can be distributed to various social subjects, and financial capital as the expression of the disciplinary power of capital-in-general. As it does so, the state channels those flows and manipulates their class content for the purpose of managing class relations and fostering the accumulation of national total social capital. In order to secure its own reproduction as well as that of money, it is forced to perform the aforementioned task in ways compatible with global capital accumulation, that is, with the expanded reproduction of global total social capital. The central argument of this chapter is that the social determinations that we have identified are the essential form-determinations of cross-border finance management in general, that is, they are the constraints that all nation states necessarily face when managing cross-border finance, by virtue of their very existence as states in capitalist society. By identifying these form-determinations and their implications, the chapter has also shed light on the class character of cross-border finance management, that is, the class dimensions of what the state actually does (or hopes to achieve) when it manages cross-border finance. This alternative theoretical conceptualisation, based on a systematic form-­ analysis of the categories state, money, and financial capital and their contradictory relationship, has therefore provided us with tools to study cross-border finance management from a radically different angle than the commonly used national accounting type of definitions which we have critically discussed at the beginning of this chapter. This alternative theoretical conceptualisation will also allow us in the remainder of this book to better account for the influence on crossborder financial policy-making of the factors underlined by the various IPE perspectives discussed in chapter 2, such as economic ideas, domestic institutions, interest groups, and the historical-geographical specificity of capitalist development in the countries studied, as these will be considered against the background of the essential form-determinations uncovered here. Let us now take a closer look at the configuration of these form-determinations in the specific case of emerging markets, and in particular, at how they are shaped by the specific position of the emerging market in a geographically uneven world market.

Notes 1 The purpose of Marxism understood as the critique of political economy is the critique of the (fetishised) bourgeois social relations, and the historically specific forms that they take (Bonefeld, 2001). Capitalist forms of social life (the forms of the relationship between humans, and between humans and extra-human natures), Marx argued, are

Cross-border finance management  65 ‘perverted’ forms (Marx, 1867/1991; Bonefeld, 2001, p. 57). The categorical critique of capitalist social forms such as value, the commodity, the state, capital, and money thus consists in revealing their social constitution, that is, the ‘human basis of their existence’ (Bonefeld, 2001, pp. 54–56). See Alami (2019) for an elaboration on this. 2 To be clear, the state discussed in this section is a capitalist state, that is, ‘the state of a society dominated by capitalist relations of production’ (Clarke, 1978, p. 55). 3 Marx argued that the world market is ‘the very basis and living atmosphere of the capitalist mode of production’ (1894/1991, p. 205). 4 The Marxian concept total social capital refers to the unity of all individual capitals. 5 Milios and Sotiropoulos (2009, p. 194) make a similar point. It is worth insisting with them that the ‘national’ in national total social capital does not refer here to the legal forms of property (national vs. foreign) of individual capitals. National total social capital is the unity of all individual capitals operating in a particular national space of valorisation. As such, the local subsidiary/branch of a transnational corporation is indeed incorporated in the national total social capital. 6 A clarification is in order: ‘money-form’ refers to money as a moment of capitalist class relations. By contrast, ‘forms of money’ refers to the forms taken by money throughout the course of history: commodity moneys, coins and paper moneys, state-backed privately issued credit moneys, etc. 7 Following Henri Lefebvre (1991), Neil Smith (1984/2008), and Fernando Coronil (1997), one might add the category ‘nature/land-ground rent’ as another permanent and fundamental area of state intervention. Chapters 5 and 6 will show the significance of land rents generated in the primary sector for understanding the historical-geographical specificity of capital accumulation in Brazil and South Africa, as well as the management of cross-border finance. 8 State debt is a form of fictitious capital because it is a capitalised claim to future tax revenue. To secure their material reproduction, ‘states must constantly be able to recycle existing state debts. This involves demonstrating that the state’s fictitious capital claims held by financial capital today can be honoured in the future’ (Marois, 2014, pp. 311–312). 9 Although, as we will see throughout this book, in the case of developing and emerging economies, sharp capital account reversal can often happen owing to factors largely disconnected from the economic conditions prevailing in their national space of valorisation. This will be discussed in particular in the next chapter.

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Cross-border finance management  67 Hampton, M. (2003, Spring–Summer). The return of scarcity and the international organisation of money after the collapse of Bretton Woods. The Commoner, 7. Hampton, M. (2006). Hegemony, class struggle and the radical historiography of global monetary standards. Capital & Class, 30(2), 131–164. Harvey, D. (1982/2006). Limits to capital (6th ed.). London: Verso Books. Harvey, D. (1989). The condition of postmodernity. Oxford: Blackwell. Harvey, D. (2010). A companion to Marx’s capital (Vol. 1). London: Verso Books. Harvey, D. (2014). Seventeen contradictions and the end of capitalism. Oxford: Oxford University Press. Heinrich, M. (2004). An introduction to the three volumes of Marx’s capital. New York: Monthly Review Press. Holloway, J. (1991). The state and everyday struggle. In S. Clarke (Ed.), The state debate (pp. 225–259). London: Palgrave Macmillan. Holloway, J. (1994). Global capital and the national state. Capital & Class, 18(1), 23–49. Itoh, M., & Lapavitsas, C. (1999). Political economy of money and finance. London: Palgrave Macmillan. Jeanne, O. (2012a). Capital-account policies and the real exchange rate. NBER International Seminar on Macroeconomics 2012. University of Chicago Press, 7–42. Kettell, S. (2004). The political economy of exchange rate policy-making. from the gold: Standard to the Euro. Houndmills: Palgrave Macmillan. Koelble, T. A., & LiPuma, E. (2006). The effects of circulatory capitalism on democratization: Observations from South Africa and Brazil. Democratization, 13(4), 605–631. Lapavitsas, C. (2013). Profiting without producing: How finance exploits us all. London: Verso Books. Lefebvre, H. (1991). The production of space (Vol. 142). Oxford: Blackwell. Marazzi, C. (1996). Money in the world crisis: The new basis of capitalist power. In W.  Bonefeld  & J. Holloway (Eds.), Global capital, national state and the politics of money (pp. 69–91). London: Palgrave Macmillan. Marois, T. (2014). Historical precedents, contemporary manifestations: Crisis and the socialization of financial risk in neoliberal Mexico. Review of Radical Political Economics, 46(3), 308–330. Martin, R. (Ed.). (1999). Money and the space economy. London: Wiley. Marx, K. (1857/1993). Grundrisse, foundations of the critique of political economy (M. Nicolaus, Trans.). New York: Penguin Books. Marx, K. (1867/1991). Capital: A critique of political economy (Vol. I, B. Fowkes, Trans.). London: Penguin Classics. Marx, K. (1885/1992). Capital: A critique of political economy (Vol. II, D. Fernbach, Trans.). London: Penguin Classics. Marx, K. (1894/1991). Capital: A critique of political economy (Vol. III, D. Fernbach, Trans.). London: Penguin Classics. McNally, D. (2014). The blood of the commonwealth: War, the state and the making of world-money. Historical Materialism, 22(2), 3–32. Milios, J., & Sotiropoulos, D. (2009). Rethinking imperialism: A study of capitalist rule. London: Palgrave Macmillan. Neary, M.,  & Taylor, G. (1998). Money and the human condition. London: Palgrave Macmillan. Negri, A. (1991). Marx beyond Marx lessons on the Grundrisse. London: Pluto Press. Radice, H. (2008). The developmental state under global neoliberalism. Third World Quarterly, 29(6), 1153–1174.

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4 The specificity of cross-border finance management in emerging markets

Now that we have established the essential form-determinations of the management of cross-border finance in general (that is, for all nation states), let us focus on the specific case of emerging economies. Our objective here will be to identify potential additional social determinants of cross-border finance management in emerging markets. For that purpose, we will now give full attention to notions that have been continuously present in the background of the conceptual analysis conducted in the previous chapter, but underexplored: space and geography.1 Recall also that many of the arguments advanced by the IPE literature refer, more or less explicitly, to geographical processes, such as subordinate financial integration, peripheral financialisation, and the like. Although, as discussed in chapter 2, this literature falls short of fully unpacking the geographical processes and spatial relations at stake. As a result, it leaves unanswered the following question: how is cross-border finance management profoundly shaped by the specific position of emerging economies in a geographically uneven world market? This chapter provides theoretical substantiation for one of the key arguments of the book: comprehending the politics of managing cross-border finance in emerging markets requires a keen attention to spatial and geographical relations. In order to do so, it will continue the conceptual analysis conducted in the previous chapter by drawing upon and combining an eclectic range of literatures. Marxist and economic geographical studies of money and finance will allow us to investigate the spatial logic of the money-power of capital, and how command over space is constitutive of that power. Post-Keynesian/Minskian economics and financial geography will provide us with conceptual tools for exploring the concrete and distinct geographies of the global financial system and of the global monetary system. The rich IPE literature inspired by feminism and postcolonialism (which is rarely used to examine questions of cross-border finance in emerging markets) will also prove particularly useful to grasp the raced and gendered components of contemporary financial and monetary relations. As we will see, this matters for understanding how the operations of the money-power of capital on a planetary scale are constituted by unequal class relations, but also profoundly shaped by relations of race, empire, and masculinity. This has far-reaching implications for patterns of financial capital flows and cross-border finance management in emerging markets.

70  Theory, history, and geography The overall contention of the chapter is that the money-power of capital unfolds unevenly across the global capitalist economy. This is because it is mediated by what we will call the relational geographies of money-power, and which are constituted by two overlapping sets of geographies: the geographies of the global monetary system and the geographies of the global financial system. Despite growing integration into the financial world market, emerging markets have retained a subordinate positionality in the relational geographies of money-power. As a result, the contradictory relationship between the state, money, and financial capital (which we scrutinised in the previous chapter) takes a particularly acute form of realisation in emerging markets, making the management of monetary and financial affairs considerably more difficult for the capitalist state. This constitutes an additional layer of social determination on cross-border finance management in emerging markets.

1. The spatial logic of the money-power of capital By investigating the particular role of money in the space-time matrix of capital, economic geographers have highlighted the contradictory relation between money, space, and uneven development (see Harvey, 1985; Corbridge & Thrift, 1994; Thrift, Corbridge,  & Martin, 1994; Bond, 1998; Mann, 2008, 2010). As explained in the previous chapter, money is the socially recognised embodiment of value, the universal equivalent. As such, it acts as a ‘radical leveller, [which] extinguishes all distinctions’ (Marx, 1867/1991, p. 229). It is a ubiquitous expression of class power, which is ‘everywhere but nowhere in particular’ (Harvey, 1985, p. 167). Money has the ability to ‘link places distant in space and time’, and therefore contributes to an ‘homogenisation’ of spaces, that is, to the tendency of economic practices within and across these spaces to ‘conform more to the abstract conventions and rationalities of the community of money and capital’ (Leyshon, 1996, pp. 64–65). Nevertheless, space has certainly not been ‘levelled out of existence’ by the spatial-territorial expansion of the community of money and capital. In fact, the asymmetric movement of money and financial capital between uneven spaces in perpetual search for higher profit opportunities is precisely the way through which class power (re)asserts itself: financial capital leaves those locations and sectors of activities which do not conform to capitalist value disciplines and flows into those locations and sectors with better prospects of labour exploitation and domination, thereby both mobilising and exacerbating uneven development across places, territories, and scales (Harvey, 1982/2006; Smith, 1984/2008). Spatial uneven development is both a necessary condition and a consequence of the expression of the money-power of capital: it is constitutive of it. Financial capital flows across space in order to appropriate living labour and extra-human natures, and command over space is therefore a key ‘moment’ of this power. However, as discussed in the previous chapter, this power is always in crisis, and it rests upon the dialectic between the imposition of work-discipline and the resistance to it. The movement of money-capital across space therefore expresses

The specificity of cross-border finance  71 both ‘money-as-command’ and ‘command-in-crisis’ (Bonnet, 2002). This is what John Holloway calls the ‘flight of-and-from the insubordination of labour’ (1995). A central aspect of capital’s struggle to impose discipline upon labour, Holloway argues, is the flight (often in the form of money and finance) from labour insubordination. But capital can never escape its dependence on the subordination of labour, and therefore is inherently and constantly mobile. Money ‘liquefies’ this class relation of ‘mutual repulsion’, and fetishises it as the flow of finance across space (Holloway, 1995, p. 141). Yet, while this metaphor of ‘liquefaction’ of the class relation is particularly useful to understand the spatial logic of the moneypower of capital, it is worth insisting that financial capital does not flow mechanically from one place to another and that there is no automatic flight-of-and-from labour insubordination. What is needed, then, is an examination of the concrete modalities through which the contemporary form of the money-power of capital is constituted and operates across space. This new form of the money-power of capital, primarily operating through global financial markets, has progressively developed since the 1970s. Its emergence has been facilitated by a series of financial and monetary transformations in the context of a global crisis of capital overaccumulation. First, the collapse of the Bretton Woods global monetary system has removed the ‘metal limit’ on credit creation and favoured the emergence of an ‘infinitely elastic paper money form driven by fictitious capital’, resulting in a world ‘awash’ with financial capital (Hampton, 2003, p. 2; Harvey, 1982/2006; Fine, 2013).2 Second, both the spatial mobility (switching geographical places) and the liquidity (the ease to change asset classes and/or currencies in which they are denominated) of financial capital have been greatly enhanced by a number of factors. These included technological advances in financial trading systems, contributing to a significant round of what Marx calls ‘annihilation of space by time’, domestic financial deregulation, and the removal of barriers to the geographical flow of financial capital (Watson, 2007; Harvey, 2010). Importantly, the latter involved the liberalisation of crossborder finance, the widespread liberalisation of the capital account, and the global integration of financial markets, as discussed in chapter 1. Financial innovation has also significantly contributed to enhancing the spatial mobility, liquidity, and fungibility of financial capital, by constructing a wide range of financial instruments through which capital may be mobilised and flows of capital switched from one place/investment to another (Orléan, 2011; Norfield, 2016). This is because financial practices such as securitisation consist in the ‘reification’ of social relations into liquid financial securities that appear as autonomous from these underlying social relations and that can then be put into circulation as fictitious capital (Pineault, 2013, p. 118; Sotiropoulos, Milios, & Lapatsioras, 2013, p.  53).3 Financial derivative products play a particularly important role in that process, inasmuch that they essentially commodify, package, and put a price tag on a variety of risks that are associated with future events, which can potentially disrupt capital accumulation. These concrete risks are place-based, by nature highly heterogeneous, and difficult to measure, quantify, and predict. Securitisation consists in transforming them into ‘commodities with a price, that

72  Theory, history, and geography is to say economic objects always already quantifiable’. This is to render them ‘commensurate with each other and to reduce their heterogeneity to expressions of a single social attribute, abstract risk’, for the purpose of continuous monitoring and quantification of place-specific events that would be detrimental from the perspective of capital (Sotiropoulos et al., 2013, p. 3). Importantly, the design and pricing of financial products involves a fetishised ‘representation’ and quantification of present and future prospects of labour exploitation and domination (in a particular sector, country, or region), comprising worldviews, imaginaries, and perceptions, which reflect real power relations, including social relations of race, coloniality, and gender.4 These fetishised and objectified interpretations of capitalist society are ‘socially functioning’, in the sense that they ‘call forth the proper mode of behaviour required for the effective reproduction of capitalist power relations’ (Sotiropoulos et al., 2013, p.  151). As such, and under the guise of revealing, rationally processing, and disseminating seemingly neutral information and quantifiable knowledge with regard to economic data, what financial markets actually do is ‘not so much about forecasting the future but about disciplining the present, even if this passes through the estimation of future outcomes’ (Sotiropoulos et al., 2013, p. 113; also Soederberg, 2005). All in all, the aforementioned financial and monetary transformations have allowed international investors to quickly (re)adjust their financial portfolios in order to protect their profit potential and the value of their financial holdings (Watson, 2007). A key strategy for that purpose is portfolio diversification, that is, the holding of assets with different risk/reward ratios. Diversification (across different financial assets, activities, sectors, and regions) is precisely founded upon the (re) production of uneven financial geographies, with different magnitudes of risk/ reward, ‘at scales greater and smaller than the national in which, however, the national frame is highly influential’ (which is where national economic policy is formulated, including cross-border finance management) (Lee, 2003, pp. 67–68). In the next section, we will investigate what this implies for emerging markets. For now, the key argument is that the constant spatial rearrangement of financial assets by international investors for the purpose of risk-management and diversification across uneven geographies is the contemporary fetishised form of expression of the money-power of capital. It is predicated upon enhanced spatial mobility, liquidity, and fungibility of financial capital. In this configuration, ‘hyper-mobile money’ has become ‘the cornerstone of money’s social power to enforce the social bond(age) of the market’ (Hampton, 2003, p. 12). However, the upshot of the rise of this form of money-power has been extreme financial volatility at the level of the world market, resulting in the frequency and depth of financial crises markedly increasingly over the past 40  years. As discussed at length in chapters 1 and 2, developing economies, and notably emerging markets, have been particularly badly hit by these crises, which suggests that the money-power of capital does not express itself evenly across the global capitalist economy. This also suggests that there are distinct geographies of expression of this power. The question of why this is the case is crucial for understanding

The specificity of cross-border finance  73 cross-border finance management in emerging markets. As the next section shows, the answer lies in the geographical organisation and structuring of the global flow of financial capital.

2. The relational geographies of money-power Financial capital does not flow in a void, as if liberated from any constraint of space and place. Economic geographers have comprehensively shown that there is an ‘inescapably geographic, material rootedness’ to the global circuits of financial capital (Leyshon, 2003; Pike & Pollard, 2010; Doucette & Seo, 2011; Dixon, 2014). Elucidating this spatiality is important, because space and place play a constitutive role in the operations, processes, and effects of financial capital (French, Leyshon, & Wainwright, 2011). Indeed, as Trevor Barnes and Brett Christophers put it, financial processes are predicated upon and influenced by spatial relations, relations across geographical space. Put another way, different places are connected with another through the operation of financial processes, and those connections between places shape the form and outcome of the processes in question. (2018, p. 219) At the most basic level, this spatiality relates to the spaces, often local and particular, in which the social practices that underpin the flow of financial capital, such as the creation of money through a credit transaction or the act of buying or selling a financial asset, literally take place. Investment practices and financial instruments are also shaped by social, cultural, institutional, and regulatory practices, all deeply spatially embedded (Hall, 2011, p. 238). For instance, location remains a crucial determinant of investment management and performance, and money and financial assets ‘concretely [belong] to specific individuals living in particular places’ (Williams, 2004, p. 153). In the remainder of this chapter, we will investigate the particular network of space and power relations within which financial capital flows (Harvey, 1993, 2010).5 To be clear, our purpose here is not to provide a comprehensive account of the multi-scalar geographies of finance. Rather, we will aim at identifying the socio-spatial features that matter most to understanding why emerging markets seem to suffer more from financial crises than advanced capitalist economies. Our analytical emphasis will therefore be on the ‘positionality’ (a term borrowed from Eric Sheppard, and which we explain later) of emerging markets within this network of space and power relations, or within what we will call the relational geographies of money-power. We will analyse in turn three types of overlapping geographies which are of paramount importance to understand cross-border finance management in emerging markets: the geographies of the global monetary system, the geographies of the global financial system, and the geographical financial imaginations of emerging markets.

74  Theory, history, and geography 2.1. The geographies of the global monetary system The first important geography in order to understand the network of space and power relations within which financial capital flows is quite simply that defined by the fragmentation of the global capitalist economy into discontinuous spaces of valorisation with unequal political authorities, financial regulatory frameworks which often compete with each other, and distinct national moneys. The relation between the different national moneys is defined by a set of historically specific institutional and spatial arrangements: the global monetary system.6 Since the collapse of the Bretton Woods system in the early 1970s, the deregulation of exchange rates, and the widespread (though not total) liberalisation of the capital account, the global monetary system is generally based on a ‘form of convertibility . . . defined by the right to switch currencies at will’ (Hampton, 2003, p. 5). This means that the relative value of currencies – the exchange rate – is in principle determined by supply and demand on foreign exchange and currency markets. Yet, as pointed out by economic historians (Eichengreen, 1996/2008; Helleiner, 1996), post-Keynesian/Minskian economists (De Conti, Biancarelli,  & Rossi, 2013; Andrade & Prates, 2013), and IPE scholars (Aglietta, 2002; Cohen, 1998; Jessop, 2015), the current global monetary system is made of a currency hierarchy (or currency pyramid), with different ‘liquidity premiums’ which depend on their ‘degree of convertibility’. This degree relates to currencies’ ability to perform internationally the functions of money, such as unit of account, means of payment, and store of value (Andrade & Prates, 2013, 409). The currencies of the advanced capitalist states are at the top of the hierarchy, with the US dollar in leading (though contested) position, given that it ‘serves as a universal unit of account, while the monetary liabilities of the US state function as a universal means of purchase, means of payment and a key reserve asset’ (Ivanova, 2013, p. 63; Helleiner, 2009).7 The currencies of developing countries lie at the bottom of the pyramid, due to their extremely poor ability to perform the functions previously mentioned. While the currencies of emerging markets, including the Brazilian real and the South Africa rand, have become widely traded on international currency markets (as subsequent chapters will extensively discuss), this has not challenged their subordinate position in the currency pyramid. There is therefore a built-in structural asymmetry in the global monetary system which penalises emerging markets and which is expressed as a systematic volatility of exchange rates and high interest rates (Andrade & Prates, 2013; Palludeto & Abouchedid, 2016). We will return to this important point later. This asymmetry translates into the unequal capability of national spaces of valorisation (and, within them, particular places such as urban centres) to attract financial capital. This is most blatant in crisis contexts, where this results in a highly uneven spatial distribution of deflationary adjustment. Indeed, crises manifest themselves inter alia as liquidity crises, which means that those spaces most capable of attracting financial capital flows will be better able to withstand the crisis and shift the burden of devaluation to other spaces of valorisation (Harvey, 1982/2006). When a crisis erupts, investors seek refuge in what is deemed ‘high quality liquidity’, or ‘safe haven’ assets, and the question of the currency in which

The specificity of cross-border finance  75 these assets are denominated is obviously crucial, as well as related questions of confidence and trust in the ability of states to back the value of their national moneys. This has systematically disadvantaged developing and emerging economies: ‘drying up’ of liquidity and ‘flight to quality’ during crises amount to capital flight from developing countries (and currency collapse) and a rush to ‘safe’ assets denominated in advanced capitalist economies’ currencies.8 Re-establishing market confidence is then crucial to maintain the viability of domestic financial systems, sustain the integration of the economy into the global circuits of capital and the exploitation of labour by the national total social capital, and defend creditworthiness in global government bond markets. As a result of this process, the crisis-driven bouts of state-enforced austerity and (often violent) labour disciplining in order to maintain/restore creditworthiness and confidence in the national money have been harsher in developing and emerging economies, crucially shaping their trajectory of capitalist development and incurring high social costs disproportionately borne by the working classes (under the form of reduced public subsidies, privatisation of reproductive labour, casualisation of productive labour, and transfer of locally generated surpluses to international creditors) (e.g. Soederberg, 2004, 2006; Marois, 2012). Chapters 5 to 8 will illustrate this process with the cases of Brazil and South Africa. The pyramidal structure of the global monetary system does not only penalise emerging markets in crisis contexts. Post-Keynesian/Minskian scholars such as Annina Kaltenbrunner and Bruno Bonizzi have shown that the currency pyramid also fundamentally shapes the portfolio decisions and the balance-sheet structures of institutional investors such as pension funds and insurance companies (Bonizzi  & Kaltenbrunner, 2019). These investors invest in emerging market assets as part of a ‘return-seeking’ strategy: in a context where their liabilities grow rapidly (due to structural factors such as an ageing population) and where the value of their traditional assets such as bonds stagnates (owing to extremely low interest rates and a shortage of safe assets), these institutional investors aim to reduce the growing gap between their assets and liabilities by investing in assets considered riskier but which deliver higher returns. Due to the lower liquidity premium of their currencies, emerging market assets are considered as such. This means that the demand for emerging market assets ‘depends largely on the conditions that create a need to seek return-seeking assets, which are entirely independent of economic conditions in [emerging markets]’ (Bonizzi  & Kaltenbrunner, 2019, p. 434). A change in these conditions often results in a major reallocation of portfolios away from the riskier assets, including those of emerging markets. Now, it is essential to emphasise that the global monetary system’s pyramidal structure is ‘neither permanent nor ahistorical’, and therefore ‘should not be reified’ (Palludeto & Abouchedid, 2016, p. 68). In fact, it has been enforced, maintained, and contested through various forms of state power, including imperialism. Since the 1970s, the US has deployed various policies to maintain the US dollar at the top of the currency pyramid (Gowan, 1999; Helleiner, 2009; Vasudevan, 2008; Konings, 2011; Duménil & Lévy, 2011; Panitch & Gindin, 2012), while the UK has implemented imperialist policies to retain control of the global

76  Theory, history, and geography financial system through the City of London (Norfield, 2016).9 The geographies of the global monetary system and national state regulation have therefore been actively (re)produced by the international hierarchy of national states and imperial power, and they importantly shape the network of space and power relations that characterises the relational geographies of money-power. The latter, however, are also defined by another set of overlapping geographies. 2.2.  The geographies of the global financial system This second set of geographies has been termed the ‘locational’ geographies of the global financial system and its institutions (Martin, 1999). We have mentioned in the previous chapter the fundamental role of the global financial system and its institutions in creating money in the form of credit, and in collecting, pooling, and allocating idle financial capital across spaces, activities, and sectors, thereby effectively specialising in ‘the assemblage and dispensation of money-power’ (Harvey, 2010, p.  52). These financial institutions (banks, insurance companies, institutional investors, investment funds, international capitalist institutions, credit rating agencies, and the legal, accounting, tax advice, information, media, and other activities alongside the core financial functions) and financial markets (money, foreign exchange, capital, commodity and derivatives markets) have become integrated into ‘distinctive geographical and institutional hierarchies from the local to the global level’ (Clark, 2005, p. 99; Agnew, 2016). Their distribution across space is highly uneven, with a particular concentration in urban centres and regions. Due to their capacity to centralise and concentrate the money-power of capital in space and place, world financial centres such as London, New York, Frankfurt, and Tokyo accumulate a vast social power, dominate this hierarchy, and exert control functions over ‘not only their own domestic economies, but also wider continental regional economic blocs (Europe, the Americas, and South-East Asia) and the global financial system as a whole’ (Martin, 1999, p. 7). Economic geographers have called this configuration of authority and control the ‘world–city network’ (Agnew, 2010, p. 220). The asset management industry, which manages trillions of US dollars, is extremely concentrated and disproportionately located in US financial centres (Gabor, 2019). Foreign exchange trading, a ‘vital cog in the global economy’ (Clark ad Thrift, 2005), is also increasingly concentrated in the hands of a few global banks located in London and New York (Wojcik, MacDonald-Korth, & Zhao, 2017). While financial centres in emerging economies such as São Paulo, Johannesburg, Beijing, Shanghai, Mexico City, and Istanbul have become increasingly globally integrated over the past 20 years or so, receiving growing volumes of financial capital flows and becoming important sites of financial innovation (particularly at the regional level), this has not challenged the dominance of the aforementioned world financial centres, which remain disproportionately located in advanced capitalist economies and largely control the global orchestration of financial capital flows (Sassen, 2013, p. 27; Pryke, 2011, pp. 289–293; Bassens, 2012).10 There are at least two ways through which world financial centres exercise huge power on the wider geographies of the global financial system. First, powerful

The specificity of cross-border finance  77 actors of the global financial system, such as global investment banks and institutional funds, organise their scale of operations and diversification into other geographical markets, from these world financial centres. According to Bonizzi (2017), the majority of insurance companies and pension fund flows in emerging market assets have stemmed from a small group of world financial centres in advanced capitalist economies. Besides, as of 2014, almost 80% of global pension assets were concentrated in financial centres in three countries, the UK, the US, and Japan (Bonizzi, 2017). This has a considerable impact on patterns of financial capital flows, particularly in cases of financial distress. For instance, Beaverstock and Doel (2001) show that Japanese investment banks ceased their operations in continental Asia when the 1997 Asian financial crisis erupted and consolidated activities in Japan. This had the side effect of limiting the contagion to the Japanese economy but largely shaped the uneven unfolding of the crisis, at the expense of Asian developing countries (Glassman, 2003). Key international capitalist institutions (such as the IMF, the Bank for International Settlements, the World Bank, and the International Finance Corporation [IFC]) are also located in these world financial centres. These institutions strive to facilitate the flow of financial capital across the world market, expand its spatial reach, and overcome any potential blockage to its circulation (Harvey, 2010). As they do so, they importantly shape the global circuits of financial capital, often disciplining states in developing countries in the process, as the literature on the brutal resolution of the 1980s Third World debt crisis and of the 1997 Asian crisis has largely shown (e.g. Soederberg, 2004; Wade & Veneroso, 1998). Pressures for the liberalisation of the capital account and cross-border finance in the 1980s–1990s, and then for macroeconomic ‘stabilisation’ policies in developing and emerging economies, must be understood in this light, as discussed in chapters 1 and 2. Second, world financial centres exercise huge power on the wider geographies of the global financial system because they are the leading sites of production of financial instruments and knowledge.11 Importantly, they gather large credit rating agencies (particularly the Big Three: Moody’s, Standard and Poor’s, and Fitch) and other financial firms that specialise in the assessment of the bonds of companies, municipalities, and national governments, using a system of rating from ‘top quality’ investment worth to highly risky capital market ventures (Clark & Thrift, 2005; Sinclair, 2005; Agnew, 2016). As leading sites of financial knowledge production, world financial centres have tremendous power in shaping the global circuits of financial capital and in ‘categorising’ the uneven geographies of global finance. Roger Lee therefore calls them ‘spaces of hegemony’ (2011). Consider the following examples. Clark and Wojcik (2001) show that the financial expectations formed in the City of London had a dramatic impact on the unfolding of the 1997 financial crisis in Asia. Heinemann (2016) argues that shifting perceptions about the world economy in spaces of hegemony have importantly shaped patterns of financial capital flows to Turkey since the 2008 global financial crisis. These perceptions and expectations, it is worth insisting, are (re)made with regard to current and future (objective) prospects of labour exploitation, but this leaves considerable room for interpretation. It is therefore crucial to uncover the power relations involved in the production of such expectations.

78  Theory, history, and geography 2.3.  Geographical financial imaginations of emerging markets The production of financial instruments and knowledge involves a variety of social and cultural processes, such as discursive practices, which are deeply geographical (Beaverstock & Doel, 2001; Clark & Thrift, 2005; Pike & Pollard, 2010; Hall, 2011; Pryke, 2011). There is a ‘geo-historical and geo-cultural relativity’ to the production of such knowledge (Lee, 2003, p. 62) inasmuch as it involves placespecific and context-dependent worldviews, imaginaries, and representations. Importantly, these are not simply more or less unconscious biases but forms of existence of real power relations of race, coloniality, gender, ethnicity, sexuality, and so on. The fact that predominantly middle-aged White, elite, professional males (especially at senior-level positions) living in powerful and wealthy urban centres produce the bulk of the financial knowledge about developing and emerging economies bears enormous influence on the nature of those knowledge and on the shifting financial reputation of these economies.12 This has major impacts on patterns of financial capital flows to developing economies. Consider how a set of developing economies, including Brazil and South Africa, are (re)constructed as ‘emerging markets’, that is, as a specific asset category. This social construction consists in ‘transforming’ territorial objects – mostly national economies – ‘into specifically geographically-bound investment categories’ (Bassens, 2012, p. 342; Lee, 2003). Drawing upon the work of Marxist geographer Doreen Massey, scholars have shown that this is best understood as a dynamic process of place-making, whereby markets are ‘(re)framed’ in accordance with the material needs of capital accumulation and with regard to events and dynamics simultaneously taking place elsewhere in the world market (Lee, 2003, 2011; Massey, 2005; Bassens, 2012; Heinemann, 2016), such as changing global dynamics of accumulation and associated crises, the unfolding of the class struggle on a global scale, and resulting patterns/availability of global liquidity. Yet, this process of place-making is also permeated by a set of power-laden geographical imaginaries and representations. Not only are these imaginaries grounded in ­capital-centric views of history and in stagist/linear conceptions of development – with advanced capitalist economies considered the apex of financial modernity, they also rely upon and reproduce specific gender norms (e.g. O’Tuathail, 1997; Sidaway & Pryke, 2000; Ling, 2002; Lai, 2006; Bassens, 2012). Indeed, as feminist scholars have shown, ‘gendered configurations of power, knowledge, representation, and identity’ pervade the geographical imaginaries and practices of global finance (Griffin, 2013, p.  10). This is not simply about the testosterone-driven culture of investment banking, widely pictured in Hollywood movies and much criticised in the media and liberal commentary since the 2007/2008 global financial crisis (Brassett & Rethel, 2015). As Penny Griffin explains, the global expansion of financial capital has depended upon a ‘masculinised and ethnocentric model of human activity’ (2017b, p. 155). This model, which relates to standards of competitive, profitable, rational, and successful economic behaviour, ‘[has] become, subsequent to the concentrating of historical privilege in the hands of white men, associated with masculine subjectivities’

The specificity of cross-border finance  79 (Griffin, 2017a, p. 403). It defines what ‘human attributes should be encouraged in financial capitalism, and incentivised across its practices (Griffin, 2017b, p. 158). It privileges particular forms of hyper-masculinised behaviour, such as aggressive risk-taking, a drive for competitiveness, the alleged ability to act decisively and strongly, heterosexual male confidence, and a singular focus on profit-making at the expense of other considerations (Roberts & Elias, 2018, p. 282; Griffin, 2013; De Goede, 2009; McDowell, 2010; True, 2016; Connell & Wood, 2005). In other words, a hegemonic vision of manliness has become ‘embodied in the figure of the financial actor’ (Griffin, 2017b, p.  162), and as we will see later, there are reasons to believe that such behavioural traits are even more valued in the specific case of the figure of the investor in emerging markets. There are at least two specific ways in which the ‘gendered cultural practices’ of global finance – to use Marieke De Goede’s expression (2004) – crucially shape patterns of cross-border finance to emerging markets. They explicitly relate to the process, mentioned earlier, of construction of emerging markets as an investment category. This process consists in the production of discourses, representations, and other forms of financial knowledge about investing in emerging markets. It involves various actors, including national governments, international capitalist organisations, brokers and fund managers, financial services firms, the financial press, and so on. Sidaway and Pryke (2000), for instance, examine how the IFC (the commercial arm of the World Bank) played a key role in the social construction of this category, with the explicit aim of orchestrating the flow of financial capital into postcolonial spaces from the 1980s onwards. The key point here is that emerging markets are often portrayed as an ‘exotic’ investment destination. Texts about emerging markets are characterised by ‘discourses of exploration, exoticism, unpredictability and wildness’ and frequent references to ‘exotic-erotic scripts of sex and violence’ (Sidaway & Pryke, 2000, pp. 190, 195). The myths and fantasies that promote the exoticised nature of emerging markets as investment destinations are ridden with power relations of gender and sexuality. Put differently, emerging markets are produced as what feminist geographers have called ‘gendered and sexualised spaces’ (Doan, 2010). These ‘feminised’ postcolonial landscapes are specifically constructed to appeal to the gaze of the financial investor in terms which are gendered (Pritchard & Morgan, 2000, p. 885). Not only are the language and imaginaries of investing in emerging markets shaped by patriarchy, they are also ‘scripted’ for a male heterosexual audience, and they celebrate the manliness of the financial investor (Pritchard & Morgan, 2000, p. 886). Emerging markets are seductive and wild spaces that must be explored, penetrated, conquered, and ultimately mastered by the masculinised prowess of financial capital embodied by the investor. The dialectical counterpart of the feminisation and sexualisation of the spaces of emerging markets is the validation of the hyper-masculine gaze of the financial investor (Pritchard & Morgan, 2000, p. 892). It also calls for an even more extreme version of heterosexual hypermasculine behaviour. Indeed, the investor in emerging markets is not only a risktaker, (s)he is also a courageous adventurer and explorer, unafraid of investing in unpredictable and wild spaces (Sidaway & Pryke, 2000; O’Tuathail, 1997). The

80  Theory, history, and geography investor in emerging markets, then, is an even manlier figure than the regular financial investor. As a South African senior government official explained at interview, not un-ironically: ‘[Investing in] Africa is not for sissies.’ Which leads us to another fundamental point: the gendering and sexualising of the spaces of emerging markets is profoundly linked to processes of racialisation. Critical geographers have shown that the ‘re-scripting’ of postcolonial spaces as emerging markets has profound continuities with colonial/imperial geographical imaginaries (Sidaway  & Pryke, 2000; O’Tuathail, 1997; Bassens, 2012). Discourses and texts about emerging markets are replete with ‘geographical metaphors of frontiers, pioneers, exploration’, and the ‘rhetoric of explorationopportunity has close affinities to classic colonial discourse’ (Sidaway & Pryke, 2000, p.  195). For instance, Ling has highlighted the colonial invocations that underpinned the assessment of the causes of the 1997 Asian financial crisis by ‘liberal elites in the West’ (2002). Lisa Tilley has offered an exploration of the raced component of the process of scripting emerging markets as investment destination (2018). According to Tilley, discourses about emerging markets operate as racialised ‘modes of constructing investibility’ for private financial capital. They simultaneously perform two things. On the one hand, the category emerging markets is a ‘common marker’ which categorises extremely variegated spaces and political economies and includes them in the world of mobile financial capital. On the other hand, it clearly establishes postcolonial spaces within global market hierarchies and financial relations, by maintaining a hierarchical distinction between the ‘superior’ advanced West/North and its ‘inferior’ Others. This subjects postcolonial spaces to more intense social pressures. For instance, Mosley argues that economic policy choices in emerging markets are more intensely scrutinised by international investors than they are in advanced capitalist economies (2003, 2015). The category emerging market also reproduces racialised colonial imaginations of unpredictable and unruly non-White Others. The emerging market category, Lisa Tilley reminds us, is externally ascribed (often from the financial spaces of hegemony previously discussed), and as such, it operates as an Orientalist form of ‘epistemic control’ (Tilley, 2018). Furthermore, financial imaginaries about emerging markets are entwined with ‘imperial nostalgia for the financial “stability” offered by Imperial rule’ (Gilbert, 2018). In his work on political risk analysts, insurers, and other financial actors based in the City of London and other world financial centres, anthropologist Paul Gilbert argues that the imaginaries that are produced and circulated by these actors ‘share a great deal with the images circulated by imperial nostalgists hoping to rehabilitate the legacy of Britain’s empire’, in the sense that they are deeply concerned with ‘how far unruly post-colonial subjects might disrupt the earning potential of overseas assets’. This provokes ‘continued anxieties’ about the consequences of investing in emerging markets (Gilbert, 2018: n.d.). Crucially, these racialised and colonial imaginaries ‘impinge upon the calculation of an asset’s earning potential and so its value’ (ibid). This is a fundamental point, since it draws attention to the fact that these gendered, sexualised, and racialised geographical imaginations influence how

The specificity of cross-border finance  81 economic and financial prospects are assessed in emerging markets, which is reflected in how financial actors evaluate the riskiness and desirability of emerging market assets. Mainstream economists and financial investors would argue that processes of risk valuation and investment decision-making in emerging markets are driven by the rational processing of allegedly objective investment criteria such as historical volatility and financial returns, economic fundamentals, political stability, and so on. But as previously argued in this chapter, processes of risk valuation are not about revealing, rationally processing, and disseminating economic data in a value-neutral manner. They are about disciplining the present. We can now add that in the case of emerging markets, the social construction of risk and the production of alienated and objectified financial knowledge (such as credit ratings, political risk assessments, benchmark indexes, etc.) is profoundly shaped by gendered, sexualised, and racialised geographical imaginaries. In other words, this is a case where, to paraphrase Alberto Toscano (2019), the violence of capitalist abstraction mobilises relations of race, empire, gender, and sexuality in regulating flows of capital to emerging markets. Now, this does not mean that all spaces categorised as emerging markets are racialised and gendered in the same way. As we will see throughout the book, and in particular in chapter 9, there are very significant differences in the ways in which Brazil and South Africa are racialised as investment destinations, with important implications for how they are perceived by the international financial community. The point is rather that the implications of gendered, sexualised, and racialised geographical imaginaries in the perception of all emerging markets – and, as a matter of fact, other investment categories such as ‘frontier markets’  – results in their representation as clusters of asset classes with relatively high risk/reward ratios. This means that emerging markets will ‘tend to be favoured by risk-loving investors, especially when the level of aversion to risk is low and are shunned – often dramatically quickly – when the level of aversion grows’ (Lee, 2003, p. 66). Let us now discuss some of the most important implications.

3. Implications for cross-border finance in emerging markets The mediation of the money-power of capital by the overlapping geographies of the global monetary system, the financial system, and the geographical financial imaginations discussed in the previous section has at least five very concrete material consequences in terms of patterns of financial capital flows and crossborder finance management in emerging markets. First, financial capital flows to emerging markets are extremely pro-cyclical, often worsening periods of financial distress (see the heterodox economic critiques discussed in chapter 1). As a result, external financial capital in emerging market tends to be experienced as either ‘too much’ (as vividly expressed by the phrase liquidity tsunami), or ‘not enough’. Episodes of sudden stops and capital flights are extremely common in emerging markets. Second, financial capital flows to emerging markets lead to the build-up of particular forms of external vulnerability, characterised by the large presence of

82  Theory, history, and geography non-resident investors in short-term financial assets (including bonds, shares, foreign exchange derivatives, etc.), making emerging markets highly exposed to capital account reversals (Kaltenbrunner & Painceira, 2015, 2018; Akyüz, 2017). Chapter  7 will provide a study of these new forms of external vulnerability in Brazil and South Africa and discuss the specific issues they posed for cross-border finance management. A third set of implications is related to the clustering together of emerging market assets, either via the use of financial indexes and other benchmark techniques or the use of cognitive shortcuts and heuristics by international investors (Mosley, 2003; Brooks,Cunha, & Mosley, 2015; Linsi & Schaffner, 2018). These practices tie together the investment decisions of spatially dispersed investors and create ‘peer group effects’ in processes of risk valuation (Brooks et al., 2015, p. 588). As a result, risk perception in individual emerging markets become increasingly divorced from economic and political fundamentals, and instead become driven by market assessments of economies that are considered ‘peers’ (Brooks et al., 2015; Naqvi, 2018). Not only does this matter in terms of access and cost of borrowing (higher risk premiums spread geographically via peer group effects), but it also contributes to crisis transmission and spatial contagion between developing countries categorised as emerging markets. Simply put, a crisis in one emerging market often means trouble for the other ones. A recent example is the 2018 currency and debt crisis in Turkey. International investors, nervous about the collapse of the Turkish lira, also ‘dumped’ (as it is often called in financial jargon) other emerging markets currencies such as the Mexican peso, the South African rand, and the Russian rouble. Fourth, due to their clustering together, emerging markets fiercely compete with each other in order to attract financial capital. This means that national states in these countries must deploy economic and financial policies in order to develop deep and liquid financial markets, build reputation as attractive financial destinations, and ensure high rewards to the application of capital in its financial form, such as extremely high interest rates. Importantly, the policies and institutional arrangements designed to signal to the global financial community a commitment to fiscal and monetary discipline are often costly, and their risks and costs are socialised across social classes (see the Marxist arguments discussed in chapter 2). Fifth, and despite the aforementioned attempts to attract financial capital, emerging markets remain largely subordinated to ‘push’ factors, such as global liquidity and market sentiment, the private investment decisions of large institutional investors (such as insurance companies and pension funds) located in advanced capitalist economies, and the monetary policy choices of financial authorities in advanced capitalist economies (Naqvi, 2018; Bonizzi, 2017). This makes the demand for emerging markets assets very unstable (Bonizzi & Kaltenbrunner, 2019). These five implications are crucial to understanding the recent global financial crisis, its uneven and temporal unfolding, and associated patterns of financial capital flows to emerging markets, as we will discuss at length in this book with a particular focus on Brazil and South Africa. For now, the argument is that emerging

The specificity of cross-border finance  83 economies are systematically penalised by the way the relational geographies of money-power structure and orchestrate the global flow of financial capital. These geographies are about who is capable of exerting relations of power in shaping the global circuits of capitalist finance. Due to the poorer capability of emerging economies to attract financial capital, especially in crisis context, the contradictory relationship between the state, money, and financial capital (which we scrutinised in the previous chapter) takes a particularly acute form of realisation in emerging markets, making the management of monetary and financial affairs considerably more difficult for the capitalist state. Now, this does not mean that advanced capitalist countries are not vulnerable to crises. The recent global financial crisis, erupting in the heartland of the global capitalist economy, is a clear illustration of that. Rather, the argument is that the ‘positionality’, defined as ‘an asymmetric relationship’ where ‘core agents exert more influence over peripherally positioned agents’ locations than vice versa’ (Sheppard, 2002, p.  323), of emerging economies within the relational geographies of money-power constitutes an additional layer of social determination on cross-border finance management in emerging markets.

Conclusion A growing body of literature, in both heterodox economics and IPE, has questioned the extent to which financial markets valuate risks and allocate financial capital in ways that reflect economic and political fundamentals, particularly in the case of emerging economies (Brooks et al., 2015). This chapter has suggested that this is owing to the material, cultural, and symbolic geographies in which financial capital flows and the myriad forms of power relations that underpin them (such as class, empire, coloniality, race, and gender). Paying attention to these distinct and concrete geographies of money and finance is essential to understanding the operations of the money-power of capital on a planetary scale, and how it unevenly shapes cross-border finance management, at the expense of emerging economies. The determinations identified in this chapter and in the previous one (the essential form-determinations of cross-border finance management in general, and the additional layer of social determination in the specific case of emerging economies) are largely neglected by the near-entire scholarship on cross-border finance management discussed in chapters 1 and 2. Yet, as the book will show, they are crucial to understanding the drivers and diversity of post-crisis cross-border finance management in Brazil, South Africa, and other emerging markets, for at least two reasons: first, because these social determinations constitute the ‘underlying unity’ to the difference in cross-border finance management in emerging markets. It is worth insisting that by emphasising this underlying unity, our purpose here is not to ‘suspend’ the differences or to downplay the richness of the concrete reality of cross-border finance management in emerging economies. Quite the contrary, uncovering this underlying unity is essential to comparing and contrasting the diverse policy choices, because it ‘sets limits on the nature of the differentiations

84  Theory, history, and geography which can be generated’ (Harvey, 1996/2004, p. 67). Put differently, the concrete reality of cross-border finance management is seen as a ‘specific articulation of differences’ within that unity (Finelli, 1987, quoted in Toscano, 2008, p. 276). In the remainder of this book, the multiple processes of differentiation will therefore be explored with ongoing reference to this underlying unity. Second, this analytical focus on the social determinations of cross-border finance management, grounded in the social relations of capitalist production and the limits set by the dynamic process of capitalist valorisation, does not mean that elements of contingency, such as political struggles over the policy-making process, will be neglected in the rest of the analysis. By contrast, the argument is that it is in fact not possible to fully grasp these contingent elements without referring to the social determinations identified here. Indeed, pace the critical IPE literature reviewed in chapter  2, cross-border finance management simply results neither from a particular resolution of the conflicts between various interest groups and political organisations nor from the power of hegemonic ideas and norms about capital mobility. These contingent struggles and ideas are certainly important; however, they always unfold against the background of the social determinations identified here, and which set the limits within which cross-border finance is managed. This alternative conception of cross-border finance management in emerging markets will provide a theoretical framework for the more empirically grounded chapters in the second part of the book.

Notes 1 Questions of scale are avowedly underdeveloped in the theoretical conceptualisation outlined in this book, but see Alami (2018). 2 The Bretton Woods system consisted in a fixed but adjustable exchange rate regime whereby currencies were convertible into US dollar at a specific parity, and the dollar was in turn convertible into gold at a defined rate. 3 Based on the theory of commodity fetishism, the Marxian concept of reification means the transformation of social relations into ‘things’, which become objective social mediations that can affect socio-economic processes (Pineault, 2013, p. 125). 4 This is a particularly important point. We will discuss later how a set of colonial, racist, and gendered imaginaries enter into the production of financial knowledge about emerging markets. 5 By space relations, David Harvey means that ‘what goes on in a place cannot be understood outside of the space relations that support that place any more than the space relations can be understood independently of what goes on in particular places’ (1993, p. 14). Another radical geographer, Eric Sheppard, makes a similar point: networked spaces are characterised by the ‘relational inequalities’ within them (2002, p.  308). Lee, Clark, Pollard, and Leyshon (2009, p. 725) also argue that finance should be conceived as a ‘hegemonic set of geographical relations’. 6 There have been four global monetary systems throughout the historical geography of global capitalism: the classical gold standard, the inter-war gold-exchange standard, the Bretton Woods system, and the current ‘non-system’. Space constraints prevent us from outlining their diverse workings, but see Hampton (2006). 7 The US dollar is therefore the ‘quasi-world money’ (Lapavitsas, 2013; Painceira, 2012). The US benefits from ‘seignorage’: it can set the price of quasi-world money

The specificity of cross-border finance  85 8

9

10 11

12

and can decisively influence international monetary and credit arrangements in the global economy (Soederberg, 2004b; Norfield, 2016). It is worth highlighting that this ‘flight to safety’ to assets in advanced capitalist countries reinforces the ‘safe haven’ character of the latter’s currencies. During crises, currency instability and depreciation in developing countries contributes to maintaining currency stability in advanced capitalist countries, as well as the value of the assets in which they are denominated. This is a key manifestation of contemporary imperialism. Similarly, the imposition of imperialist financial and monetary policies in the colonies played a crucial role in stabilising the 19th-century gold standard and facilitating the reproduction of the national moneys of colonial powers (Knafo, 2013; Patnaik, 2011; Vasudevan, 2008). See Alami (2019) for an elaboration of this argument. In fact, there has been a remarkable historical continuity in the dominance of the world financial centres, which is tightly linked to imperialism. As previously argued, the production of (alienated) representations of capitalist reality is essential for the functioning of financial markets, and the constant (re)switching of financial capital from one place to another is predicated upon the reproduction of uneven financial geographies. The flow of knowledge is, however, not unidirectional, and ‘global finance is increasingly permeated by the practices and discourses of emerging market actors’ (Bassens, 2012, pp. 340–341). Although even these discourses and practices are shaped by the representations formed in spaces of hegemony, as financial institutions in developing countries ‘leapfrog regional and national financial centres to gain access to the most important global markets for financial securities, products, services’ (Clark, 2015, p. 179). State managers are of course also important place-making actors, through the policies they deploy but also via discursive practices (O’Tuathail, 1997; Soederberg, 2005). As we will discuss later in the book, examples of such discursive practices include Nelson Mandela touring advanced capitalist economies in the early 1990s and Lula issuing the Letter to the Brazilian people in 2003, both to reassure the international financial community that their rise to power would not threaten capitalist relations of domination and exploitation.

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The specificity of cross-border finance  89 Mosley, L. (2003). Global capital and national governments. Cambridge: Cambridge University Press. Mosley, L. (2015). Investment and debt. In C. Lancaster & N. van de Walle (Eds.), The Oxford handbook of politics of development. Oxford: Oxford University Press. Naqvi, N. (2018). Manias, panics and crashes in emerging markets: An empirical investigation of the post-2008 crisis period. New Political Economy, online first. Norfield, T. (2016). The city: London and the global power of finance. London: Verso Books. Orléan, A. (2011). L’Empire de la Valeur, Refonder l’Economie. Paris: Edition du Seuil. O’Tuathail, G. (1997). Emerging markets and other simulations: Mexico, the Chiapas revolt, and the geofinancial panopticon. Ecumene, 4(3), 300–317. Painceira, J. P. (2012). Developing countries in the era of financialisation: From deficit accumulation to reserve accumulation. In C. Lapavitsas (Ed.), Financialisation in crisis. Leiden: Brill. Palludeto, A. W., & Abouchedid, S. C. (2016). The currency hierarchy in center-periphery relationships. In R. Desai (Ed.), Analytical gains of geopolitical economy (pp. 53–90). Bingley, UK: Emerald Group Publishing Limited. Panitch, L., & Gindin, S. (2012). The making of global capitalism: The political economy of American empire. London: Verso Books. Patnaik, P. (2011). Capitalism and imperialism. Monthly Review Magazine. Retrieved March 5, 2015, from http://mrzine.monthlyreview.org/2011/patnaik190611.html Pike, A., & Pollard, J. (2010). Economic geographies of financialization. Economic Geography, 86(1), 29–51. Pineault, E. (2013). Réification et massification du capital financier: une contribution à la théorie critique de la financiarisation à partir de l’analyse de la titrisation. Cahiers de recherche sociologique, 55, 117–154. Pritchard, A.,  & Morgan, N. J. (2000). Privileging the male gaze. Annals of Tourism Research, 27(4), 884–905. Pryke, M. (2011). Geographies of economic growth II: Money and finance. In A. Leyshon, R. Lee, & L. McDowell (Eds.), The Sage handbook of economic geography. London: Sage Publications. Roberts, A., & Elias, J. (2018). Financial crises in historical perspective. In A. Roberts & J. Elias (Eds.), Handbook on the international political economy of gender (pp. 281– 297). Cheltenham: Edward Elgar Publishing. Sassen, S. (2013). Global finance and its institutional spaces. In K. K. Cetina & A. Preda (Eds.), The Oxford handbook of the sociology of finance (pp. 13–32). Oxford: Oxford University Press. Sheppard, E. (2002). The spaces and times of globalization: Place, scale, networks, and positionality. Economic Geography, 78(3), 307–330. Sidaway, J. D.,  & Pryke, M. (2000). The strange geographies of “emerging markets”. Transactions of the Institute of British Geographers, 25(2), 187–201. Sinclair, T. J. (2005). The new masters of capital: American bond rating agencies and the politics of creditworthiness. Ithaca and London: Cornell University Press. Smith, N. (1984/2008). Uneven development: Nature, capital, and the production of space. London: Verso. Soederberg, S. (2004). The politics of the new international financial architecture: Reimposing neoliberal domination in the global South. London: Zed Books. Soederberg, S. (2005). The transnational debt architecture and emerging markets: The politics of paradoxes and punishment. Third World Quarterly, 26(6), 927–949.

90  Theory, history, and geography Soederberg, S. (2006). Global governance in question: Empire, class, and the new common sense in managing North-South relations. London and Ann Arbor, MI: Pluto Press. Sotiropoulos, D. P., Milios, J., & Lapatsioras, S. (2013). A political economy of contemporary capitalism and its crisis: Demystifying finance. London: Routledge. Thrift, N. J., Corbridge, S.,  & Martin, R. L. (Eds.). (1994). Money, power, and space. London: Blackwell. Tilley, L. (2018). Recasting and re-racialising the “third world” in “emerging market” terms: Understanding market emergence in historical colonial perspective. Discover Society. Retrieved August  29, 2019, from https://discoversociety.org/2018/09/04/ recasting-and-re-racialising-the-third-world-in-emerging-market-terms-understandingmarket-emergence-in-historical-colonial-perspective/ Toscano, A. (2008). The open secret of real abstraction. Rethinking Marxism, 20(2), 273–287. Toscano, A. (2019). The violence of abstraction: From debt to race and back again. Public Seminar. Retrieved August 29, 2019, from www.publicseminar.org/2019/05/the-violenceof-abstraction/ True, J. (2016). The global financial crisis’s silver bullet: Women leaders and “leaning In”. In A. A. Hozić & J. True (Eds.), Scandalous economics: Gender and the politics of financial crises (pp. 41–56). Oxford: Oxford University Press. Vasudevan, R. (2008). Finance, imperialism and the hegemony of the dollar. Monthly Review, 59(11). Wade, R., & Veneroso, F. (1998). The Asian crisis: The high debt model versus the wall street-treasury-IMF complex. New Left Review, 228, 3. Watson, M. (2007). The political economy of international capital mobility. Basingstoke: Palgrave Macmillan. Williams, C. (2004). A borderless world of hypermobile and homeless money? An evaluation of financial flows in the mutual fund industry. The Industrial Geographer, 2(2), 1–13. Wojcik, D., MacDonald-Korth, D.,  & Zhao, S. X. (2017). The political-economic geo­ graphy of foreign exchange trading. Journal of Economic Geography, 17(2), 267–286.

Part 2

Case studies

5 Capitalist development and cross-border finance in Brazil

This second part of the book is dedicated to case studies. In the two previous chapters, we have uncovered the social determinations of cross-border finance management in general and in the specific case of emerging economies. Chapter 3 has shown that state policies to manage the capital account and cross-border finance are the (national) institutional and political forms through which the capitalist state mediates the complex entanglement of opportunities and constraints constituted by financial capital, that is, financial capital as a source of social wealth that can be distributed to various social subjects, and financial capital as the expression of the disciplinary power of capital. As it does so, the state channels those flows and manipulates their class content for the purpose of managing class relations and fostering the accumulation of national total social capital. In order to secure its own reproduction as well as that of money, it is forced to perform the aforementioned task in ways compatible with global capital accumulation, that is, with the reproduction of global total social capital. Chapter 4 has demonstrated that the contradictory tasks discussed previously are particularly hard to manage in developing and emerging economies, due to their subordinate positionality within what we called the uneven global geographies of money-power. In the second part of this book, we will now look at the concrete forms of realisation of these processes, by analysing the historical trajectory of cross-border finance management in ­Brazil and South Africa, in light of the historical-geographical specificity of capital accumulation and class relations prevailing in both countries. This chapter offers a critical account of the management of the capital account and cross-border finance in Brazil from the 1930s to the eve of the 2008 global financial crisis. The periodisation proposed, and reflected in the diverse sections of the chapter, is based upon the historical waves of financial capital flows to ­Brazil. Indeed, the boom-and-bust cycles of international financial capital flows have profoundly shaped the historical trajectory of policy-making in Brazil in the realm of cross-border finance. The chapter emphasises the impacts that the operations of cross-border capitalist finance had in terms of various rounds of state policy-making, policy experimentation, and institutional innovation. The periodisation starts in the 1930s, because these years saw the implementation of a number of legal and institutional financial and monetary reforms which still matter to this day for understanding cross-border finance management in Brazil.

94  Case studies The analysis draws upon national accounts data, research documents, and public statements released by Brazilian state authorities (especially the Central Bank and the Finance Ministry), the Exchange Arrangements and Exchange Restrictions database curated by the IMF, and primary data generated through qualitative research interviews. It shows that various policies to manage cross-border finance have been deployed, adjusted, and scaled back depending on the availability of global liquidity, with the objective of facilitating the crisis-led reproduction of money and the state, but also depending on variegated state strategies to manage class relations. Importantly, this underlines the active – though indirect – role that Brazilian workers, peasants, and the poor played in shaping the management of cross-border finance from the 1930s to 2008.

1. Cross-border finance management in the 1930s On the eve of the Great Depression, and despite some industrialisation having taken place since the late 19th century, Brazil was still heavily dependent on primary commodities exports (mainly coffee) to advanced capitalist countries (Evans, 1979; Baer, 2008). Consequently, Brazil was severely hit by the contraction of international trade, the fall in coffee prices, and the collapse of international financial markets in the early 1930s. The contraction of exports resulted in heavy balance-of-payments pressures and a foreign exchange crisis. Brazil defaulted twice on its foreign debt, in 1931 and 1937. This was accompanied by a monetary crisis, under the form of inflation and large-scale capital flight that threatened the reproduction of the national money. In this context, the national-populist Vargas administration deployed a series of measures to regulate cross-border finance and established a legislative framework that still represents an important basis for the current legislation on capital controls (Goldfajn & Minella, 2007). The primary objective was to establish the domestic currency as the only legal tender. Generally, capital controls consisted in forbidding banking deposits in foreign currency, export earnings had to be converted in domestic currency, and the Bank of Brazil was granted a monopoly on foreign exchange operations in order to facilitate the reproduction of national money (Texeira, 2003).1 By restricting the cross-border flow of finance and the convertibility of the domestic currency  – and thereby the possibility of capital flight – these regulations also provided some room for manoeuvre for the Vargas administration to politically contain and integrate some fractions of labour along corporatist lines. Indeed, in a context of political unrest where ‘the Communist-dominated left had aroused the fears of the elite, both civilian and military’ (Skidmore, 1999, p. 111) and where the Great Depression had severely impacted the lives of ordinary people, concessions were made to the growing urban working class under the form of corporatism, in order to quell discontent and ‘pre-empt direct class confrontation’ (Hudson, 1997). In addition, exchange controls, such as restrictions on the purchase and accumulation of foreign exchange, also allowed the Bank of Brazil to manage scarce resources according to priorities defined by the state, such as financing the needs of the public sector and the payment of imports (Texeira, 2003, p. 3). Capital and exchange

Capitalist development in Brazil  95 controls were adjusted during the period, depending on the situation of the balance of payments, but most importantly they provided the legal framework for the manipulation of foreign exchange markets as a tool for trade and industrial policy, as explained in the next section.

2. Cross-border finance management and ISI development (1945–early 1960s) The post-war period saw the consolidation in Brazil of a growth strategy based on capital accumulation through Import-Substituting Industrialisation (ISI). Although some of the ISI mechanisms (such as overvalued exchange rates and protectionist trade policies) were already in place before the 1940s, they became systematically used after WWII (Grinberg, 2011, p.  45). In that context, the policy framework for managing cross-border finance deployed during the previous period became actively used (Nembhard, 1996). This was facilitated by the Bretton Woods system, under which capital controls played an important role in allowing states to nationally process class relations in relative isolation from the speculative movement of global finance. In Brazil, this consisted in deepening the populist-corporatist class compromise, ‘in the form of wage hikes, nationalist economic initiatives, and patronage for the faithful’ (Skidmore, 1999, p. 136). This was, at least in part, ‘a response to the massive industrial strikes (such as the “Strike of the 300,000”) which had shaken Sao Paulo in 1953’ (ibid). Capital controls were not only instrumental in containing labour, they were also adjusted and modified in accordance with the expansion (or contraction) of the revenues from primary commodity exports. For instance, in the 1950s, the democratic regimes led by Vargas, then Kubitschek, reinforced exchange controls (foreign exchange regulations and an import licensing system) in order to take advantage of the boom in primary commodity markets associated with the Korean War (1950–1953) (Grinberg, 2011, p. 45). The manipulation of foreign exchange markets and state control of trade were used to cheapen the local price of foreign exchange for strategic imports (such as machinery and industrial inputs). This allowed transferring a share of surplus from primary commodity exporters to various sectors producing for the domestic markets. This was a central aspect of the ISI growth strategy (Grinberg & Starosta, 2014). Throughout the period, exchange controls were adjusted in order to proceed with ISI, ‘reflecting the higher level of industrialisation that the country had achieved’ (Texeira, 2003, p. 10). Capital controls were also adjusted in accordance with cross-border patterns of capital flows. For example, in the late 1950s, a legislative framework was designed to govern booming capital inflows, including foreign-invested industrial capital (mainly under the form of foreign direct investment, or FDI, as transnational corporations were opening branches in Brazil) and financial capital (mainly under the form of bank loans) (Goldfajn & Minella, 2007, p. 371; Texeira, 2003, p. 12). Simultaneously, capital controls on outflows –particularly on profits, interests, and royalties repatriation – were reinforced to prevent capital flight and to facilitate the reproduction of money in a context of weak currency and inflation.

96  Case studies These regulations, which still constitute the basis of the regulatory framework for foreign capital in Brazil, established that flows should be registered (and income tax paid) in the Banco Central do Brasil (the central bank) before obtaining permission for associated outflows (profits, interests, royalties, and repatriation) (de Paula, 2014).2

3. Cross-border finance management and ISI development (1960s–1970s) Between 1963 and 1967, a fall in global commodity prices and a slowdown in financial capital inflows resulted in balance-of-payments pressures, a foreign exchange crisis, creeping inflation, and the acceleration of the collapse of the class compromise based on corporatist arrangements (Hudson, 1997; Chodor, 2015). The associated political crisis led to a military coup d’état that toppled the Goulart administration in 1964. Violent police repression by the newly established military dictatorship resulted in significant wage contractions, benefitting capital especially in the industrial sector. The military dictatorship also lifted capital controls on capital and profit remittances, which was explicitly motivated by the will to restore access to the flow of foreign finance, and measures were deployed to facilitate external borrowing from domestic firms (Texeira, 2003, p. 14). Both revenues from commodity exports and financial capital inflows recovered in the early 1970s, respectively driven by the 1972–1975 commodity boom and Euromarkets expansion.3 The demand for financial capital was initially driven by the need to finance the expensive military and police repression of the working class and left activists, in a context of intensifying social struggles (Cleaver, 1989). Indeed, the 1970s saw a renewed wave of worker militancy and organised labour movement, including the famous metalworkers’ strikes in the São Paulo region, the rise of the Workers’ Party (Partido dos Trabalhadores PT), and the emergence of a large variety of social movements: landless workers’ movements, women’s groups, progressive religious movements, anti-racist and Black movements (Hudson, 1997). In the face of growing resistance and political opposition to the dictatorship, the Geisel and Figueiredo governments relied on foreign finance to fund short-term concessions to labour, such as increases in public spending concerning education, health, public transport, popular housing, and regional development (Herold, 1996). These choices reflected the ruling elites’ choice of a ‘debt-fuelled growth’ rather than a deflationary adjustment, in order to tame social conflicts in the context of a difficult transition to political democracy (ibid). All in all, the recovery of revenues from commodity exports entailed the redeployment of exchange controls that formed the heart of ISI (Grinberg, 2011, p.  50). The increasing reliance on foreign finance also involved the strengthening and deployment of new controls on the capital account, including strict restrictions on foreign borrowing (such as minimum maturity requirements and quantitative limits on net foreign borrowing positions) and on capital outflows to facilitate the reproduction of money (Nembhard, 1996, p. 146; Texeira, 2003, pp. 18–19).

Capitalist development in Brazil  97

4. Cross-border finance management during the crisis period (early 1980s–early 1990s) In the 1980s, Brazil entered a decade-long capitalist crisis, worsened by declining non-oil primary commodity prices on global markets. Moreover, the increasing reliance on external finance in the 1970s did not enhance capital accumulation. Credit was used to maintain consumption and income levels and finance concessions to dissenting working classes. Money was not converted into command over labour, and therefore not backed by labour exploitation. In that context, despite the build-up of foreign debt, jumping from 14.3% of gross national income in 1970 to 51.7% in 1983 (World Bank International Debt Statistics, 2019), annual growth rates of productive capital accumulation collapsed, from 21% in 1973 to −16% in 1983 (World Development Indicators, 2019).4 Persistently high rates of inflation were also evidence that the state had lost the ability to ‘regulate the balance of class power in money terms’ in ways compatible with accumulation, leading to an escalation of the social conflicts around the use of money (Cleaver, 1996, p. 152). In August 1982, Mexico defaulted on its sovereign debt, triggering a loss of confidence in international financial markets, a sudden stop of commercial lending, and capital flight from developing countries to the US. The international financial community stopped lending to Brazil and demanded that the dictatorship impose structural reforms. This was nothing else than the historically specific mode through which the money-power of capital reasserted itself upon the Brazilian state in order to restore class power. It was expressed through an economic form (refusal to roll over Brazilian sovereign debt and capital flight) and a political form (pressures from the consortia of international commercial banks, the IMF, the World Bank, and the US Treasury Department).5 However, this power was effectively held in check by the working class throughout the 1980s: continuous protests led to the repeated failures of implementation of the structural adjustment measures and of the successive monetary plans to curb extremely high rates of inflation (Cleaver, 1989; Herold, 1996). Despite these failures, a series of neoliberal reforms implemented over the period, particularly after the return to civilian rule in 1985, had four profound implications for the regulation of money, cross-border finance, and the structure of the financial system. First, the reforms marked a shift towards export-led growth in order to accumulate large amounts of hard currency and pay international creditors (Oliveira & Nakatani, 2007). This involved a process of trade liberalisation, initiated under the Sarney administration, which included the scaling down of the mechanisms transferring surplus from the primary sector to industrial capital, such as foreign exchange controls (Teixeira, 2003, p. 24; Nembhard, 1996). Second, in order to prevent the complete collapse of the universal equivalent and to maintain the liquidity of state fictitious capital in a context of extremely high inflation, the government put in place a dual monetary system based on a separation of the functions of money: on the one hand, state-issued money acted as a means of payment and unit of account; on the other hand, private money as a store of value was created by the financial sector from government debt (via indexed

98  Case studies government securities) (Araújo, Bruno, & Pimentel, 2012). While the former suffered from inflation, the value of the latter was preserved through complex mechanisms of price and income indexation. This was particularly profitable given that the state maintained extremely high real interest rates to curb inflation and prevent the dollarisation of the economy, on average about 40% in the 1980s (Saad Filho & Mollo, 2002, pp. 121–123). As a consequence, in spite of high inflation and economic stagnation, this ‘indexed money’ allowed for significant fictitious capital accumulation and the development of sophisticated trading operations and a deep derivatives market for foreign exchange futures (Araújo et  al., 2012; Prates  & Fritz, 2016, p. 193). Notably, this process contributed to a concentration of wealth in the hands of rentier classes and more broadly within the financial sector. As we will discuss at length in chapters 7 and 8, the development of a deep derivatives market for foreign exchange futures would also durably shape the specific institutional structure of the Brazilian currency market, with important implications for understanding the post-crisis management of cross-border finance. Third, measures were taken in order to restore access to foreign finance. In 1987, stock and bond portfolio inflows were allowed through the establishment of foreign capital investment companies and funds (Goldfajn & Minella, 2007, p. 372). This initiated a deep process of capital account liberalisation that would continue until the mid-2000s. Between May  1991 and 1992, under the Collor de Mello administration, changes in capital controls further allowed for foreign investors to invest in domestic debt and equity markets and in the options and futures markets for exchange rate and interest rate securities. The tax on remittances abroad of profits and dividend was also reduced (de Paula, 2011).6 A process of domestic financial liberalisation, though limited, was also started in order to facilitate the national circulation of financial capital. For instance, in 1988, the central bank revoked the regulation that separated banks’ financial activities and allowed the formation of universal banks. It also deregulated interest rates and stimulated debt securities markets. Fourth, significant monetary policy reforms were made. Full monetary authority was given to the central bank in 1988. In May 1991, monetary policy shifted from monetary targets to interest rate targets. Real interest rates were maintained at high levels in order to stimulate the demand for public bonds, fight inflation, and attract foreign finance (de Paula, 2011, pp.  32–34). These policy reforms, combined with an agreement with international creditors under the framework of the Brady Plan in 1991,7 allowed Brazil to return to international financial markets and take advantage of abundant global liquidity, in a context of expansionary monetary policies in advanced capitalist countries, as shown in Figure 5.1. The period also marked an important change regarding the nature and composition of capital inflows: they became driven by portfolio investment and FDI rather than debt flows (as illustrated in Figure 5.1), and debt flows changed from a dominance of sovereign debt to private debt (see Figure 5.2). This had considerable implications in terms of the modalities through which the money relation impinged upon the state. This became expressed by the movement of highly volatile cross-border finance (as shown in Figure  5.1), which increasingly became the main determinant of the exchange rate. This new relation

Capitalist development in Brazil 99

Figure 5.1 Net capital account and composition of inflows (1970–2014). Source: Author, based on Banco Central do Brasil data. Note: The large hikes in ‘portfolio investments’ and in ‘other investments’ in 1994 are due to external debt renegotiation under the Brady Plan and are not relevant for the trend analysed here.

Figure 5.2 Composition of debt flows (1970–2000). Net flows received by the borrower during the year are disbursements minus principal repayments. Source: Author, based on World Development Indicators – World Bank International Debt Statistics.

first took the form of the Plano Real (Real Plan 1994–1999) deployed under the neoliberal administrations of Itamar Franco and Fernando Henrique Cardoso: a price stabilisation plan based upon the introduction of a new currency, tight monetary policy, the widespread de-indexation of the economy (to repress distributive

100  Case studies conflicts over money), the liberalisation of the balance of payments, and cuts in government spending (Saad Filho & Mollo, 2002), as further discussed in the next section.

5. Cross-border finance management during the neoliberal period (mid 1990s–1998) As revenues from primary commodity exports also recovered in the mid-1990s, the Brazilian state reintroduced some foreign exchange controls and subsidies to transfer a portion of those revenues to industrial capitals (Grinberg, 2011). While measures such as the de-indexation of wages in the context of the Real Plan, privatisation, and reduction in public employment contributed to the fragmentation and disciplining of the labour force, resulting in low levels of workers’ militancy and a reduction in real wages, a degree of social consent was initially achieved thanks to the success of the Real Plan in drastically reducing inflation, in particular from the middle classes (Saad Filho & Mollo, 2002; Skidmore, 1999). This provided room for manoeuvre for the Cardoso administration to deploy a series of policies designed to sustain foreign financial inflows.8 It proceeded with the liberalisation of the capital account and cross-border finance. It simplified procedures on capital remittances abroad, facilitated the establishment of new channels for Brazilian investment abroad, eased the purchase of debt securities by residents in international markets, and allowed the entry of foreign banks in the domestic market (Goldfajn & Minella, 2007, p. 374; de Paula, 2011). Other important policies to sustain financial inflows included tight monetary policy and the setting of high real interest rates, the implementation of monetary sterilisation measures (by issuing public bonds), the formation of primary budget surpluses (on average 0.3% of gross domestic product over the period), and measures to restructure and strengthen the stability of the domestic financial system, such as the Programme to Support the Restructuring and Strengthening of the National Financial System and the Programme of Incentives for the Restructuring of the State Public Financial System (de Paula, 2011, p. 36; Saad Filho & Mollo, 2002; Bin, 2014). Those programmes were crucial to ‘reshape markets in such a way as to strengthen the power of public regulators and institutions, particularly the central bank’ (Torres Filho, Macahyba, & Zeidan, 2014, p. 6). The Real Plan, the more open capital account, and financial reforms deepened the integration of Brazil into the global circuits of capitalist finance and changed the basis for fictitious capital accumulation in Brazil, which became driven by derivatives and fixed income securities connected to public debt under extremely high real interest rates by international standards (Araújo et al., 2012, p. 11). The boom in financial inflows that ensued, and especially volatile short-term portfolio flows, pressured the exchange rate and money markets (Goldfajn & Minella, 2007, pp. 373–374). Sterilised foreign exchange interventions to cope with those pressures were increasingly costly. As a result, at the same time as it was consolidating policies to sustain the inflow of financial capital, the Cardoso administration also

Capitalist development in Brazil  101 deployed a series of controls on the more speculative inflows. It implemented a financial transaction tax on portfolio inflows (Imposto Sobre Operações Financeiras, or IOF) and increased the minimum maturity requirement for inflows (de Paula, 2011). These were strengthened or loosened according to the evolution of inflows. For instance, capital controls were temporarily loosened up in 1995 during the Tequila crisis, to maintain inflows. These measures aimed at facilitating the reproduction of the national money without reversing the capital account liberalisation trend. Abundant external finance helped fund growing current account deficits, which were fuelled by the deterioration of industrial competitiveness, but did not contribute much to the accumulation of capital. Rates of gross fixed capital formation in the Brazilian economy remained very modest (far below 20% of GDP) and followed a clear downward trend at the same time as financial inflows were booming (World Development Indicators, 2019). This sharply contrasts with the significant rates of fictitious capital accumulation that characterised the period, as Figure 5.3 shows. It is, therefore, reasonable to assume that growing volumes of external finance contributed to the build-up of fictitious capital, instead of being converted into expanded command over labour, which made the reversal of flows even more brutal. Public finances were also increasingly destabilised by the growing burden of interest payments, due to a large share of treasury bonds being indexed to the base rate of the central bank (the Selic rate).

Figure 5.3 Accumulation of the three ‘elementary forms’ of fictitious capital (% of GDP). Source: Author, data from the World Bank and the IMF. Note: This figure only displays the accumulation of the three ‘elementary forms’ of fictitious capital (as defined by Marx, 1894/1991). It does not include more complex forms such as derivatives and other financial instruments or fictitious capital absorbed in the built environment. It is therefore highly likely that the figure shows a conservative picture of fictitious capital accumulation in Brazil over the period.

102  Case studies

6. Cross-border finance management during the crisis period (1999–2003) Between 1999 and 2003, Brazil entered another crisis period. Global liquidity conditions contracted, due to a series of financial crises that rocked the developing world (East Asia, Russia, Turkey, Argentina) between 1997 and 2001 and the bursting of the dotcom bubble. Financial flows to Brazil turned into massive outflows, amounting to about 6% of surpluses produced in the economy (Grinberg, 2011, p. 100). A global economic slowdown also constrained the global demand for primary commodities, resulting in a drastic reduction in revenues from commodity reports. In late 1998, speculation against the currency and capital flight (due to deteriorating economic conditions and growing contestation from social movements and working classes) led to a drain of reserves ($40 billion in a few months) and eventually the collapse of the exchange rate peg in 1999, despite a large IMF loan (Saad Filho & Mollo, 2002, p. 129). From 2000, a general loss of confidence in the government’s economic strategy and a resurgence of working-class struggles against neoliberal policies and social inequalities further deepened the crisis: protests from indigenous movements, massive land occupations by the Movimento dos Trabalhadores Sem Terra (violently repressed), and demonstrations by teachers, health workers, bank workers, and transit workers (Lewis, 2001; Chodor, 2015). The impact of this sequence on the exchange rate can be seen in Figure 5.4:

Figure 5.4 Brazilian real – real effective exchange rate (1994–2014) (Monthly averages; 2010 = 100). Source: Author, based on Bank for International Settlements data.

This led to a change in the modalities through which the Brazilian state regulated the national money, characterised by a shift to the so-called macroeconomic policy tripod: a floating (but managed) exchange rate, an inflation-­targeting regime (which means that the nominal ‘anchor’ of prices became the base

Capitalist development in Brazil  103 interest rate), and high targets for primary fiscal surplus (Paulani, 2010; Cunha, Prates, & Ferrari-Filho, 2011; Feijo & Lamonica, 2013). In January 2000, a landmark regulation in terms of cross-border finance (resolution CMN no.  2,689) allowed the unrestricted access of non-resident investors to all the segments of the domestic financial market, including the derivatives market (Prates  & de Paula, 2017, p. 114). In 2002, the prospect that a radical leftist party (the Partido dos Trabalhadores, or PT, led by Lula) – supported by trade unions and social movements – would be elected triggered another major confidence crisis, characterised by a sharp increase in country risk premium and a brutal exchange rate depreciation. The money-power of capital, expressed economically through massive capital flight, politically by the IMF, and ideologically by the Brazilian mainstream media, forced Lula to issue a Letter to the Brazilian People, declaring that his government would service the domestic and foreign debts on schedule and enforce the policies agreed with the IMF in exchange for a $30 billion loan (Morais & Saad Filho, 2011). When in power, the PT administration implemented a series of policies in order to restore the inflow of external finance. These policies displayed much continuity, if not deepening, with those deployed by the Cardoso administration over the previous decade. The capital controls on inflows largely used during 1993–1998 were lifted, as well as several foreign exchange controls (de Paula, 2014; Texeira, 2003, p. 30). This move was at least partly motivated by the fact that the use of exchange controls (on the current account) was forbidden under the IMF standby agreement.9 Capital account liberalisation was deepened with the removal of controls on outflows (Goldfajn  & Minella, 2007, p.  376). Last but not least, a commitment to fiscal austerity was signalled by announcing an increase of the primary budget surplus target (from the IMF-mandated 3.75% to 4.25%) (Chodor, 2015, p. 135; Bin, 2014).

7. Cross-border finance management during the commodity boom (2004–2008) In 2003 and 2005 respectively, commodity export revenues and foreign financial capital inflows recovered, in the context of a phase of credit-fuelled accumulation on a world scale and a primary commodity boom driven by the demand of industrial development and fast-pace urbanisation in China. Under the guise of ‘neo-developmentalism’, the PT administration resorted again to several policies to channel a share of surplus from the primary sector to industries: local industry protection and import taxes, foreign policies to open up external markets to Brazilian agricultural products (including in the framework of the Mercado Común del Sur Mercosur), infrastructure provision, and credit at subsidised rates by national development banks (Boito, 2010; Saad Filho, 2010; Grinberg & Starosta, 2014). These measures were crucial in ‘softening the blows’ of deindustrialisation and loss of competitiveness, largely due to exchange rate overvaluation and extremely high interest rates (Boito & Saad Filho, 2016).

104  Case studies Financial capital inflows also boomed, driven by the commodity super-cycle, a strong currency, high interest rates, and vibrant asset markets in a context of low global risk aversion. Flows were driven by the steady improvement in the country risk of Brazil, which was granted ‘investment grade’ by all three major credit rating agencies in the second quarter of 2008. This increased demand for Brazilian public bonds by large institutional investors and allowed for better financing conditions. These historically large commodity exports and financial capital inflows resulted in significant economic growth, on average 4.8% of GDP between 2004 and 2008, but their contribution to productive capital accumulation was very limited. Rates of accumulation remained modest, especially in comparison with other emerging capitalist economies. Gross fixed capital formation in Brazil averaged 17.6% of GDP between 2003 and 2013. Over the same period, rates of gross fixed capital formation in China were 43%, 30.7% in India, 21.7% in Mexico, and 20% in Turkey (World Development Indicators 2019). By contrast, the build-up of fictitious capital over the period was impressive, as shown in Figure 5.3. Vast volumes of external finance fuelled a boom in stock market capitalisation, a real estate property bubble, as well as credit-driven consumption. Locally operating capitalist firms also increasingly relied on international money markets to fund their operations and hedge financial risks (Torres Filho et al., 2014, p. 34; Kaltenbrunner  & Karacimen, 2016). An important consequence of the growing stock of short-term, foreign-owned fictitious capital is that it deepened the reach of the money-power of capital in the Brazilian space of capital valorisation, with crucial implications for the management of cross-border finance. We will return to this important issue in chapter 7. Vast financial capital inflows and rents from commodity exports were absorbed by the economy and channelled by the Brazilian state in multiple ways. This provided the material basis for the specific mode of managing class relations engineered by the PT. For instance, large volumes of capital inflows and primary commodity export revenues helped finance a wide array of policies emblematic of the PT rule, including a minimum wage increase, the growth of public sector employment, welfare regime extension, direct income redistribution with programmes such as Bolsa Família, the expansion of university education and professional schools (especially for racial minorities and the poor), the protection of family agriculture, and public housing programmes (Boito & Saad Filho 2016). External finance also fuelled the rapid extension of household credit, allowing the poor to purchase durable consumer goods such as automobiles. This was a key vector of social policy under the PT. It was at the heart of a particular conception of citizenship and social inclusion based on credit-fuelled consumption (Lavinas, 2017; von Mettenheim, 2015), which was promoted by the state and financed by federal banks, such as Caixa Econômica and Banco do Brasil, through the diffusion of specific financial products.10 As a result, the number of bankless Brazilians declined from 80% to 50% (von Mettenheim, 2015). Housing credit also increased from 7  billion Brazilian reais in 2005 to 70  billion in 2011 (Palma, 2012, p. 9).

Capitalist development in Brazil  105 As a whole, those policies led to significant improvement in the living and working conditions of Brazilians and contributed to the formation of a lower middle class. This allowed the PT to engineer a new mode of labour containment, based on securing the consent of the poorest stratum of the population, informal and marginalised workers, and organised peasants, the ‘neutralisation’ of relatively well-paid workers in strategic sectors (such as in the oil and automotive industry), and the neo-corporatist integration of a unionised working-class elite into state power (Bianchi & Braga, 2005; Boito, 2010). Financial capital and rents from commodity export revenues were also channelled to large industrial capitalist firms and to some small and medium-sized enterprises through large-scale infrastructural investment plans, such as the Growth Acceleration Programme launched in 2007, subsidised loans, direct investment, and a ‘national champion’ policy. The Brazilian development bank, Banco Nacional de Desenvolvimento Econômico e Social (BNDES), played a crucial role in that regard. Its loan portfolio expanded tenfold in about ten years. These policies were instrumental in temporarily securing the relative support of some sections of what Boito and Saad Filho call the ‘internal bourgeoisie’, and which consists in the owners of large firms (across a variety of sectors such as manufacturing, construction, and food processing) and small and medium-sized enterprises (Boito  & Saad Filho, 2016, p.  192).11 Currency appreciation, financial opening, high interest rates, and the boom in asset markets largely benefitted higher middle classes and the rich, who own the vast majority of treasury bonds (Paulani, 2010). To be clear, these multiple state policies of channelling and distributing resources to various social subjects were not exclusively dependent on and determined by commodity export revenues and the inflow of external finance. Nonetheless, it is clear that the large availability of these sources of social wealth provided the material basis for what Alfredo Saad Filho has termed the PT brand of ‘left neoliberalism’ (2013). The resounding re-election of Lula in 2006 is further evidence of this. The reliance of the Lula administration on the inflow of external financial capital was reflected in its policy choices regarding cross-border finance. The policies deployed in the previous period to sustain inflows were deepened. The removal of capital controls on outflows continued apace until 2006 (de Paula, 2011). The Lula administration also demonstrated a continuous commitment to the macroeconomic policy tripod described in the previous section. The autonomy of the central bank and its exclusive jurisdiction over monetary policy was bolstered by a constitutional order (Ban, 2013, p. 303). While the Lula administration did not use any capital controls between 2003 and 2007 – largely as part of the aforementioned attempt to reassure international investors and local ruling classes that the election of the PT would not threaten capitalist relations of domination and exploitation  – it then deployed a series of IOFs (mainly on external loans and credit card operations abroad) in 2007–2008, as the Finance Ministry and the central bank became increasingly concerned with the appreciation and volatility of the exchange rate. The IOFs were then lifted in the immediate pre-crisis period, as there were signs that global liquidity conditions were starting to tighten. Other

106  Case studies important polices to sustain global financial capital inflows included a policy of large accumulation of foreign exchange reserves, sustained central bank foreign exchange interventions (either directly on the spot market or using swaps) to provide market liquidity and smooth short-term exchange rate fluctuations, and expansion of state fictitious capital for monetary sterilisation purposes. In addition, a series of financial reforms were implemented to cope with some of the forms of financial vulnerability, which proved critical in the unfolding of the previous financial crises. Large current account surpluses allowed significantly reducing the foreign debt. All debts to the IMF were repaid ahead of schedule, in 2005. The supervision and regulation of the domestic financial and banking system was upgraded to international norms and best practices. Financial regulation and prudential supervision in Brazil became tighter and more conservative than the Basel II recommendations, which were published in 2004. The Brazilian state also established a capital market supervisory authority, adopted more transparent financial reporting standards, modernised federal banks, and restructured treasury bonds in order to improve the cost and maturity profile of public debt (von Mettenheim, 2015; Torres Filho et al., 2014). As we will see in chapter 7, these financial reforms played a major role in shaping patterns of cross-border finance and in limiting the impacts of the 2008 global financial crisis in Brazil. Nonetheless, all forms of financial vulnerability were far from eliminated.

Conclusion This chapter has offered a critical historical account of the management of the capital account and cross-border finance throughout Brazilian capitalist development, with a particular emphasis on their class character and their uneven articulation to broader modes of managing class relations and fostering capital accumulation. Three main conclusions can be drawn. First, the chapter has shown that crossborder finance management has been part of a wider arsenal of state policies that have mediated the particular form of capital accumulation in Brazil, that is, the channelling of rents and revenues from primary commodity exports and external financial capital over literally decades. The high degree of dependence of Brazil on those two sources of social wealth has made capital accumulation particularly vulnerable to the movement of world money. Repeated balance-of-payments pressures and foreign exchange crises (during the ISI period), but also brutal reversal of the capital account (from the early 1990s onwards), have led to acute difficulties in reproducing the state-form (debt servicing and the rolling over of state debt) and the money-form (capital flight, currency confidence crises, and severe periods of inflation). In other words, the counterpart of the structurally weak form of capital accumulation has been the severity of the expression of the relation between the state, money, and financial capital (see chapter 3). The consequence of this acute relation is that the money-power of capital has had enormous influence over the modalities through which the Brazilian state has politically contained and integrated labour within its national space of capital valorisation. Second, different forms of policies have been deployed, adjusted, or scaled back, depending on the availability of global liquidity on the world market, with

Capitalist development in Brazil  107 the objective of facilitating the crisis-led reproduction of the money and the state, but also depending on variegated state strategies to manage class relations. This means that the working class has played an active (though indirect) role in shaping the management of cross-border finance from the 1930s to the eve of the 2008 global financial crisis, at least indirectly through variegated state attempts (projects) to contain its struggles or through influencing the movement of crossborder finance. Third, financial and monetary crises have been critical moments in the long historical trajectory of cross-border finance management in Brazil, and they have profoundly shaped the cumulative rounds of policy-making in the matter. The contingent unfolding of those crises has sparked processes of legal and institutional innovation and policy experimentation in the realms of money and finance, reshaping the contours of inherited institutional landscapes and legislative frameworks. Before further discussing the implications of these arguments for understanding contemporary cross-border finance in Brazil, and in emerging markets more generally, let us now turn to the second case study.

Notes 1 The Bank of Brazil (Banco do Brasil) is a commercial bank, but it used to perform a number of functions on behalf of the state and the National Treasury, such as issuing currency and handling foreign exchange transactions. Until 1988, monetary authority was shared between the Brazilian Central Bank (which was created in 1964) and federal commercial banks such as Banco do Brasil. 2 For instance, Law 4,321/1961, which allows the adoption of controls on capital outflows by non-residents, is still in place (Prates & de Paula, 2017). 3 After the collapse of the Bretton Woods system of fixed exchange rates, the gradual deregulation of international money markets, and the first oil shock, growing volumes of petrodollars were recycled through the Euromarkets and extended to developing countries under the form of syndicated bank loans. 4 The huge hikes in interest rates due to the Volcker shock and the turn to monetarist policies in advanced capitalist economies also contributed to this build-up of debt. 5 During the 1980s, capital flight amounted to between 3% and 10% of the entire surplus produced in the Brazilian economy per year (Grinberg, 2011). Capital flight worsened during periods of global liquidity contractions due to financial crises or stock market crashes in advanced capitalist countries, for instance in 1987. 6 Key regulations included Annex IV of Central Bank of Brazil Resolution no. 1,289, ‘permitting foreign institutional investors to participate directly in the Brazilian capital market and, in 1992, the redesign of CC5 accounts, permitting residents and non-­residents to make capital transfers abroad from Brazil’ (Prates & de Paula, 2017, p. 114). 7 The Brady Plan promoted the securitisation of debt claims. The newly created financial assets, the Brady bonds, could then be traded in secondary markets. 8 By establishing an (overvalued) semifixed exchange rate as the ‘anchor’ of prices to control inflation, the Real Plan also made the continuous inflow of financial capital necessary to reproduce the national money. 9 Indeed, Article VIII ‘prevents restrictions on the making of payments and transfers for current international transactions’ (IMF Articles of Agreement). 10 A notorious example of such financial products is the so-called payroll lending (creditos consignados), which lowered the interest rates for a significant share of households (in exchange for instalments being taken directly from their payroll).

108  Case studies 11 Other crucial policies in securing the consent of the internal bourgeoisie included the ‘reforms of labour law and trade union legislation reinforcing state control of the unions while, simultaneously, eliminating workers’ rights’ (Boito, 2010, p. 191).

References Araújo, E., Bruno, M., & Pimentel, D. (2012). Financialization against Industrialization: A regulationnist approach of the Brazilian paradox. Revue de la régulation. Capitalisme, institutions, pouvoirs, 11. Baer, W. (2008). The Brazilian economy: Growth and development (6th ed.). London: Lynne Rienner Publishers. Ban, C. (2013). Brazil’s liberal neo-developmentalism: New paradigm or edited orthodoxy? Review of International Political Economy, 20(2), 298–331. Bianchi, A., & Braga, R. (2005). Brazil: The Lula government and financial globalization. Social Forces, 83(4), 1745–1762. Bin, D. (2014). The class character of macroeconomic policies in Brazil of the real. Critical Sociology, 40(3), 431–449. Boito, A. (2010). Social classes and politics in Brazil: Form Cardoso to Lula. In A. Saad Filho & G. L. Yalman (Eds.), Economic transitions to neoliberalism in middle-income countries: Policy dilemmas, economic crises, forms of resistance (pp. 190–201). London: Routledge. Boito, A., & Saad-Filho, A. (2016). State, state institutions, and political power in Brazil. Latin American Perspectives, 43(2), 190–206. Chodor, T. (2015). Neoliberal hegemony and the pink tide in Latin America: Breaking up with TINA? London: Palgrave Macmillan. Cleaver, H. (1989). Close the IMF, abolish debt and end development: A class analysis of the international debt crisis. Capital & Class, 13(3), 17–50. Cleaver, H. (1996). The subversion of money-as-command in the current crisis. In W. Bonefeld & J. Holloway (Eds.), Global capital, the national state and the politics of money (pp. 141–177). London: Palgrave Macmillan. Cunha, A. M., Prates, D. M., & Ferrari-Filho, F. (2011). Brazil responses to the international financial crisis: A successful example of Keynesian policies? Panoeconomicus, 58(5), 693–714. de Paula, L. F. (2011). Financial liberalization and economic performance: Brazil at the crossroads. London: Routledge. de Paula, L. F. (2014). Financial liberalization, capital account regulation and economic policy in Brazil. In L. C. Bresser-Pereira, J. Kregel, & L. Burlamaqui (Eds.), Financial stability and growth: Perspectives on financial regulation and new developmentalism. London: Routledge, chapter 22. Evans, P. B. (1979). Dependent development: The alliance of multinational, state, and local capital in Brazil. Princeton, NJ: Princeton University Press. Feijo, C. A., & Lamonica, M. T. (2013). Changes in financial regulation and the Brazilian economy: Comments on “the evolution of financial regulation before and after the crisis”. Revista Econômica – Niterói, 15(1), 55–61. Goldfajn, I.,  & Minella, A. (2007). Capital flows and controls in Brazil: What have we learned? In S. Edwards (Ed.), Capital controls and capital flows in emerging economies: Policies, practices and consequences. Chicago: University of Chicago Press, chapter 8. Grinberg, N. (2011). Transformations in the Korean and Brazilian processes of capitalist development between the mid-1950s and the mid-2000s: The political economy of late industrialisation (PhD thesis), London School of Economics and Political Science.

Capitalist development in Brazil  109 Grinberg, N.,  & Starosta, G. (2014). From global capital accumulation to varieties of ­centre- leftism in South America: The cases of Brazil and Argentina. In S. Spronk & J. Webber (Eds.), Crisis and contradiction, Marxist perspectives on Latin America in the global political economy (pp. 236–272). Leiden: Brill. Herold, C. M. (1996). Working class struggle and the Brazilian debt crisis. Austin: University of Texas, Mimeo. Hudson, R. A. (1997). Brazil: A country study. Washington, DC: GPO for the Library of Congress. Kaltenbrunner, A.,  & Karacimen, E. (2016). The contested nature of financialisation in emerging capitalist economies. In T. Subasat & J. Weeks (Eds.), The great meltdown of 2008: Systemic, conjunctural or policy created? Cheltenham: Edward Edgard Publishing, chapter 16. Lavinas, L. (2017). The takeover of social policy by financialisation: The Brazilian paradox. New York: Palgrave Macmillan. Lewis, T. (2001). Brazil: The struggle against neoliberalism. International Socialist Review, 18. Marx, K. (1894/1991). Capital: A critique of political economy (Vol. III, D. Fernbach, Trans.). London: Penguin Classics. Morais, L.,  & Saad Filho, A. (2011). Brazil beyond Lula forging ahead or pausing for breath? Latin American Perspectives, 38(2), 31–44. Nembhard, J. G. (1996). Capital control, financial regulation, and industrial policy in South Korea and Brazil. Westport, CT and London: Praeger. Oliveira, F. A., & Nakatani, P. (2007). The Brazilian economy under Lula: A balance of contradictions. Monthly Review, 58(9). Palma, J. G. (2012, March). Is Brazil’s recent growth acceleration the world’s most overrated boom? Background Paper UNCTAD and South Centre. Paulani, L. M. (2010). Brazil in the crisis of the finance-led regime of accumulation. Review of Radical Political Economics, 42(3), 363–372. Prates, D. M., & Fritz, B. (2016). Beyond capital controls: Regulation of foreign currency derivatives markets in the Republic of Korea and Brazil after the global financial crisis. CEPAL Review, 118. Prates, D. M., & Paula, L. (2017). Capital account regulation in Brazil: An assessment of the 2009–2013 period. Brazilian Journal of Political Economy, 37(1), 108–112. Saad Filho, A. (2010). Neoliberalism, democracy, and development policy in Brazil. Development and Society, 39(1), 1–28. Saad Filho, A. (2013). Mass protests under “left neoliberalism”: Brazil, June-July 2013. Critical Sociology, 39(5), 657–669. Saad Filho, A., & Mollo, M. R. M. (2002). Inflation and stabilization in Brazil: A political economy analysis. Review of Radical Political Economics, 34(2), 109–135. Skidmore, T. E. (1999). Brazil: Five centuries of change. New York: Oxford University Press. Texeira, E. B. F. (2003). Brazilian foreign exchange controls pertaining to international trade. Institute of Brazilian Business and Public Management Issues, The George Washington University, Mimeo. The World Bank (2019). World Development Indicators, available at: https://datacatalog. worldbank.org/dataset/world-development-indicators The World Bank (2019). International Debt Statistics, available at: https://datacatalog. worldbank.org/dataset/international-debt-statistics Torres Filho, E. T., Macahyba, L., & Zeidan, R. M. (2014). Restructuring Brazil’s national financial system. IRIBA Working Paper 6, School of Environment, Education and Development. Manchester: The University of Manchester. von Mettenheim, K. (2015). Monetary statecraft in Brazil: 1808–2014. London: Routledge.

6 Capitalist development and cross-border finance in South Africa

This chapter provides a critical analysis of the management of the capital account and cross-border finance in South Africa from the 1930s to 2008, with a particular emphasis on their class character and their uneven articulation to broader modes of managing class relations and fostering capital accumulation. Similarly to the previous chapter, the periodisation which organises the present analysis is based upon the historical waves of financial capital flows to South Africa and how they shaped various rounds of state policy-making, policy experimentation, and institutional innovation in terms of cross-border finance management. The chapter draws on national accounts data, official and research documents, as well as public statements released by South African authorities (the National Treasury and the South African Reserve Bank) and the IMF (the Exchange Arrangements and Exchange Restrictions database) and on primary data generated through qualitative research interviews. The chapter concludes with reflections on the comparative historical experiences of Brazil and South Africa from the 1930s to 2008 and draws implications for understanding elements of similitude and differentiation in the long historical trajectory of cross-border finance management in the two countries.

1. Cross-border finance management in the 1930s The South African economy in the early 1930s was highly dependent on gold mining. Inasmuch as world demand and prices for gold remained stable in the 1930s, the Great Depression was ‘comparatively mild in South Africa’ (Davies, Kaplan, Morris, & O’Meara, 1976, p. 14).1 Agriculture was the most severely hit sector, but overall, by late 1932 the economy was recovering (ibid). Throughout the 1930s, the Hertzog government deployed a series of policy mechanisms to channel a significant portion of the surplus generated in mining to agrarian and industrial capitalist firms. It implemented a system of calibrated protection of domestic markets and price controls for agriculture (at levels far above world market prices), provided subsidies for exports, intensely invested in infrastructure, and directly supported the development of the steel industry (Bond, 2003, p. 262; Davies et al., 1976, p. 15). Much of the costs of these measures were financed by direct taxation of mining capital, taking advantage of the peak in gold exports.

Capitalist development in South Africa  111 Nonetheless, massive financial capital outflows after Britain abandoned the gold standard in 1931 put pressure on the gold standard in South Africa. This pushed the government to abandon it in 1932, in order to avoid ‘deflationary adjustment, which would have compromised the civilised labour policy’ (Davies et al., 1976, p. 12). Indeed, this policy was instrumental in the management of class relations by the Hertzog government. The policy consisted in making important concessions to the ‘poor white workers, (“civilised workers” by opposition with Black proletarians) . . . to avoid their radicalisation’ (ibid). This included the extension of public employment, unemployment benefits, a minimum wage, and tariff protection for capitalist firms employing ‘a fair amount of civilized labour’ (Davies et al., 1976, pp. 11–12). Simultaneously, Black workers’ struggles were heavily repressed by the draconian Hertzog Bills, deepening the division between White and African workers (Innes & Plaut, 1978). Another key legislative measure related to the management of money and cross-border finance, the Currency and Exchange Act, was implemented in 1933 with a double objective. First, it strengthened the role of the domestic currency, the South African pound, as legal tender, and established a framework for the South African Reserve Bank (SARB) foreign exchange intervention in order to ‘prevent undue fluctuations’ in the exchange value of the South African pound ‘in relation to the units of currency which are legal tender in the United Kingdom of Great Britain and Northern Ireland’.2 It also allowed the SARB to deploy controls ‘in regard to any matter directly or indirectly relating to or affecting or having any bearing upon currency, banking or exchanges’ (Union Gazette, 1933, pp. lxviii–lxx). In 1939, capital controls were implemented to restrict outflows to non-Sterling Area countries and to ensure the free movement of funds, emanating mainly from the United Kingdom, within the Sterling Area (Stals, 1998).

2. Cross-border finance management and ISI development (1940s–late 1960s) The post-war period saw the acceleration of capital accumulation through ImportSubstituting Industrialisation (ISI), characterised by some significant levels of industrial capital accumulation (particularly in sectors producing durable consumer goods), higher capital intensity in mining and agriculture, and relatively high growth rates (Fine & Rustomjee, 1996). The material basis for this boom was provided by large revenues from primary commodity exports (resulting from the discovery of new gold fields in the Orange Free State during the 1940s and from the commodity boom associated with the Korean War in the early 1950s) as well as by large foreign financial capital inflows: ‘by 1948, a third of total industrial capitalisation came from foreign sources’ (Davies et al., 1976, p. 25). The Smuts government deployed a series of policies to channel these flows. The Sterling Area capital controls were gradually phased out and became tailored to proceed with the ISI strategy (Davies et al., 1976, p. 27; Stals, 1998). National development finance institutions were created to facilitate the flow of finance to industries and to spur the development of sophisticated financial markets

112  Case studies (Fine & Rustomjee, 1996). In 1940, the Industrial Development Corporation was established to directly support manufacturing by providing long-term finance. In 1949, the National Finance Corporation was created to centralise and allocate corporate savings (Ashman & Fine, 2013). Newly expanding financial markets mediated financial inflows coming from ‘British financial institutions, mainly banks, insurance companies, pension funds, investment and trust units, and various other institutional investors’ (Bond, 2003, p. 267). The large flows of external finance and revenues from commodity exports were important for managing class relations. The National Party, which won power in 1948, favoured the emergence of a class of financial, industrial, and commercial Afrikaner capitalists, by centralising and channelling rents generated in the agricultural sector (O’Meara, 1983). It also institutionalised existing racialisation practices by officially establishing the apartheid regime. Rapid financial development, partly owing to large financial inflows, allowed financing the construction of urban areas and townships such as Soweto (Bond, 2003, pp. 267–268). The reversal of capital flows in the late 1950s marked an important step in the management of cross-border finance: the state deployed a tighter and more pervasive framework to prevent large-scale outflows from South Africa (Farrell  & Todani, 2004, p.  2) in a context of intensified and brutally repressed African ­working-class struggles, which culminated with the 1960 Sharpeville massacre and the declaration of a state of emergency by the National Party. This also happened in the context of South Africa’s withdrawal from the British Commonwealth, the establishment of the Republic of South Africa, and the creation of the rand as the national money in replacement of the South African pound. When outflows accelerated in the aftermath of the 1960 Sharpeville massacre, leading to a collapse of gold and foreign exchange reserves, controls were further tightened, restricting for the first time the repatriation of non-resident investment funds from the country (Stals, 1998). The National Party government indeed decided to block the repatriation of the proceeds of sales of South African securities by nonresidents (the ‘blocked rand’ mechanism). These proceeds had to be deposited in blocked rand accounts with commercial banks and could only be repatriated under certain circumstances, for instance according to maturity requirements (Gidlow, 1976; Farrell & Todani, 2004). These capital controls, promulgated in Government Notices R1111 and R1112 of 1 December 1961, were at the time considered emergency crisis measures, but to this day still provide the basis for the existing legislative framework for capital controls in South Africa. Importantly, it states that ‘the control over South Africa’s foreign currency reserves, as well as the accruals and spending thereof, is vested in the Treasury’ and that ‘the Bank [SARB] is responsible, on behalf of the Minister of Finance, for the day-to-day administration of exchange controls in South Africa’ (SARB website, 2016).

3. Cross-border finance management and ISI development (1960s–1985) In the 1960s, capital inflows recovered, under the predominant form of direct investment through the establishment of subsidiaries by transnational corporations.

Capitalist development in South Africa  113 These inflows importantly contributed to the development of industries producing for the domestic market and industries processing primary commodities. This process was intimately connected with the intensification of racial oppression (Clarke, 1978b). Indeed, the period saw the extension of apartheid policies and spatial control of the Black population through the development of Bantustans and the mass eviction and forced removals under the Group Areas acts, in order to develop an urban labour force suitably ‘responsible’ and ‘disciplined’ (Clarke, 1978a). In this period, ‘the institutions of apartheid were fully developed into an all-pervasive and ruthless system of domination of the indigenous labour force, no longer focused on the requirements of the mining areas but characterising the whole of South African society’ (Clarke, 1978b, p. 15). This contributed to the perpetuation of extremely low wages paid to Black workers (Seekings & Nattrass, 2005, p. 140). Primary commodity exports also expanded, with rapid growth in both mining and agriculture, and the apartheid state scaled-up policies to channel part of these revenues to industrial capitalist firms, including through heavy investment in electricity and transport (Fine & Rustomjee, 1996, pp. 160–168). This provided the conditions for the mid-1960s economic boom and significant levels of capital accumulation. In the early 1970s, the ISI growth model reached its limits. Industrialisation remained limited and continuously dependent on the import of capital goods. The relatively small domestic market for manufactured goods showed growing signs of chronic overproduction. There was also a demand constraint due to a racially structured market with a large Black population with low purchasing power. The balance of payment was increasingly difficult to manage, owing to a dependence on gold as a source of foreign exchange (Fine & Rustomjee, 1996; Bond, 2003; Legassick, 2009). These issues were worsened by the oil shocks. Furthermore, the 1970s saw outbursts of African working-class resistance in many forms, including spontaneous strike actions in 1973 by workers in the textile and metal industries around Durban, which then spread across the country. This also included the emergence of the Black Consciousness movement and the intensification of student and community protests in the aftermath of the 1976 Soweto riots. This forced the government to recognise Black trade unions and pushed up average wage rates (Seeking & Nattrass, 2005, p. 149; Hart & Padayachee, 2013). The situation worsened after the 1972–1975 commodity boom ended and gold prices strongly declined (Padayachee, 1991, p. 91). With commodity export revenues drying up, large-scale capitalist firms, state-owned companies, and the state increasingly relied on external finance inflows to fund enormous infrastructural and industrial development in the period (Clarke, 1978b). There was, however, a marked change in the composition of these flows, which became driven by syndicated bank loans and public bond issues on Euromarkets. Syndicated bank loans to South Africa increased from US$60 in 1970 to US$1,088 million in 1976 and reached US$2,100 million in 1982 (Padayachee, 1988, p. 362). This was nonetheless interrupted by inflows drying up and a brutal episode of capital flight in 1977, in the aftermath of the Soweto riots and the military intervention in Angola, plunging the economy into recession (Clarke, 1978b). The government adjusted capital and exchange controls in order to mediate this

114  Case studies pattern of capital flows. In February 1976, it introduced the ‘securities rand’ to curb the illegal capital flight practices that took place under the ‘blocked rand’ mechanism (Farrell & Todani, 2004, p. 7). The ‘securities rand’ allowed for the conversion of the proceeds of the sale of non-resident-owned securities in South Africa into securities rand, tradable between non-residents at a lower exchange rate (ibid). The mechanism was tightened in response to the capital flight episode triggered with the Soweto riots (Stals, 1998) and remained in place until 1979. In the early 1980s, several controls on the capital account were lifted in order to further attract inflows, and limit outflows, on the assumptions that the latter were paradoxically encouraged by the presence of controls. This included the replacement of the ‘securities rand’ by the ‘financial rand’, which lasted until 1983. It established a dual exchange rate system, one for capital account transactions by non-residents (the financial rand) and one for current account transactions (the commercial rand). It aimed to conciliate the need to attract external finance, a growing demand for foreign exchange to finance imports, and controls on outflows (Farrell & Todani, 2004). In a context of slowing inflows in 1983 due to the unfolding of the Third World debt crisis, South Africa abolished the financial rand, adopted a floating exchange rate, lifted controls on non-residents, and started liberalising the domestic financial sectors (Bond, 2000; Ashman & Fine, 2013; SARB, 2015). For these financial liberalisation measures, the apartheid state ‘received plaudits from the IMF and some of its major international creditor banks’ (Padayachee, 1988, p. 368). Yet the dependence on external finance and the build-up of foreign-denominated short-term debt became increasingly problematic, and the rand was under growing pressure (Padayachee, 1988). Government borrowing and the budget deficit increased, largely to finance violent police repression and military expenditures, in a context of intensifying working-class struggles: the early 1980s saw nationwide school boycotts, the creation of the United Democratic Front in 1983, a national alliance of community organisations (women, youth, cultural, and civic organisations) and trade unions, huge strike activity in 1984 (including in the gold mines), the township uprisings of 1984–1985, and the expansion of the African National Congress and other national liberation movements’ struggles. These were violently repressed by the Botha government, which declared a state of emergency in July  1985. Simultaneously, the international anti-apartheid disinvestment movement increased its pressure on transnational firms and international banks. It became clear, including for the international financial community, that the apartheid state had lost the ability to manage class relations and control labour. The rand collapsed in 1984–1985, increasing the rand value of the foreign debt, and major New York and London banks withdrew lines of credit. The Botha administration declared default and a moratorium on foreign debt; controls on outflows were deployed, and the financial rand system was reintroduced (Farrell & Todani, 2004, p. 17).

4. Cross-border finance management during democratic transition (1985–mid 1990s) The debt moratorium, the reintroduction of the financial rand, the temporary suspension of the financial liberalisation policies, and intensifying international

Capitalist development in South Africa  115 sanctions marked the beginning of a period of relative isolation.3 Net inflows turned negative between 1986 and 1991, and capital flight (including through illegal means) averaged 5.4% of GDP a year (Mohamed & Finnoff, 2004). Capital flight put serious pressure on the financial rand in the early 1990s as the large capitalist firms that dominated the economy started a process of restructuring and internationalisation, shifting portions of their assets abroad ‘beyond the reach of the future democratic state’ (Rustomjee, 1991, p. 89). South Africa entered a deep recession that lasted until 1993. Inflation and public debt rose as the National Party government extended monetary flows to ‘compensate and protect its supporters in the face of inevitable change’ (Habib  & Padayachee, 2000, p.  247). Despite direct state support and wage increases below inflation levels, profit and investment rates fell, and a huge portion of surplus was increasingly channelled into the financial system and into speculative construction of commercial property. This contributed to the formation of asset price bubbles in the stock and real estate markets and the development of a deep, sophisticated, and highly concentrated financial system (Bond, 2000; Ashman & Fine, 2013). The crisis also accelerated the move towards a new growth strategy, driven by the implementation of neoliberal reforms (Ashman, Fine, & Newman, 2011a, 2014). The process aimed at shifting from ‘export promotion with import controls to openness through tariff liberalisation’ (Edwards, 2014, p. 88). Comprehensive measures were taken in order to restore access to foreign financial capital and to take advantage of favourable global liquidity conditions in the early 1990s. In addition to a turn to monetarism to control inflation, there was a growing commitment to reduce the fiscal deficit, and a series of measures to liberalise the financial system and cross-border finance were taken, ‘with the explicit aim of attracting new foreign investment’ (Gelb  & Black, 2004, p.  178). The banking sector was significantly deregulated and foreign banks allowed entry. South African banks were also permitted to establish offshore interests (Ashman  & Fine, 2013, pp. 163–164). It is in this context that the negotiations over a new constitution and democratic elections started, after the unbanning of the ANC and other proscribed liberation organisations in 1990. During this process, the question of ensuring business confidence in order to secure capital inflows was central. This concern explains the continuation and deepening of the financial liberalisation and opening policies after the election of the government of National Unity in April 1994, dominated by the ANC (Rustomjee, 1991; Habib & Padayachee, 2000). According to Murray, the ‘twin objectives of restoring business confidence and attracting foreign investment seemed to swamp all other considerations’ (quoted in Habib & ­Padayachee, 2000, p. 249).4 The view that external finance was necessary to compensate for low levels of domestic savings became deeply entrenched amongst South African policy-makers and capitalists and has endured to this day, as we will discuss in chapter 8. Capital inflows recovered from 1991 onwards and further accelerated after the debt standstill arrangement of 1993, the removal of international sanctions against the South African economy in 1994, the abolition of the financial rand in March 1995, and the relaxing of a series of capital controls. Controls on the

116  Case studies current account were completely relaxed, controls on the capital account for nonresidents were lifted, and asset swap arrangements allowed resident institutional investors to invest a portion of their assets abroad (Stals, 1998; Farrell & Todani, 2004; SARB, 2015). Strict controls on residents were maintained to avoid largescale capital flight. The volume of inflows rapidly grew and became increasingly driven by short-term portfolio flows, as shown in Figure 6.1:

Figure 6.1 Net capital account and composition of foreign capital flows to South Africa (1985–2014) (R million). Source: Author, based on SARB data.

Similarly to the Brazilian experience, this entailed a change in the form through which the money relation impinged upon the state, characterised by the movement of highly volatile short-term financial capital, which increasingly determined the exchange rate. Furthermore, high levels of capital flight persisted, suggesting that capitalists operating in South Africa ‘[seemed] to maintain a distrust of the [Black] South African government despite the government’s efforts to create a business-friendly environment and their conservative approach to fiscal policy and monetary policy’ (Mohamed & Finnoff, 2004, p. 3).

5. Cross-border finance management during the 1996–2000 period The destabilising effects of volatile financial capital flows rapidly manifested themselves. A  sudden stop triggered a brutal depreciation of the rand in early 1996, as show in Figure 6.2.

Capitalist development in South Africa  117

Figure 6.2 Rand – real effective exchange rate (1994–2014). Source: Author, based on BIS data.

In that context, Mandela’s government announced an orthodox macroeconomic stabilisation plan, the Growth, Employment, and Redistribution (GEAR) policy framework, characterised by fiscal discipline, orthodox monetary policy, privatisation of public assets, deregulation of agricultural marketing and control boards, and tariff rationalising. GEAR, which has been interpreted by critical scholars as a ‘home-grown’ structural adjustment programme, had devastating effects in terms of deindustrialisation and growing unemployment, which particularly hit key labour-intensive sectors and contributed to disciplining and fragmenting the working class (strike days declined dramatically, wage inequalities increased between unionised and better skilled and unskilled workers) (Bond, 2003, p. 49; Desai, 2003, 2004; Legassick, 2009). It was nevertheless relatively successful in taming inflation and in attracting large inflows. Mandela’s government also continued liberalising the capital account by gradually relaxing capital controls as well as by adopting a laxer attitude towards their enforcement (Mohamed, 2012). As Mandela himself put it in a state of the nation address on 9 February 1996: ‘For us, it is not a matter of whether, but of when, these controls will be phased out’ (quoted in Urbach, 2016). The scope of the asset swap arrangements was broadened to a larger variety of financial institutions (insurers, pension funds, fund managers), and the limits on foreign investments were increased (SARB, 2015). Controls on short-term trade financing and interbank financing arrangements were eased or lifted, and administrative procedures

118  Case studies were simplified. Controls concerning private individuals were also relaxed, for instance concerning the transfer of legacies, donations, and emigrants’ blocked funds in South African bank accounts (ibid). Overall, ‘three-quarters of the foreign exchange control regulations in 1994 had been eliminated by 1998’ (Gelb & Black, 2004, p. 179). The phasing-out of capital controls was also accompanied by ‘a simultaneous process of liberalising, modernising and upgrading of the domestic financial system’ designed to allow the entry of foreign financial institutions and the absorption of large financial inflows (Stals, 1998, p. 5). New regulations were introduced to ensure the system was in line with international standards (including Basel guidelines) and was well monitored. The 1996 Constitution also granted the SARB full independence and set out that its primary goal and mission was to protect the value of the currency (Padayachee, 2014). Furthermore, the SARB ran a growing ‘oversold forward book’, a policy instrument that aimed at ensuring industrial and banking firms against the risk of currency devaluation. This essentially means that the SARB was using its own monetary resources in order to subsidise those capitals against financial and currency risk (Bond, 2000). Importantly, and despite the fact that social spending and basic service delivery were subordinated to fiscal discipline and inflation control, these financial liberalisation and deregulation measures were framed by the state as policies designed ‘to address the inequality, poverty and unemployment legacy of apartheid’ (Mohamed, 2012, p.  35).5 Besides, in conjunction with the ANC government’s programme of affirmative action, Black Economic Empowerment (BEE), they would help to create a new progressive Black capitalist class. These policies were clearly successful in attracting large volumes of external finance. However, inflows did not contribute much to industrial capital accumulation. While rates of gross fixed capital formation remained at very modest levels, there was a boom in fictitious accumulation on the stock market. This contributed to the creation of a Black bourgeoisie, whose wealth was increasingly derived from ownership of financial assets.6 By early 1998, ‘9% of the stock market was black-controlled’ (Bond, 2000, p. 37). Sustained illicit capital flight nonetheless continued over the period. Mohamed and Finnoff (2004) estimate that it rose to an average of 9.2% of GDP per year, which was higher than during the politically unstable period of the 1980s. This ‘[indicated] a multi-year effort to build up wealth reserves outside of South Africa’ and reflected the deep lack of trust of the (mostly White) capitalist class in the (Black) ANC government’s ability to foster accumulation and control the poor (2004, pp. 12–15). This racial dimension was also evident during the episode of brutal capital account reversal which occurred in late 1998, following the Asian crisis. Outflows accelerated when the government announced the nomination of a new SARB governor, Tito Mboweni, the first Black South African to hold the position. Many in the investor community doubted that Tito Mboweni would be capable of continuing the tough anti-inflation stance of his (White) predecessor Chris Stals (Handley, 2005).7 This put intense pressure on the exchange rate, and the SARB massively intervened by running up the oversold forward book to prevent a currency crash (De Jager & Kahn, 2014, p. 111). The intervention was very costly – it

Capitalist development in South Africa  119 took more than five years to pay down the net open forward position – and largely unsuccessful. After this, the SARB publicly announced that it would not intervene anymore to affect the exchange rate and affirmed its commitment to a floating exchange rate (Mminele, 2013). This was a defining experience in terms of what South African policy-makers in the Treasury and the SARB think that they can (and cannot) do to ‘lean against the wind’ (Alami, 2018c). As we will see in chapter 8, this is a key factor in explaining the very hands-off approach of the SARB in terms of currency intervention since then. A series of measures were taken in the aftermath of the currency crash, including tax cuts, fiscal discipline, and high interest rates to restore access to global liquidity. An important measure concerning the capital account was also implemented in order to facilitate the restructuring, internationalisation, and financialisation of South African large capitalist firms (Ashman, Fine, & Newman, 2011b). Between 1998 and 2001, several conglomerates were allowed to shift their headquarters and primary stock market listings abroad, mainly to London and Sydney. The rationale behind this rather intriguing decision was that the conglomerates did not have room to expand in the South African domestic market. They needed to internationalise to become more competitive. Listing abroad would allow raising finance at lower cost and reducing financial and currency risk exposure, which would in return raise investment levels in South Africa (Mohamed  & Finnoff, 2004; Chabane, Roberts, & Goldstein, 2006). While expectations of higher levels of investment did not materialise, this policy triggered a sustained outflow of profits and dividends, creating a structural deficit in the income account of the balance of payments and contributing to a worsening current account deficit throughout the 2000s.8

6. Cross-border finance management during the crisis period (1999–2003) Financial inflows recovered in late 1999 but remained very volatile. They rapidly declined again in 2001, in a context of global liquidity contraction following the collapse of the dotcom bubble, economic and political turmoil in neighbouring Zimbabwe, and heightened currency speculation against the rand, triggering another currency crash (see Figure  6.2). As Figure  6.1 illustrates, volumes of financial inflows went back to pre-democratisation levels. In that context, capital controls were tightened up, though the SARB governor Tito Mboweni simultaneously reaffirmed the commitment ‘to the orderly and gradual process of relaxation of exchange controls’ (quoted in Bond, 2003, p. 302). Fiscal discipline was tightened, interest rates were raised, and the SARB adopted an inflation-targeting framework with a commitment to maintain inflation between a 3% and 6% target range (Padayachee, 2014). Inflation targeting was justified by the rhetoric of macroeconomic stability and prioritised the imperatives of maintaining low inflation and attracting external finance (Isaacs, 2014, p. 35). The period also saw a three-pronged landmark shift in the management of the capital account. First, the Treasury and the SARB began transforming remaining

120  Case studies controls on outflows into a macroprudential regime for banks and institutional funds, managed by the Exchange Control Department of the SARB. Leape and Thomas explain, The principal objective of exchange control was to limit outflows of capital. Prudential regulation is instead concerned with the financial soundness of individual institutions and the broader objective of systemic stability, as part of the overall framework for supporting macroeconomic stability. (2011, p. iii) This shows how the post-apartheid state adapted and transformed existing controls in order to keep on with the long-term capital account liberalisation strategy while ensuring against some of the risks associated with it. These regulations were designed following international best practices, but also, importantly, tailored to the specific form of integration of South Africa into global financial markets. For instance, in 2000, controls on resident institutional funds were changed to ‘prudential requirements which allow between 25 and 35% of retail assets to be invested abroad, depending on the type of funds’ (De Jager  & Kahn, 2014, p. 110). Second, the focus of exchange rate policy became the expunging of the SARB oversold forward book. Henceforth, reserve accumulation (mostly funded by the Treasury) would be considered a tool for macroprudential and liquidity management, and would not be used to influence the level of the exchange rate (ibid; Mminele, 2013). Third, the Treasury and the SARB began to develop a particular regime of macroprudential controls, allowing larger outflows to African countries than to the rest of the world.9 The objective is to facilitate the expansion of South African capital into other African countries, and to position South Africa as a global financial hub for the rest of Africa. As Figure  6.2 shows, the rand recovered extremely quickly in 2002, and in 2003 it was back at the pre-crash level. The Mbeki administration further relaxed some controls, for both private individuals (by unblocking the accounts of emigrants and raising the investment allowance abroad) and for firms (Farrell  & Todani, 2004, p.  28). It also introduced a foreign exchange and tax ‘amnesty’, whose objective was to regularise undisclosed assets held abroad and to include them in the tax base (ibid). It was, however, an implicit recognition by South African financial authorities that they would rather try and regularise the assets held abroad than tackle the issue of sustained capital flight (Bond, 2003; Ashman et al., 2011b).

7. Cross-border finance management during the commodity boom (2004–2008) Over this period, characterised by abundant liquidity in international markets and a boom in global primary commodity prices, South Africa received large volumes of commodity export revenues and external finance. In this context, there was a ‘(faltering) revival of interventionist industrial policy’ that channelled

Capitalist development in South Africa  121 a share of surplus generated in the primary sector to firms in the automotive, transport, textiles, chemicals, information and communication technologies, and aerospace sectors (Isaacs, 2014, p.  52). Policies included tax breaks, tariff protection, and energy subsidies. Financial inflows also boomed, attracted by the commodity super-cycle, a strong currency, and relatively high interest rates. Net inflows increased to 4.9% of GDP in 2005 and peaked at 7.6% in 2007 (Mohamed, 2012, p. 12). While those large volumes of commodity export revenues and external finance contributed to relatively high economic growth rates – growth rates averaged 5.20% of GDP in 2005–2007 (World Development Indicators, 2019) – the impact in terms of investment and productive accumulation remained modest. The acute volatility of the rand over the period significantly deterred investment, and the sustained currency appreciation between 2003 and 2007 considerably hurt the external competitiveness of the manufacturing sector (Makgetla, 2013). Instead of scaling up investment, large industrial and mining firms used their cash reserves to perform financial operations. Their share of profits accruing from financial markets grew enormously (Ashman et al., 2011a; Karwowski, 2015). Besides, the sectoral allocation of external financial capital inflows limited economic diversification, as they fuelled growth in the financial and service sectors linked to debt-driven consumption (Ashman, Fine,  & Newman, 2012; Mohamed, 2012). FDI flows remained low in comparison with other emerging capitalist economies, including Brazil. Large portfolio inflows fuelled unprecedented stock market capitalisation, as Figure 6.3 illustrates.

Figure 6.3 Accumulation of the three ‘elementary forms’ of fictitious capital in South Africa. Source: Author, based on World Bank Development Indicators.

122  Case studies The Johannesburg Stock Exchange index climbed by 29% a year from 2003 to 2007 (Makgetla, 2013, p. 9). The value of trades in futures (a particular type of derivatives) rose from about 60% of GDP in 2003 to 240% in 2007 (ibid, p. 11). Moreover, financial capital inflows fuelled a residential real estate bubble, with residential property prices increasing almost threefold over the period (Bank for International Settlements). Capital flight also continued to be a major issue for the South African economy, with short-term financial capital inflows financing longterm outflows (Ashman et al., 2011b). Such outflows, supported by an overvalued currency, averaged 12% of GDP between 2001 and 2006 and peaked at 23.4% in 2007 (Mohamed, 2012). They largely benefited a small minority who were the beneficiaries of conglomerate ownership and control (Ashman, Fine, Padayachee, & Sender, 2014, p. 69). Importantly, the way external finance was absorbed by the economy and channelled by the state was instrumental in the management of class relations. First, vast financial capital inflows, by maintaining high equity and real estate prices, favoured exacerbated elite consumption (Ashman & Fine, 2013). Indeed, the largest increases in property prices concerned luxury houses in established suburbs, thereby benefiting (mostly White) rich homeowners (Bond, 2013b). But price increases also concerned middle-income properties of the middle class (PonsVignon & McKenzie, 2012). A key spatial manifestation of this process has been a construction boom in large cities, geared towards unproductive investment such as shopping malls and car parks (Pons-Vignon  & McKenzie, 2012, p.  11). By maintaining high asset prices, capital inflows were also instrumental in the second phase of the BEE, which started in the early 2000s, and largely relied on financial market operations and merger and acquisitions to enrich a small Black bourgeoisie (Chabane et al., 2006; Ashman & Fine, 2013). Second, vast financial inflows (and lower interest rates until mid-2006) fuelled rapid credit extension to the private non-financial sector, largely directed to the household sector (SARB, 2011). This process was importantly facilitated by the state, which adapted the regulatory framework and designed new legislation to extend credit relations to the poor and to support the BEE policy. Two regulations are particularly interesting in that regard. In 2003, the Financial Sector Charter embodied an agreement among the major players in the financial sector – banks, insurance companies, brokers and exchanges – on a set of service provision and empowerment targets in such areas as banking services to low income populations, black employment and ownership in the financial sector, and support for black entrepreneurship. (Kirsten, 2006, p. 5) In 2005, the National Credit Act, introduced by the Department of Trade and Industry, aimed specifically at extending credit to the poor, the rural population, and other marginalised groups (Schraten, 2014). Rapidly growing consumer debt was crucial to sustain increasing household consumption expenditures. Households’

Capitalist development in South Africa  123 debt to disposable income jumped from 50% in 2005 to 80% in 2008 (Bond, 2014, p. 181). However, the extent of financial inclusion should not be overstated: ‘40% of the population have had no access to formal financial services whatsoever’, and debt-driven consumption was limited to the top 20% of the population (Ashman & Fine, 2013, p. 169; Ashman et al., 2014, p. 68). Financial inflows were also directly channelled by and through the state. The ANC government benefited from historically low bond yields, partly because the sovereign credit ratings of both foreign currency debt and local currency debt improved respectively to BBB+ and A+ (Dorsch, 2006). This helped to finance a slightly expanded social wage, based on the extension of the social grants programme, including unconditional cash transfers to poor households with children, disabled people, and pensioners. The state also channelled external finance into large-scale infrastructure development, although this was mainly associated with the 2010 World Cup and with major construction projects that were soon to be characterised as ‘white elephants’ (Bond, 2014, p. 176). As the ANC government channelled large flows of finance, it increasingly presented itself as a developmental state. Indeed, after 2004 the developmental state rhetoric became omnipresent in ANC and government documents. Large inflows were therefore instrumental in the ideological representation of the ANC government as a pro-poor developmental state (Alami, 2018).10 In terms of cross-border finance management, the period was characterised by continuation and deepening. The ANC government maintained a conservative macroeconomic policy framework, ‘justified as a way of attracting foreign capital and avoiding the punitive reaction of the markets should more ambitious growth policies be adopted’ (Ashman et al., 2014, p. 69). The fiscal deficit (2.3% of GDP in 2003/4) was turned into a surplus of 1% by 2007 (Havemann, 2014). The strongly appreciating currency served as an anchor to control inflation. The ANC government also took advantage of the boom in inflows to increase markedly the pace of reserve accumulation. Between 2005 and 2008, the government continued the strategy of establishing an institutional framework for a risk-based approach to financial regulation (Leape & Thomas, 2011, p. ii; SARB, 2015). It involved gradually lifting some capital controls and transforming some of the remaining ones into macroprudential regulations. The foreign exposure limit on collective investment scheme management companies and for investment managers was raised to 30% of total retail assets. It also allowed an additional 5% of their total retail assets for portfolio investment in Africa, enhancing the role of South African fund managers in facilitating the flow of funds to the African continent (SARB, 2015). Between 2004 and 2007, reforms of the prudential supervision of the banking system (especially capital adequacy ratios) were implemented, as well as Basel II norms (Havemann, 2014). Furthermore, in 2007, a ‘formal review’ of the financial regulatory system was started (SARB, 2016). We will return to this important aspect in chapter 8. While these reforms were undoubtedly far-reaching, they did not prevent the build-up of various forms of financial vulnerability, which we will discuss at length in the next chapter. These became increasingly visible in 2006–2007 in the

124  Case studies context of a drastic currency depreciation triggered by the official announcement of a record current account deficit of 7%, concerns that the economy was overheating, and a sharp slide in gold prices (Dorsch, 2006).

Conclusion So what can we conclude from the cumulative histories of the management of cross-border finance in Brazil and South Africa (1930s–2008) offered in these two chapters, and how can they help us make sense of the diversity of post-crisis policy choices? The analysis has shown that there have been both significant elements of similitude and a continuous (re)production of unevenness in the long-term historical trajectory of cross-border finance management in the two countries. These can be grouped into three categories. (a)  The common logic and uneven strategic objectives of cross-border financial policies In both countries, various policies have been deployed, adjusted, and scaled back to attract financial capital flows (depending on their availability on the world market) and to facilitate the crisis-led reproduction of money and the state. However, within this broad common logic, the policies that regulated cross-border finance have had variegated strategic objectives, depending on their articulation to broader modes of managing class relations and fostering capital accumulation. These objectives have also differed in both countries owing to the different structures of domestic financial systems, themselves resulting from the specificity of accumulation and associated configurations of class relations, the uneven and contingent unfolding of crises and social struggles, and state attempts at containing them. (b)  The concrete policy instruments, practices, and institutional forms The policy instruments and institutional forms associated with cross-border finance management in Brazil and South Africa have displayed some remarkable elements of similitude. For instance, key components of the legislative framework still in place in both countries for the management of cross-border finance were implemented at similar historical junctures, such as the 1930s and early 1960s. Cross-border finance management played a central role in ISI strategies and in the reproduction of capitalist social relations during the deep crises of the 1980s. The 1990s and 2000s then saw similar policy and institutional developments, including long-term gradual capital account liberalisation, the adoption of flexible exchange rates, inflation-targeting regimes, relatively tight fiscal discipline, the strengthening and upgrading of financial and banking systems, the development of macroprudential regulations, and the accumulation of foreign exchange reserves. Nonetheless, there has also been continuous diversity in some of the policy instruments used. This is particularly evident regarding the type of capital controls and

Capitalist development in South Africa  125 currency market interventions used by central banks, which have significantly differed in the two countries, especially since the 1980s: while Brazil continued to occasionally deploy controls on (non-resident) inflows, South Africa maintained different forms of controls on outflows (for residents). The Brazilian Central Bank also actively intervened in foreign exchange markets, while the SARB has adopted a much more hands-off approach post-2000. In chapter 8, we will scrutinise how these elements of the longer-term trajectory of cross-border finance management have crucially shaped post-crisis policy choices in Brazil and South Africa. These elements also point at forms of both path dependency and change in the policy instruments, practices, and institutional forms associated with cross-border finance management. We will discuss these issues at length in chapter 9. (c)  The evolutionary pathway of cross-border finance management In both countries, cross-border finance management trajectories have not been uniform, linear, and characterised by the continuous replacement of one ‘regulatory template’ by another (for instance, a completely open capital account replacing a closed capital account) (Brenner, Peck, & Theodore, 2010). By contrast, the trajectories have consisted of cumulative rounds of policy-making, where crises have been critical moments. Each round has been driven by the necessity to find new ways of mediating contradictions, depending on contextually specific forms of resistance and struggles and the availability of global liquidity on the world market. Each round was also performed in relation to unanticipated or unexpected outcomes of past policy choices and inherited institutional landscapes and legislative frameworks, thereby reshaping the contours of the latter. Cross-border finance management trajectories have therefore been characterised by crisis-led ‘sedimented patternings’ of policies, practices, and instruments (Brenner et al., 2010). Crises have played a crucial role in this process for two interrelated reasons. First, the counterpart of the structurally weak forms of accumulation has been the severity of the expression of the relation between money-capital, money, and the state. The consequence of this acute relation is that the money-power of capital has had enormous influence over the modalities through which the Brazilian and South African states have politically contained and integrated labour within their national spaces of capital valorisation. Second, it is clear from the aforementioned historical accounts that the crises and the form they took were intimately linked to the subordinate positionality of Brazil and South Africa in the relational geographies of money-power. We have emphasised how historical cycles of financial capital flows to Brazil and South Africa, and financial contagion from other corners of the world market, be it from advanced capitalist countries (Euromarkets, Volcker shock, dotcom crisis) or from other developing countries (Tequila crisis, Asian crisis, etc.), have shaped cross-border finance management trajectories. These conclusions raise three key questions: what have been the drivers of continuity and change for each trajectory? What are the drivers of the continuous (re)production of both underlying commonalities and unevenness between the two trajectories? What does this mean for contemporary cross-border finance

126  Case studies management in emerging capitalist countries? The next four chapters of this book are dedicated to exploring these questions, with a focus on post-crisis cross-­border finance management.

Notes 1 Gold continued to be the international money commodity throughout the period and played a crucial role as the ‘ultimate store of value’ (Bond, 2003). 2 The Union of South Africa was part of the British colonial Sterling Area. 3 South Africa, nonetheless, still had access to short-term trade finance. 4 A 1992 speech of Mandela himself is particularly representative of this view: ‘Our economic policy will also take into account the need for foreign investment in South Africa  .  .  . In order to attract foreign investment we will abide by all internationally recognised standards that are consistent with our objectives of growth with equity.’ Retrieved 11 November 2019, http://www.mandela.gov.za/mandela_speeches/ 1992/920217_foreign.htm 5 More broadly, trade and financial liberalisation were justified by the ideology of the two-stage National Democratic Revolution. The first phase was to establish a democratic state, led by the Triple Alliance (the ANC, the South African Communist Party SACP, and the Congress of South African Trade Unions COSATU), and de-racialise White monopoly capital. Liberalisation and exposure to international competition would help break White monopoly capital, reverse colonial and apartheid social relations, and set the economy on a path to sustained growth. This would then provide the conditions for the second stage of the revolution, a transition to socialism in collaboration with a newly created progressive Black bourgeoisie (see the multiple strategic documents available on the websites of the ANC and the SACP). 6 This new bourgeoisie is made up of a small elite with close links to the ANC. Its social power has consistently relied upon financial accumulation and privileged access to state power (Fine, 2012; Hart & Padayachee, 2013). 7 This racial dimension, in the way the money relation impinges upon the post-apartheid state, has endured to this day. We will return to this important topic in chapter 9. 8 Current account = trade balance (exports of goods and services minus imports) + net factor income (income, dividends, profits, interest payments received from abroad minus those abroad). 9 Particularly countries of the South African Development Community. 10 It is important to mention that despite a poor economic performance, rising inequalities (along gendered, racialised, and spatialised lines), and the formation of an extremely large surplus population (unemployment reaches 30% and 40% depending on estimates), the ANC government managed to contain social struggles within and against the national state. This is partly because the ANC still benefited from a remarkable degree of legitimacy from its historical participation in the liberation struggles. Apart from some important struggles at the national levels, such as large public workers’ strikes in 2007, most of the protests in the 2000s in fact concentrated against the local state, which had become the ‘key site’ of contradictions, ‘the impossible terrain of official efforts to manage poverty and deprivation in a racially inflected capitalist society marked by massive inequalities and increasingly precarious livelihoods for the large majority of the population’ (Hart, 2013, p. 5).

References Alami, I. (2018). Capital accumulation and capital controls in South Africa: A class perspective. Review of African Political Economy, 45(156), 223–249.

Capitalist development in South Africa  127 Ashman, S., & Fine, B. (2013). Neo-liberalism, varieties of capitalism, and the shifting contours of South Africa’s financial system. Transformation: Critical Perspectives on Southern Africa, 81(1), 144–178. Ashman, S., Fine, B., & Newman, S. (2011a). The crisis in South Africa: Neoliberalism, financialization and uneven and combined development. Socialist Register, 47(47), 174–195. Ashman, S., Fine, B., & Newman, S. (2011b). Amnesty international? The nature, scale and impact of capital flight from South Africa. Journal of Southern African Studies, 37(1), 7–25. Ashman, S., Fine, B., & Newman, S. (2012). Systems of accumulation and the evolving MEC. In B. Fine, J. Saraswati, & D. Tavasci (Eds.), Beyond the developmental state: Industrial policy into the 21st century. London: Pluto Press. Ashman, S., Fine, B., Padayachee, V.,  & Sender, J. (2014). The political economy of restructuring in South Africa. In H. Bhorat, A. Hirsch, R. Kanbur, & M. Ncube (Eds.), The Oxford companion to the economics of South Africa (pp. 67–73). Oxford: Oxford University Press. Bank for International Settlements (2019) Residential property prices: detailed series, retrieved from https://www.bis.org/statistics/pp_detailed.htm Bond, P. (2000). Elite transition: From apartheid to neoliberalism in South Africa. London: Pluto Press. Bond, P. (2003). Against global apartheid: South Africa meets the world bank, IMF and international finance. London: Zed Books. Bond, P. (2013b). Debt, Uneven Development and Capitalist Crisis in South Africa: from Moody’s macroeconomic monitoring to Marikana microfinance mashonisas. Third World Quarterly, 34(4), 569–592. Bond, P. (2014). Consolidating the contradictions: From Mandela to Marikana, 2000– 2012. In J. Saul & P. Bond (Eds.), South Africa: The present as history (pp. 176–210). Johannesburg: Jacana. Brenner, N., Peck, J., & Theodore, N. (2010). Variegated neoliberalization: Geographies, modalities, pathways. Global Networks, 10(2), 182–222. Chabane, N., Roberts, S., & Goldstein, A. (2006). The changing face and strategies of big business in South Africa: More than a decade of political democracy. Industrial and Corporate Change, 15(3), 549–577. Clarke, S. (1978a). How long will South Africa survive? Review of R.W. Johnson. The Future of South Africa, Journal of Southern African Studies, 4(2), 257–261. Clarke, S. (1978b). Changing patterns of international investment in South Africa and the disinvestment campaign. Foreign Investment in South Africa: A  Discussion Series 3. London: Anti-Apartheid Movement. Davies, R., Kaplan, D., Morris, M., & O’Meara, D. (1976). Class struggle and the periodisation of the state in South Africa. Review of African Political Economy, 3(7), 4–30. De Jager, S., & Kahn, B. (2014). South Africa’s exchange rate policy and exchange rate developments. In H. Bhorat, A. Hirsch, R. Kanbur,  & M. Ncube (Eds.), The Oxford companion to the economics of South Africa (pp. 110–116). Oxford: Oxford University Press. Desai, A. (2003). Neoliberalism and resistance in South Africa. Monthly Review, 54(8). Desai, A. (2004, May–June). Mandela’s legacy. International Socialist Review Issue, 35. Dorsch, G. (2006, June  27). Extreme volatility in South Africa’s rand  & gold miners. Global Money Trends Magazine. Retrieved November  29, 2016, from www.321gold. com/editorials/sirchartsalot/dorsch062706.html

128  Case studies Edwards, L. (2014). Trade policy reform in South Africa, in Haroon Bhorat, Alan Hirsch, Ravi Kanbur, and Mthuli Ncube (eds), The Oxford Companion to the Economics of South Africa, Oxford: Oxford University Press, pp. 87–94. Farrell, G. N., & Todani, K. R. (2004). Capital flows, exchange control regulations and exchange rate policy: The South African experience. South African Reserve Bank Working Paper. Background paper prepared for OECD seminar “How to reduce debt costs in Southern Africa?” Bond Exchange of South Africa, 25 and 26 March 2004. Pretoria. Fine, B. (2012). Assessing South Africa’s new growth path: Framework for change? Review of African Political Economy, 39(134), 551–568. Fine, B., & Rustomjee, Z. (1996). The political economy of South Africa: From mineralsenergy complex to industrialisation. London: Hurst. Gelb, S., & Black, A. (2004). Foreign direct investment in South Africa. In S. Estrin & K. Meyer (Eds.), Investment strategies in emerging markets. Cheltenham: Edward Elgar Publishing. Gidlow, R. M. (1976). Exchange control and the blocked rand mechanism. South African Journal of Economics, 44(1), 52–58. Habib, A., & Padayachee, V. (2000). Economic policy and power relations in South Africa’s transition to democracy. World Development, 28(2), 245–263. Handley, A. (2005). Business, government and economic policymaking in the new South Africa, 1990–2000. The Journal of Modern African Studies, 43(2), 211–239. Hart, G. (2013). Rethinking the South African crisis: Nationalism, populism, hegemony. Durban: University of Kwazulu-Natal Press. Hart, K., & Padayachee, V. (2013). A history of South African capitalism in national and global perspective. Transformation: Critical Perspectives on Southern Africa, 81(1), 55–85. Havemann, R. (2014). Counter-cyclical capital buffers and interest-rate policy as complements – the experience of South Africa. Economic Research Southern Africa Working Paper Series, 476. Innes, D.,  & Plaut, M. (1978). Class struggle and the state. Review of African Political Economy, 5(11), 51–61. Isaacs, G. (2014). The myth of “neutrality” and the rhetoric of “stability”: Macroeconomic policy in democratic South Africa. Unpublished manuscript. Karwowski, E. (2015). The finance  – mining nexus in South Africa: How mining companies use the South African equity market to speculate. Journal of Southern African Studies, 41(1), 9–28. Kirsten, M. (2006, May 31). Policy initiatives to expand financial outreach in South Africa. Notes for session VII Access to Finance: Building Inclusive Financial Systems. Washington, DC: World Bank. Leape, J., & Thomas, L. (2011). Prudential regulation of foreign exposure for South African institutional investors. LSE Centre for Research into Economics  & Finance in Southern Africa. Legassick, M. (2009). Notes on the South African economic crisis. Amandla! Cape Town. Retrieved October 30, 2016, from www.europe-solidaire.org/spip.php?article13617 Makgetla, N. (2013). Financialisation in South Africa: A discussion document. South African Economic Development Department discussion paper. Mminele, D. (2013). Note on the foreign exchange market operations of the South African reserve bank. BIS Review, 73. Mohamed, S. (2012). The impact of international capital flows on the South Africa economy since the end of apartheid. Retrieved October 30, 2016, from www.policyinnova tions.org/ideas/policy_library/data/01386/

Capitalist development in South Africa  129 Mohamed, S., & Finnoff, K. (2004, October 13–15). Capital flight from South Africa, 1980 to 2000. African Development and Poverty Reduction Forum Paper, Somerset West, South Africa. O’Meara, D. (1983). Volkskapitalisme: Class, capitalism and ideology in the development of Afrikaner nationalism. Cambridge: Cambridge University Press. Padayachee, V. (1988). Private international banks, the debt crisis and the apartheid state, 1982–1985. African Affairs, 87(348), 361–376. Padayachee, V. (1991). The politics of South Africa’s international financial relations, 1970–1990. In S. Gelb (Ed.), South Africa’s economic crisis. Cape Town: David Philip and London: Zed Books. Padayachee, V. (2014). Central banking after the global financial crisis: The South African case. In H. Bhorat, A. Hirsch, R. Kanbur, & M. Ncube (Eds.), The Oxford companion to the economics of South Africa (pp. 156–162). Oxford: Oxford University Press. Pons-Vignon, N., & McKenzie, R. (2012, February). Volatile capital flows and a route to financial crisis in South Africa. AUGUR EC FP7 Working Paper. WP 2, University of the Witwatersrand Johannesburg, available at: https://mpra.ub.uni-muenchen.de/40119/1/ MPRA_paper_40119.pdf Rustomjee, Z. (1991). Capital flight under apartheid. Transformation: Critical Perspectives on Southern Africa, 15, 89–103. Schraten, J. (2014). The transformation of the South African credit market. Transformation: Critical Perspectives on Southern Africa, 85, 1–20. Seekings, J.,  & Nattrass, N. (2005). Class, race, and inequality in South Africa. New Haven, CT: Yale University Press. South African Reserve Bank. (2015). Financial surveillance and exchange controls. Retrieved November  30, 2016, from www.resbank.co.za/RegulationAndSupervision/ FinancialSurveillanceAndExchangeCont rol/EXCMan/Section%20C/Section%20C.pdf South African Reserve Bank Quarterly Bulletins. (2011). Various quarterly issues 1990– 2016. Pretoria: SARB Publications. Stals, C. (1998). The changing face of exchange control and its impact on cross-border investment opportunities in South Africa. BIS Review, 87. The World Bank (2019). World Development Indicators, available at: https://datacatalog. worldbank.org/dataset/world-development-indicators Union Gazette. (1933). Currency and exchange act of 1933. SARB website. Retrieved October 30, 2016, from www.gov.za/sites/www.gov.za/files/Act9of1933.pdf Urbach, J. (2016, October). Outdated exchange controls are crippling SA’s growth potential. Business Day. Retrieved November  9, 2016, from www.businesslive.co.za/bd/ opinion/2016-10-27-outdated-exchange-controls-are-crippling-sas-growth-potential/

7 Class relations and post-crisis financial vulnerability in Brazil and South Africa

This chapter sets the historical-social context for the analysis of post-crisis crossborder finance management performed in chapters 8 and 9. The objective is to contextualise and situate the policy choices made in Brazil and South Africa. The first part of the chapter  provides a brief account of the unfolding of the global financial crisis in both countries, key state policy responses, and post-crisis patterns of cross-border finance. It also examines the political situation and the evolution of the balance of forces between state, capital, and labour between 2008 and 2014. The second part of the chapter scrutinises the main issues associated with post-crisis financial capital inflows during the period studied. Indeed, the post-crisis boom catalysed the build-up of various forms of financial vulnerability in Brazil and South Africa. These uneven configurations of financial vulnerability presented policy-makers with a set of new challenges for cross-border finance management. The ways in which policy-makers responded to these challenges are crucial to understanding the nature of post-crisis policy choices in terms of crossborder finance management.

1. Global financial crisis and post-crisis patterns of financial capital flows 1.1.  Crisis, policy response, and economic recovery in Brazil (2008–2011) The global financial crisis was transmitted to Brazil through two financial channels. First, a sharp increase in global risk aversion triggered a shortage of liquidity in both local and foreign currencies. This led to a significant but short-lived credit crunch, with interbank lending, loans to the private sector, and export credit lines drying up and a contraction of the demand for durable consumer goods (Torres Filho, Macahyba, & Zeidan, 2014, p. 13). The banking system was not seriously impacted, due to tight regulation and supervision of banks’ balance sheets, high reserves and provisions against losses, limited internationalisation, and little exposition to toxic assets and mortgage risks (Torres Filho et al., 2014, p. 30). The impacts were circumscribed by counter-cyclical state intervention in the form of liquidity provision by the central bank and credit extension by the three federal

Class relations and financial vulnerability  131 banks Caixa Econômica Federal, Banco do Brasil, and BNDES (von Mettenheim, 2014, pp. 187–192; Torres Filho et al., 2014, pp. 15–16). Liquidity provision, through foreign exchange (FX) swaps and the direct sale of reserves, and a bilateral swap agreement with the US Fed, helped limit the shortage of FX liquidity (Painceira, 2010; Cunha, Prates, & Ferrari-Filho, 2011). Second, the sharp increase in global risk aversion triggered a large capital account reversal. This prompted a drastic stock market collapse, with the São Paulo stock exchange index (BOVESPA) falling from a historically high level of 73,000 points in June 2008 to below 37,500 by the end of 2008 (Torres Filho et al., 2014, p. 27). This also sparked the largest exchange rate depreciation experienced in developing countries (Kaltenbrunner, 2010). This brutal depreciation proved particularly problematic for a number of Brazilian firms, especially exporters, which had engaged in speculative operations on FX derivatives markets when the Brazilian currency was strongly appreciating (Torres Filho et al., 2014, pp. 35–37). Giant companies such as paper and pulp exporter Aracruz and food exporter Sadia were brought down and acquired by other companies with the participation of BNDES (Zeidan & Rodrigues, 2013). This drew the attention of Brazilian financial authorities to the potential systemic risk that FX derivatives markets represented. As we will see in the next chapter, this is crucial to understanding post-crisis policy choices in Brazil. Overall, ‘for the first time in modern history when facing an international crisis, the Brazilian economy managed to avoid a long recession and an external debt problem’ (Torres Filho et al., 2014, p. 7). This was owing to a relatively low level of external debt (38.8% of GDP in 2008, with almost all of it denominated in domestic currency, and therefore not exposed to exchange rate risk), a current account surplus, high primary fiscal surpluses (more than 3% of GDP since 2003), and large FX reserves. Banks were tightly regulated and well capitalised. As discussed in chapter  5, this was largely due to a variety of financial policy reforms in the 2000s which aimed at reducing the types of external vulnerability that had proved problematic in past crises (more on this later). The trade channel was much more significant in the transmission of the global financial crisis, due to a significant slowdown of exports to two of the largest trading partners, the US and the Eurozone. A drastic fall in economic activity was prevented, however, due to a series of policies that maintained domestic demand (expansion of public investment, a slightly more flexible fiscal surplus target, multiple tax cuts and subsidies to various economic sectors such as construction and agriculture, enhanced budget transfers from the federal government to municipalities) and consumption (extension of unemployment benefits, cash transfers, increase in the minimum wage, and growth in public employment) (Cunha et al., 2011, pp. 702–709; Morais & Saad Filho, 2011). While the scale of the counter-cyclical stimulus package as a whole should certainly not be overstated, it nonetheless contributed to prompt economic recovery between mid-2009 and mid-2011.1 A  key factor of the recovery, it is worth noting, is that the commodity boom kept apace until late 2011, resulting in extremely large commodity export revenues, as illustrated in Figure 7.1.

132  Case studies

Figure 7.1 Average annual change in prices of a series of key Brazilian agrarian and mining commodities (2000–2015). Source: Author, based on data in Jacks (2013).

Financial capital inflows quickly resumed, in the context of a ‘world awash with liquidity’ (as discussed in chapter  1): international investors took advantage of the policies of Quantitative Easing (QE) and borrowed cheap money in advanced ­capitalist countries that they massively invested in fictitious capital (primarily in bond markets) in emerging markets with high interest rates, rising asset prices, and better prospects of labour exploitation. Due to interest rates amongst the highest in the world and sophisticated financial markets concentrated in very short maturities (Kaltenbrunner, 2010), Brazil (and South Africa) represented extremely lucrative opportunities for carry trade operations and attracted unprecedented volumes of financial capital in 2010–2011, as illustrated in Figure 7.2. This happened against the backdrop of much excitement in the international financial community about Brazil and a very optimistic assessment of economic and financial prospects in the Brazilian space of valorisation.2 In 2009/2010, The World Investment Prospects Survey ranked Brazil as the fourth most attractive investment destination after China, the US, and India (Ban, 2013, p. 299). The PT took advantage of the boom and continued channelling large inflows of financial capital and commodity export revenues to various social subjects. This provided the material basis for deepening a specific mode of managing class relations. Some of the key measures in that regard included the following. In 2008, the PT introduced an industrial policy programme Política de Desenvolvimento Produtivo, which involved tax breaks and subsidies to boost investment and innovation. In 2009, a programme was launched to provide access to housing

Class relations and financial vulnerability  133

Figure 7.2 Net capital account and composition of inflows in Brazil (1999–2014). Source: Author, based on Banco Central do Brasil data.

to millions of poor (Minha Casa, Minha Vida), while subsidising the construction sector (through public investment, tax cuts, and direct subsidies) and creating jobs. In 2010, a large-scale infrastructural investment plan was deployed (PAC-2). Massive construction projects were launched to prepare for the 2013 Football Confederation Cup, the 2014 FIFA World Cup, and the 2016 Olympic Games. In August 2011, another industrial policy plan was launched to adapt industrial policy to the changing international environment (more on this later), the Brasil Maior Plan, and to prevent competitiveness deterioration. The plan included government purchases, tax cuts on the payroll and investment, and exports and energy subsidies (Kupfer, Ferraz,  & Marques, 2013). It also entailed measures to protect strategic sectors: ‘in late 2011, the government slammed a 30% tax on imported cars with less than 65% local content’ (Ban, 2013, p.  312). The BNDES doubled its loan portfolio from 2008 to 2010, mostly to employment-rich large firms (‘national champions’) but also to small and medium-sized companies (Ban, 2013). The PT also continued distributing vast state subsidies to civil society organisations, mostly in the party’s ‘socio-political field’, and expanded subsidies and rural credit for small-scale farmers (Gómez Bruera, 2013). Between 2008 and 2013, spending for public health and education, unemployment benefits, and old age and disability pensions (Benefício de Prestação Continuada) increased from 0.40% to 0.56% of GDP and conditional cash transfers (Bolsa Família) from 0.30% to 0.45% (Saad Filho, 2015). The real minimum wage was increased by 27% between 2006 and 2012 (Loureiro & Saad Filho, 2019). This was accompanied by credit extension to boost household consumption (more on

134  Case studies this later). Increase in public spending and expansion of civil service was facilitated by improvements in sovereign funding conditions between 2009 and 2013. These measures did not endanger the commitment to macroeconomic orthodoxy, the so-called neoliberal tripod discussed in chapter 5 (Cunha et al., 2011; Ban, 2013). Under favourable external conditions, they allowed delivering real gains for the poor and reducing inequalities along gendered, racialised, and spatialised lines (Saad Filho, 2015). Lula ‘left office in 2011 with record high approval ratings of 80%, and his protégé Dilma Rousseff was elected as his successor, continuing the PT project’ (Chodor, 2015, p. 136). 1.2.  Slowdown in capital flows and the limits of ‘left neoliberalism’ in Brazil (2012–2014) The Rousseff administration first aimed at deepening the aforementioned policies. However, mid-2011 marked an important shift in global economic conditions, including the end of the commodity boom (as illustrated in Figure 7.1), the unfolding of the Euro crisis, the escalation of policies in other emerging countries to boost external competitiveness, and the Fed ‘taper tantrum’ in 2013.3 The policies of the PT, while delivering real social gains, had left Brazil vulnerable to deteriorating global conditions. In that context, the limits of the PT brand of ‘left neoliberalism’ became increasingly evident, and a series of processes and events led to social and political unrest, which further deteriorated economic prospects in Brazil, and led to the disintegration of the PT’s fragile hold on power (Loureiro  & Saad Filho, 2019). As a result, from late 2012 to 2014, inflows considerably slowed down. Let us briefly underline a few key elements of this historical sequence, emphasising changes in the balance of forces between state, capital, and labour. The internal contradictions of the PT’s mode of managing class relations became more acute. First, the PT’s support base gradually dissolved. There was a resurgence of labour militancy, characterised by growing distance between the national leadership of the Central Única dos Trabalhadores (the largest union federation, which supported the government) and rank-and-file unionists, particularly in the public sector (Riethof, 2019). Millions of jobs had been created, but ‘they were mostly precarious, poorly paid and unskilled, urban services were neglected, manufacturing shrank and there was alarming underinvestment in economic infrastructure’ (Saad Filho  & Boito, 2016, p.  218). Besides, the limited political and economic integration of the poor had created ‘expectations of progress and emancipation’ and ‘growing popular mobilisations across civil society articulating demands for such progress’ (Chodor, 2015, p. 143). There was also a growing militancy by the ‘worst paid and most exploited fraction of the urban proletariat and the rural working class’ (Braga, 2017, p. 12), struggling against poor public services and the rising costs of urban life. Second, in a context of global economic slowdown, declining profitability in the non-financial corporate sector (IMF, 2013, p. 15), and strong exchange rate overvaluation (which will be discussed in detail later), the Rousseff administration

Class relations and financial vulnerability  135 made an attempt in 2011–2012 at redirecting ‘the engine of growth away from a faltering external sector and towards domestic investment and consumption’, with the objective of maintaining growth and securing the support of the internal bourgeoisie (Saad Filho & Boito, 2016, p. 219; Singer, 2012). This included lowering interest rates, forcing private operators to reduce electricity costs, the introduction of tariffs and tax cuts, and a large programme of concessions (public-private partnerships) for infrastructure development. Fiscal policy was also slightly more expansionary. Yet, several of these policies were extremely unpopular and failed to secure the support of the internal bourgeoisie, which denounced too much state interventionism. Social and political unrest, including mobilisation of indigenous movements, student and left-wing activism, and urban workers’ and public servants’ strikes, increasingly signalled the dissolution of the social base of the PT. In June 2013, there were massive demonstrations against increases in public services fees, the 2014 FIFA World Cup, and police violence and corruption. These protests formulated a wide range of demand from increasing education and health spending to political reforms (Riethof, 2019; Braga, 2017; Saad Filho, 2013). A ‘New Right’ mass opposition movement also emerged, composed of the traditional bourgeoisie and upper middle class, who were frustrated by changes in social reproduction and race relations, afraid of a loss of socio-economic status, and opposed to redistributive policies. The mass opposition movement also included some segment of informal workers amidst corruption scandals (Singer, 2015; Saad Filho & Boito, 2016). This diversity of social forces clearly shows the PT’s failure to manage class relations. The latter first reacted with an expansionary programme of social transfers and subsidised credit and with policies designed to accommodate the Right and business interests, including higher tax cuts. This strategy largely failed, and social and political unrest grew apace. The deterioration of public finances further damaged growth prospects and prompted a drastic change in the financial reputation of Brazil. Private capital inflows slowed considerably from late 2012 to 2014. In January 2014, Brazil ‘recorded the biggest dollar outflow in over 10 years’ (Pearson, 2014), further worsening the economic situation. Despite Dilma’s re-election in 2014 and the nomination of former banker Joaquin Lévy as finance minister to try and restore market confidence via austerity measures, the severe political crisis escalated and the rise of conservative and reactionary forces ultimately led to a coup d’état, under the form of a parliamentary-judicial presidential impeachment in 2016. 1.3.  Crisis, policy response, and economic recovery in South Africa (2008–2011) While South Africa entered the global financial crisis with some significant vulnerabilities, including inflationary pressures due to rising oil and food prices and a large current account deficit (Viegi, 2008), the transmission of the crisis through the financial channel was limited. The South African financial sector remained

136  Case studies stable, because it had limited exposure to foreign assets and banks were well capitalised (IMF, 2011; Mohamed, 2010). Macroprudential regulations and residual capital controls had helped weather the crisis, and the SARB did not have to provide emergency liquidity. However, a sharp capital account reversal, as shown in Figure 7.3, triggered a collapse of the exchange rate and of the stock market. The main index of the Johannesburg stock market, the Johannesburg Securities Exchange all-share index, fell from a high of 32,542 on 23 May 2008 to a low of 18,066 on 21 November 2008 (Padayachee, 2009, p. 5). The credit crunch shed light on the limits of debt-driven growth: tighter credit markets led to rapid declines in private sector access to credit, which in turn led to rapid declines in the services sectors associated with increased debt-driven consumption, construction and automobiles and components. There has been a large increase in automobile repossessions, house foreclosures and business bankruptcies. (Mohamed, 2010, p. 3) Manufacturing output declined by close to 25% (ibid). Besides, South Africa was particularly affected through the trade channel, with the mining and energy sectors severely hit by declining global demand (ibid; Viegi, 2008). Overall, the contraction in output worsened overcapacity in several economic sectors and led to the destruction of about 800,000 (net) jobs, especially in construction, retail, and financial services (Kganyago, 2012). The state responded in 2008–2009 with counter-­ cyclical fiscal policy based on a large infrastructure development programme

Figure 7.3 Net capital account and composition of inflows in South Africa (1999–2014). Source: Author, based on SARB data.

Class relations and financial vulnerability  137 (especially investment in electricity and transportation) and some degree of monetary policy easing (Padayachee, 2009; IMF, 2011; Kganyago, 2012). This historical sequence unfolded in a tense political climate, due to rising costs of food and energy and electricity shortages, but also due to factional struggles within the ruling ANC. The struggle opposed two main factions with different social bases: a faction led by Jacob Zuma was supported by a large proportion of unemployed and trade unionists, versus the Thabo Mbeki faction, supported by the middle classes (Alexander, 2010). This led to the resignation of president Mbeki in September 2008 and the election of Jacob Zuma as president in May 2009, who (at first) benefitted form much greater political legitimacy and was the source of much progressive hope (Fine, 2012). The economic recovery from mid-2009 onwards was slower and more modest than in Brazil. External financial inflows resumed, driven by high primary commodity prices. The Zuma government channelled large inflows of financial capital and commodity export revenues to various social subjects along the following lines. It scaled up its ‘menu’ of social welfare interventions (including social grants, food relief schemes, and so on), which reached 16.5 million South Africans in 2012 out of a population of 52 million (Burger & Calitz, 2015, p. 649). In 2004/05, these interventions only reached 9.4 million people. The Zuma government increased the share of the budget allocated to education and health, a significant proportion consisting in wage increases (ibid). Industries in strategic sectors, such as automotive and textile, received tax cuts and import subsidies. Flows were also channelled into vast infrastructure development, associated with the 2010 FIFA World Cup and large-scale construction projects such as the Gautrain fast rail network that links Johannesburg, Pretoria, and the OR Tambo Airport (Bond, 2014). Investment by state-owned financial institutions, such as the Industrial Development Corporation, increased from 2.1% of GDP for the period 2001–2008 to 4.2% for the period 2009–2013. General government investment increased from an average of 2.6% to 3% (Burger & Calitz, 2015, p. 649). Better funding conditions helped finance these expenses and a rising government debt. There were, however, difficulties in redistributing commodity export revenues, due to structural problems in the mining and minerals sector, including poor infrastructure (rail, ports, and electricity) and production disruptions due to safety shutdowns (Baxter, 2009; Bowman, 2016), but also due to misuses of ­commodity-based revenues. For critical commentators, the ANC government failed to use the years of the commodity boom for redistribution and diversification (Ashman, Fine, Padayachee, & Sender, 2014). The period was also characterised by large protest movements. These included township residents protesting against poor living conditions and joblessness in July 2009, a nationwide strike of public servants (including nurses, health practitioners, and teachers) for higher wages in August in 2010, and the denunciation of government’s excessive expenditure on the 2010 FIFA World Cup. As we will see in the next chapter, this matters to understanding post-crisis policy choices in South Africa. Indeed, in this tense political context, issues of cross-border finance appeared secondary to South African state managers.

138  Case studies 1.4.  Slowdown in financial inflows and the deepening of crisis in South Africa (2011–2014) The political-economic crisis significantly deepened from 2011 onwards due to a series of factors. The end of the commodity boom (Figure 7.4) had devastating consequences for the economy due to its dependence on mining and energy (Ashman, Fine, & Newman, 2012). Social and political unrest intensified. There was a wave of strikes in manufacturing (especially in the automotive sector) and transport industries. Farmworker and mineworker strikes were brutally repressed. Large-scale wildcat strikes in the platinum sector followed the massacre of mine workers in Marikana in August  2012, who protested against low wages and extreme forms of indebtedness. Strikes were compounded by a deep crisis of organised labour, with the largest union, the National Union of Metalworkers of South Africa, leaving the main trade union federation (the Congress of South African Trade Unions), in a context of growing tensions within the ruling Tripartite Alliance (Ashman, 2015).4 Protests beyond the workplace included shack dwellers’ social movements in urban peripheries, such as Abahlali baseMjondolo in Durban struggling for the right to the city. They also included ‘service delivery’ protests, led by impoverished youth, against the lack of municipal services and housing, as well as extremely high

Figure 7.4 Average annual change in prices of a series of key South African mining commodities (2000–2015). Source: Author, based on data in Jacks (2013).

Class relations and financial vulnerability  139 levels of inequality and unemployment (Alexander, 2010; Hart, 2013; Pithouse, 2009). Social unrest also took a highly reactionary form with a recrudescence of xenophobic violence. Multiple corruption scandals accelerated the general loss of legitimacy of the Zuma government, and business confidence deteriorated. The combination of these factors led to the rapid deterioration of economic and growth prospects in South Africa from mid-2011 onwards, and financial inflows significantly slowed down. In an attempt to sustain inflows, tighter monetary and fiscal policies were implemented in 2012–2014. As we will see in the next chapter, this sequence of events and associated patterns of cross-border finance are crucial to understanding post-crisis policy choices in South Africa. Let us now take a closer look at the financial issues associated with post-crisis patterns of capital flows in both countries. This will help to provide a comprehensive picture of the challenges that Brazilian and South African state managers faced in terms of cross-border finance management.

2. Between traditional and new forms of financial vulnerability Before looking at the financial issues associated with cross-border finance in Brazil and South Africa, a couple of theoretical and methodological remarks are in order. The distinction between ‘traditional’ and ‘new’ forms of financial vulnerability is based on recent Minskian and post-Keynesian economics scholarship (e.g. Kaltenbrunner & Painceira, 2015, 2018; Bonizzi, 2017; Akyüz, 2017). The main insight is that pre- and post-crisis booms in financial capital flows to developing and emerging countries accelerated the build-up of forms of financial vulnerability which are different – but no less problematic – from those which repeatedly led to crises throughout the 1990s. The remainder of this chapter will provide a snapshot of the recent evolution of both traditional and new forms of vulnerability in Brazil and South Africa, and it will underline the challenges that they represented for cross-border finance management. 2.1.  Wither ‘traditional’ forms of financial vulnerability? The economics literature identifies the following traditional sources of financial vulnerability: • • • •

Weak macroeconomic fundamentals, such as deteriorating public finances (high public debt to GDP ratios), high inflation rates, and current account deficits; Balance-sheet currency and maturity mismatches, such as high short-term external debt, and domestic liability dollarisation; Low levels of FX reserves (for instance, in comparison to total external debt); High growth rates of credit and property prices.

These sources of financial vulnerability are routinely monitored by domestic financial authorities and international capitalist organisations, such as the IMF and the

140  Case studies Bank for International Settlements (BIS), to maintain financial stability. The interviews with Brazilian and South African state managers conducted for this book also showed that they were systematically factored into their policy choices. It is therefore important to examine their evolution over the period studied (2008–2014) in order to understand the political-economic challenges that they represented. Let us start with fiscal considerations. As discussed in chapters 5 and 6, both countries sustained primary fiscal surpluses over the 2005–2008 period (more than 1% of GDP in South Africa, 4% in Brazil), signalling a commitment to fiscal discipline. This provided room for some flexibility in the post-crisis economic policy response, as outlined in the first part of this chapter. The fiscal situation, however, deteriorated rapidly. South Africa sustained large primary fiscal deficits from 2009 onwards, contributing to the rapid build-up of public debt. The situation also gradually deteriorated in Brazil, where a primary budget deficit was recorded in 2014 (−0.63% of GDP) for the first time in 10 years.5 Government debt-to-GDP ratios rapidly increased in South Africa after the crisis, from 27.8% in 2008 to 44.1% in 2013, but remained at modest levels by international standards. In Brazil, the ratio actually decreased from 60.7% in 2008 to 57.2% in 2013. In both countries, there was a rapid build-up of external debt due to current account deficits, especially after 2011. However, debt stocks remained at manageable levels (41% of GNI in South Africa, 23.5% in Brazil), and their maturity profiles did not pose significant risks. Furthermore, much of the external debt was denominated in local currencies. In South Africa, foreign currency-denominated debt represented less than 10% of total government gross debt in 2012–2013 (Burger & Calitz, 2015). As a whole, the post-crisis boom in capital flows therefore little contributed to the formation of traditional forms of currency and maturity mismatches.6 In the next chapter, we will see that this is important to explain post-crisis policy choices. Indeed, South African state managers considered that large exchange rate fluctuations would not be a risk for financial stability. By contrast, Brazilian state managers did not feel that confident in this regard. Despite the limited build-up of traditional forms of currency and maturity mismatches, exchange rate fluctuations still posed a risk given the speculative exposure of a number of large firms on FX derivatives markets, as previously noted. Another traditional source of financial vulnerability is linked to the level of FX reserves. The pre-crisis accumulation of FX reserves was very large in ­Brazil, increasing from 28% of total external debt in 2005 to about 80% in 2008. It was much more modest in South Africa (it reached 48% of total external debt in 2008) and considered low by international standards, especially compared to other emerging markets with intensely traded currencies frequently under speculative attack (Hassan & Smith, 2011, p. 21). South African policy-makers therefore had room to accumulate more reserves. In Brazil, very large FX reserves had not prevented a brutal depreciation, which signalled to policy-makers that this policy was exhausted. In terms of macroeconomic fundamentals, the situation of South Africa as it entered the 2008 crisis was worrying, owing to one of the largest current account

Class relations and financial vulnerability  141 deficits amongst emerging markets and inflationary pressures. In the post-crisis period, inflation was rapidly brought under control and remained so until late 2013. The situation of the current account slightly improved in 2009–2010, largely due to a fall in imports associated with the economic downturn, only to worsen again from 2011 onwards. Brazil entered the 2008 crisis with inflation under control and consolidated current account surpluses. However, inflation became a concern and the situation of the current account worsened when capital flows boomed in mid-2010 and 2011. As we will see in the next chapter, this sequence is important to grasp the nature of monetary policy over the period studied. The imperative to sustain inflows in order to fund current account deficits also crucially shaped post-crisis policy choices. Finally, let us look at credit markets. These evolved in different ways: in South Africa, large inflows pre-crisis fuelled rapid credit extension, raising serious concerns about economic overheating and financial instability (Hassan  & Smith, 2011). However, credit extension to the private sector stagnated post-crisis. By contrast, credit growth was strong in Brazil both pre- and post-crisis. The growth of real domestic credit averaged 9% year-on-year between 2004 and 2011 (versus 1% for South Africa) (IMF figures). This growth was primarily driven by credit extension to households, which was sustained over the period, but started from a low level by international standards.7 We have seen that credit extension was a central aspect of the mode of labour containment engineered by the PT. As such, it was encouraged by state regulations that facilitated mortgage lending, and via the use of federal commercial banks to directly extend credit lines (von Mettenheim, 2014). But rapid credit extension was also a contingent outcome associated with some of the policies implemented over the previous period. Indeed, reserve accumulation, and concomitant monetary sterilisation through emitting large amounts of treasury bonds, had a lasting impact on the funding structure of banks. In short, banks increasingly used these public debt securities as collaterals to extend credit to households (see Kaltenbrunner & Painceira, 2018). Given the extremely high interest rates that prevail in Brazil, there was a growing concern amongst ­policy-makers that debt-to-disposable income ratios – as well as the share of non-performing loans – would increase to problematic levels, especially as growth slowed down after 2010. As we will discuss in the next chapter, this concern motivated the adoption of stronger macroprudential regulations. In sum, the build-up of traditional forms of financial vulnerability was limited in both countries (especially in Brazil) during the post-crisis boom, although these forms certainly did not disappear. This is important to understand the state of mind of state managers: the fact that a major financial crisis had been avoided and that this was partly due to previous policy efforts led to a significant degree of relief and self-confidence amongst state managers, at least in the initial stages of the post-crisis period (2009–2010). This sense of confidence was largely shared by the international financial community. However, as we will see in the next chapter, this degree of newfound self-confidence amongst policy-makers progressively melted from mid-2010 onwards, especially in Brazil. This was because a series of economic and financial problems worsened, and because policy-makers

142  Case studies would gradually become aware of new forms of financial vulnerability, which we now turn to. 2.2.  The accumulation of ‘new’ forms of financial vulnerability New forms of financial vulnerability are characterised by the ‘rising share of foreign investors in an increasingly complex set of domestic-currency financial assets, many of them very short-term and aimed at generating profit from trading and the ensuing capital gains’ (Kaltenbrunner  & Painceira, 2015, p.  1284). The remainder of this chapter provides a snapshot of the evolution of new forms of vulnerability in Brazil and South Africa. The account offered, by no means exhaustive, focusses on the forms that were most important to understanding post-crisis financial policy choices. In particular, it examines equity, debt, and FX derivatives markets. 2.2.1. The growing presence of non-resident investors in equity and debt markets In both social formations, the pre- and post-crisis booms in capital inflows were associated with the growing presence of non-resident investors, such as transnational banks, hedge funds, and institutional investors, in equity and debt markets. The process was driven by carry trade operations. These operations are ‘investment strategies that borrow low-interest rate currencies (funding currencies) [such as the US dollar or the Japanese yen] in order to invest in high-interest rate currencies (destination or target currencies) [in this case, the Brazilian real BRL and the South African rand ZAR], typically with short-term instruments’ (BIS, 2015, p. 4). The stock of non-resident investment in Brazilian equity grew from about 5% of GDP in the early 2000s to 23.2% in 2009. In South Africa, the figure reached 36.8% in 2010 (World Development Indicators, 2019). The presence of nonresidents also grew in debt markets in South Africa: they owned the equivalent of 17% of GDP in bonds in 2012. According to IMF figures, non-residents also owned as much as 36% of sovereign debt in 2014, versus 14% in 2004. This accumulation of portfolio liabilities (equity and debt owned by non-resident investors) was only little compensated by the acquisition of assets abroad, with the exception of large portfolio equity assets in the case of South Africa which amounted to 42.4% of GDP in 2013 (World Development Indicators, 2019). This reflected the specific pattern of internationalisation and financialisation of South African large capitalist firms, which moved a large chunk of their assets abroad. This was notably facilitated by the dual listing policy discussed in chapter 6 (Ashman & Fine, 2013; Mohamed, 2010). The main implication of a large fraction of equity and debt hold by non-­residents is that these assets can be liquidated very quickly and converted into foreign currency (Feijo  & Lamonica, 2013). Besides, ‘given the enormous size of these financial [international institutional] investors, even a small reallocation of their portfolio shares can have a huge impact’ on recipient countries (Kaltenbrunner &

Class relations and financial vulnerability  143 Painceira, 2015, p. 1288). This increased Brazil’s and South Africa’s vulnerability to capital account reversal. Furthermore, inasmuch as assets are denominated in local currency, the currency risk is borne by non-resident investors, which makes them very sensitive to expected exchange rate movements and changes in global liquidity conditions (ibid). As we will discuss at length later, this resulted in very strong appreciation and volatility of the Brazilian and South African currencies. But for now, the key takeaway point is that the uneven build-up of this new form of vulnerability (and associated structure of portfolio assets and liabilities) led to different policy stances regarding cross-border finance. Indeed, we will see in chapter 8 that while Brazilian policy-makers deployed a variety of tax-based capital controls on non-resident portfolio inflows between late 2009 and 2013, South African policy-makers considered that the growing assets hold by South Africa abroad would act as a buffer in case of capital account reversal. Let us now turn to the other new form of vulnerability which importantly shaped post-crisis policy choices. 2.2.2. Derivatives markets and speculative carry trade operations In both countries, financial derivatives markets became an important site of financial fragility, owing to large carry trade operations by non-resident investors and arbitrage activities by local financial actors. Foreign exchange (FX) derivatives markets were particularly concerned. The ZAR and the BRL were two of the most attractive currencies in terms of carry-to-risk ratio.8 The turnover of FX derivatives rapidly increased between 2004 and 2013, both over-the-counter (OTC, i.e. private agreements) and on regulated exchanges (in the case of Brazil), as shown in Tables 7.1 and 7.2. Table 7.1 Turnover of over-the-counter foreign exchange instruments, by currency. ­“Net-net” basis, daily averages, in billions of US dollars. Turnover of OTC foreign exchange instruments, by currency 2004

2007

2010

2013

2016

South African Rand

14

30

29

60

49

Brazilian Real

 5

13

27

59

51

Source: Author, BIS data (Triennial OTC derivatives statistics).

Table 7.2 Turnover of exchange-traded futures, by currency. Notional principal, in billions of US dollars. Turnover of Exchange-traded futures, by currency 2004

2007

2010

2013

2016

South African Rand

0