Financial Mercantilism and Developing Countries
University of Pavia
Please cite the paper as:
Gianni Vaggi, (2018), Financial Mercantilism and Developing Countries, World Economics Association (WEA) Conferences, No. 2 2018, The 2008 Economic Crisis Ten Years On, 15th October to 30th November, 2018
This paper has been included in the publication
“The 2008 Crisis Ten Years On: in Retrospect, Context and Prospect Paperback”
International financial markets are characterized by Financial Mercantilism, FM. There are many similarities between the operation of the seventeen century merchants and today financial intermediaries. Resorting to notions derived from history of economic ideas and in particular from Smith and Marx the paper identifies the features which characterize FM and which portray the role of finance in the present phase of the capitalist system. The paper describes the features of the mercantilist and of the financial reproduction cycle, where money, M, becomes more money, M’. The appropriation of this surplus is also discussed.
Some paradoxes of the present ‘savings glut’ and to the debate on ‘secular stagnation’ are also highlighted, these facts bring about serious doubts about the role of finance in stimulating economic growth. In particular FM is not the ideal setting to channel funds towards developing countries, which risk to repeat crises from the past..
The last to sections of the paper discusses the challenges facing developing countries when they need to resort to external funds to finance their development strategies and goals. Some indications on how to mitigate the possible negative impacts of Financial Mercantilism on financing for development are also discussed. In particular the paper contends that given the nature of today’s financial markets development finance should take place with separate tools and dedicated markets.
Many thanks for your itneresting paperthat highlights financial mercantislism as a main feature of globalization.
Regarding your sentence ” Pension funds have a long-term contract with their clients who save now in view of more
consumption capacity in the future. However, in order to guarantee a future income to their
customers the pension funds must continuously shift savings across different types of investments,
in order to yield an annual return at least similar to those of their competitor”
I would like you to clarify the role that pension funds in the context of financial mercantislism.
I think pension funds are a typical example of mismatch between the goal which is clearly long run and the day-to-day actions which are necessary in order to achieve that goal. True part of the funds of pension funds are invested in long run realtively safe assets: triple A bonds, but on the other hand these funds cannot rely only on low yield type of assets hotherwise returns would be minimal. Thus they too must engage in ‘trading’ buying and selling different assets, includiong long-run ones like 10 years bonds.
Pension funds are a case inwhich it migh make sense to have a separation between speculative funds and more prudent funds; the sort of separation I advocate for development funds. Coomercial baks/funds on one side, investment banks/funds on the other. One could say that in practice you could put your savings into funds which are rick averse/speculatibe in different degrees, but the problem is that in today finance this separation is not always clear as the crisis as shown. Regulation has been the answer, but a very timid one; I think separation qould be better. Of course pension funds manage a lot of savings, thus this separation could lead to decrease in more speculative financial activites.
Dear Professor Vaggi,
at the light of your research on developing countries, how do you see their stability and development possibilities in the present scenario? In particular, we assist to a resurgent general Mercantilism (Mahathir as “new” leader in Malaysia, Jokowi and his crazy policies on beef and corn in Indonesia…), but, when compared with the situation you described, the present reality sees private saving deteriorating (in Malaysia household debt is 83% of GDP, China suffers of huge private debt, etc…).
What’s your perspective on the future for Southeast Asia?
With best regards.
you poses two issues. The use of neo-Mercatlist policies by some developing countries and the rising debt in many of these countries.
Personally I consider the adoption of special and differential treatment for developing countries an opportunity for them to make a first step to enter the international markets without being immediately wiped out by most advanced and emerging economies. Here of course I think of low Income Countries in particular. The crucial but difficult thing is if countries are able to have joint policies at the regional level. Think of East Africa Economic Community; if these countries could negotiate special trade rules as a group they could have better chances of taking advantage of their trade relations with High Income economies and with China.
Different is the case of emerging ecobnomies which are alreday growing quite fast and are in an Upper Middle Income status. here of course the advanciong protectismo could be damaging in particular because of the possible rise of state-firms cohalition and concentration of power.
In general I have no objections to policies which defend coutry and regional interests of the poorest countries and of policies and instruments which are designaded to re-balance economic powers.
II do agree that many emerging economies in Asia, but also some Low Inocme countries in africa, now suffer from excessive indebtedness, but this again ask for a separation between development finance, clearly geared to improve GDP growth rates in the poorest countries an speculative activities. AS the 1997-98 Asian crisis has shown the latter can easily enter the picture and generate bubbles even in fast growing economies
The legislative instrument to separate the commercial and investment banks operations was a success and lasted for many decades after the Wall Street Crash of 1929 and the Great Depression. Why it has been abandoned? It seems that policy makers do not learn from history or they can’t resist the market forces.