Effects of Financialization

Krippner (2005) defines financialization as “a pattern of accumulation in which profits come primarily through financial channels rather than through trade and commodity production.” Financilazation gives power to control other country.

In late 1970s financialization begun in US with deregulated financial sector and liberalization. Financialization leads to shift in direct ownership of enterprise to financial securities. It is one of the best ways for capitalist to escape from the problem of introduction of new technologies, new product and other inheriting problem of market. At that time in USA cost of production was increasing, rise in price was not possible because market was oligopoly, due to competition from European and Japanese firm US was losing its own domestic market in addition to foreign market. Due to stagnation in real wage growth in US market and it was no more profitable for firms so investment in real sector so they started to invest in financial sector to offset low profit from real sector these all factor initiated financialzation rapidly. Process of financialzation in US can be through following points.

1. Shareholders value revolution: Shareholders started demanding more return from their investment there was shift of notion of retain and reinvest to maximize shareholders value through dividend payments, share buy-backs and merger and acquisition.
2. Change in the gap between the rate of return on manufacturing investment and rate of return on investment in financial assets. Returns from finance sector boomed after deregulation of financial markets and on the manufacturing side emergence of Japan and Europe and later East Asian countries as competitors affected profit directly, especially in automobiles and electronics.

There were two more dimensions for transformation from finance capital to financialization. Rise in the net worth of financial sector steadily relative to non financial sector Traditional non financial firm became more like financial holding companies, with a spectrum of financial services and financial investments swamping production in terms of their contribution to company revenue (Milberg 2008)’.

Above mentioned factors lead to vertical disintegration, offshoring, outsourcing and globalization of production to take benefit of cheap inputs, labour resource that helped them to increase profit share. It addition to reduction in direct cost it helped in lower wage demand in US itself. Oligopsony power in global value chain lead US firms to have greater control over input prices and greater flexibility due to the presence of multiple, competing suppliers which helped them to rise mark-up over cost, “capital inflows from trade surplus countries spurred in part by high returns on equity resulting from financialization” (Milberg 2008, 430) In 1990s managing global supply chain itself became an important strategy for US to compete with its low cost and flexible competitors.

Shift in the notion from retain and reinvest to downsize and distribute had made corporate managers to allocate resource efficiently and get returns to maintain the value of shareholders. In the name of ‘creating shareholder value’ past two decade have witnessed a marked shift in the strategic orientation of top corporate managers in the allocation of corporate resources away from retain and reinvest towards downsize and distribute. Under the new regime top mangers downsize the corporations they control, with a particular emphasis on cutting the size of the labour force they employ in an attempt to increase the return on equity. And with mangers productivity being judged by the profit they make their position has become more volatile. With such above mention steps there is huge layoffs and with no investment in real sector and offshoring and outsourcing outside US has created less job, stagnation in real wage has made labours life difficult. High speculations in stock market has made US economy more crisis prone that affect not only US but other nations too for instance 2008 US financial crisis affected most of the nations in different ways such as fall in export revenue, loss of jobs etc. Crisis play significant role in production and distribution as with crisis one can go away with unused resources and leads cheapening labour force. In global economy crisis has lead to widening gap between labour wages and capital profitability. Wage growth seems to be negligible where as profit shows rapid increasing trend and after each crisis profit has increased more.

Financialization has lead to deindustrialization in most of the developed nations they now import from developing nations and just handle selling and distributions activities without owning any manufacturing units. Rapid expansion of manufacturing units in low wage countries has increased export revenue of developing nations there is reverse capital flow from periphery to core. Condition of periphery has become more vulnerable as they have low bargaining power; they have to loosen their regulations such as labour laws, environmental rules and regulation, tax laws to attract foreign capital. (Example Bhopal Gas Tragedy).

Capitalist production requires continuous retention and reinvestment of surplus value to grow. This ongoing process of accumulation itself is crisis prone because i) as there is more and more accumulation surplus reserve army will be exhausted leading higher works bargaining power and fall in surplus ii) due to competition capitalist won’t be able to rise price iii. Capitalist can use more ‘c’ then ‘v’ but again this will create problem a) labour only has capacity to produce surplus value b) there will be always problem of under consumption as capitalist doesn’t consume all of its income and workers have receive much less to spend. Hence successful accumulation and expanded reproduction leads to problem of under consumption. Rosa Luxemburg states that there is need of external non capitalist market for capitalist to expand so non capitalist territories should be forced to open not only to trade but also to permit capital to invest in profitable ventures using cheap labour known as spatio- temporal fix. Primitive accumulation is a dual movement i) it provides initial capital ii) provides free labour. Colonization of small country by powerful and strong economies is the example of this. Today Spatio temporal fix is not to discover new market to sell but to produce cheaply.

Problem of over accumulation is likely to affect china in following ways

1. Through under consumption:

Nearly 75% of Chinese industries are estimated to have overcapacity. Fixed investment in industries are already experiencing overinvestment of about 40-50% of Chinese GDP growth in 2005 (Hung 2008). With acceleration of urban reforms state owned enterprise were privatized into autonomous profit making units, fixed centrally planned prices to floating market prices, dismantling of state supported welfare package for workers and replacement of lifelong employment to contractual one. Urban – rural and inter- regional inequalities has increased in China along with the economic growth, number of layoff is more than number of job created by export oriented sector. Vulnerability of workers is increasing since the benefit and security they used to get is no more. China’s gini coefficient rose from 0.33 in 1980 to more than 45% today (Hung 2008, 162). Income has been concentrated in the hands of few capitalist. This rising disparity in income distribution has narrowed the domestic consumption market and share of consumption in GDP is falling. China’s high household saving may predict potential market consumer market but it is difficult to mobilize these saving because 80% of this saving is concentrated with less than 20% of urban elite population who prefer to spend on luxury imported goods than domestic low cost manufactured. And rest savings are held by remaining population for precautionary purpose. So is very difficult to bring it into the market for consumption process so china is likely to face under consumption problem. And moreover growing imbalance between investment and consumption can further lead to realisation problem.

Falling prices of finished goods – over accumulation of industrial capacity and sluggish consumption had lead to falling prices of finished products of key industries. Deflation of finished products and inflation of inflation of raw materials and fuels has lead to ‘biflation’ (Hung 2008, 167). It has lead to fall in profit margins for Chinese firms leading to profit less growth.

Chinese economy is export led economy. China became successful to achieve alarming growth rate through successful export. US market accounts for nearly 30% of Chinese export market. US economy which in itself is debt financed economy and when US itself is going through crisis how long US will absorb Chinese product is a question that needs to be thought over as Chinese growth depends upon stability of US market. Expansion of export sector has brought huge foreign exchange into Chinese economy enabling it to expand credit in banking sector and boosting debt financed investment leading to further expand production capacity. Export led growth strategy adopted by East Asian tigers were successful at that time mainly because few developing nation followed this strategy and exports of these economies were easily absorbed by foreign markets but China is a big country producing more than double of these countries and will global market be able to observe its output with growing investment in fixed assets. Moreover by now many developing countries have adopted this strategy and world market is flooded with cheap manufacturing export, so it has become even more volatile.