Sunanda Sen is a name all students of economics are familiar with. Rarely does a student complete his/her course without referring to her articles. Therefore, it need not be mentioned that Sen’s book, Dominant Finance and Stagnant Economies, is brilliant. The book puts in perspective the state of finance in the world today, which is dominated by certain sections. This, in turn, has turned things upside down in developing economies like India, making them more vulnerable.
The concept of global finance has evolved over the years, from the time conditions were controlled to a present state of deregulation. In the old days, loans used to be tied. This meant that donor countries lent money on the condition that the receiver should spend it to buy goods from the donor and, finally, repay the loan in hard currency. This was a challenge for the recipients who were invariably short of foreign currency. Such loans helped speed up the growth process in donor countries, as their exports benefitted. India has gone through this phase too, with the last instance being during the time of reforms when the International Monetary Fund provided a loan to India with conditions attached. Today, even though financial markets are sophisticated, world economy remains fragile. This, says the author, is due to the prevalence of a hegemonic order of financial institutions, which has caused the financial crisis to aggrandise instability. Let us see how Sen puts together the pieces: there has been a rapid expansion of markets in goods and services, as well as financial flows over the years. But these flows do not lead to the creation of real investment, that is, physical assets. While there has been accumulation of financial assets, the same has not happened for physical assets. Further, the distribution of such benefits has been uneven and, more often than not, policies are guided by the dominant investor—the relentless call to open up emerging markets and create policies towards such enablement are manifestations of the influence of these countries. Two things have resulted from these developments. The first is the concept of derivatives, which has proliferated across the world on the premise that markets are efficient and information is available to all players, which, finally, gets reflected in the price. The second is that the concept of structured products has come in, where one multiplies assets by originating and distributing assets, which has led to the creation of higher levels of profit compared to the ‘commitment models’ run by banks traditionally. Now, the growth of credit is no longer constrained by capital and own reserves, which was the check imposed by banking systems across the world. Another point made by the author is that as growth centres emerged in developing countries, there has been, simultaneously, a considerable amount of inflow of FII funds, which have gone mainly into secondary equity markets, real estate and commodities. This has not really helped growth, as it engenders more of speculative activity and also bids up prices of commodities, especially food and fuel. In fact, Sen is quite critical of the role played by the commodity futures market in India in fuelling inflation. Additionally, governments have provided a lot of sops to these funds and markets through capital gains tax being liberalised. Consequently, there is less incentive to invest in debt, as equity, though risky, is given preferential tax treatment. The book is a collection of articles, some of which have been published earlier, but revised to fit into the current context. The view is quite pragmatic, unbiased and, more importantly, hard-hitting. Giving examples of India and China, the author proves that an overbearing sign of hegemony of finance, controlled by corporates in industrialised countries, is manifested when footloose capital has sway on policies in host countries. We can see it in India today, where policymakers are always looking to cater to the needs of developed countries, rating agencies and multilateral institutions. Quite clearly, we need to take a relook at the way in which these financial flows behave.
The concept of global finance has evolved over the years, from the time conditions were controlled to a present state of deregulation. In the old days, loans used to be tied. This meant that donor countries lent money on the condition that the receiver should spend it to buy goods from the donor and, finally, repay the loan in hard currency. This was a challenge for the recipients who were invariably short of foreign currency. Such loans helped speed up the growth process in donor countries, as their exports benefitted. India has gone through this phase too, with the last instance being during the time of reforms when the International Monetary Fund provided a loan to India with conditions attached. Today, even though financial markets are sophisticated, world economy remains fragile. This, says the author, is due to the prevalence of a hegemonic order of financial institutions, which has caused the financial crisis to aggrandise instability. Let us see how Sen puts together the pieces: there has been a rapid expansion of markets in goods and services, as well as financial flows over the years. But these flows do not lead to the creation of real investment, that is, physical assets. While there has been accumulation of financial assets, the same has not happened for physical assets. Further, the distribution of such benefits has been uneven and, more often than not, policies are guided by the dominant investor—the relentless call to open up emerging markets and create policies towards such enablement are manifestations of the influence of these countries. Two things have resulted from these developments. The first is the concept of derivatives, which has proliferated across the world on the premise that markets are efficient and information is available to all players, which, finally, gets reflected in the price. The second is that the concept of structured products has come in, where one multiplies assets by originating and distributing assets, which has led to the creation of higher levels of profit compared to the ‘commitment models’ run by banks traditionally. Now, the growth of credit is no longer constrained by capital and own reserves, which was the check imposed by banking systems across the world. Another point made by the author is that as growth centres emerged in developing countries, there has been, simultaneously, a considerable amount of inflow of FII funds, which have gone mainly into secondary equity markets, real estate and commodities. This has not really helped growth, as it engenders more of speculative activity and also bids up prices of commodities, especially food and fuel. In fact, Sen is quite critical of the role played by the commodity futures market in India in fuelling inflation. Additionally, governments have provided a lot of sops to these funds and markets through capital gains tax being liberalised. Consequently, there is less incentive to invest in debt, as equity, though risky, is given preferential tax treatment. The book is a collection of articles, some of which have been published earlier, but revised to fit into the current context. The view is quite pragmatic, unbiased and, more importantly, hard-hitting. Giving examples of India and China, the author proves that an overbearing sign of hegemony of finance, controlled by corporates in industrialised countries, is manifested when footloose capital has sway on policies in host countries. We can see it in India today, where policymakers are always looking to cater to the needs of developed countries, rating agencies and multilateral institutions. Quite clearly, we need to take a relook at the way in which these financial flows behave.
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