[Reader-list] Meaning of Financial Liberalisation

[A. Mani]

(from PD)

The Meaning of Financial Liberalisation



Prabhat Patnaik



THE term financial liberalisation is used to cover a whole set of
measures, such as the autonomy of the Central Bank from the
government; the complete freedom of finance to move into and out of
the economy, which implies the full convertibility of the currency;
the abandonment of all “priority sector” lending targets; an end to
government-imposed differential interest rate schemes; a freeing of
interest rates; the complete freedom of banks to pursue profits
unhindered by government directives; the removal of restrictions on
the ownership of banks, which means de-nationalisation, full freedom
for foreign ownership, and an end to “voting caps”; and so on. These
measures are not necessarily presented as a package, and not always in
their maximal form. The Narasimhan Committee in India for instance did
not ask for a complete denationalisation of banks; it suggested that
the government, the foreigners and the Indian private sector should
have one-third equity each in the currently-nationalised banks.
Nonetheless, no matter what the exact sequence, form and strategy
through which financial liberalisation is sought to be ushered in, the
objective ultimately is to realise the above set of measures.



Since financial liberalisation is seen as consisting of these
measures, the debate upon it gets fragmented into a debate upon the
desirability of each of these measures, ie, whether central bank
autonomy is desirable or not; whether the government should have
exclusive equity ownership in banks or only a majority ownership, or
not even that; whether priority sector lending targets serve the
purpose they are meant to; whether control over interest rates has not
understated the scarcity value of “capital” (a particularly silly
debate this, based on a Hayekian assumption of full employment); and
so on. Because of this fragmentation of issues, the process of
financial liberalisation is never seen in its totality. This, by
camouflaging the total impact of financial liberalisation, keeps the
opposition to it enfeebled, and thereby helps the “liberalisers”. The
question therefore arises: what is financial liberalization in its
totality?



STRANGLEHOLD OF

FINANCE CAPITAL

The essence of financial liberalisation, seen in its totality, is to
ensure the stranglehold of finance capital over the State. This may
appear paradoxical at first sight: as the term “liberalisation”
appended to “financial” suggests, the basic aim of the process is to
liberate finance from the shackles of the State, ie, to ensure not the
control of finance over the State but the negation of the control of
the State over finance. But the remarkable aspect of financial
liberalisation consists precisely in this: what appears at first sight
as the liberation of finance from the shackles of the State is nothing
else but the acquisition by finance of control over the State.



This is not just the outcome of the dialectics of a conflict
situation. For instance, in a wrestling bout when each of two
wrestlers is having a grip on the other, the liberation of one from
the grip of the other may be said to mark simultaneously the
ascendancy of the one so liberated over the other; in a similar
fashion it may be argued that the liberation of finance from the
State, and therefore from the possible control of other classes
exerted through the State, marks simultaneously the acquisition of
hegemony by finance over the State. The dialectics of class struggle
in this case may thus be seen only as another instance of the
dialectics of any struggle, of which the wrestling bout is just an
example.



This perception, though not wrong, is inadequate. Financial
liberalisation does not just mean an inversion: the ascendancy of
finance arising from the very fact of the social grip over it,
exercised through the State, being loosened. Since we live in a world
where the State remains a nation-State while finance is globalised,
ie, is international in character, financial liberalisation is not
just liberalisation; it is simultaneously a process of globalisation
of finance, ie, the conversion of “national finance capital” into an
integral element of international finance capital, and hence the
acquisition on its part of enormous strength vis-à-vis the
nation-State. To go back to the wrestling analogy, it is as if the
loosening of grip over one wrestler makes the one so loosened multiply
several times in size, and hence necessarily acquire ascendancy. It is
within this specific global context that financial liberalisation
necessarily marks the acquisition by finance capital of a stranglehold
over the State. In countries like India where financial liberalisation
has been kept in check to an extent because of the struggles of the
trade unions and the Left, even this acquisition of stranglehold has
as yet been kept in check; and much of the financial sector still
remains nationalised despite the best efforts of the “liberalisers”.
But this does not by any means alter the meaning of financial
liberalisation.



Every single one of the measures mentioned above as constituting
financial liberalisation has the effect of strengthening the hegemony
of finance over the State. Central Bank autonomy removes a host of
policies, eg, monetary policy, exchange rate policy, and credit
policy, from the purview of the democratically-elected government and
entrusts them to the caprices of a bunch of financiers, or bureaucrats
aligned to them, who exercise control over the so-called autonomous
Central Bank. This restricts the domain of intervention of the State.
In addition, since the target with regard to State borrowing from the
Central Bank is fixed, an autonomous Central Bank simply pushes the
State to the mercy of the financial market to meet its borrowing
requirement above this limit. The State in short can spend only as
much as finance capital allows it to. What is more, since being
creditworthy in the eyes of finance capital becomes a matter of
paramount importance for the State, it pursues only such policies as
finance capital would like it to.



A fully convertible currency, and freedom for financial flows into and
out of the country, has exactly the same effect. Since the pursuit of
policies that finance capital dislikes would give rise to a financial
outflow with potentially disastrous consequences for the economy, the
State becomes obliged to follow only those policies which keep up the
“confidence” of finance in the economy; it is in short obliged to
pursue only those policies which are to the liking of finance capital.



Likewise, the freeing of finance capital from all social obligations
like priority sector lending targets and differential interest rates,
not only increases its profitability, even while pushing petty
producers and small capitalists deeper into crisis, but also allows it
to pursue its own profit-seeking ways over a global terrain, which has
the effect of subjugating the State to the thralldom of
internationalised finance capital. In short, financial liberalisation
is the process through which a fundamental change is enforced on the
bourgeois State: from being an entity apparently standing above
society and intervening for the “social good”, which means keeping in
check to some extent the rapacity of big capital, even while promoting
it and defending its monopoly privileges, the State becomes
exclusively dominated by financial interests (with which big corporate
interests are closely enmeshed) and loses its relative autonomy
vis-a-vis such interests. We have not the “rolling back” of the State
as neo-liberal ideologues suggest, but State intervention in the
exclusive interests of finance capital.



PROFOUND

IMPLICATIONS

This change has profound implications, of which only three will be
discussed here. The first which is obvious and need not be laboured
here relates to the attenuation of democracy. As long as the economy
is characterised by financial liberalisation and hence the
stranglehold over the State by finance capital, any change of
government effected through popular democratic intervention will make
no difference to the condition of the people. Or putting it
differently, any assertion of democracy necessarily requires a
negation of the stranglehold of finance capital over the State (which
financial liberalisation entails), and hence a reassertion of social
control over finance effected through the State. (This in turn
presupposes a change in the nature of the State itself). The defence
of democracy in countries like India requires therefore a prevention
of any further financial liberalisation and a reversal of the
financial liberalisation that has already occurred.



Secondly, capitalism requires some external prop to make it come out
of crises. In the absence of such props the crises would get
inordinately prolonged, imposing such heavy burdens on the working
people that the social stability of the system would get jeopardised.
Historically, colonialism played this role of providing an external
prop to the system; and the fact that this prop had got more or less
exhausted by then was the main reason behind the Great Depression of
the thirties. In the post-war period, State intervention in demand
management provided such an external prop.



Such intervention could only happen however if the State had some
autonomy, if it was not part of the “spontaneity” of the system, but
represented an “external element” to such spontaneity. But if the
State loses this autonomy, if its own actions are dictated by the
caprices of finance capital, and hence by the spontaneity of the
system itself, so that it ceases to be an “external element” in this
sense, then it loses the capacity to intervene in situations of
crisis. This necessarily makes the crises inordinately prolonged, with
no clear end in sight, which not only imposes heavy burdens on the
working people but also undermines the system’s social stability and
legitimacy. Financial liberalisation sets the stage for social
upheavals.



Thirdly, the State’s inability to truncate crises is part of a wider
phenomenon, namely its inability to rid the system of its obvious
ills. John Maynard Keynes was aware of these ills and wanted a reform
of the system to eliminate them, for otherwise he was afraid that the
system would give way to socialism which he did not wish to happen. He
was a Liberal but he advocated State intervention for he saw liberal
capitalism as undermining the Liberal values he cherished which
required a humane economic system. He saw the State as an embodiment
of “social rationality” intervening in a capitalist system to make it
function in a manner different from what its own spontaneity dictated.
Underlying his reform agenda, and indeed any Liberal reform agenda, is
the presumption that the State stands outside the “spontaneity” of the
system, so that it can intervene in a “rational” manner. But if the
State is under the hegemony of finance capital, and hence lacks the
autonomy to intervene in any manner that does not meet with the
approval of finance capital, then that puts paid to all agendas of
Liberal reform of capitalism.

_____________________________________________________________________________________



Best

A. Mani





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