Political economy of finance reversed?

I had pointed earlier about a superb paper from Stehen Haber where he shows why financial systems remain under-developed.

However, what we are seeing is opposite in places where fin system is developed. It has become so powerful that the entire idea of underdevelopment has been turned on its head. In this excellent roundtable conversation the questions were raised amidst who is who (Soros, John GIeve etc):

FORD: Back to the big picture. What will happen to the financial sector in Britain and the US as a result of all this? Will it shrink? Should it? Are there areas of business which shouldn’t revive because they were fundamentally unstable and unsatisfactory?

SOROS: It should shrink. It has really got overblown. The size of the financial industry is out of proportion to the rest of the economy. It has been growing excessively over a long period, ending in this super-bubble of the last 25 years. I think this is the end of that era.

Then Dr. Reddy in his recent speech said:

whether there is, what may be called, financialisation of the political economy? The attractiveness of financial intermediaries in terms of high profitability, significant growth – especially cross-border, massive spread of investors, and the inadequate scope for application of principles of rules of origin in the financial sector could have resulted in enhanced clout for these intermediaries in the political economy. Incidentally, Professor Jagdish Bhagwati’s reference to Wall Street – Washington links is relevant in this context.  

The Jagdish Bhagwati reference  Dr. Reddy mentions, I covered it here. Then one must also read this interview of Dr. Liz Warren, Law Professor at Harvard: 

The consumer financial services industry has been the single biggest contributor in the 2000 election cycle, in the 2002 election cycle, and they’re on target to do it again in the 2004 election cycle. George W. Bush’s single biggest contributor to his [2000] presidential campaign was MBNA, the second biggest credit card issuer in the country.

And let’s be clear who’s on the other side: It’s a bunch of middle-class families who are in financial trouble. They don’t give money to political action committees; they don’t hire a bunch of lobbyists; they don’t take out a lot of newspaper ads; they don’t get a big public relations campaign going. … This is about as lopsided as you can get in Washington. Sen. [Russ] Feingold, of McCain-Feingold, once remarked that the bankruptcy bill should be the poster child for why we need campaign finance reform in America. It’s a great big multibillion-dollar industry talking to Congress, whispering in their ear. …

And then you have views of Joh Bogle who always questions the developments in various forums.

The irony is a large part of the world still does not have basic bank accounts. In the same roundtable pointed above, Mark Hannam of Prospect magazine says:

Half of the world or more is still un-banked. Many communities depend on microcredit for access to finance. The opportunity for growth of financial services is still enormous. Large financial institutions based in the west can carry on growing for a long time without having to lend any more money to over-indebted western consumers.

What lessons should a policymaker take from all these developments? Unfortunately, none of the committees that are set up to review financial systems in developing countries acknowledge these developments. I agree, that the main idea is to kick-start the financial system in these places and by mentioning these risks, it won’t start. But again efforts have to made early on to ensure we don’t have a financial system we are seeing in developed world where it has become a norm- all profits are mine, all losses are yours.

Clearly more thought is needed on the topic.

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10 Responses to “Political economy of finance reversed?”

  1. Jason Whitmen Says:

    Just wanted to say HI. I found your blog a few days ago on Technorati and have been reading it over the past few days.

  2. Money Whirled » Head OfFinance Says:

    […] Political economy offinancereversed? […]

  3. It is hightime that we review financial innovation « Mostly Economics Says:

    […] make work on finance/financial innovation more balanced. Otherwise, finance is always going to be questioned everytime things go […]

  4. mbna access Says:

    […] opposite in places where fin system is developed. It has become so powerful that the entire idea ohttps://mostlyeconomics.wordpress.com/2008/07/17/political-economy-of-finance-reversed/Redirecting to https://www.mbnanetaccess.com/index.html?mnag=1000 […]

  5. Oprea Andrei Says:

    Reddy was right but things are more fit to a working economy with positive growth rates 🙂

  6. Hernando De Soto’s view on this crisis « Mostly Economics Says:

    […] incentives for use. And why do the authorities continue to ignore the developments? Liz Warren had pointed finance indutry is the biggest contributor in in elections. However, all this is too speculative. […]

  7. Financial Oligarchy at its best « Mostly Economics Says:

    […] What is also interesting is all this points to a complete reversal of interest group theory of financial development. This was advocated by Raghu Rajan and Luigi Zingales in their paper and Stephen Haber in this paper. They look at political reasons for non-development if financial systems in developing economies. However, the recent developments and comments from top economists (Solow, Rogoff)  made me write a post whether this political economy is reversed? […]

  8. The Political Economy of Global Finance « Mostly Economics Says:

    […] The Political Economy of Global Finance By Amol Agrawal I am quite fascinated by the political economy literature. The recent piece by Simon Johnson explaining the growth of finance sector is a must read. The famous pieceby Jagdish Bhagwati explores the rise of US Treasury and Wall Street. Then Stepen Haber looks atpolitical economy of financial development which I thought had reversed. […]

  9. daysofmb.com Says:

    Basic bank accounts, also known as starter accounts or introductory accounts

  10. Politics of Financial regulation « Mostly Economics Says:

    […] we see in developed countries after the crisis is reversal of the entire idea. The financial sector is just so powerful that it opposes any reform which could mean more […]

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