Book Review: Playing with Fire: Deepened Financial Integration and Changing Vulnerabilities of the Global South

Yilmaz Akyuz, Playing with Fire: Deepened Financial Integration and Changing Vulnerabilities of the Global South, Oxford University Press, 2017.

Book Review

Yilmaz Akyuz is one of very few people with years of experience analysing the global financial system both at the academic as well as at policy-making levels. He is presently a Chief Economist with the South Center, which is an inter-governmental think-tank of the global South based in Geneva. Until 2003 he was for a long time the Director of the Division on Globalization and Development Strategies at the United Nations Conference on Trade and Development (UNCTAD), and the principal author of its annual Trade and Development Report.

Playing with Fire, published by the Oxford University Press in collaboration with the South Centre, brings together several essays written by Akyuz on the theory and practice of the development of countries of the global South. He gives a detailed analysis of the integration, since early 1990s, of the economies of the emerging and developing economies (EDEs) into a globalised system of production, trade and finance.  What did this involve? It involved the EDEs to liberalise, to open up, their markets for trade and investments.  In this book Akyuz focuses on investments. Liberalisation allowed for a greater freedom for international lenders and investors to enter the EDE markets, and for the EDEs to borrow and invest in global financial markets.  The latter is largely confined to the bigger EDEs such as China, India and Brazil. Most of Africa, on the other hand, are net borrowers and provide their resources to be exploited by foreign corporate investors. Banks act as agents to facilitate the movement of capital.

Part I of the book is about the “Financial Crisis, Policy Response and the Global South” that deals with a broad range of issues, focusing on the “neo-liberal fallacies and obsessions”, and spill over effects of the global financial crisis on the global South. Part II is about Internationalization of finance capital and increasing vulnerability of EDEs to deepening integration and global boom-bust cycles.  Almost all EDEs, Akyuz argues, are now vulnerable irrespective of their balance-of-payments, external debt, net foreign assets, and international reserve positions although these play an important role in the way these shocks manifest and impact on them. This is a matter for concern since the multilateral system still lacks mechanisms for orderly resolution of financial crises with international dimensions. And Part III is about Foreign Direct Investment (FDI) focusing on the “Myths and Realities” about the FDI.

 Myths and Realities about the FDI

Of particular interest to Africa is the role that FDI plays.  Akyuz argues that the FDI “is one of the most ambiguous and the least understood concepts in international economics”. It is often presented as a long term, stable, cross-border flow of capital that adds to productive capacity, helps meet balance-of-payments shortfalls, transfers technology and management skills, and links domestic firms with wider global markets.  But if you look at the reality on the ground, a different picture emerges. FDI is essentially about control than development. In fact, often there is no transfer of capital. I agree with Akyuz. When working with the South Centre between 2004 and 2009, I was involved in the so-called “intellectual property rights” (IPRs). In my book “Trade is War” I describe what I called “IP Wars” giving the example of the pharmaceutical industry. I found that during the 1970s and 1980s many countries in the South – such as China, India, Brazil as well as African nations – had encouraged manufacturing of local generics. But under IPS and under the guise of FDIs, the pharmaceutical conglomerates are trying to stifle local knowledge systems, if not kill them outright.  I also agree with him that what is commonly designated as FDI contains speculative, “mythical” components. The longer-term impact of FDI on the balance of payments is often negative.

Playing with fire” is an apt description of the risk that the developing countries take in inviting foreign investments. This is not to say that the FDI should be barred by Africa, but it is to underscore the point that policy-makers must be wary of the hidden ghosts lurking ominously behind the mask of FDI. FDI policy should to be embedded in a carefully designed industrial strategy and its implementation, monitoring and assessment. Akyuz argues that FDI should not be used as a way of meeting balance-of-payments shortfalls: the long-term impact of FDI on external payments is often negative even when you seek FDI to encourage export-oriented production. He also warns against uncritically signing the so-called Bilateral Investment Agreements (BITS). Only a few developing countries signing BITS benefit from them. In a large majority of cases there is no reciprocity in deriving benefits from the rights and protection granted to foreign investors under the BITs.

The decoupling debate

There is, however, one issue that Akyuz needs to clarify further, and that is the issue of “decoupling” from the global system of production and international finance. He argues:

  1. “Given their significantly deepened integration into the global economy, notably the international financial system, EDEs cannot really restore stability and growth with their own action” (p.17)
  2. “Decoupling … would be quite implausible in view of increasingly closer integration of the EDEs.” Further, on the same page: “Until 2013 the IMF was a major advocate of the decoupling thesis … [stating] that the dependence of growth in the South on the North had significantly weakened.”  However, Akyuz adds, “[t]he IMF ‘refined’ its position on the question of decoupling [in a paper] ‘Resilience in Emerging Market and Developing Economies: Will it last?’ “.  (p.61)
  3. The EDEs “have become highly vulnerable to external financial shocks as a result of their deepened integration into the international financial system” (p.79)

There are several logical and epistemic contradictions in the above statements made not only by the IMF but also by Akyuz. One would have thought that if the “deepened integration” of the EDEs in the global economy is a reason why they “cannot really restore stability and growth with their own action”, then it is imperative that the EDEs “decouple” themselves from such a system precisely in order to “restore stability and growth with their own action.”  The prescription should follow the diagnosis.  Venezuela’s economy may be “deeply integrated” in the system, but (following the example of a tiny country like Cuba) it is trying both under Hugo Chavez and now under Nicolas Maduro to “decouple” the country from the hold of American corporate hegemony.  It is a long battle, but it can be won.  Why? Because development is resistance.[1]  That is how Africa won its political independence from colonial powers. That is how Africa will liberate itself from neocolonialism in order to work towards an auto-centered development.  Akyuz is right when he says that FDI is essentially about control than development. In fact the entire global system of production and finance is about politics of power, not about economics of development.

@Yash Tandon

1 November, 2017

[1] See: Yash Tandon, “Development is Resistance”, Africa Development, Vol. 40, No 3 (2015)

 

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