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New Finance Papers

Leslie Elliott Armijo

September 2014

Seven recent publications illustrate the breadth of theoretical approaches that inform my work. All touch, in one way or another, on financial sector regulation and governance, which is the public policy issue arena that has fascinated me the longest. The order of presentation moves from the more explicitly theoretical pieces to the more directly policy-relevant publications. (Please see Publications for draft versions.)


* “Equality and Regional Finance in the Americas,” Latin American Politics and Society, 55:4, Winter 2013, pp. 95-118.

This article melds neorealism and constructivism to understand the presence (and absence) of transnational and multilateral financial cooperation and regulation in the Western Hemisphere in the late 20th and early 21st centuries. The interstate distribution of capabilities in the hemisphere, both overall and within the capital markets, suggests that the United States remains a clear hegemon. Nonetheless, Brazil’s government quietly has pursued initiatives to define the relevant international region as South America only, thus awarding itself primacy. Meanwhile, until his death in 2013, Venezuelan President Hugo Chávez sought to create a circum-Caribbean political and economic alliance of smaller, left-leaning countries, a grouping in which his country could lead. Within these three overlapping definitions of the region, policymakers in each would-be leader state attempted construction of cross-border financial links consistent with their dominant national visions of equality and justice. Each national financial ideology emphasized “equal access” for borrowers, but U.S. policymakers conceptualized access in terms of free markets, while their Brazilian and Venezuelan counterparts highlighted a necessary role for the state in extending access. U.S. and Brazilian regulators employed the language of equality to develop “equal legal protections” for investors and savers, although North Americans attended more to the rights of multinational investors, while Brazilians in contrast only applied this concept to the rights of minority shareholders. Finally, the idea of “equal policy space” for national governments was entirely absent from the U.S. debates, but central to the international regulatory frameworks envisioned by both the Brazilian and Venezuelan governments. Policymakers in each country attempted to shape regional financial ties in ways consistent with their power capabilities and ideological visions.


* “Absolute or Relative Gains? How Status Quo and Emerging Powers Conceptualize Global Finance” (with John Echeverri-Gent). In Thomas Oatley and William Winecoft, eds. Handbook of International Monetary Relations. Cheltenham: Edward Elgar, 2014, pp. 144-165.

This state-of-the-discipline handbook chapter contrasts the views of three groups of actors on hot button contemporary debates over global finance and money. Most U.S. economists, economic policymakers, and business leaders are economic liberals, for whom it remains axiomatic that free markets will function efficiently (that is, at the lowest cost in resources) and effectively (in other words, achieving socially desirable results), absent perverse regulatory incentives. Academic social scientists in the U.S. and Western Europe, as well as some policymakers, especially those associated with multilateral organizations, incline toward liberal institutionalism, emphasizing the virtues of having well-designed institutions to channel clear-eyed, self-interested cooperation. Opinion leaders in both of these first two groups are predisposed to see absolute gains for all parties as the consequence of financial globalization. In contrast, emerging economy policymakers are more skeptical, as most begin with a cognitive map that emphasizes power inequalities and relative gains. Opinion leaders in emerging economies are, by and large, economic realists. We illustrate these pervasive underlying mental maps via a selection of recent academic and policymaker analyses of three contentious issues in international financial governance: capital account liberalization, the key currency role of the U.S. dollar, and the lessons to be drawn from the international financial crisis of 2008-09.


* “The Public Bank Trilemma: The BNDES and Brazil’s New Developmentalism.” In Peter Kingstone and Timothy Power, eds., Democratic Brazil Ascendant. Pittsburgh: University of Pittsburgh Press. (under review).

This chapter plays off of the image of the monetary trilemma, or impossible trinity, much beloved by analysts of the international political economy of money. The impossible trinity of global finance states that a national policymaker cannot simultaneously enjoy an open external capital account, domestic monetary policy autonomy, and a fixed exchange rate. An analogous impossible trinity exists for policymakers in a contemporary democracy attempting to manage a domestic industrial development bank. The chapter recounts the saga of the recent accomplishments of—and widespread political attacks on—Brazil’s National Economic and Social Development Bank, currently the second largest of its kind in the world (after China’s, of course). The analytical framework draws on the managerial difficulties for the BNDES president and his boss, the finance minister, associated with balancing the often conflicting imperatives of Expertise (that is, allowing technocrats to decide how the bank should allocate its funds), Democracy (responding to political directives from the president and legislators, who are in turn sensitive to public protests over dams, BNDES loans to transnationals, and similar issues), and Markets (in other words, supporting rather than undermining the private financial system, and not simply by using private banks as conduits to on-loan credits from the BNDES itself).


* “The Systemic Financial Importance of Emerging Powers” (with Laurissa Muehlich and Daniel Tirone). Journal of Policy Modeling, 36, Supplement 1, 2014, pp. S67-S88.

This paper takes seriously the notion that a country’s national financial capabilities are a significant contributor to its overall international power profile, but suggests that these capabilities are multifaceted, and have not been well-measured. We look at two standard relative power indices—the Composite Index of National Capabilities (CINC), calculated by scholars at the University of Michigan for “major powers” reaching back two centuries and the Contemporary Capabilities Index (CCI), an updating of the CINC, which employs the same methodology, but substitutes more appropriate contemporary indicators for four of the six components. For example, for technological prowess the CINC uses urban population and iron and steel production, while CCI substitutes industrial value-added and share of world telephone lines. In addition, we construct three new indices getting at diverse aspects of international monetary and financial influence: the Correlates of Monetary Capability Index (CMCI), focusing on international currency power (reserve currency status and related dimensions); the Share of Financial Stocks Index (SS), which measures a country’s ownership share of total global financial assets; and the Share of Financial Transactions Index (ST), which calculates a country’s importance in global financial markets and as an intermediator of cross-border financial transactions. We examine 180 countries during 1995-2010, finding that the U.S. displays a high and stable systemic importance across all five indices. An increase in the share of the BRICS countries, especially China, mirrors a strong decline in the global weight of Japan, which nonetheless remains a senior financial power. We also track relative declines in other advanced industrial countries, excepting Germany. We currently are refining our data set in order to support further studies, including by other researchers.


* “Theorizing the Financial Statecraft of Emerging Powers,” (with Saori N. Katada). New Political Economy (in press). Online publication January 13, 2014, pp. 1-21. DOI: 10.1080/13563467.2013.866082

Rising multipolarity in the contemporary international system has been accompanied by the increasingly sophisticated use of financial statecraft (FS, defined as the conscious use, by national governments, of international financial levers to achieve foreign policy purposes) by emerging powers, including countries such as China, India, Brazil, Argentina, and Venezuela. We extend the analytical framework developed by David M. Andrews (2006) to capture the ways in which developing countries employ FS, distinguishing three major dimensions, each of which constitutes a continuum, but is easiest to conceptualize in terms of its dichotomous endpoints. The aims of FS may be defensive (Andrews terms this “inward-oriented”), intended to shield the user’s economy or polity from financial and monetary disturbances, ranging from crises to sanctions, originating abroad. FS may also be offensive (a.k.a. “externally-oriented”), and aimed at securing international political or economic advantage for the country, including via the extension of sovereign-to-sovereign credits or promoting regional currency stabilization schemes. Financial statecraft also divides into that targeted bilaterally (from debt defaults to financial sanctions) and systemically (such as capital controls or active participation in global financial governance). Finally, FS may deal with international finance (credit, investment, and the regulation thereof) or money (reserve currency, trading currencies, and the level and characteristics of exchange rate regimes). We find that recent shifts in relative international capabilities have permitted major emerging powers to move from relying exclusively on the bilateral and defensive FS options of the weak, such as debt defaults and nationalization of foreign direct investments, to FS options that are increasingly assertive and bilateral, such as extending foreign aid or sovereign credits themselves, or are offensive but targeted systemically, such as regional currency cooperation or collective activism in global fora, as illustrated by the willingness of the BRICS countries to jointly lobby for enhanced shares and voting rights at the International Monetary Fund or World Bank.


* “The Emerging Powers and Global Governance: Why the BRICS Matter” (with Cynthia Roberts). In Robert Looney, ed. Handbook of Emerging Economies. New York: Routledge, 2014, pp. 503-524.

Does the increasing presence of non-traditional powers in global governance organizations actually alter outcomes? If not yet, should we expect it to anytime soon? We argue that the composition and practice of international governmental organizations (IGOs) constitute non-trivial leading indicators of international relations to come. Focusing on the collective behavior of the recently-established formal IGO created by the BRICS countries (Brazil, Russia, India, China, and South Africa), which held its first leaders’ summit only in early 2009, we suggest that international institutions create path-dependency and, despite the oft-emphasized disparities and rivalries among the group, demonstrate a rather surprising record of substantive cooperation. The chapter examines joint behavior in the two issue arenas of security cooperation and global financial governance. Sitting as non-permanent members in the U.N. Security Council, Brazil and India often aligned their votes with China and Russia, even on controversial issues such as the U.S. bombing of Libya—and despite the fact that Western permanent members such as Britain and the U.S. were in fact more supportive of UNSC membership for these democratic BRICS. In global finance, the BRICS have issued carefully-worded joint declarations calling for a greater multiplicity of international reserve currencies (although, at China’s insistence, stopping short of explicitly promoting the renminbi) and greater representation in the international financial institutions such as the IMF and World Bank. There are a great many reasons to predict that the BRICS grouping will fade or even collapse (although this seldom occurs with IGOs), yet perhaps just as many to believe that each of the members may find it useful to continue and, more importantly, that the group’s actions may be consequential. For example, all four of the other members feel both threatened by China, whether militarily, economically, or both, and underappreciated by the G7 status quo powers. They thus imagine that by cooperating with China they may be able to bind its fortunes to their own. These hopes of non-zero-sum containment may be pipe dreams. Nonetheless, the results have created real institutions, from a host of new transnational bodies stimulating commerce, academic exchanges, and the like, to the very recently-established New Development Bank, headquartered in China but with capital and management split among all five.


* “Introduction” and “Lessons from the Cases” (both with Carol Wise and Saori N. Katada) in C. Wise, L.E. Armijo, and S.N. Katada, eds., Unexpected Outcomes: How Emerging Economies Survived the Global Financial Crisis, Washington, D.C.: Brookings Institution, forthcoming 2014.

Confounding most expert opinion in both the global “North” and “South,” most emerging economies (EEs) in Asia and Latin America survived the global financial crisis of 2008-09 surprisingly well, so much so that in some instances their less-inhibited leaders (such as Lula and Putin) were inspired to boast about how much better their economies had performed than those of the advanced industrial countries. While the quick rebound of most EEs in these regions—although not in Eastern Europe—is indisputable, explanations have proliferated. Our framing chapters to this collection of country case studies by prominent political economists articulate, then attempt to evaluate, four broad explanatory themes, each of which has ideologically-committed partisans. First, we find that those who emphasize the protective role of prior neoliberal macroeconomic reforms, including macroeconomic stabilization and the reform of public accounts, identify a factor that was almost certainly necessary. At the same time, a record of public sector fiscal responsibility did not protect countries in East Asia at the time of the Asian financial crisis of the late 1990s, suggesting that other independent dimensions also played a role. Second, examination of prior financial reforms suggests that, neither the countries whose policies most wholeheartedly embraced free markets (such as Mexico), nor those with the greatest state repression of financial markets (China, Argentina) subsequently performed as well on strictly financial measures (such as credit extended to the private sector and the share of non-performing in total loans) as countries that steered a middle course (Korea, Chile, and more surprisingly Brazil and India) by encouraging domestic bank liberalization and competition while maintaining substantial policy space for government crisis responses, including both countercyclical macroeconomic policies and emergency capital controls. Third, although trade liberalization has many advocates, and seems clearly related to postwar global growth, we did not find evidence plausibly linking either export-promotion or intentional trade diversification to an easier ride during international financial crises. Finally, two fortuitous factors, neither the result of clever or foresighted prior policy reforms in EEs, smoothed the recovery. These were the legacy of high commodity prices in the first decade of the 21st century, which facilitated the buildup of foreign exchange cushions, mainly in Latin America, and historically low interest rates in the advanced countries, which subsequently were eased further as a crisis-response there. Low interest rates in the core economies put EEs in the somewhat enviable position of having to worry about excessive capital inflows, rather than having to cope with the even more destabilizing policy challenge of capital flight. The policy implication of the analysis would seem to be more or less as follows. Pro-market reformers are mostly correct about the economic sources of innovation, stability, and growth. However, when financial markets spin out of control, as they periodically and inevitably do, then decisions about rescue packages will be political. It therefore behooves EE governments, when and if they are able, to retain some policy options, even though these (like all other forms of insurance) are never without costs, which in this case are themselves both economic and political.