High liquidity and reduced credits: An important cause of Economic Recessions in Dev eloping countries

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High liquidity and reduced credits An important
cause of Economic Recessions in Dev eloping
countries

• Paper prepared for the Conference
• Re-regulating global finance in the light of the
  global crisis
• by
• Noemi Levy

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BACKGROUNDS OF THE ACTUAL CRISES

• A rise of capital index prices (financial
  inflation ?pF) along financial deepness induced
  a credit boom channeled to consumption and
  housing
• Financial expansion was stopped by the
  limitation of DC productive capacity (low
  investment, income redistribution in favor K
  owner) which demanded increased credits to
  support economic expansion
• DeC face different crisis, not anteceded by
  credit booms. Economic recession was led by
  reduction of external demand (financial crisis
  can unfold)
• Main problem of DeC A dichotomy of high levels
  of liquidity and reduced finance.

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• HYPOTHESIS
• Financial liquidity (and innovation) have limited
  effects in DeC (credit booms are lows low with
  reduced short term impact on economic growth)
• New financial structure eliminated domestic
  mechanisms to revert economic growth in DeC
• Economic neoliberal policies based on market
  mechanisms cannot solve DeC crises (e.r
  stability, higher interest rate gaps with DC and
  economic globalization (free trade production
  and finance).
• We start discussing
• Different financial structure ant its impact
  finance

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I. FINANCIAL STRUCTURES, LIQUIDITY AND FINANCE

• i) Anglo-Saxon system Capital markets rules
  with high liquidity
• Market mechanisms need to get right prices
• Deregulation and globalization
• Privatization of the economy
• Financial Structures
• Capital market deepness (?capitalization ?
  turnover ? pF)
• Financial deepening (M3-M1/ GDP)
• Macroeconomic stability ? maximizes economic
  growth

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• ii) The bank-based system banks main providers
  of finance with limited liquidity
• High state intervention
• Monetary policies finance priority sectors w/
  low stable prices ? credit channeling policy
• Active fiscal policies priority sectors,
  anti-cyclical policies
• Price differentiation
• Compensatory mechanisms
•   Financial structural characteristic
• Strong public regulation, financial segmentation
• Limited capital mobility (market mechanisms are
  blocked )
• Strong relation between government, banks and
  enterprises

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• iii) Capital Market based system in the
  Financial led capitalist system (1980s)
• Financial segmentation and Q regulation abolished
• Capital mobility raised in search of financial
  gains
• Exchange and interest rate risks shifts to the
  private sector ? ? Financial innovations
  (Derivates Securitization)
• Big banks financial corporations (supranational
  entities) with limited domestic control
• Institutional investors (Pension funds, mutual
  funds, insurance companies, investment trusts,
  etc.) increased financiarization

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• Financiarization
• Financial inflation DFS gt ? money market
  outflows
• (FS remain in the K market, not linked to
  finance)
• Finance wealth? redistribution of income in
  favor K owners
• Financial Securities modify agents behavior
  institutional investors banks, non financial
  corporations and families
• Consequences
• Redistribution of wealth in favor of agents
  possessing FS
• Reduced finance to domestic small medium firms
• Poverty increases
• Big gaps between DC, DevC and especially w/poor
  countries
• DevC reduced access to counter-cyclical policies

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II. MEXICAN FINANCIAL ORGANIZATION IN THE
FINANCIAL LED SUSTEM

• Deep institutional changes
• Bank Deregulation disappearance of compensatory
  mechanisms
• Financial deepening bond and capital segments
• Trade openness Financial market globalization
• Promotion of institutional investors
• more importantly after NAFTA
• Adoption of the North-American Financial System
• Derivatives Securitization
• FDI deregulation

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• High Liquidity and reduced finance

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Two periods of financial inflation Financial
innovation limited to external K movement and
Mexican K-based remained weak

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Financial deepening increased i) After 1994
crisis lead by non bank instruments
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Private non financial sectors finance decreased
in a context of financial and capital deepness
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• Finance to private non financial sectors
• Main finance sources
• Favored activities

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Finance to private non financial sectors dropped
Commercial bank credits shrank New domestic
sources of finance External finance did not
increase
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Enterprises the most affect sector export led
model does not leave space to domestic
enterprises and high uncertainty became an
important issue
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• Why finance to private non-financial
  enterprises shrank
• No competition within institutions of the
  financial sectors
• Bank credit cards have high interest rates
• Small medium enterprises have low access
  depended in supplier finance

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Financial Institutions specializationEnterprises
low access to bank credits (supplier finance
important for small medium enterprises)
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Consumption credit card costs are very high and
development banks concentrated in housing
finance. High commercial bank income margins
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• Worrying signs
• Bank financial indexes
• Productive Structure
• External capital movement

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Bank index start to show some fragility (Default
index)
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The Mexican productive structure changed
internal market shrank (Reduced internal market,
Led Export economy w/ negative net exports)
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External capital flows highly unstable Higher
current account deficit unstable FPI and FDI
flows
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• Counter-cyclical economic programs
• PICE (Program to increase employment and economic
  growth) October 2008
• Program to support families economies and
  employment (January, 2009)
• The spirit these programs remain neoliberal
• Exchange rate Stability market
  mechanisms
• No policies to strengthen internal
  market

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Exchange rate stability policy External reserves
fall and FMI debt

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• Loose Monetary policy (2009) Interest rate
  objective had not strong impact on finance

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• Other policies
• Integral reform to PEMEX the construction of
  one refinery Postponed
• Collective Transport (1300 millions of
  dollars). Not done
• Program to support families economies and
  employment (January, 2009). Insufficient to
  increase economic growth .
• Supported corporations linked to the external
  market (car industry)
• Deters unemployment in big enterprises
  link to the external market
• Price squeeze of goods that undergone
  before strong rises (electricity and gasoline)
• Social Policies
• Extended coverage of social security from 3 to 6
  months
• Ability to retire savings from workers own
  pension funds

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• Fiscal policy No serous contra-cyclical measure
• Based on exchange rate market intervention and
  more foreign trade Market based policies -
  Tariff reduction ? - Exchange rate
  stability (central bank sold reserve to prevent
  exchange rate devaluation

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Conclusions

• Need to reform the Mexican Financial System
  increasing links between bank and non-bank
  financial institutions and enterprises
• Excess liquidity needs to be limited
• External capital mobility need to be
  restricted (taxes)
• Banks ownership need to be domestic
• Institutional investors need to be
  re-organized
• Public bonds need to be reduced
• Financial segmentation needs to come
  back (increase capital reserves for investment
  activities)
• Limit non-bank financial institutions
• Active fiscal policies Priority sectors

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• New Monetary instruments
• Reserve requirement in case of excess
  liquidity
• Interest rate cups, commissions and fees
  need to be limited
• Reintroduce direct central credit to
  government
• Compensatory mechanisms are required
• Development bank
• Government guarantees for domestic
  productive entrepreneurs
• Reduce external dependence ? internal market
• Distribution of income to be changed in favor of
  salaries and production