Academic journal article Journal of Economic Issues

Stock Markets, Rentier Interest, and the Current Mexican Crisis

Academic journal article Journal of Economic Issues

Stock Markets, Rentier Interest, and the Current Mexican Crisis

Article excerpt

The current financial crisis in Mexico has focused attention on the risks for investors of investing in volatile emerging markets.(1) However, there has been little, if any, attention paid to the real risks to developing countries posed by emerging market activity in general and to the current reliance on portfolio investment (PI) inflows in particular. This paper takes up this issue. The paper presents a Post Keynesian theoretical analysis of the domestic macroeconomic and political consequences of the recent strategy of marketing developing countries as attractive sites for PI.

The Problems of Portfolio Investment

Despite the fact that PI can and does provide developing countries with capital, it has two negative, mutually reinforcing effects on these economies: the problems of "constrained policy autonomy" and "increased risk potential." I consider each in turn.

Constrained Policy Autonomy

One of the attractions of PI to policymakers in developing countries is that it seems to entail fewer constraints on domestic policy autonomy than the traditional sources of capital inflows. Direct foreign investment has proven hazardous, as multinational corporations have challenged national sovereignty; and bank borrowing and aid have proven equally constraining, as foreign governments and multilateral lending institutions imposed strict conditions on borrowing governments. However, PI entails restrictions on host country autonomy, although its effects are indirect. Instead of enhancing governments' ability to maneuver, PI can actually restrict the range of viable policy options. Specifically, countries that become dependent on PI inflows need to adopt or maintain policies that secure investor confidence and rentier rewards.

To market the economy as an attractive site for PI, governments may need to maintain interest rates at levels higher than they might otherwise prefer, say, for reasons of promoting industry. In addition, maintaining a viable investment climate may necessitate measures that reduce government budget deficits and otherwise dampen inflationary expectations. While these types of measures are not always problematic, in practice they tend to jeopardize the standard of living of economically vulnerable groups.

Privatization programs also contribute to the creation of an appropriate climate for PI. In addition to securing new capital inflows by creating profit opportunities, they also address investor concerns that government support of particular industries may fuel budget deficits. In addition, measures to liberalize the economy are likely to be pursued or furthered to assure investors that investment efficiency will not be undermined by government intervention. Political repression, particularly involving suppression of labor or popular opposition to government policies, may be undertaken in order to demonstrate to investors that the government has the necessary political will to maintain neoliberal programs.

If governments in developing countries seek to maintain PI inflows, they can be severely constrained in the ex ante sense: the construction of an appropriate investment climate mandates adoption of a fairly comprehensive set of policies. Portfolio investors become the ultimate arbiters of national macroeconomic policy. Investors' "veto power" is not expressed through conspiracy or brute force, of course - or even through formal conditionality agreements - but rather through portfolio reallocation. But the indirectness of the threat or actuality of capital flight does not reduce its power as a constraint on policy autonomy. J. M. Keynes [1933] wrote presciently of the constraining effect on domestic policies posed by the threat of flight. In a world in which even the poorest countries have open capital markets offering highly liquid investment opportunities, investors may "discipline" what they view as errant policymakers through portfolio reallocation. Jamaica's President Manley in 1972-77, French President Mitterand in 1982, and U. …

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