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GovernanceXBorders co-editor Phil Mader contributes a review of Wolfgang Streeck’s new book “Gekaufte Zeit: Die vertagte Krise des demokratischen Kapitalismus“, a book which is highly critical of transnational regimes, at least regarding the European Union’s crisis management, at TheCurrentMoment.

One of the things that make blogs particularly interesting are series. The “series” series recommends series at related blogs.

When Daniel Rozas warns, I listen. Rozas forecasted the crisis of microfinance which broke out in India in late 2010, warning as early as November 2009 that Andhra Pradesh was the most saturated microfinance market in the world alongside Bangladesh, and mass defaults could begin any time.

2009:

I can’t predict whether the microfinance bubble I believe exists and continues to grow in Andhra Pradesh and other south Indian states will deflate quietly or burst spectacularly. […] In their pursuit of growth, many MFIs have continued to add large numbers of new customers in Andhra Pradesh and other highly saturated regions – I believe that is irresponsible. […] The spark that sets off a large-scale delinquency crisis can be anything and could come at any time – a rapid drop in economic growth, a populist political movement, a religious decree, or a collections effort gone bad.  One can’t control the spark, but one can control how much fuel that spark can ignite.

Since this February, Rozas has been outlining the scenario of a possible further repayment crisis in a series of posts (links to parts 2 & 3) on the Financial Access Initiative Blog. He says self-regulatory efforts over the past years have been important, but perhaps not enough to stem lending excesses in certain countries (I would agree). Looking at indebtedness and lending at the sub-national level, Rozas reveals a fairly alarming picture in the Mexican state Chiapas, which shows similar patterns to Andhra Pradesh in 2009.

But it is Rozas’ attunement to the political economy of microlending which sets him apart from most sector consultants. Read the rest of this entry »

More than three years after I posted ‘Fair value accounting in retreat?’ on this blog, it seems appropriate to take stock of the results of reform initiatives undertaken after the financial crisis. Just as a brief reminder: In the course of the financial crisis, International Financial Reporting Standards were suspected to have exacerbated the collapse of financial markets. Particularly the use of “fair value accounting” for banks’ financial assets was scrutinized for its contribution to downwards spirals between devaluated market assets and banks’ rising capital requirements. Previously considered as a purely technical matter, accounting principles suddenly became a matter of international politics. The G20, the Financial Stability Board, IOSCO and the two leading standard setters, IASB and the US-American FASB, all got involved in what appeared a busy beehive of reform debates. Three-and-a-half years later, with the financial crisis followed and superseded by the European sovereign debt crisis, accounting principles seem to have returned to their status of “sleeping beauty”. Yet, this impression is misleading. Accounting principles continue to be a crucial link between the reporting of financial institutions and financial market regulation. All the more a reason for reviewing two recent publications which analyse international accounting standards reform and harmonisation.

Read the rest of this entry »

This is the second half of my search for the causes of the microfinance crisis and suicide tragedy in Andhra Pradesh. In my last posting, I outlined the macro causes as I saw them. I found evidence that MFIs were charging borrowers interest rates over and above what they actually could have charged them. I also found that the government failed to regulate despite an evident lack of self-regulation; that is, until Andhra Pradesh clamped down two weeks ago. In this posting I search for micro-level causes.

Since my last post, SKS on Saturday posted profits up by 116 percent y-o-y (read: more than doubled), and also apparently held a secret board meeting over the weekend. You don’t need to be a Marxist to find a steep rise in profits disturbing for a bank which lost at least 17 of its clients to debt-driven suicide in the same quarter. Yet the crisis in AP is far bigger than SKS, and the five biggest MFIs’ have realised this and collectively announced last Friday to restructure distressed loans. Finally. It took nearly two months of suicides, a heavy-handed regulatory clampdown and a media backlash to drive enough sense into the MFIs. The women’s Self-Help-Group movement is also pushing for better regulation. How did we get here in the first place?

The poor are prone to debt traps

The media have caught onto some of the macro issues, but here I will identifiy drivers for the heavy debt burdens and suicides which operate at the micro level. We must be aware that suicide in India is already shockingly common among farmers. But many, if not most victims in AP were small traders, not subsistence farmers, so we’re dealing with a new phenomenon here.

It is no surprise that highly-indebted microfinance borrowers can be driven into debt spirals towards MFIs under conditions of heavy marketing, misinformation, social pressure to join self-help groups, and the vagaries of economic life at the bottom of the social order. If one thing goes wrong (an illness, a crop loss), an apparently sensibly invested loan suddenly turns into an insurmountable debt burden (see these media reports for illustrations of microfinance-funded debt traps). In reality, “India Shining” is home to some of the poorest people in the world. As we saw last week, some microfinanciers are apparently out of touch with this reality. Atul Takle of SKS went on the record telling the Associated Press, “I personally don’t think a person would take her life for 225 rupees ($5.08) a week.” But four out of five people in India live on less than 20 Rupees a day (2007; latest figure I could find).

This (self-drafted, non-exhaustive) list outlines individual causes for the poor taking on unsustainable debt. It shows that there are mulitple reasons for the poor falling into microfinance debt traps, and that most are outside of their control. Read the rest of this entry »

Capitalism as a system transcends borders, and so does the latest capitalist crisis. Sometimes pictures tell a story better than words. A brilliant animated cartoon appeared this summer on youtube, illustrating a lecture by CUNY-based British social theorist David Harvey in which he outlines his explanation of the 2008-20xx economic crisis.

Harvey’s analysis of the structural politico-economic origins and mechanisms of the crisis is poignant. The witty animation brought to life by the RSA is a true delight, regardless of what one may think of his arguments. A certain part of Harvey’s narrative caught my eye in relation to microfinance (more below). But first, let me briefly recap his story (in an unduly simplified manner). Harvey says:

There are five common explanations of the crisis, all of which are somewhat true:

[1] It stems from human nature – predatory instincts, greed, etc.

[2] The regulators failed, therefore institutions need to be reconfigured.

[3] Everyone believed in a false theory – forget Hayek, return to Keynes!

[4] It has cultural origins – homeowning-obsessed Americans and lazy Greeks, your fault!

[5] It’s a failure of policy – too much regulation of the wrong sort.

Read the rest of this entry »

This article first appeared in the Paris newspaper La Tribune on February 9, 2010, and is translated and adapted here with permission of the authors. Paul Lagneau-Ymonet is a member of the Research Group Institution Building Across Borders at the MPIfG.

To date, the organization of securities markets has not yet benefited from the feigned attempts of reform presented by authorities since the outbreak of the current crisis. However, speculative opportunities like the risks incurred also depend on the markets on which one operates. It is for this reason that the coming revision of the European Markets in Financial Instruments Directive (MiFID), which came into effect on November 1st, 2007, is such a considerable challenge.

This Directive reflected an incredible faith in the coordinating virtues of the market – the central idea being that competition between exchanges and other trading venues would reduce transaction costs, increase trading volume and, as a result, lower the cost of capital for issuers. The MiFID notably abolished the ‘concentration rule’, which, in a number of countries (i.a. France), imposed intermediaries to carry out most of their transactions on a single regulated market, so as to concentrate the liquidity and to establish, for each security, a “fair price” known to all. Eventually, the directive has made possible the emergence of various opaque trading venues that challenge more transparent regulated markets.

Reports from the Committee of European Securities Regulators (CESR) and from the French Association of Financial Markets (AMAFI) reveal the extent of the disillusionment. The lower fees that resulted from unleashed competition have only benefited to a few internationally operating banks, namely about ten institutions that are responsible for three-quarters of the financial transactions in Europe. But the end clients – private individuals, in particular – do not fare as well. Read the rest of this entry »

This post is provided by our “guest blogger” Glenn Morgan. Glenn Morgan is Professor of Organisational Behaviour and Associate Dean for Research at Warwick Business School.

The last few weeks have seen a number of news stories indicating that the broad agreement reached by the G20 in early 2009 regarding the regulation of Over the Counter (OTC) derivatives is breaking down. On January 5th 2010, for example, the Financial Times titled ‘Cracks in transatlantic derivatives rules‘. In the UK, the Financial Services Authority and the Treasury published in December 2009, a report on regulation of these marketswhich, whilst couched in supportive language, made a number of criticisms of the Commission of the European Communities document on this topic published in October 2009 .

Meanwhile in the US, the US Treasury is aiming to achieve legislation on this topic; in Congress, the House has agreed a draft bill which differs again in some respects from both the UK and the EU and the Senate is due to consider the issue this month. Most recently, non-financial companies in the EU under the aegis of the European Association of Corporate Treasurers have protested strongly about some of the existing proposals in a letter addressed to the EU Commission on the grounds that they will financially penalize them .

The result is a somewhat confusing situation in which the danger is that regulation will not be coherent across the main financial markets and regulatory arbitrage will emerge, potentially paving the way for a further destabilisation of the global economy.  Many of these debates and differences appear very technical but as I have sought to show in a recent article on ‘Legitimacy in financial markets: credit default swaps in the current crisis’ in Socio-Economic Review, underlying them are major issues of politics and power.

Read the rest of this entry »

The last several weeks have been extremely frustrating for many activists, international organizations and general public. Several international summits have shown that the global governance system was significantly damaged by the global financial crisis. The crisis created uncertainty about the future and made governments of the world’s leading economies careful about their commitments. After the meeting of parties of the UN Framework Convention on Climate Change on 2-4 November 2009 in Barcelona it became clear that the conference of parties to be held in Copenhagen in December was not likely to result in any legally binding arrangement to succeed the Kyoto Protocol. The World Summit on Food Security held on 16-18 November also did not result in any significant binding commitments. Meanwhile, the Food and Agriculture Organization of the UN reports that due to the global economic recession, the number of hungry people in the world will exceed one billion in 2009. In 2008, it was 850 million people. Only the G-20 Summit in Pittsburgh in September 2009 can be seen as a success of international regulatory efforts, at least to some extent. G-8 was transformed into G-20. The general principles of the new global economic architecture were approved. One of such principles is tough regulation of financial markets. Read the rest of this entry »

In 2009, many received wisdoms of late capitalism are crumbling. To mention a few disappointments, which it didn’t take a telescope to see from a mile away,

  • No – we haven’t overcome the business cycle.
  • Sorry – China and India aren’t gonna drag us out of the recession.
  • Nope – deregulation doesn’t bring widespread prosperity.
  • Too bad – wealth doesn’t grow on trees or in banks or hedge funds.
  • Please – add your own favourite here: __________________________

A crisis is a moment in which illusions or expectations fall apart. In the Nigerian novel “Things Fall Apart”, the patriarchal protagonist Okonkwo confronts a world of changing values (colonialism, Christianity) in which he finds he has no leading role left to play. Rather than adapt to these circumstances, he takes his life.

This pessimistic example, however, doesn’t seem to apply to some international organisations in the current crisis. Rather, after years of seeming anachronistic, the World Bank, IMF, NATO and OECD are experiencing something of a revival – notable absentee: the UN.

According to classical (or vulgar?) institutional theory, institutions persist rather statically until some kind of “critical juncture” suddenly occurs, at which point they disappear or reinvent themselves (or are reinvented). As far as critical junctures go, they don’t get much bigger than the 2007 to 20xx? global capitalist crisis. Read the rest of this entry »

It doesn’t happen very often that technical matters like accounting standards make it into the final declaration of a G20 summit, agreed by the heads of government of the world’s leading nations. Nevertheless, yesterday it happened (PDF). After deliberating for two days in the City of London about the appropriate means to cure the most severe worldwide financial crisis since 1929, the leaders of the G20 stated in their declaration on strengthening the financial system

We have agreed that the accounting standard setters should improve standards for the valuation of financial instruments based on their liquidity and investors’ holding horizons…. We also welcome the FSF recommendation on procyclicality that address accounting issues. We have agreed that accounting standard setters should take action by the end of 2009 to … (for more see PDF)

Why did something so mundane make it to the agenda of world politics? While it is certainly the merit of Nicolas Sarkozy’s populist threat to walk demonstratively out of the summit that made bloggers and newspaper writers wonder whether accounting standards could save the G20, the reasons for the G20 leaders dealing with “fair value” and “dynamic provision” are certainly more complex. Some, like David Zaring, also wonder whether the G20 summit produced more than just rhetoric. Read the rest of this entry »

The Book

Governance across borders: transnational fields and transversal themes. Leonhard Dobusch, Philip Mader and Sigrid Quack (eds.), 2013, epubli publishers.
August 2017
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