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Financialization in Mexico - Dr. Gregorio Vidal

Financialization in Mexico - Dr. Gregorio Vidal


260 JOURNAL OF POST KEYNESIAN ECONOMICS separations between short-term money markets and longer-term financial markets (Plihon, 2007). The bankruptcy of Lehman Brothers revealed the breadth, diversity, and extension that a single firm can attain within this global hierarchy. Lehman was composed of 2,985 legal entities that operated in over fifty countries. This transnational company with headquarters in the United States had subsidiaries operating under the local legal framework in countries as diverse as Switzerland, Japan, Singapore, Hong Kong, Germany, Luxembourg, Australia, the Netherlands, and Bermuda (Bank for International Settlements, 2010). The markets in which these legal entities participated encompassed multiple financial activities and relationships with companies, banks, and other types of economic activities. Lehman is hardly the exception; Citigroup, for example, currently maintains 427 subsidiaries operating in so-called fiscal paradises alone (Gaggero et al., 2010). As briefly mentioned, the process of financialization has had a profound impact on individual firms. Plihon (2003a) underlines the transition from Fordist capitalism that prevailed in the postwar period to shareholder capitalism in which market-based finances perform the central role and whose central function is the creation of financial wealth by companies (Plihon, 2003a, p. 68). In the same tenor, Orléan (1999) highlights a substantial modification in the financing of large firms, with a notable growth in the importance of stock markets and the participation of institutional investors as a fundamental characteristic of financialization. In the United States, institutional investors held 3.1 percent of all stocks in 1952, while in 1996, this proportion had risen to 37.2 percent. By 1994, institutional investors held 64.3 percent of the capital of the fifty largest U.S. companies and had become the largest actors in terms of daily trading volume of the New York Stock Exchange (Orléan, 1999, pp. 211–212). Guttmann (2009) proposes that the central attribute of present-day capitalism is financialization, which is defined by Epstein (2005, p. 3) as the “the increasing role of financial motives, financial markets, financial actors and financial institutions in the operations of domestic and international economies.” Many authors also see a clear evolution toward the financialization of the global economy. Guttmann (2010, p. 192) considers the development of finance-led capitalism to be the reaction by segments of the financial world and of many of the largest corporations to the rupture of the Bretton Woods monetary system. One of its most noteworthy political expressions was the Reagan Revolution, the conservative movement that prompted deregulation and privatization and stimulated the reactivation of the U.S. economy through massive tax cuts for corporations together

FINANCIALIzATION IN MEXICO: TRAJECTORY AND LIMITS 261 with higher subsidies for industry through military expenditures and limitations placed on unions. Plihon (2003b) contends that the 1987 market crash deepened financialization and induced many corporations to modify their operating conditions, with the central objective being the maximization of share prices. During the 1990s, the growth and the constitution of firm profits, including those of nonfinancial firms, became more dependent on over-the-counter markets, off-balance-sheet activity, and cross-border operations that created a new relationship with emerging markets and the global economy. In addition to Plihon’s observation, the massive incorporation of workers and capital of the former Soviet bloc into the global capitalist market opened new frontiers for the expansion of financial and nonfinancial activities. This was also true of the trade and financial opening of much of Latin America (in addition to other regions) during (principally) the 1980s and 1990s. Yet, unlike the former Soviet bloc, Latin America was already inserted into the global capitalist economy. This period saw the incorporation of these economies into the globalized financial sphere. The exploitation of new markets for financial activity generated significant one-off earnings; however, the impact of these on the firms’ balance sheets and stock market values was in many cases quite substantial, eventually defining their competitive position. Such international expansion has been most evident in the intensive processes of M&As. Because M&As modify companies’ stock market value, are financed through multiple types of debt securities, and provide corporations with the opportunity to roll out new debt issues, they represent one of the most important expressions of corporate investment. A large part of M&A operations are cross-border, constituting one of the most relevant forms of foreign direct investments (FDIs), which has been expanding since the beginning of the 1990s (Vidal, 2004, 2008). Both the multiplication of M&A operations and FDIs are significant aspects of the evolution of corporate financial management (Vidal, 2004, 2009b). The internationalization of banking systems, operating under common FDI dynamics, has been particularly salient for the economic performance of Latin America, and Mexico in particular, in recent years. After multiple banking crises and public bailouts, financial systems, credit, deposits, securitization, and financing have been reconstructed under conditions of increasing centralization and constant wealth transfer. Many of the largest developing economies have issued massive amounts of government debt at the local and national levels, which have been purchased by domestic and international banks and institutional investors. As developing economies

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