Financial Statecraft and its Limits in the Semi-Periphery

Over the past decade, two, intertwined research agendas on international financial subordination (IFS) and subordinate financialization (SF) have proposed to identify how an increasingly finance-dominated global capitalism incorporates the (Semi-)Peripheries.

The IFS research agenda recognizes that a “subordinate” national currency comes with a risk premium increasing the costs of financing public debt – in other words, the current, US dollar-based currency hierarchy acts as a structural fiscal constraint in the Global South, limiting the scope for badly needed public investments. Foreign capital – in the form of foreign currency-denominated sovereign and private debt-, foreign aid, and foreign direct investment – is then touted as a solution to this artificial and unfair developmental constraint.

The SF agenda examines how this straightjacket on fiscal space has been further compounded with the liberalization of global capital mobility over the past forty years, diffusing credit-based accumulation strategies from the Core to the Peripheries: the financialization of (semi-)peripheral economies radically misallocates financial resources from socially and environmentally vital public goods and transformative industrial policies towards developmentally regressive strategies of accumulation driven by speculation and asset-price inflation.

Programmatic visions for liberating (semi-) peripheral economies from the dual constraints of a national fiscal space suffocated by the global currency hierarchy and globally mobile capital flows which deepen financialization are underdeveloped. Two scales of action are plausible: At the international level, de-dollarization is promoted by the BRICS bloc, but it remains uncertain what forms of international financial solidarity and collaboration, if any, will materialize under its aegis. The national level comprises an alternative scale as the State continues to be perceived as the most likely candidate for ringfencing domestic social, environmental, and developmental objectives from the pressures of global capital mobility and the structural constraints of the global currency hierarchy.

In a recent co-authored piece with Pınar E. Dönmez, we study the politics governing the management of money in Hungary and Turkey, two semi-peripheral economies where the executive has built a vast array of direct and indirect tools to intervene in monetary policy, retail banking and credit allocation to manage financial subordination.

It would be tempting to equate (semi-) peripheral economies with passive states dispossessed by global capital mobility and financialization. Contra this narrative, we observe that over the past decades, governments in many developing countries have developed new forms of political control over money not despite, but because of their exposure to- and previous experience with- debt crises, capital flight and foreign exchange volatility. Enhanced public interventions have often been necessary to manage the structural risks borne by economies which entered global capital mobility from a structurally weaker position due to their subordinate position in the global currency hierarchy. But an expansion in public control over finance should not be confused with de-financialization: credit-based accumulation strategies are often economically attractive for incumbents to boost GDP, while they also enable new forms of political control over the social allocation of credit, which stabilize patron-client relationships between state and particular social groups while further deepening capitalist social relations and the exploitation of subordinated classes.

We call financial statecraft these emerging forms of state power, and we distinguish between two forms: defensive financial statecraft groups political interventions which aim to regovern finance, limit the macro-economic destabilizing effects of exposure to financial risk and subordinate the process of finance-based accumulation to domestic political imperatives. By contrast, offensive financial statecraft describes policy interventions to govern society through finance by strategically deepening financialization: centralized executive control over credit conditions, interest rates and the social allocation of credit enables incumbents to establish rentier social contracts between state and society to stabilize their political regimes. Since the 1997 Asian financial crisis, many (semi-) peripheral economies have engineered both defensive and offensive forms of financial statecraft to regovern finance and govern society through finance.

Our two cases, Hungary and Turkey, represent a particular form of semi-peripheral financial statecraft we call statist authoritarian financialization (AF). Under AF, the executive directly shapes monetary and macro-financial policy by imposing its prefered interest rates and macroprudential regulations to Central Banks. Simultaneously, the executive also uses moral suasion, or simply nationalizes private banks to monetize government debt, and force banks to lend at preferential rates to discrete groups of households and firms. Under AF, the executive develops a “financial vertical” which blends formal and informal instruments in an attempt to politically control the entire domestic circuit of credit from the Central Bank down to retail banks.

However, without provisions for democratic accountability and under the conditions of capitalist accumulation and exploitation, such an expansion of governmental control doesn’t democratize money as a public good: Similarly to natural resource rents, unaccountable, centralized political control over money merely cements a political economy of rent-based (in this case subsidized credit-based) social contracts between incumbents and discrete, politically salient social groups to stabilize anti-democratic, authoritarian regimes.

We draw on the works of Poulantzas, Offe and a tradition of non-reductionist Marxist state theorists to analyze the contradictions of a statist authoritarian mode of managing IFS and SF: instead of stabilizing a national economy, the expansion of executive political control over the management and social allocation of money in regimes which simultaneously deepen credit-based accumulation only internalizes ideological and class conflicts within the state apparatus. These tensions are masked when global liquidity is cheap, but when it contracts, painful trade-offs appear between the fiscal solvency of the state and political pacification maintained with subsidized lending. These tensions materialize within the state as political conflicts between the Central Bank and the executive, torn between the objectives of price stability and fiscal solvency on the one hand, and the financialization of households and firms favored by incumbents  on the other. The simultaneous management of public and private debt with the same policy instruments pose zero-sum distributive conflicts given that sovereign debt also forms a key collateral for private credit.

We detail the consolidation and limits of financial statecraft and authoritarian financialization in Hungary and Turkey over the past two decades, analyzing how changing global liquidity conditions between the early 2000s and the 2020-22 Polycrisis have affected the state’s management of money.

In both countries, financial crises in the early 2000s incentivized public interventions which momentarily consolidated a centralized system of political control over money managed by the executive from the mid- to late 2010s onwards. Soon, “defensive” forms of financial statecraft were revamped into “offensive” tools, allowing the executive to ride the wave of cheap global capital liquidity by deepening credit-based accumulation, which enhanced GDP growth and co-opted large social constituencies via subsidized lending.

The semblance of an economic miracle broke down in both cases as soon as global credit conditions worsened: the hitherto expanded and centralized executive control over money proved unable to simultaneously manage public debt and the financialization of the private sector.

Faced with this dilemma, Hungary and Turkey first followed different strategies: In the context of peak global inflation, and the resulting interest rate hikes in Core Central Banks in 2022, a disinflationary power bloc prevailed in Hungary between the executive, non-tradable domestic capital factions, and  households hurt by inflation. For Viktor Orban, this meant sacrificing large-scale subsizied lending programs for households and SMEs which had previously played a crucial role in stabilizing the Fidesz regime.

In Turkey, a narrow power bloc between Erdogan’s hyper-presidential regime, export-oriented SMEs, and the construction sector maintained a loose monetary policy against the resistance of the Central Bank and the interests of wage-earning households hurt by inflation. In the second half of 2023, Erdogan sidestepped this strategy as the costs on the sustainability of public debt proved overwhelming, and even exporting firms were hurt by rising intermediary import costs due to hyperinflation and collapsing exchange rate: thereafter, Turkey signalled a similar approach to Hungary’s conversion to an orthodox crisis-management strategy but at the time of writing, its full adoption and impact are yet to be seen.

In fair weather, a dramatically expanded political and institutional apparatus empowered the Hungarian and Turkish executives to centralize control over the domestic circuit of money, giving the illusion that semi-peripheral financial statecraft had managed to simulatenously contain the destabilizing effects of global financial mobility, while harnessing credit-based accumulation for cultivating patron-client relations to help the political stabilization of these regimes. The dramatic shift in global credit conditions in 2022 lifted the veil over this illusion: no matter the expansion of executive control over the domestic management and allocation of money, a global liquidity contraction forced these regimes to prioritize fiscal solvency and the exchange rate by opting for austerity and aggressive interest rate hikes, which undermined their capacity for pacifying wide cross-sections of society via subsizied credit.

The Hungarian and Turkish pathways contain multiple lessons which resonate in the wider Global South.

A first lesson is that without radically new political institutions and policies ensuring democratic accountability, an expansion of centralized state control over money ensures no progressive alternative to neoliberal forms of credit-based accumulation and only deepens finance-based accumulation strategies elaborated under neoliberal capitalism. Instead of using money for socially and environmentally progressive causes, incumbents in the Global South may find the developmentally regressive logic of using subsidized credit for boosting a finance-insurance-real estate-construction nexus difficult to resist given the promises of short-term economic and political dividends.

A second significant lesson lies with the limits of strictly national strategies to manage the constraints of the global currency hierarchy and the risks of global capital mobility in the Global South. Hungary and Turkey illustrate that no matter the expansion of direct executive control over the domestic management of money, the financial statecraft of (semi-) peripheral economies remains structurally incapable of mitigating the effects of global financial cycles driven by Core Central Banks such as the FED. Without international collaboration and new international institutions, the constraints posed by the current dollar-based global currency hierarchy and global capital mobility will continue to restrict fiscal space in the Global South, and instead of opening financial means to invest in essential public goods, will incentivize developmentally regressive finance-based accumulation strategies.

A radical alternative to de-risking private capital investments in the Global South would be to derisk public finance instead: letting states invest in essential social and environmental public goods under a novel progressive paradigm that firmly departs from prioritising profit-maximisation. In Europe, the COVID19 crisis showed that Core Central Banks have the means to derisk the public debt of emerging economies: it is a purely (geo)political decision if this dormant capacity is not leveraged to build a more just international financial architecture.

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