How the pursuit of shareholder value weakened the economy

[stpioc]

Shareholder capitalism is now weakening emerging markets. Not only did they go on a borrowing spree, the money was largely wasted because of, well, shareholder capitalism..

Much of the money was wasted, skewed towards "highly cyclical and rent-based sectors of limited strategic importance for catching up," it said. Worse yet, these countries have imported the deformities of western finance before they are ready to cope with the consequences. This has undermined what UNCTAD calls the "profit-investment nexus" that ultimately drives growth and prosperity.

Is the world about to get another financial kicking? The extraordinary result is that some countries are slipping backwards, victims of "premature deindustrialisation". Many of them have fallen further behind the rich world than they were in 1980 despite opening up their economies and following the global policy script diligently. The middle income trap closed in on Latin America and the non-oil states of the Middle East a long time ago, but now it is beginning to close in such countries as Malaysia and Thailand, and in some respects China.

"The benefits of a rushed integration into international financial markets post-2008 are fast evaporating," it said. If policymakers fail to mitigate the negative impacts of unchecked global market forces, then a turn to protectionism could trigger a vicious downward spiral for everyone. Yet the suffocating liabilities built up over the QE years remain. UNCTAD says corporate debt in emerging markets has risen from 57pc to 104pc of GDP since the end of 2008, and much of this may have to written off unless there is a world policy revolution.

"If the global economy were to slow down more sharply, a significant share of developing-country debt incurred since 2008 could become unpayable and exert considerable pressure on the financial system," it said. "There remains a risk of deflationary spirals in which capital flight, currency devaluations and collapsing asset prices would stymie growth and shrink government revenues. As capital begins to flow out, there is now a real danger of entering a third phase of the financial crisis which began in the US housing market in late 2007 before spreading to the European bond market," it said.

The UN's diagnosis is that "shareholder primacy" and the entire edifice of liberal market finance are among the key culprits, all made worse by stringent fiscal austerity that has starved the global economy of sufficient demand.


Its prescription is radical. The world must jettison neo-liberal ideology, and launch a "global new deal" with a blitz of investment on strategic sectors. It wants a return of the "developmental state", commanding a potent industrial policy, and backed by severe controls on capital flows.

"If policymakers fail to mitigate the negative impacts of unchecked global market forces, then a turn to protectionism could trigger a vicious downward spiral for everyone," it said.

The UNCTAD critique - controversial to be sure - is that activist funds have acquired a stranglehold over the corporate management, leading to a culture of share-buybacks and the relentless extraction of profit. "Corporations are not reinvesting their profits into production capacity, jobs, or self-sustaining growth," it says.

While the profit share of GDP has risen to an historic high of 36pc of GDP from 30pc in 1980, private investment has slumped to 17pc from 21pc. This accumulation of unused savings is itself a major cause of the deflationary malaise.

It also explains the conundrum of collapsing productivity. There is no need for the grim pessimism of Professor Robert Gordon, who thinks the great the spurt of human progress over the last 250 years is largely exhausted, supposedly because we have already made most of the great advances. Falling investment explains it well enough.

UN fears third leg of the global financial crisis - with prospect of epic debt defaults