C. P. Chandrasekhar and Jayati Ghosh in Boston Review ( Image: James Robertson/Jubilee Debt Campaign):
It is by now well known that three decades of financial globalization have led to massive increases in income and asset inequalities in the United States and Europe. But in the developing world, the effects of financial globalization have been even worse: along with new inequality and instability, the creation of “emerging markets” to support investment in poor countries has undermined development projects and created a relationship in which poor countries supply financial resources to rich ones. This is exactly the opposite of what was meant to happen. Yet this growing disparity in per capita incomes across the global North and South is not a bug in the system but a result of how global financial markets have been allowed to function.
The biggest promise of neoliberal finance, initially pushed by economists such as Ronald McKinnon from the late 1970s onward, was that it would enable greater and more secure access to resources for development for countries deemed too poor to generate enough savings within their own economies to fund necessary investment. To access savings from abroad, they were encouraged to tap into global financial markets.
At the same time, changes in the economies of the developed world in the late 1980s generated mobile finance willing to slosh around the globe in search of higher returns. Deregulation enabled new financial “instruments,” such as credit default swaps (which supposedly insure against debt default) and other derivatives, that suddenly made it attractive to provide finance to activities and borrowers that were previously excluded. In the United States this gave rise to the phenomenon of “sub-prime” lending in the housing market, but it also encouraged international finance to provide loans to countries without much previous access to private funds. Indeed, many lenders actively sought out new borrowers, as moving capital was one of the major routes to higher profitability in the financial sector.
These developments gave rise to the term “emerging markets,” first used by economists at the World Bank’s private investment arm, the International Finance Corporation (IFC) in 1981 to promote mutual fund investments in developing countries.