Economic crisis, global financial cycles and state control of finance: public development banking in Brazil and South Africa

Published date01 June 2023
AuthorNatalya Naqvi
Date01 June 2023
European Journal of
International Relations
2023, Vol. 29(2) 283 –318
© The Author(s) 2022
Article reuse guidelines:
DOI: 10.1177/13540661221114370
Economic crisis, global
financial cycles and state
control of finance: public
development banking in
Brazil and South Africa
Natalya Naqvi
The London School of Economics and Political Science, UK
In the aftermath of recent crisis, national governments across the global south
increasingly see state ownership and control of finance as a vital public policy tool.
What explains variation in state control of finance in the wake of crisis? Interventionist
policies can elicit disinvestment or exit threats from private financial actors if they
limit profitability. When disinvestment threats are credible, policymakers may rule out
reform for fear of devastating economic consequences. I argue that the credibility of
disinvestment threats is conditioned by two key variables, the resilience of the national
economy to capital flight, which affects the level of damage capital flight will inflict, and
global financial liquidity, which can be used to undercut domestic disinvestment threats.
These arguments are developed through comparative case studies of cross-national and
over-time variation in the scale and scope of public development banking in Brazil and
South Africa in the wake of the 2008 crisis.
Political economy, global finance, third world, globalization, state sovereignty,
economic interdependence
Corresponding author:
Natalya Naqvi, Department of International Relations, The London School of Economics and Political
Science, London WC2A 2AE, UK.
1114370EJT0010.1177/13540661221114370European Journal of International RelationsNaqvi
284 European Journal of International Relations 29(2)
During the post-war period, governments across the developing world tended to ‘repress’
or exercise control over their financial sectors. State-owned banks, established either
under public ownership or through nationalization of private banks, featured promi-
nently. Since the onset of financial globalization in the 1980s, state ownership and con-
trol of the domestic financial sector steadily declined across the world. Financial
globalization pressures have long been thought to encourage a convergence of national
financial systems towards the liberalized Anglo-Saxon model. Furthermore, as capital
account mobility increased financial actors’ capacity for exit over policies they disliked,
reversal of financial liberalization reforms was thought to be all but impossible.
During the 2000s, this trend was disrupted, and unorthodox financial policies includ-
ing public banking took on renewed importance in some emerging market (EM) coun-
tries (Bertay et al., 2012). Despite common shocks associated with the 2008 crisis,
developing countries exhibited striking variation in their use of state-owned banking to
manage the aftermath (Cull et al., 2018). Some governments scaled back, while others
not only directed public development banks to mount strong countercyclical responses,
but also play a continued role in resource allocation well after the end of the crisis period
(Luna-Martinez et al., 2018). External globalization pressures alone cannot explain this
variation. These recent trends indicate that financial globalization may limit national
autonomy to a lesser extent than previously thought, and that financial actors are not
always all-powerful. However, little is known about the conditions under which policy-
makers are able to exert autonomy and financial actors’ preferences are undermined.
In countries where domestic pressures to increase national control over finance are
weak, it is unsurprising that governments will shore up market-based methods of resource
allocation. Where such pressures are strong, often from domestic labour and industry
groups concerned with job creation and access to investment credit, policymakers are
likely to attempt to use crisis as an opportunity to increase public control of financial
resource allocation. Out of the subset of EM countries where pressures are strong, why
were some governments able to increase state control of the financial sector, through
scaling up public development banks, while others were unable to push through signifi-
cant financial reform?
I argue that this variation in policy outcomes depends on the credibility of the disin-
vestment or exit threats from the domestic private financial sector, which is likely to be
opposed to public control. Because public development banks usually have access to
subsidized funding sources, which enable them to make cheap loans, private banks per-
ceive them as competitive threats, which can limit profits. Significant public develop-
ment bank expansion may also increase government indebtedness and result in sovereign
ratings downgrades, which trigger foreign portfolio outflows. This has negative knock-
on effects for domestic banks and institutional investors, such as decreasing the value of
their assets and increasing their borrowing costs.
Through its ownership and control of vital capital, the private financial sector has
enormous potential structural power over policymakers. If domestic capital flees or for-
eign investors exit, this can inflict enormous economic damage. But this potential struc-
tural power becomes decisive only when policymakers perceive disinvestment threats to
Naqvi 285
be credible. I argue that credibility is conditioned by two key variables: the resilience of
the national economy to capital flight and the global financial cycle, which affects the
availability of external replacement capital. When policymakers perceive national finan-
cial resilience to be strong, and replacement capital is readily available during global
financial booms, they are likely to ignore disinvestment threats and aggressively increase
state control of finance, and vice versa.
This could explain the rise of unorthodox financial policies among the major EMs
with stronger external balances, including China, Brazil, India, Russia and Argentina, in
the post-crisis high liquidity period (Ban and Blyth, 2013; Chen, 2020). In countries with
extensive capital controls that never seriously liberalized in the first place, such as India
and China, external market pressures should be even more muted, though not absent due
to dollar requirements and illegal capital flight. Major oil exporters such as Venezuela
and Kazakhstan should have the policy autonomy for interventionism due to an abun-
dance of foreign exchange during commodity booms (Jepson, 2020). On the other hand,
more limited deviations from orthodoxy or further liberalization in EMs such as South
Africa, Mexico, Colombia, Turkey, Romania and the Philippines could be due to either
policymakers’ perceptions of weak financial resilience or a lack of demand from domes-
tic interest groups.
Policymakers have historically used a variety of tools to control financial resource
allocation. The scale and scope of national development banks are the main focus of this
paper because they are the most direct form of state control. They can be mandated to
channel funds according to strategic government priorities,1 and are the main tool of
financial control used in my country cases. More indirect tools include interest rate con-
trols, credit quotas to direct private bank lending, banking entry restrictions and loan
guarantees among others. While the tools may vary, the purpose is similar: to direct
financial resources to priority sectors in volumes or at prices they would not receive
privately, often against market signals, and with the aim of structurally transforming the
economy, usually as part of an industrial policy. State control implies that the financial
sectors, or parts of it, no longer function according to a purely profit-making logic, but
are free to pursue a broader range of objectives, for better or worse.
Relying on 113 interviews conducted during extensive fieldwork, I utilize in-depth
comparisons of the scale and scope of public development banking in Brazil and South
Africa to examine my claims. Despite the common shock of the 2008 crisis and global
liquidity boom that followed, public banking responses diverged sharply. This was
despite strong pro-intervention pressures from a coalition of labour and industry, and
centre-left governments in power in both countries. After the 2008 crisis, Brazil’s public
banking sector became one of the largest and most interventionist in the world, while
South Africa’s remained small and passive.
Between 2006 and 2014, Brazil’s main national development bank, the National Bank
for Economic and Social Development (BNDES), was scaled up dramatically in com-
parison with South Africa’s main development banks, Industrial Development
Corporation (IDC) and the Development Bank of Southern Africa (DBSA), after which
BNDES was dramatically scaled down once again (Figure 1). While scale is a useful
proxy for state control, and enables rough cross-national comparison, more important is
the scope: the extent to which public banks play a market-defying role through lending

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