Lessons from the crisis in Finland and Sweden in the 1990s

This paper discusses the lessons of the Nordic financial crisis which hit Sweden and Finland in the beginning of the 1990s. The main causes of this exceptionally deep recession were the deregulation of the financial markets in the 1980s and the subsequent overheating, during which the asset prices and debts doubled. The consequences of the bursting of this financial bouble were currency and banking crises, collapsing asset prices, mass unenployment and large fiscal deficits. There are some lessons which can be learnt by analyzing these events, and they are presented in this paper. Among the lessons are the importance of asset prices and wealth effects to the stability of the whole financial system.     

What are the Policy Lessons from Sweden? On the Rise,Fall and Revival of a Capitalist Welfare State

This paper discusses a number of questions with regard to Sweden's economic and political development:

? How did Sweden become rich?

? What explains Sweden's high level of income equality?

? What were the causes of Sweden's problems from 1970 to 1995?

? How is it possible that Sweden, since the crisis of the early 1990s, is growing faster than most EU countries despite its high taxes and generous welfare state?

These questions are analysed using recent insights from institutional economics, as well as studies of inequality and economic growth. The main conclusion is that there is little, if any, Swedish exceptionalism: Sweden became rich because of well-functioning capitalist institutions, and inequality was low before the expansion of the welfare state. The recent favourable growth record of Sweden, including the period of financial stress (2008–10), is a likely outcome of a number of far-reaching structural reforms implemented in the 1980s and 1990s.     

The Nordic Model on the Global Market of Ideas: The Welfare State as Scandinavia’s Best Brand

This article analyses the contemporary deployment of the Nordic welfare state model as a centrepiece of Nordic competitive identity and strategic communication on the global market of ideas. First, it looks at the interrelated phenomena of global competition, competitive identity and region branding. Second, it studies the interplay between Nordic transnational public diplomacy and national public diplomacy of individual Nordic countries, in particular Sweden, on the one hand and international media outlets’ reporting on the Nordic countries on the other. In analysing this cross-fertilizing genre, the article identifies how the welfare state is being repackaged for export along with a set of “progressive values” which are coded as specifically “Nordic.” The article discusses (1) the interaction between outer images and inner visions; (2) the place and significance of the Nordic model, progressive values and the welfare state in today’s Nordic branding; and (3) the possible function of outward competitive identity as a kind of “compensatory imagination” directed inward as well as outward.     

Globalisation and the Institutional Re-embedding of Markets: The Political Economy of Price Formation in the Bordeaux En Primeur Market

Contemporary analyses commonly attribute the global credit crisis to faulty regulation. What have been the roots of these deficient rules, particularly in Europe, where rapid spill-over from US markets took policy makers and observers by surprise? This article focuses on regulatory liberalism as the paradigm guiding European Union (EU) regulation. It has dominated regulatory thinking for decades, but it has been implemented throughout Europe only since the mid-1990s. This shift can be traced to political institutions that have filtered policy ideas. EU financial reforms have pushed policy from pragmatism, under which it was adapted to political contingencies, to dogmatism, which adapts it to the intellectual exigencies of rigid policy paradigms. Inadvertently, reforms had created an epistemic community in which ‘professional’ rule setters systematically ignored external criticisms. The institutionalised ambition to craft ‘intellectually sound’ policy–rather than policy that simply ‘works’ –generated rules that persistently ignored the financial markets' self-reflexivity and thereby aggravated the crisis.     

The economic crisis of the 1990s in Finland

In the 1990s, Finland underwent a deep depression as its GDP dropped about 14% and unemployment rose from 3 to almost 20%. This is a story of bad luck and bad policies. Bad luck took the form of external shocks: the collapse of trade with the former Soviet Union in 1991, but also sharp cycles in the OECD area. However, bad luck is far from being the whole story. In the absence of bad policies, Finland would have experienced a recession, not a depression. Bad policies included a poorly designed financial regulation and mistaken reactions to the onset of the crisis. Of particular interest is the role of financial factors in triggering the crisis and aggravating the effects of bad policies. Not only were consumption and investment spending hurt by the credit crunch, but there is evidence that the private sector's indebtedness has increased structural unemployment, which explains why the recovery is proceeding with few job creations. A number of general lessons emerge. They concern the deregulation of financial markets, the policy reaction to massive capital inflows and the role of employment policies.     

International restructuring,health and the advanced industrial state

For the better part of the last century, the debate between ‘liberalisers’ and ‘interventionists’ marked thinking about the relationship between finance and development. It has by now been superseded by the emergence of the discourse of financial system development, which links economic growth to the development of the financial sector. As the risks entailed by wholesale financial reform came to the fore in the financial crises of the 1990s and early 2000s, emphasis shifted from liberalising financial markets to building institutional frameworks to accommodate investment. Arguably, the emergence of the financial-system-development discourse occurred within a wider shift in the neoliberal paradigm towards institution building. These changes are particularly pronounced in East and Southeast Asia. This paper argues that a convergence of opinions has occurred between Asian financial policy elites, previously strong supporters of the bank-based developmental state model, and the liberalisers, represented through international financial institutions such as the IMF. This consensus is geared towards the expansion of capital markets and a generally more neoliberal, market-oriented mode of economic governance. To illustrate this claim, this paper traces institutional changes in Asian financial systems since the 1997-98 financial crisis. Although local characteristics remain, a common feature is the more salient role of bond markets in the financial system. This is the result of the conscious and deliberate development of local currency debt markets by policymakers. However, the new consensus narrows down the space in which economic policymaking takes place. Yet, by re-politicising financial system development, this space could be broadened again.     

The political economy of delayed reform

Abstract

The role of economic policy in Finland's depression of the 1990s is analyzed with a simple model of an open economy, and the conditions for a successful financial reform derived: Let the system adjust after the removal of interest rate ceilings, and the domestic interest rate then be aligned with foreign rates before liberalizing international capital flows. In Finland, the financial system was liberalized simultaneously with international capital movements, with the domestic shadow interest rate initially considerably higher than the international market rates. A capital inflow the size of the monetary base followed, leading to the ‘crazy years’ of 1987–89. With a large current account deficit, the Bank of Finland tightened money sharply, causing a banking crisis practically wiping out the savings bank sector. The GDP declined by 13%. Several lesser policy measures aggravated the crisis.     

欧债危机与资本主义福利国家新变化

欧债危机爆发后,有一种观点认为危机的原因是高福利。通过分析希腊债务危机与本国福利制度的关系,对比南北欧在危机中的不同表现,可以看出高福利制度只是债务危机的直接推手,欧债危机的发生还有其他原因。本文通过对北欧福利国家改革的历史考察以及这次债务危机中各国财政紧缩和福利改革措施的分析,探讨福利国家改革的走向和趋势。     

Hedging its Bets: The UK and the Politics of European Financial Services Regulation

Some argue that European financial services regulation is witnessing a shift from a ‘market-making’ to a ‘market-shaping’ paradigm after the global financial crisis. This so-called ‘new’ political economy explanation stresses the role of ideas to understand this change. We consider this claim by providing an in-depth examination of recent European hedge fund legislation from the perspective of two key ‘market-making’ coalition members: the UK government and the hedge fund industry. We accept that the legislation represents a set-back for the ‘market-makers’ but question whether it represents a victory for the ‘market-shapers’. Moreover, we cast doubt on the causal role of ideas, calling for a domestic politics approach.     

Projecting from a Fiction: The Case of Denmark and the Financial Crisis

Institutional and ideational crises are characterised by fundamental uncertainty about the world, and at the same time require swift action on part of decision makers. How do political actors overcome uncertainty to enable collective action? The paper argues that actors use the ideas of the pre-crisis regime and through processes of bricolage seek to fit them to radically different circumstances. This enables action, but it also privileges the actors that benefited from these ideas before the crisis. This helps explain why so relatively few changes to financial regulation are appearing from the recent crisis. The argument is illustrated through the case of financial crisis in Denmark, demonstrating that the Danish authorities used ideas developed since the banking crisis of the 1980s concurring on the discourse that the best solution to the crisis would be a further ‘consolidation' of the sector, that is, fewer small banks and stronger large banks. This shows both the strength and weakness of using old ideas for radically new problems: it enables actors to act in concert, but changes are incremental and the weaknesses of the previous regime may thus live on in the new regime.     

Taming the City? Ideas,Structural Power and the Evolution of British Banking Policy Amidst the Great Financial Meltdown

We are increasingly learning more about the contingencies and independent variables that shape the structural power of business and financial interests. This paper contributes to this research by analysing factors that led to weakening in the structural power of financial interests in the City of London in the aftermath of the 2007/2008 crisis. We focus on under-researched mediators of structural power dynamics, especially the context of action and the agency and ideas of state leaders. Prior to the crisis, closed regulatory policy and a prevailing discourse premised upon the notion of market efficiency, helped to reinforce the structural power of the UK banking and financial sector. After the crisis heightened politicisation, more assertive state leadership, and especially ideational revision, has increasingly challenged the power of the City. We illustrate this through an examination of the Independent Commission on Banking's proposals in relation to the ‘ring fencing’ of investment and retail banks.     

The Stagnation Tendencies of Neoliberalism: A Review Essay

In his 2012 book, From Financial Crisis to Stagnation, Thomas Palley argued that the financial crisis of 2008 would be likely to result in a period of long-term stagnation. Both the crisis and the predicted stagnation, Palley argued, were the outcomes of policies pursued since the 1980s; the persistence of those policies explains the stagnation. Underpinning the policies and their consequences are the flaws of the neoliberal macro model and the particular role played by finance in that model. The rejection of Keynesianism meant the abandonment of the commitment to full employment. The neoliberal paradigm rests upon a foundation of ‘bad ideas’ that are located in political philosophy as much as in economic theory. Palley’s argument has a bearing on recent discussions among mainstream macroeconomists, whose interest in secular stagnation has been revived by the ‘ongoing crisis’. These discussions have left mostly unanswered the question of the causes of stagnation. The present essay argues that Palley’s concept of ‘structural Keynesianism’ can benefit from a closer association with the analysis of structural transformation and its effects on policy regimes and stagnation tendencies.     

The IMF as just One Creditor: Who’s in Charge When a Country Can’t Pay?

ABSTRACT

The international community’s management of the 2010 financial crisis in Greece revealed a major gap in the international financial system. No single institution is any longer unambiguously in charge. Consequently, the path is open for narrow interests to predominate over global interests. An examination of postwar history shows that this problem has been growing gradually since the 1970s and has become much greater since the mid-1990s. To alleviate the problem, the International Monetary Fund needs to develop an effective strategy for reducing the opportunities for creditor countries to intervene in decisions on how crises should be resolved.     

Beyond ‘Poverty Reduction through Good Governance’: The New Political Economy of Development in Africa

The new political economy of development, characterised by the rising powers' new resource finds in many poor countries and the financial crisis, has driven development ideas and practices towards a paradigm shift, moving it beyond the post-Washington Consensus which marked the high point of development's ‘Poverty Reduction through Good Governance’ agenda. This has important implications for the extent to which developing countries remain governed by the institutional and ideological imperatives of development. Optimists suggest that this could herald a new era of sovereignty that enables African countries to take fuller control of their governance and development priorities, including a shift towards a ‘southern consensus’ around structural transformation, whilst pessimists argue that the hegemony of orthodox development ideas has only been partially reordered and that new problems of sovereignty are now emerging. Insights from Uganda suggest that both of these scenarios are currently unfolding, leaving the outcomes uncertain and much to play for. What remains of the ‘good governance’ agenda has yet to adapt itself to this new politics of development, which requires the emergence of new forms of developmental state in Africa.     

贷款损失准备金与信贷紧缩

本文通过构建贷款风险迁移矩阵的理论模型,分析了前瞻性的贷款准备金计提模式具有抑制信贷紧缩的积极作用。在此基础上,分析了80年代末芬兰、挪威和瑞典三个北欧国家及90年代日本的银行危机、信贷紧缩及贷款准备金计提模式,从贷款准备金的角度指出贷款准备金计提模式的滞后性是这些国家信贷紧缩产生的一个重要原因。最后,实证分析了1996~2005年十年间我国国有商业银行和股份制商业银行的贷款准备金计提模式,得出的结论是:国有银行的贷款准备金计提模式有强化或助推信贷紧缩的影响,而股份制银行的贷款准备金计提模式具有一定的前瞻性,这可以部分解释1996~1998年我国出现的信贷紧缩。     

Narrating Crisis,Constructing Policy: Economic Ideas and Institutional Change in Syria

During crises, ideas play a decisive role in shaping radical paradigm shifts in economic governance. However, not all crises immediately produce such ‘great transformations’. Why do some ideas result in incremental rather than abrupt change after crisis? To identify mechanisms potentially explaining this variation, I conduct an exploratory process tracing of an understudied case of incremental institutional change: post-independence Syria. Competing political actors in Syria converged on identical policy responses to crisis despite their very different interpretations of its causes. Although power oscillated between these increasingly bitter rivals in the early 1950s, their ideational consensus on economic issues nevertheless led to a decade of steady institutional change that transformed previously fragile government institutions into powerful vehicles of statism. I derive from this analysis the potential causal significance of two new variables – crisis narrative and crisis response – and hypothesise that their configuration can explain variation in post-crisis patterns of institutional change. Ideas can explain not only the new direction of economic governance after crisis, but also the speed and scale of its movement.     

Social investment: A guiding principle for welfare state adjustment after the crisis?

The European welfare states have undergone a significant amount of change over the last decades. In light of the unresolved tensions resulting from changed macroeconomic conditions, the emergence of new social risks as well as from the consequences of the Great Recession and its aftershocks, more adjustments are needed. The present paper investigates the current outlook on welfare state change, retracing its socio-economic drivers and the salient steps that were undertaken to reform welfare states in the last decades. Since the outbreak of the crisis, calls to adopt a social investment perspective on welfare state reform intensified, both in the academic field and at the EU policy-level. Ample space is therefore devoted to the discussion of this perspective, its conceptual basis, and implementation. For a number of reasons, social investment seems the most appropriate approach to frame the objectives that contemporary welfare states have to pursue and to devise a consistent set of policies. The objections which have been moved against the social investment perspective have however to be taken seriously. Moreover, current developments indicate diverging trends across EU Member States, with lack of progress in those countries which are most in need of a social investment strategy. To become an effective policy paradigm, the social investment perspective thus needs a stronger anchoring within the EU architecture and more co-ordinated commitment from Member States.     

The Gender Impact of Social Protection Policies: A Critical Review of the Evidence

Abstract

Over the course of the neoliberal era, social protection policies have been transformed dramatically; these changes have had profound gender implications. Since the early 1980s, welfare state regimes around the world have shifted away from ‘universalism' towards ‘targeting'. More recently, there has been a further shift—especially in industrialized countries—away from the male-breadwinner to the adult worker model. Despite the progressivity implied by this latter shift, important issues of gender inequality remain unresolved (even in Nordic countries where levels of gender equity are higher than elsewhere). This paper presents a critical review of social protection policies, examined from a gender perspective. The analysis presents a conceptual framework on gender and the welfare state, and examines the experience of major industrialized and developing countries in engendering social policy. In particular, this paper provides a careful examination of care-related programs, since this domain is particularly important to understanding the gendered effects of social protection policies. Finally, the gendered implications of the global crisis and subsequent policy measures are examined.     

Interdependence or contagion: A model switching approach with a focus on Latin America

Empirical research analysing contagion has become increasingly fragmented. Different definitions of contagion have resulted in different methods being deployed to analyse financial transmission channels. This paper devises a novel econometric strategy where the nature of interdependencies, magnitude of interdependencies and transmission channels selected for inclusion can change over time. We thus appeal to multiple definitions of contagion, distinguishing between: interdependence, contagion through interdependence and abrupt contagion through changing linkages. Using our approach we analyse different crisis episodes in Latin America. Results generally indicate interdependence not contagion during the currency crises of the 1990s and Argentine crisis of 1998–2002. During the global financial crisis, results indicate abrupt contagion from the US to Argentina and Brazil. Mexico, however, experiences contagion through existing interdependencies with the US. Results also show that macroeconomic and uncertainty channels play a role during different crises not just financial channels. By establishing whether or not different interdependencies and transmission channels are present during different crises our model switching approach provides new insights.     

The Boom and Bust of the RMB's Internationalization: A Perspective from Cross‐Border Arbitrage

The RMB's internationalization developed very quickly from 2010 to 2015H1, but it slowed down significantly since 2015H2. This paper argues that cross‐border arbitraging activities played a significant role in both the boom and the bust of the RMB's internationalization. A slower pace of the RMB's internationalization based more on real demand might become a new norm in the future. To pursue a more sustainable RMB internationalization in the next decade, the Chinese government should maintain a relatively high economic growth rate, avoid the burst of systemic financial crisis, continue to liberalize the capital account in a gradual and cautious way, accelerate the reform and opening up of the domestic financial market, and integrate the RMB's internationalization with Asian monetary cooperation.