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The Meaning of Financial Liberalisation

The term financial liberalisation is used to cover a whole set of measures, such as the autonomy of the Central Bank from the government; the complete freedom of finance to move into and out of the economy, which implies the full convertibility of the currency; the abandonment of all “priority sector” lending targets; an end to government-imposed differential interest rate schemes; a freeing of interest rates; the complete freedom of banks to pursue profits unhindered by government directives; the removal of restrictions on the ownership of banks, which means de-nationalisation, full freedom for foreign ownership, and an end to “voting caps”; and so on.  These measures are not necessarily presented as a package, and not always in their maximal form.  The Narasimhan Committee in India for instance did not ask for a complete denationalisation of banks; it suggested that the government, the foreigners and the Indian private sector should have one-third equity each in the currently-nationalised banks.  Nonetheless, no matter what the exact sequence, form and strategy through which financial liberalisation is sought to be ushered in, the objective ultimately is to realise the above set of measures.

Since financial liberalisation is seen as consisting of these measures, the debate upon it gets fragmented into a debate upon the desirability of each of these measures, ie, whether central bank autonomy is desirable or not; whether the government should have exclusive equity ownership in banks or only a majority ownership, or not even that; whether priority sector lending targets serve the purpose they are meant to; whether control over interest rates has not understated the scarcity value of “capital” (a particularly silly debate this, based on a Hayekian assumption of full employment); and so on.  Because of this fragmentation of issues, the process of financial liberalisation is never seen in its totality.  This, by camouflaging the total impact of financial liberalisation, keeps the opposition to it enfeebled, and thereby helps the “liberalisers”.  The question therefore arises: what is financial liberalization in its totality?

The essence of financial liberalisation, seen in its totality, is to ensure the stranglehold of finance capital over the State.  This may appear paradoxical at first sight: as the term “liberalisation” appended to “financial” suggests, the basic aim of the process is to liberate finance from the shackles of the State, ie, to ensure not the control of finance over the State but the negation of the control of the State over finance.  But the remarkable aspect of financial liberalisation consists precisely in this: what appears at first sight as the liberation of finance from the shackles of the State is nothing else but the acquisition by finance of control over the State.

This is not just the outcome of the dialectics of a conflict situation.  For instance, in a wrestling bout when each of two wrestlers is having a grip on the other, the liberation of one from the grip of the other may be said to mark simultaneously the ascendancy of the one so liberated over the other; in a similar fashion it may be argued that the liberation of finance from the State, and therefore from the possible control of other classes exerted through the State, marks simultaneously the acquisition of hegemony by finance over the State.  The dialectics of class struggle in this case may thus be seen only as another instance of the dialectics of any struggle, of which the wrestling bout is just an example.

This perception, though not wrong, is inadequate.  Financial liberalisation does not just mean an inversion: the ascendancy of finance arising from the very fact of the social grip over it, exercised through the State, being loosened.  Since we live in a world where the State remains a nation-State while finance is globalised, ie, is international in character, financial liberalisation is not just liberalisation; it is simultaneously a process of globalisation of finance, ie, the conversion of “national finance capital” into an integral element of international finance capital, and hence the acquisition on its part of enormous strength vis-à-vis the nation-State.  To go back to the wrestling analogy, it is as if the loosening of grip over one wrestler makes the one so loosened multiply several times in size, and hence necessarily acquire ascendancy.  It is within this specific global context that financial liberalisation necessarily marks the acquisition by finance capital of a stranglehold over the State.  In countries like India where financial liberalisation has been kept in check to an extent because of the struggles of the trade unions and the Left, even this acquisition of stranglehold has as yet been kept in check; and much of the financial sector still remains nationalised despite the best efforts of the “liberalisers”.  But this does not by any means alter the meaning of financial liberalisation.

Every single one of the measures mentioned above as constituting financial liberalisation has the effect of strengthening the hegemony of finance over the State.  Central Bank autonomy removes a host of policies, eg, monetary policy, exchange rate policy, and credit policy, from the purview of the democratically-elected government and entrusts them to the caprices of a bunch of financiers, or bureaucrats aligned to them, who exercise control over the so-called autonomous Central Bank.  This restricts the domain of intervention of the State.  In addition, since the target with regard to State borrowing from the Central Bank is fixed, an autonomous Central Bank simply pushes the State to the mercy of the financial market to meet its borrowing requirement above this limit.  The State in short can spend only as much as finance capital allows it to.  What is more, since being creditworthy in the eyes of finance capital becomes a matter of paramount importance for the State, it pursues only such policies as finance capital would like it to.

A fully convertible currency, and freedom for financial flows into and out of the country, has exactly the same effect.  Since the pursuit of policies that finance capital dislikes would give rise to a financial outflow with potentially disastrous consequences for the economy, the State becomes obliged to follow only those policies which keep up the “confidence” of finance in the economy; it is in short obliged to pursue only those policies which are to the liking of finance capital.

Likewise, the freeing of finance capital from all social obligations like priority sector lending targets and differential interest rates, not only increases its profitability, even while pushing petty producers and small capitalists deeper into crisis, but also allows it to pursue its own profit-seeking ways over a global terrain, which has the effect of subjugating the State to the thralldom of internationalised finance capital.  In short, financial liberalisation is the process through which a fundamental change is enforced on the bourgeois State: from being an entity apparently standing above society and intervening for the “social good”, which means keeping in check to some extent the rapacity of big capital, even while promoting it and defending its monopoly privileges, the State becomes exclusively dominated by financial interests (with which big corporate interests are closely enmeshed) and loses its relative autonomy vis-a-vis such interests.  We have not the “rolling back” of the State as neo-liberal ideologues suggest, but State intervention in the exclusive interests of finance capital.

This change has profound implications, of which only three will be discussed here.  The first which is obvious and need not be laboured here relates to the attenuation of democracy.  As long as the economy is characterised by financial liberalisation and hence the stranglehold over the State by finance capital, any change of government effected through popular democratic intervention will make no difference to the condition of the people.  Or putting it differently, any assertion of democracy necessarily requires a negation of the stranglehold of finance capital over the State (which financial liberalisation entails), and hence a reassertion of social control over finance effected through the State.  (This in turn presupposes a change in the nature of the State itself).  The defence of democracy in countries like India requires therefore a prevention of any further financial liberalisation and a reversal of the financial liberalisation that has already occurred.

Secondly, capitalism requires some external prop to make it come out of crises.  In the absence of such props the crises would get inordinately prolonged, imposing such heavy burdens on the working people that the social stability of the system would get jeopardised.  Historically, colonialism played this role of providing an external prop to the system; and the fact that this prop had got more or less exhausted by then was the main reason behind the Great Depression of the thirties.  In the post-war period, State intervention in demand management provided such an external prop.

Such intervention could only happen however if the State had some autonomy, if it was not part of the “spontaneity” of the system, but represented an “external element” to such spontaneity.  But if the State loses this autonomy, if its own actions are dictated by the caprices of finance capital, and hence by the spontaneity of the system itself, so that it ceases to be an “external element” in this sense, then it loses the capacity to intervene in situations of crisis.  This necessarily makes the crises inordinately prolonged, with no clear end in sight, which not only imposes heavy burdens on the working people but also undermines the system’s social stability and legitimacy.  Financial liberalisation sets the stage for social upheavals.

Thirdly, the State’s inability to truncate crises is part of a wider phenomenon, namely its inability to rid the system of its obvious ills.  John Maynard Keynes was aware of these ills and wanted a reform of the system to eliminate them, for otherwise he was afraid that the system would give way to socialism which he did not wish to happen.  He was a Liberal but he advocated State intervention for he saw liberal capitalism as undermining the Liberal values he cherished which required a humane economic system.  He saw the State as an embodiment of “social rationality” intervening in a capitalist system to make it function in a manner different from what its own spontaneity dictated.  Underlying his reform agenda, and indeed any Liberal reform agenda, is the presumption that the State stands outside the “spontaneity” of the system, so that it can intervene in a “rational” manner.  But if the State is under the hegemony of finance capital, and hence lacks the autonomy to intervene in any manner that does not meet with the approval of finance capital, then that puts paid to all agendas of Liberal reform of capitalism.


Prabhat Patnaik is a Marxist economist in India.  This article was first published in People’s Democracy on 5 June 2011; it is reproduced here for non-profit educational purposes.


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