When Do Central Banks Accommodate Financial Globalization?

• In Event: Comparative Politics of Developing Countries Virtual Poster Session 2

Abstract

This paper develops a political economy theory about when and why central banks in the Global South steer between accommodating and limiting postures toward financial accumulation. An accommodatory stance is understood here as the provision of exchange rate risk insurance while limiting postures involve the use of prudential instruments and capital controls. The paper argues that central banks take an accommodatory stance when the dominant (nonfinancial) capital group is financialized and politically aligned with the ruling party. A comparative analysis of four cases provide evidence: Turkey 2000 – 2008 and 2009 – 2018, India 2000 – 2008 and 2009 – 2018. Dominant capital groups in both India and Turkey financialized rapidly in the 2000s, accumulating high levels of foreign currency (FX) denominated debt, and engaged in financial arbitrage. During this period, dominant capital groups were also politically aligned with the ruling party, thus resulting in the Central Bank of the Republic of Turkey (CBRT) and the Reserve Bank of India (RBI) accommodating financial activity by intervening heavily in FX markets. However, in the second period, the CBRT switched to prudential measures and halted FX interventions, whereas the RBI continued its accommodatory stance. The paper explains this divergence in terms of the Turkish ruling party (the AKP) aligning itself with small and medium-sized capital from Anatolia against dominant capital, largely from Istanbul. In India, both the Congress Party and the BJP continued their support for dominant, mostly family-based capital groups in India. The analysis relies on documentary evidence from business associations, political parties and central banks, as well as descriptive statistics from financial institutions and corporate balance sheets. The paper makes a contribution to the literature on financialization by examining how domestic political economy factors shape financial governance.

Author

• Fathimath Musthaq, Reed College