Introduction: global south gaps in the study of financialisation
There has been increasing attention given to financialisation in recent decades, especially since the 2008 global financial crisis. Increasing global inequality and a deep economic crisis are often linked to a growing role for finance, prompting many scholars and commentators to examine the impact of a growing financial sector not only on overall economic performances, but also on issues of growth, inequality and job creation.
Bezemer and Hudson (2016), for example, discuss how the financial sector is a key barrier to the growth of the job-creating productive economy, as it attracts investments away from the latter. Similarly, Nicholas Shaxson (2020) describes financialisation as a curse, and argues that it ‘makes us all poorer’ since it has become more of a wealth extraction mechanism than a driver for wealth creation. For Gerald Epstein, financialisation is ‘the increasing importance of financial markets, financial motives, financial institutions, and financial elites in the operation of the economy and its governing institutions, both at the national and international levels’ (Epstein 2019, 380).
Van der Zwan (2014), on the other hand, adopts a typological review of approaches to studying financialisation. She identifies three approaches: the first sees financialisation as a regime of accumulation that manifests itself in the rise of financial investment as an increasingly popular avenue for capital investment. The second approach treats financialisation as a prioritisation of shareholder value in corporate behaviour. Last is the financialisation of everyday life, meaning that finance becomes part of the everyday logic of social life. This is also often referred to as mass-based financialisation (Bonizzi 2013).
As an accumulation regime, financialisation is identified by some scholars as a historical-structural phenomenon, that is, a phenomenon which constitutes more than just a recurrent phase of a traditional business cycle; according to this view, financialisation is the outcome of structural contradictions, is peculiar to a specific historical context and is resistant to self-correction. On the other hand, there are scholars who focus on the cyclical nature of the economy; for them, financialisation is often regarded as the phase that precedes a crash in the business cycle when profitability reaches its limit in the productive economy. Most notable in this approach are Fernand Braudel’s ‘sign of autumn’ (1992) and ‘Minsky’s moment’. The ‘sign of autumn’ was a description coined by Braudel to describe periods of financial expansion. The use of ‘autumn’ makes financialisation analogous to natural cycles, which implies that it should wither away on its own with the start of a new business cycle. He characterised these periods as ones of a crisis of accumulation in trade and productive activities, that is, ‘mature’ periods in the cycle of capital accumulation that immediately precede a decline. Similarly, the Minsky moment, named after American economist Hyman Minsky, refers to the end of the era of long growth, which entices investors to take risks including by expanding credit and making speculative decisions, and is often followed by a crash (Lahart 2007).
Despite the vast body of literature on financialisation, there has been considerably less literature on global south financialisation. Adam Hanieh (2016) argues that a major limitation in the study of financialisation is ‘that the vast majority of academic work on financialisation has concentrated on the core capitalist countries’. According to Hanieh, the work that has been done in this regard has been restricted to a handful of countries, notably, Brazil, South Korea and Turkey – and has largely focused on how these countries are inserted into global financial flows, rather than mapping the specificities of their own domestic financial markets.
This lack of literature occurs despite financialisation having significantly different manifestations in the global north compared to the global south. Bonizzi (2013) argues that financialisation in ‘advanced’ Anglo-American economies is based on the appreciation of financial asset prices (e.g. stocks and bonds), whereas in global south countries, financialisation often occurs through the increase in interest income; this is due to the prevalence of high inflation and the need to encourage capital inflows and discourage outflows, which pushes global south governments to adopt high interest rates. This form has also been termed ‘subordinate financialisation’, constituting a system where ‘financial capital can secure profits and take them out of the country safely, while industrial capital pays the penalty of low competitiveness’ (Lapavitsas and Kadri 2020). Bonizzi (2013) also argues that the combined availability of high-return/short-term financial investments has led in many global south countries to a reduction in productive investments. In recent years, Egypt was a major contender for offering the highest real interest rate in the world (Magdy 2021).
In Brazil, for example, during the rise of neoliberalism in the 1990s, financial accumulation was primarily driven by very high interest rates. The expansion of public debt marked the financialisation of the economy, accompanied by subsequent redistribution of income from the middle class toward financial capital. Similarly, the experience of Mexico has been one of recurrent crises of financial imbalances followed by spikes in interest rates, and economic policies that slowly moved the economy toward a finance-led regime (Bonizzi 2013). As I discuss below, the experience of Egypt matches that of Mexico, Brazil and other global south countries which were pushed to raise their interest rates in response to recurring financial and economic crises.
As for the second approach that deals with the prioritisation of shareholder value over other considerations, it will remain out of this article’s scope since evidence suggests that in recent years financial activity in Egypt was driven more by increases in interest rates than by ‘shareholder value’.
The third approach, which is the financialisation of the everyday, is also beyond the scope of this article, even if the discussion on extending the reach of financial products through a growing role of financial technologies (fintech), financial inclusion and microcredit is tightly linked to discussion on financialisation in global south contexts. Therefore, this analysis will exclusively focus on the impact of financialisation as a regime of accumulation.
The evolution of financial sector size over the last three decades
The size of the Egyptian financial sector has witnessed significant fluctuations throughout the last three decades, but the overall and long-term trend has been an upward one. The 1990s was particularly a period of large expansion during which the financial sector grew from 3.75% of gross domestic product (GDP) in 1990 to 6.14% in 2002, while Egyptian bank assets to GDP grew from 48.5% to 78.32% (TheGlobalEconomy.com 2022).1 The reason behind such growth could be mostly attributed to the enactment of the capital market law in 1992, which led to the listing of over 600 companies on the Cairo and Alexandria Stock Exchange (Otaify 2016). The expansion of this period could also be explained by a switch in the activities of financial intermediaries from interest-based revenues generated from their activity as creditors, to fees and commissions generated from their activities as intermediaries, and is associated with the growth of the stock market transactions and profits, as well as retail banking. This transformation to non-interest bank profits was observed in many countries around the world during the same period (Bonizzi 2013).
This growth decade was followed by a period of decline from 2002 until 2011: in the latter year the financial sector, expressed as a share of GDP, fell back to its 1990 level. During the same period, the ratio of bank assets to GDP fell, albeit more modestly, from 78.32% to 61.37% (TheGlobalEconomy.com 2022). This could be due to recurrent financial crashes, namely, the dotcom bubble of 2002 and the global financial crisis of 2008. Additionally, 26% of listed companies were delisted from the Egyptian Stock Exchange in 2002 due to new listing regulations, which may have also placed downward pressure on the financial sector’s size (Otaify 2016). This decade was also a time of high economic growth, which means that even if there was a large decline in the size of the financial sector relative to GDP, its absolute size would have witnessed a smaller decline.
The third phase constituted a second growth period, which stretched from 2011 until 2019, during which the financial sector’s share of GDP remained almost unchanged at around 4.5% of GDP. However, during the same period the ratio of bank assets to GDP grew significantly from 61.37% of GDP in 2011 to 74.28% in 2019. Since the GDP indicator is largely determined by return on investment (added value) while the assets to GDP indicator is determined by the value of assets regardless of their return and profitability, it is likely that this disparity between stable relative size of returns and a growing size of assets is explained by the financial sector’s shift to investing in low-risk/low-return sovereign debt, a shift that we will discuss in more detail below.
This volatility is negatively correlated with employment and capital formation rates. For example, during the first growth decade, the size of the financial sector grew by 66% relative to GDP – which itself also grew considerably during that decade. During the same period, the employment-to-population ratio declined from 42% in 1991 (earliest available data) to 39% in 2002 (World Bank 2022a). Capital formation, which measures the level of new investments in the non-financial sector, declined even more steeply, from 28.9% to 18% of GDP during the same period (World Bank 2022b).
Conversely, during the decline decade when the size of the financial sector dropped back again to the 1990 level of 3.7% of GDP, the employment-to-population ratio increased from 39% to 43% in 2011, also very similar to the early 1990s ratio. Capital formation also jumped during the period from 16.9 to 17.1%, a modest increase but an increase nevertheless, even if still far from the 1990 level.
In the second growth decade (2012–2019), during which the size of the financial sector hovered around 4.5% of GDP coupled with a momentous increase in bank assets, the employment-to-population ratio dropped from 43 to 39% and capital formation hovered around the very low rate of 17%.2
Correlation or causation?
Since correlation does not always imply causation, this section will supplement the statistical data discussed above with an analysis exploring the possible impact of a growing financial sector on job creation and levels of public and private investment as well as other social indicators.
Although increased financialisation is not always a key concern in mainstream development literature on the global south, it potentially constitutes an important obstacle to the achievement of development goals. In neoliberal development literature, the increase in financial activity is often regarded as developmentally desirable, especially because banks are believed to put otherwise idle savings into productive use (Bonizzi 2013). It is often expressed by neoliberals that finance and credit can even become a force of social progress. This is clear from the explosion of microfinance, fintech and social bond initiatives in recent decades designed to tackle poverty, bridge the gender gap and even protect the environment. For example, a 2010 World Bank study on the financial sector in Egypt starts with the following paragraph:
Access to finance is important for growth and economic development. Having an efficient financial system that can deliver essential services can make a huge contribution to a country’s economic development. Greater financial development increases growth, reduces economic volatility, creates job opportunities and improves income distribution, as has been established by a large empirical literature. A well-functioning financial market plays a critical role in channeling funds to their most productive uses, and allocates risks to those who can best bear them. (Nasr 2010, 18)
However, banks in ‘peripheral’ contexts operate rather differently. When the economy is in a state of imbalance, banks and financial intermediaries invest more in extractive, rather than productive, activities, namely funding budget and trade imbalances (i.e. deficits). The impact of growing subordinate financialisation is therefore twofold: on the level of the economy as a whole, the financial sector tends to divert capital away from other productive sectors instead of financing them; within the financial sector itself, funding deficits in current and consumption expenditure take precedence over financing productive activities. As it stands, Egypt’s financial sector is no exception due to the prevalence of long-term structural imbalances in trade and budget, and a poorly performing private sector, including the small and medium-sized enterprise (SME) sector (Adly 2020).
There are strong reasons to believe that the association between lower employment and the growth of the financial sector is more than just a coincidental correlation. First, the labour intensity of the financial sector is one of the lowest among major sectors. Every 1% of GDP's worth of investments in the financial sector would create a mere 42,000 jobs according to 2017 data. In manufacturing, on the other hand, every 1% of GDP's worth of investment would create 160,000 jobs, whereas in agriculture the number was even higher at 224,000.3
Second, subordinate financialisation’s rerouting of capital away from job-creating activities is clear when we consider the negative correlation between the growth of the financial sector and capital formation in the non-financial sector. Since correlation does not rule out that both phenomena could be caused by a third factor, it is likely that financial growth and lower capital formation are both caused by declining profitability and increased risk in more ‘traditional’ productive sectors such as manufacturing and agriculture. For example, gross value added – a proxy for total profits – in the agriculture sector in 2019 was 90% of what it was in 2013 (CAPMAS 2021). The gross value added of agriculture has declined from 18.5% of GDP in 1990 to 11% in 2019. As for manufacturing, it dropped from 17 to 16% during the same period. This is a clear example of a proven association between declining profitability and heightened risks on the one hand, and lower capital formation and hence lower employment on the other (Rowthorn 1995).
Third, subordinate financialisation diverts not only private capital, but also public capital, away from job-creating activities. Between 2013 and 2020, expenditure on interest payments on fixed-interest government securities have grown from 7.3% to 9% of GDP. As a ratio of total government expenditure, interest payments increased from about 18% of total expenditure in 2006 to 33% in 2020.4
Government investments in Egypt generally create more jobs compared to private-sector investment. Government investment stood at about 3.7% of GDP in 2019. The sectors that received most of it were storage and transportation (20%), real estate (14.6%), education (13.5%), sewage (8.2%) and health care (7.4%) (Central Bank of Egypt 2021). These are all labour-intensive sectors. Public-sector enterprises also invest sizable amounts in the manufacturing sector while public-sector economic authorities invest sizable amounts in infrastructure. On the other hand, about 24% of private-sector investments and about 70% of foreign direct investment in 2019 went to the job-scarce oil and gas sector, whereas for the government investment this rate was less than 0.1% (Central Bank of Egypt 2021). As a result of this job-creating role of public investments, when crowding out of public investment by sovereign debt interest payments occurs it is expected to have a severe impact on job creation.
Moreover, the Egyptian financial sector is overprudent in dealing with the job-creating private sector (the SME sector) which they often perceive as high-risk, and would therefore rather invest in safe government-issued securities. Our data demonstrate that bank credit that goes to the private sector shrinks significantly in favour of government financing when the financing needs of the government increase (see Figure 1). But even within the private sector, Egyptian banks prefer lending to private-sector firms connected to the state because they are perceived to be implicitly supported by the state against failure (Diwan and Schiffbauer 2018).
Breakdown of total domestic credit by sector in Egypt from 2000 to 2020. Source: Author’s calculations from the Central Bank of Egypt’s Monthly Statistical Bulletin (bulletins accessible at Central Bank of Egypt 2021 hyperlink). Note: The public business sector refers to businesses or commercial companies that are owned by the state (e.g. the telecom companies and steel factories).
In other words, this rediverting of private and public capital entails a sizable upward distribution of wealth from the working classes to a financial investor class. This occurs through two dynamics: in the domain of private capital, investments are diverted away from productive activities into financing activities, meaning that a smaller part of capital’s gross return is spent on wages (i.e. the share of value taken by the working classes). As for the domain of public capital, growing public expenditure on interests has two effects: first, it diverts large swaths of taxpayer money into financial investors’ pockets; second, constituting a third of government expenditure, interest payments crowd out public investment expenditure that would have otherwise created jobs and financed struggling and labour-intensive social sectors, such as health and education.
This upward distribution of wealth is intensified by the increasingly regressive nature of Egypt’s tax structure. The share of regressive consumption taxes (such as VAT) has increased significantly in recent years; in the financial year 2018/19, the tax on goods and services constituted 47.6% of the total tax revenue, up from 40% in the financial year 2015/16. This means that these interest payments are mostly paid for by the low- and middle-income consuming classes. In 1995, this tax constituted 27.1% of total tax revenues (Diab 2016).
A structural, rather than cyclical, phenomenon
Trends in financialisation and employment are global in nature. For example, the ratio of global employment to population declined from 62.4% in 1991 to 57.5% in 2019, and then again to 54.8% in 2020 (the year of the Covid-19 pandemic) (World Bank 2022c). The role and size of financial activities have also increased substantially around the world. As for labour-saving technologies, which contribute to overproduction in productive, job-creating sectors, diverting capital away from it, we can see that the GDP per person employed has almost doubled around the world during the same three decades (World Bank 2022d).
Egypt is no exception in this respect. As discussed above, employment-to-population ratios have declined from 42 to 39%, and GDP per person employed has also almost doubled in Egypt in the last three decades (World Bank 2022d).
My argument, in the light of this, is that Egypt’s employment crisis is a historical-structural phenomenon that demonstrates the limitations of traditional cyclical policy interventions, whether counter- or pro-cyclical. The employment crisis is structural because the increase of ‘subordinate financialisation’ is not peculiar to Egypt and is global in scope. Additionally, the structural nature manifests itself in the inescapability of adopting a high interest rates regime due to imbalance typically suffered by global south countries. It is also historical, rather than cyclical, because it is an outcome of a combination of long-term, cumulative trends, namely a deepening international division of labour, and increased productivity (i.e. a crisis of overproduction) coupled with subordinate financialisation, which leads to lower employment-to-population ratios in global south countries.
Compared to financialisation in ‘core’ countries, the outright extractive nature of subordinate financialisation makes its social impact more adverse and the extractive nature of its activities more intense. These trends if undealt with historico-structurally will intensify wealth extraction and promote uneven growth, causing a continued decoupling of economic growth from job creation and wage increases – a key outcome of neoliberal policies and their failed promise of ‘trickle-down’.