Domestic Bank Reform and the Contingent Nature of the Structural Power of Finance in Emerging Markets*

• Author: Florence Dafe,Lena Rethel
• DOI: http://doi.org/10.1177/00323292221125567
• Published date: 01 December 2022
• Date: 01 December 2022
• Subject Matter: Articles

Domestic Bank Reform and

the Contingent Nature of the

Structural Power of Finance

in Emerging Markets*

Florence Dafe

Hochschule für Politik/TUM

Lena Rethel

University of Warwick

Abstract

This article examines the structural power of domestic f‌inance in developing and emerg-

ing economies (DEEs) in the context of a shift toward increasingly activist f‌inancial devel-

opment planning and f‌inancial sector reform. Focusing on efforts to create large,

internationally competitive banks in Malaysia and Nigeria dating to the late 1990s and

early 2000s, it highlights that banks have not played their envisaged role in f‌inancing struc-

tural transformation via industrial growth and economic development. Nonetheless,

(large) banks in DEEs have attained considerable structural power over f‌inancial policy,

supporting their ability to shape growth and investment strategies. Therefore, the article

proposes a revised model of the structural power of f‌inance, recognizing its contingent

nature. States pursue various forms of f‌inancialization both as a substitute to, or in con-

junction with, industrial policy. Financialized development strategies enhance the struc-

tural power of large banks in DEEs, notwithstanding their limited role in meeting the

investment/development imperative.

Corresponding Author:

Florence Dafe, Hochschule für Politik/TUM, Richard-Wagner-Straße 1, 80333 Munich, Germany.

Email: f‌lorence.dafe@hfp.tum.de

*This special issue of Politics & Society titled “The Structural Power of Finance Meets Financialization”fea-

tures an introduction by Florence Dafe, Sandy Brian Hager, Natalya Naqvi, and Leon Wansleben and f‌ive

articles that were presented as part of the workshop series held at and funded by the Department of

International Relations, London School of Economics, November 2019, organized by Natalya Naqvi and

Florence Dafe, and at the Max Planck Institute, Cologne, June 2021, organized by Florence Dafe, Sandy Brian

Hager, Natalya Naqvi, and Leon Wansleben.

Article

Politics & Society

2022, Vol. 50(4) 571–598

© The Author(s) 2022

Article reuse guidelines:

sagepub.com/journals-permissions

DOI: 10.1177/ 00323292221125567

journals.sagepub.com/home/pas

Keywords

structural power, f‌inancialization, development planning, sub-Saharan Africa, Southeast

Asia

This article examines the structural power of domestic banks in developing and emerg-

ing economies (DEEs).

1

There is broad agreement, both in policy circles and among

scholars, that in DEEs f‌inancial institutions have not played their envisaged role in

f‌inancing economic development and industrial transformation.

2

Instead, f‌inancial

institutions have often facilitated capital outf‌lows or channeled their funds into unpro-

ductive activities such as foreign exchange speculation and consumer lending. At the

same time, there is considerable evidence that domestic f‌inancial institutions in DEEs,

in particular large commercial banks, have considerable structural power. This is com-

monly understood as power over policy that is derived from the ability to withhold

resources for productive investments.

3

How can we explain the structural power of

banks in DEEs, given their limited contribution to f‌inancing productive investment?

We argue that in order to unravel this puzzle we need to consider f‌inancialization,

which we def‌ine, following Epstein, as “the increasing role of f‌inancial motives, f‌inan-

cial markets, f‌inancial actors and f‌inancial institutions in the operation of the domestic

and international economies.”

4

Financialization, in our interpretation, is both a

response to structural change and implies an ideological shift that gives greater prom-

inence to f‌inancial actors and their preferences. DEEs face considerable challenges in

advancing economic development for several reasons detailed in the next section. In

this context, the feasibility of industrialization as promoted by the East Asian develop-

mental states in the post–World War II period to become a middle- or high-income

country has been questioned. At the same time, pressures to develop have remained

or even intensif‌ied because of factors such as population growth and greater political

competition. As a result, in many countries, rather than being perceived merely as a

prop to economic development, f‌inancial sectors have increasingly become key

targets on their own of development-oriented policymaking.

5

This is illustrated, as

we discuss in more detail below, by the growing number of countries in both

Southeast Asia and sub-Saharan Africa that publish f‌inancial development plans.

States pursue various forms of f‌inancialization, according to their positions within

the global economic structure and their socioeconomic histories, as a substitute for

or in conjunction with industrial policy. In turn, increasingly f‌inancialized develop-

ment ambitions support f‌inance’s ability to shape growth and investment strategies

and thus its structural power.

We demonstrate this argument with case studies of banking sector transformations

in Malaysia and Nigeria, two large emerging markets, from the early 2000s until today.

The two countries differ in regard to their socioeconomic contexts and potential alter-

native explanatory variables such as the depth of their banking sectors. However, in

both countries the banking sectors have come to occupy a “privileged position”in

what amounts to increasingly f‌inancialized development models.

6

In particular, both

countries have pursued similar reform paths, guided by f‌inancial development plan-

ning. Banking sector consolidations to create large, internationally competitive

572 Politics & Society 50(4)