An interesting speaker at this Friday’s TASC conference in Croke Park will be Ṏzlem Onaran, Professor of Economics, University of Greenwich. She has written several very interesting papers on investment, on the negative impact of financialisation on investment, and on equality-led growth. A new policy brief on the TASC’s economic inequality website sets out the specific implications for Ireland.
Written with others, this study is on a much needed strategy for investment and equality-led development.
Onaran et al argue that Europe needs directed public investment policies which should be accompanied by industrial policy, higher equality, stimulated demand, and regulation of finance and corporate governance.
“Our research presents strong empirical evidence that expansionary fiscal policy is sustainable when wage and public investment policies are combined with progressive tax policy; the impact is stronger when these policies are implemented in a coordinated fashion across Europe due to strong positive spill over effects on demand.”
Onaran et al also conclude that “A strong investment performance also requires a process of de-financialisation of the economy and a new approach to corporate governance.”
In another paper Onaran, with Daniele Tori, examine the effects of financialisation on investment. Their research into the impact of financialisation on European public companies, demonstrates that it leads to lower investment and stagnation. They find that there is crowding-out of investment in large companies and also on SMEs as institutions and others invest in finance rather than in the real economy.
They set out new micro-econometric evidence on the effects of financialisation on firm-level investment in Europe, using data of publicly listed non-financial companies (NFCs). They focus on three areas.
Firstly, even though higher gains from financial investment can relax NFCs’ cash-flow constraint, they can adversely affect investment by crowding-out physical investments.
Secondly, increasing financial payments for external finance and favouring the shareholders (i.e. rising interest and dividend payments) may reduce the NFCs' funds, and thus investment.
Thirdly, even though financial development (the growth of stock markets and financial intermediaries) may allow efficient allocation of investment resources, it can also push NFCs’ management to ‘financialise’ their companies’ strategy, and suppress investment in fixed assets.
They find that financialisation, (depicted as the increasing orientation towards external financing, shareholder value orientation and the internal substitution of fixed investment by financial activity), has had a fundamental role in suppressing investment in the NFCs. Secondly, “financial development has an overall negative effect on NFCs’ accumulation, by increasing the adverse effects of both inward and outward financialisation.”
They point out that financialisation of the European economic and social system has been policy of the EU and most governments with the deregulation of financial markets and at the reduction of tax rates for corporations. Accordingly, they find that “financialisation had a fundamental role in depressing NFCs’ investment in Europe.”
Apart from the re-regulation of the financial side of our economies (both at the macro and at the corporate levels), the reform of a financialised system needs coordinated public investments.
Their research finds a 32% decline in re-investment (between 1995 and 2015) which is deeply disturbing. “Overall, the slowdown in investment has been remarkable in Europe, with a 32% decline in the re-investment rate on average, where NFCs are investing about 33% of their profits as of 2015; this ratio was 50% in 1995. The highest fall is in Sweden (-49%), the UK (-32%), and Italy (-28%).”
They set out solid recommendations on fiscal policy and for a programme of public investment and re-regulation.
Paul Sweeney @paulsweeneyman
Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions. He was a President of the Statistical and Social Enquiry Society of Ireland, former member of the Economic Committee of the ETUC, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.
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