COVID-19 and the Hyper-Crisis of Neoliberalism: The Breakdown of Financialization

The cu rr e nt hype r- C r I si s of lezak, Reeves & Swartz, 2020). In response to

capitalism can be seen as an exacerbation of the it, they are urging governments to inject mon-

functional contradictions manifest in the glob- ey into their economies to minimize the lack

al economy since the 1970s, which peaked in of liquidity in businesses and keep economic

the crisis of 2008. However, the unprecedented activity afloat. Although such measures also

COVID-19 pandemic, like an echo chamber, seek to reduce large investors’ exposure to the

has amplified the failures of the economic mod- abrupt movements of capital which are occur-

el that has driven the transformations associated ring on securities exchanges, thereby preventing

with the global imposition of neoliberalism. In further contagion in the financial sector and

the network of global governance, organizations safeguarding its tenuous stability, the argument

like the International Monetary Fund (IMF), holds up only on the assumption that the COV-

the Organization for Economic Cooperation ID-19 pandemic is an external shock. As such, it

and Development (OECD), and the Institute of only impacts the markets indirectly through the

International Finance (IIF) are portraying this shockwaves it sends through the economy, the

hyper-crisis of global neoliberalism as a cri- psychology of investors, the financial markets,

sis of imbalances between the productive and and the political leaders charged with making

financial sectors (Gürcan 2019; Carlsson-Sz- economic decisions.

In this context, the radical social distancing commercial banks, presaging a rupture in global

measures adopted in the attempt to contain the processes of financialization. Finally, we present

spread of the SARS-CoV-2 virus have caused vi- some conclusions which will further help ana-

olent disruptions in economic activity, which are lyze this hyper-crisis of global neoliberalism and

resulting in loss of jobs and loss of income for the network of financial governance.

businesses and families. This in turn is translat-

ing into tremendous stresses on patterns of local The Productive Sector, Value Chains,

and global consumption. Thus, the imbalances and COVID-19

in productive activity are deflationary. The crowning achievements of globalization, in

However, this explanation ignores the real the productive sphere, include global produc-

systemic nature of the hyper-crisis of mod- tion chains whose links are articulated in dif-

ern-day neoliberalism. The appearance of COV- ferent parts of the world based on the concord-

ID-19 has merely accelerated the breakdown of ance in levels of productivity of the workforce in

the agglutinating mechanisms of globalization in the various countries which form the essential

the real sector. It has revealed in uncompromis- parts of the structure. Such chains emerged in

ing terms how governance based on financiali- response to growing pressures on companies to

zation has failed to bolster global productive and lower the costs of supplying their products, lead-

commercial activities, and instead served only ing them to design business strategies focused

to advance a sharp redistribution of resources on creating lean manufacturing with hubs via

for the benefit of society’s wealthiest. As a result, delocalization and subcontracting. An impor-

under the present crisis, the standard of living of tant aspect of this process is that reducing costs

workers and their families will fall to levels not depends fundamentally on eliminating or avoid-

seen since the Great Depression. Consequently, ing interruptions in supply chains. In this sense,

poverty and marginalization among the needi- the paralysis of trade flows produced by the on-

est, most vulnerable sectors of the global popu- going hyper-crisis of neoliberalism shows that a

lation will increase. large majority of global companies have failed to

This article was prepared based on this fun- develop logistical strategies to mitigate their risk

damental reflection; it is divided into two sec- exposure in relation to the slump in productive

tions. In the first section, we analyze the effects activities in the Asian manufacturing sector. This

of the hyper-crisis of capitalism triggered by the is because, very few international conglomerates

COVID-19 pandemic on one of the founda- are fully aware of the networks and locations of

tions of neoliberalism, the paralysis of produc- all the companies which provide parts to their

tive chains and the effects of this on the supply direct suppliers, due to their organizational scale

of goods on global markets. The second section (Haren & Simchi-Levy, 2020Haren & Simchi-Levy (2020). The source article does not provide a separate full bibliographic entry for this citation.).

examines the pressures the economic and social For example, in the textile and garment

consequences of the pandemic are exerting on industry, retailers and marketers of clothing de-

the financial markets, especially in the sovereign pend on full-package supply networks, in which

and corporate debt segments; without overlook- they buy garments made in Asia from manufac-

ing the fact that uncertainty and restrictions on turers in Hong Kong, Taiwan, and South Korea.

liquidity are already affecting the functioning of When wage levels in those countries rose, man-

ufacturers in East Asia started developing mul- generate ever-greater earnings has reached a

ti-layer global supply networks which allowed point of saturation, and costs of research and

them to implement assembly bases in low-wage development have risen; meaning that, in many

countries in Asia, Africa, and Latin America. traditional markets and activities, profit margins

Brand clothing manufacturers tend to create are far below the levels of the 1990s, when global

production networks in which garments are as- value chains were in a process of full expansion.

sembled using inputs imported from regional With the opening of economies and the im-

production networks. US manufacturers go to position of different export-led growth models

Mexico and the Caribbean Basin, while compa- (ELGM), global supply chains became differ-

nies from the European Union work more with entiated among countries, resulting in a rapid

North Africa and Eastern Europe (Gereffi, 1999; succession of important shifts in positions of

Audet, 2004; Tewari M, 2008). leadership in the global economy and trade. On

the one hand, capitalist production (based on a wage-earning workforce) in the United States Now, the paralysis of trade and the

contraction of global investment has ceased to be profitable several decades ago;

produced by the COVID-19 since then, it has operated under a strategy

pandemic is merely reproducing on which entailed increasing leveraging by families

a larger scale the choking of supply and companies to maintain domestic demand

networks in global value chains, and consumption (Debt-Led Growth Model). In

which accompanied changes in contrast, China, with its cheap and seemingly in-

global productive and commercial exhaustible workforce, opted for an export-based leadership. development strategy (Strongly Export-Led Growth Model). Not only did it become a glob- With the hyper-crisis of global neoliberalal manufacturing center; it displaced the U.S. as

ism, these networks of manufacturers, differen- the global leader in commerce. Now, the paraly-

tiated and sustainable in a globalized economy sis of trade and the contraction of global invest-

operating without major disruptions, are facing ment produced by the COVID-19 pandemic is

choke points and bottlenecks which slow inter- merely reproducing on a larger scale the choking

national production processes, resulting in job of supply networks in global value chains which

losses and slumping levels of global consump- accompanied changes in global productive and

tion and commerce. The situation has been exac- commercial leadership.

erbated by the fact that the increasingly complex In Latin America, neoliberal globalization

intersecting networks of global supply chains consolidated two models of specialization in

developed without a centralized administrative production and participation in global com-

strategy capable of assessing the potential risks merce. The first, adopted in countries like Ar-

created by an interruption in the supply chain gentina, Brazil, and Chile, features a heavy re-

they depend on for essential inputs (Gertz, liance on natural-resource-based industries to

2020). In parallel, the war among capitalists to produce products like vegetable oils, pulp and

tage: cheap unskilled labor (Katz, 2001Katz (2001). The source article does not provide a separate full bibliographic entry for this citation.). This was despite the fact that sectors of the region’s export industries produce with low added value. Consequently, the productive specialization of the aforementioned Latin American countries was associated with two different forms of subordinate insertion in global commerce. In the case of Argentina, Brazil, and Chile, commercial integration was accomplished through what is known as the Weakly Export-Led Growth Model; this did not lead to significant changes in their traditional productive structure, but did produce substantial

(Xinhua/Wang Fei, 2020Xinhua/Wang Fei (2020). The source article does not provide a separate full bibliographic entry for this citation.) external imbalances. In the case of Mexico and

some countries in Central America, commercial

paper, iron and steel, fish meal, aluminum, or- development was based on a Debt-Led Growth

ange juice, and other goods. Such industries are Model, in which policies of stabilization and fi-

usually capital intensive and highly automated, nancial deregulation facilitated a massive influx

using discontinuous-flow production processes of capital. This, through indebtedness, sustained

and relatively little labor. The second, developed private consumption (Lavoie & Stockhammer,

mainly in Mexico and some Central American 2012; Hein & Mundt, 2012).

countries, was characterized by the consolida- These models of commercial insertion have

tion of a tendency toward specialization in as- led to a polarization of manufacturing produc-

sembly (contract manufacture) in industries tion. The first pole of production rests on the

which produce computers, televisions, video sector of micro -small and medium- sized busi-

players, and garments for export to the United nesses which produce consumer goods of low

States. These sectors rely heavily on unskilled la- capital intensity for domestic consumption; the

bor ( Katz & Cimoli, 2001Katz & Cimoli (2001). The source article does not provide a separate full bibliographic entry for this citation.) second pole is made up of large multination-

The industrialization patterns of recent al corporations which produce raw materials

decades produced two modes of participation (iron and steel) and/or products assembled in

in international commerce for the economies of the contract manufacturing (maquiladora) in-

Latin America. It is noteworthy that before the dustry (e.g. computers, automobiles) for export.

COVID-19 pandemic shook the very founda- This produces highly differentiated growth rates,

tions of neoliberal globalization, Latin Ameri- which in turn reflect the varying elasticities of

can countries had sought to maximize their eco- demand on the domestic and foreign markets.

nomic openings through free-trade policies in The factor common to productive specialization

an attempt to produce a dynamic change in the and insertion of Latin American countries in in-

structure of local production, based on what was ternational trade circuits is the precariousness

seen as the region’s natural comparative advan- of work. This became the basis for these states’

Graphic 1: Figures are for the latest available year (2015–2018). Source: OECD, National Accounts Statistics: National Accounts at a Glance. OECD: https://stats.oecd.org/

competitiveness, which explains the substantial thereby to establish sustainable debt mecha-

contraction in consumer goods at the global lev- nisms for wage earners to drive the growth of

el since the 1970s. domestic consumption.

From a broad perspective, the pandemic According to the International Labour Or-

crisis has shown that consumption as an engine ganization (ILO) (2020), around 6.7% of all jobs

of growth, based on global production process- are expected to be lost in the second half of 2020

es, has very narrow limits. On the one hand, as a result of the economic impact of COVID-19;

the purchasing power of workers in developed this is equivalent to 195 million full-time work-

countries is associated with their capacity for ers.1 This in turn will cause a massive spike in

indebtedness. In most cases, the total debt of household debt in relation to income, triggering

households greatly exceeds their total dispos- a sharp drop in private consumption, especially

able income (Figure 1). In developing countries, among low-income, high-debt households. For

boosting demand among the working class de- example, “the bottom 90% of households by net

pends on their economies being able to increase wealth represents more than 72% of outstanding

formal employment to build a consumer base debt in the U.S., but controls less than 15% of fi-

similar to those of developed countries, and nancial assets” (IIF, 2020aIIF (2020a). The source article does not provide a separate full bibliographic entry for this citation.). Thus, lower-income

1 The ILO estimates this figure based on variations in working hours; it reflects both layoffs and other temporary reductions in

working time.

Graphic 2: Figures are for the latest available year (2012–2018). Informal employment includes own-account workers outside the formal sector, contributing family workers, employers and members of producers' cooperatives in the informal sector, and employees without formal contracts. This harmonized series on informality is derived from processing national household survey microdata files using a consistent approach. Source: ILOSTAT

families are more vulnerable to the economic Financial Markets, Financialization,

consequences of the COVID-19 pandemic. and COVID-19

For Latin America, the direct impact of the Another pillar of neoliberal capitalism shaken

pandemic on the job market is an upturn in lev- by the COVID-19 pandemic is the global net-

els of informal employment. While at present, work of financial markets; particularly sovereign

60% of the economically active population al- and corporate debt markets, and, by immediate

ready depend on the informal economy, massive contagion, private banking. In other words, the

basic network of institutions of neoliberal finanlayoffs – some of which have already begun, and cial governance on which global financialization more are anticipated – will increase pressures has relied over the last 40 years. This is underon the job market, and by extension levels of stood as the unbalanced relationship between

informal employment. With the loss of jobs in the financial and real sectors of economies,

the formal economy, consumption will fall even which has been identified within globalized cap-

further from the levels seen before the pandemic italism as the tendency for the value of trans-

(Figure 2). actions in the financial sector to greatly exceed

the value created in the real sector (Toporovski, ers, the global persistence of informal employ-

2000; Epstein, 2005; Bellamy & Magdoff, 2009; ment, which comprised almost 50% of the total

Lapavitsas, 2011). This gap has widened as pol- active workforce, and inequalities of earnings be-

icies of financial liberalization and deregulation tween the top executives of large companies and

– encouraged under the Washington Consensus the lowest salaries of the rest of the workforce,

by the pillars of global financial governance, the were compounded by other phenomena which

IMF, OECD, and IIF – were complemented by boosted indebtedness among workers and their

the opening of capital accounts, favoring the families. The relocation of companies and poli-

global movement of capital and the execution of cies of labor flexibilization, based on outsourc-

cross-border financial transactions. ing, exacerbated the loss of collective bargaining

capacity and contributed to the weakening of job markets; this in turn caused a cheapening of la-

Under neoliberal globalization, bor and a drop in its share of salaries in global

financial transactions – purchases income from the levels seen in the 1980s. Thus,

of instruments, debt, and loans for families with formal jobs increasingly took on

purposes other than production or debt as a complementary means of maintain-

commerce – have gained a never- ing their level of consumption (ILO, 2008; 2011,

before-seen autonomy from the 2013; 2017).

real sector. In the global financial crisis of 2008, the bursting of the real-estate bubble was first felt

Following this approach, the interrela- in banking circles. Due to the ties among inter-

tionships between financial markets, institu- mediaries (mortgage, commercial, and invest-

tions, and instruments were linked to a system ment banks, and institutional investors), this

which depended for its smooth functioning on evolved into a crisis which dragged down the

the existence of exchange stability; sufficient li- leading banks in developed countries and their

quidity in the interbank market; and low, stable institutional investors (insurance companies,

exchange rates which would permit both valida- investment funds, and pension funds). With the

tion of debts and payments and the valuation of collapse of the network of bank obligations and

portfolio investments in the financial market. the disappearance of liquidity in interbank mar-

Under neoliberal globalization, financial kets, the crisis spread to the real sector, affecting

transactions – purchases of instruments, debt, all companies which had made investments in

and loans for purposes other than production or structured products, collateralized debt obliga-

commerce – not only gained a never-before-seen tions (CDOs), and other derivatives (swaps, for-

autonomy from the real sector. They became a wards, options, etc.), or which had taken part in

source of speculative earnings for large investors processes of securitization; that is, debt transfer

and global companies able to benefit from move- strategies which were incorporated in packages

ments of capital and their effects on interest and tradable on the stock exchange.

exchange rates; variables which directly impact In fact, the world economy never overcame

the behavior of prices of stocks, securities, and the effects of the 2008 crisis. To a great extent,

credit. At the other extreme, in the case of work- the funds from government bailouts and mon-

etary policies of quantitative easing, whose goal fore, on the one hand, problems of public liquid-

was to boost liquidity in markets by increasing ity are increasing as governments have had to

bank reserves, served instead to clean the bal- make extraordinary expenditures on healthcare

ance sheets of large intermediaries affected by and unemployment benefits; on the other hand,

the crisis. There followed a round of mergers corporate revenues are falling due to supply bot-

and acquisitions in the global banking indus- tlenecks in global value chains and the paralysis

try, augmenting its international concentration. of global trade, combined with falling demand

Thus, the assets of the world’s 10 largest banks due to layoffs and confinements. This has re-

– 4 of them Chinese, 1 Japanese, 2 American, duced opportunities to diversify investments to

1 English, and 2 French –add up to U.S.$28.54 their lowest possible level.

trillion (Kim, 2016; Rao-Nicholson & Salaber, The evolution of debt figures between 2008

2016). Amid widespread job losses and the clo- and 2019 is more than illustrative. In this peri-

sure of companies resulting from the COVID-19 od, global government debt doubled, reaching

pandemic, past-due loan portfolios of the highly U.S.$70 trillion, while non-financial corporate

concentrated international banks will increase debt reached U.S.$74 trillion. Considering all exponentially, affecting their financial gains and economic sectors, in 2019 alone debt rose by the availability of credit to productive sectors. U.S.$10 trillion to reach U.S.$255 trillion, almost This will not only contribute to the ongoing 322% of global GDP. One could only anticipate global recession and stagnation, but also erode the further exacerbation of these conditions in the already precarious stability of international the post-coronavirus period. financial systems. In Latin America and the Caribbean, Unlike the 2008 financial crisis, the presgrowth of debt through issuance of sovereign ent hyper-crisis of neoliberalism has seen the and corporate bonds has also been significant, composition of debt shift from bank credit to reaffirming the subordination of real-sector acbonds. As a result, the fundamental uncertainty tivities to the flows of liquidity between global in financial activities today is produced by the

high levels of debt in the form of bonds. This has financial centers. The region’s sovereign debt

sowed panic among large investors, who do not rose from U.S.$10.2 billion to U.S.$42.4 billion

expect that in the short or medium term, their between 2008 and 2019, and corporate debt

issuers – corporate and sovereign debt – will surged from U.S.$8.8 billion to U.S.$72.6 billion

be able to redeem their obligations; even more in the same period. Most importantly, the av-

so when the long-term outlook (between three erage gross public debt of central governments

and five years) does not include forecasts which allow them to anticipate achieving a minimum This is critical because, to sustain

balance between risk and yield. the financial lines of support to

Amid the current hyper-crisis, obligations business, governments have to

in the form of government and corporate bonds trade sovereign bonds, since parts

are collapsing because there are no prospects for of their central bank reserves are

long-term profitability for investment funds and invested in government debt issued

large institutional investors worldwide. There- by other countries.

throughout the region grew to 44.8% of GDP For corporate debt, an additional risk de-

in 2019, an increase of 14.4 percentage points rives from economic and financial damage to

compared to 30.4% of GDP in 2008 (IIF, 2020b; supply chains. This results from potential in-

ECLAC, 2019, CEPAL, 2020). solvency preventing clients from paying their

Governments and corporations face differ- debts and uncertainty in establishing credible

ent problems. The former are experiencing rising contracts in terms of compliance between com-

fiscal deficits and financial demands to confront panies, suppliers, and clients. In addition, pric-

es for insurance policies and premiums correthe COVID-19 pandemic, implying a new wave sponding to commercial hedging strategies will of sovereign debt which, in a context of conreach unsustainable levels. tracting global liquidity, means greater stresses In the context of a highly concentrated global on global securities markets and reduced access banking sector – which, combined with securities to liquidity on secondary markets. exchanges, is another of the operational pillars of This is critical because, to sustain the finanfinancialization – the instability of bank revenues,

cial lines of support to business, governments derived from noncompliance with contractual

have to trade sovereign bonds, since parts of terms for debt and payments between banking

their central bank reserves are invested in gov- intermediaries and large companies, exposes the

ernment debt issued by other countries. The fragility of access to liquidity in the global bank-

problem is that such debt is being sold at the ing market. Due to the damage the COVID-19

same time as higher-risk variable-income assets. pandemic is inflicting on the payment capacity of

Consequently, the guarantees for government debtors, whether companies or families, the qual-

loans, which allow companies to acquire debt ity of bank assets will diminish as banks’ revenue

on the financial markets, cannot be enforced; streams dry up due to defaults on payments and

in other words, they must be written off and the falling fees and rates. The harmful effects of the

resulting losses will then appear on government COVID-19 pandemic range from loss in value of

balance sheets, giving a further boost to the companies’ fixed assets and sales, loss of family

spike in all countries’ sovereign debt. earnings, and unemployment, to lower consumer

spending on retail businesses. In the case of corporate debt, the core prob- Even if interest rates remain low, any inlem is that corporate fixed-income securities tend crease in loan volumes may result in higher delinto be more closely correlated to stocks. Therefore, quent portfolios for banks. Thus, bank losses will when stocks lose value, historically bonds also fall, rise in parallel to the problems of other sectors of and high-yield bonds tend to drop (credit spreads the economy: small businesses, tourism, hotels, expand) much more than investment-grade entertainment, and air transportation. A sub-

bonds (McKinsey Global Institute, 2018; Çe- stantial slowdown in investment banking activity

lik, Demirtaş & Isaksson, 2020). In this context, is also to be expected due to the cancellation of

even commodities like gold have not been spared investment projects by companies in global man-

from massive sales and falling prices. Therefore, ufacturing, wholesale commerce, aviation, and

the risks of investments other than sovereign and energy; particularly the oil and gas sector, which

corporate debt are also extremely high as a result is immersed in an ongoing crisis that has had an

of the COVID-19 pandemic. unprecedented impact on production and prices.

As a result, the cumulative structural im- will be tested, to the extent that such guaran-

balances between the real and financial sectors tees will prove unenforceable and be added to

in the wake of the 2008 crisis have merely been ballooning public debt and financial obligations

augmented by the slowdown in business activ- assumed by governments. Thus, the obligation

ity, rise in unemployment, and loss of earnings of states to operate on the basis of tax surpluses

resulting from the impact of COVID-19 on all is losing the positive economic meaning which

sectors of the economy. Thus, the harm to eco- the institutions of global financial governance

nomic activity is global. Advanced economies gave it for decades. Now more than ever it is

are expected to suffer an average GDP contrac- crucial to recognize the need for fiscal spending

tion of 6.1% (6.0% for the U.S., 7.5% for the Eu- and monetary policies to be subject not to the

rozone). For emerging markets and developing dogma of a balanced budget, but the real need

economies, anticipated losses are in the order of for economic growth.

0.1%; in Latin America and the Caribbean, GDP In this sense, the results of efforts to reacti-

is expected to fall by 5.3% (CEPAL, 2020CEPAL (2020). The source article does not provide a separate full bibliographic entry for this citation.). vate the global economy are uncertain; they will

The tensions COVID-19 has created in the depend on the world’s ability to create a strategy

network that has supported financialization in for economic growth different from that which

the economies of countries, businesses, and preceded the hyper-crisis of neoliberal capital-

families, have various impacts. Based on the ism triggered by the COVID-19 pandemic.

scale of the damage caused to financial markets,

we can expect to see further questioning of the Conclusions

institutions in the financial arena which have For at least 40 years, globalization favored the supported neoliberal governance and its policonsolidation of neoliberalism, which found in cies of financial deregulation and liberalization, the creation of global value chains and the openfomenting cross-border financial businesses ing of national economies: the perfect means which produced massive speculative gains to the to differentiate countries’ spaces of reproducdetriment of the real sectors of economies. The tion in productive and commercial terms. Most

process began with banking and non-banking developed countries made global commercial

financial intermediaries expanding their opera- networks and control of markets the source of

tions without seeing massive flows of financing expansion and profitability for their companies.

and funding for investments in the areas of pro- However, emerging and developing countries

duction and circulation. Then came the deregu- – with some exceptions in emerging countries

lation of operations, with financial instruments which rapidly took the lead in productive indus-

and securities used for acquisition of assets with try and commerce – assumed subordinate roles

debt; not to increase installed capacity, diversify in supply networks within those chains and fo-

markets, or increase investment volumes, but so cused on producing raw materials or products

that large companies could have financial assets with low added value. Against this backdrop,

on their balance sheets with which to speculate the outbreak of the SARS-CoV-2 virus and the

at times of greater financial instability and re- COVID-19 pandemic has accelerated the break-

duction in global liquidity. down of lines of communication in global gov-

Also, funding of operations on markets for ernance, especially in supply chains between

debt instruments with government guarantees developed and developing countries which sus-

tained global value chains. This will exponential- signed to reverse the supremacy of the financial

ly boost unemployment and plunge into insol- sector over the real sector of the economy, which

vency households which have maintained their requires giving global finance new content. On

level of spending by taking on debt. the other, the prevailing contradictions of neo-

But the COVID-19 crisis is also torpedoing liberal governance, in terms of the tensions be-

the functioning of financial markets; further re- tween the needs of major global economic play-

vealing the limits of financialization, which were ers and the international workers’ struggle for

already visible in the crisis of 2008. The immedi- better living conditions, must be exploited: this

ate economic perspective prefigures severe prob- hyper-crisis of global neoliberalism will force us

lems for sovereign and corporate debt markets, to redefine the structure of income distribution

but also for the commercial banking sector: to between capitalists and workers for the remain-

face the crisis, governments are increasing their der of the 21st century.

sovereign debt even more and corporate secu-

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