Lena Rethel

Whose legitimacy? Islamic finance and the global financial order

ABSTRACT Islamic finance is a fast growing segment of international financial markets. Deriving its core principles from the Quran and the Sharia, the objective of Islamic finance is to install a more equitable financial and economic order that at the same time is transaction-friendly. Thus, Islam could be seen as a foundation for the inclusion of the ethical and moral dimensions of economics and markets. This coincides with rising demand for Islamic financial products. Indeed, recent years have witnessed increasing efforts to develop and to institutionalise Islamic capital markets and above all, to make Islamic finance acceptable (and thus investable) to the mainstream. In this article, I use the question of legitimacy to explore whether Islamic finance offers an alternative to the existing international financial order. To this end, I take a closer look at the knowledge base from which Islamic financial products are constructed and assessed as well as the emerging international regulatory framework for Islamic financial markets. I conclude that efforts to expand the social constituency of Islamic finance to the transnational sphere of global finance are overly focused on its epistemic legitimation as normal financial activity. As a consequence, the currently emerging power, knowledge and governance structures for Islamic finance tend to emulate, and therefore largely reproduce, the existing global financial order.

The political economy of the subprime crisis: the economics, politics and ethics of response

Media and policy discourses on the subprime crisis and the ensuing credit crunch have been dominated by historical analogies, whereby a sense of how bad things have been since the autumn of 2007 arises from comparing the situation directly to other notable moments of financial meltdown. Typical of this approach is the measured insistence of the Chair of the US Federal Reserve, Ben Bernanke, that the spiral of illiquidity which engulfed the banking sector in September 2008 provided the most serious threat of systematic bank collapses since the Great Depression. Such constructions are clearly not without justification. Commercial banks have been nationalised at a rate unprecedented in recent memory; the once seemingly omnipresent giant US investment banks have failed to survive in their extant form; the UK has witnessed its first genuine run-on-the-bank dynamics since the middle of the nineteenth century; the interest rate spread between inter-bank lending and government bonds has reached record highs almost worldwide; and the drying up of mortgage lending has led to record annual falls in house prices in many countries. However, as an explanatory device, inference by historical analogy alone places unnecessary and unhelpful restrictions on attempts to understand how events surrounding the sub-prime crisis and its associated credit crunch have unfolded.

Financialisation and the Malaysian Political Economy

This paper argues that taking a short-term look at Malaysias response to the financial crisis of 1997–1998 does not adequately assess the socio-economic transformation that was propagated by the crisis. Most importantly, it falls short of accounting for the shift from a bank-based to a capital market-based financial system that occurred in post-crisis Malaysia and the ensuing increasing financialisation of Malaysian capitalism. This shift has significantly affected both corporate and individual financial cultures and led to the emergence of a new politics of debt. It coincides with rising levels of household indebtedness. Moreover, it has set in motion a metamorphosis of the institutions set up to govern Malaysian capitalism. Este artículo afirma que al observar a corto plazo la respuesta de Malasia a la crisis financiera de 1997–1998, no se logra evaluar la transformación socioeconómica que generó la crisis. Aún más importante, no logra explicar el cambio de un sistema financiero con base en la banca a un sistema con base de mercado de capitales, cambio que se dio durante la post crisis en Malasia, generando un incremento de la financiación del capitalismo. Este cambio afectó significativamente tanto a la cultura financiera individual, como corporativa y condujo al surgimiento de nuevas políticas de endeudamiento. Coincidió con el incremento del nivel de endeudamiento de los hogares. Es más, condujo a la metamorfosis de las instituciones establecidas para regir el capitalismo de Malasia.

The New Financial Development Paradigm and Asian Bond Markets

For the better part of the last century, the debate between ‘liberalisers’ and ‘interventionists’ marked thinking about the relationship between finance and development. It has by now been superseded by the emergence of the discourse of financial system development, which links economic growth to the development of the financial sector. As the risks entailed by wholesale financial reform came to the fore in the financial crises of the 1990s and early 2000s, emphasis shifted from liberalising financial markets to building institutional frameworks to accommodate investment. Arguably, the emergence of the financial-system-development discourse occurred within a wider shift in the neoliberal paradigm towards institution building. These changes are particularly pronounced in East and Southeast Asia. This paper argues that a convergence of opinions has occurred between Asian financial policy elites, previously strong supporters of the bank-based developmental state model, and the liberalisers, represented through international financial institutions such as the IMF. This consensus is geared towards the expansion of capital markets and a generally more neoliberal, market-oriented mode of economic governance. To illustrate this claim, this paper traces institutional changes in Asian financial systems since the 1997-98 financial crisis. Although local characteristics remain, a common feature is the more salient role of bond markets in the financial system. This is the result of the conscious and deliberate development of local currency debt markets by policymakers. However, the new consensus narrows down the space in which economic policymaking takes place. Yet, by re-politicising financial system development, this space could be broadened again.

Introduction to the Political Economy of the Sub-prime Crisis in Britain: Constructing and Contesting Competence

It is almost always inadvisable to try to second-guess the character of a General Election campaign before it begins in earnest. Yet, even in today’s shadow-boxing phase in advance of the British General Election due to be called in 2010, a number of important campaign contours are already in evidence. It is one of the unwritten laws of British electoral politics that governments unravel – particularly those of a certain longevity – as events appear ever more to have spiralled out of their control. The task for the Brown Government in the upcoming General Election campaign is to try to convince voters that there is still life left within Labour despite its current travails with the credit crunch and British banks’ self-imposed entrapment in the subprime crisis. Claim and counter-claim are likely to pass between the Government and the opposition parties as to where the blame lies for the current disarray of the banking sector, whose model of regulation is most responsible and who is best placed to ensure a successful clean-up operation. Whoever is perceived to have come out on top in this debate is likely to stand a very good chance of winning the election.

Neoliberalism, Resource Governance and the Everyday Politics of Protests in the Philippines

I have challenged the mining industry to provide evidence of at least one case of a town that developed through large-scale mining. Up until now, they cannot provide a concrete example. Danny Arias The quote above vividly captures the recent conflicts on the role of mining and social development in the Philippines. Danny Arias, responsible for linking local communities to national campaigns against large-scale mining, contests the possibilities of transnational investments bringing long-term economic development to a country characterized by challenging geographies for mineral extraction, political violence and a history of socioenvironmental disasters. Importantly, his critique opens up an important intellectual space for academic research that places questions of rights, agency and political mobilization as key organizing concepts in understanding why the ‘logic of globalization’ is neither inevitable nor necessarily desirable. As the pace of neoliberal reforms intensifies in the region, ordinary people – especially those with limited material and political resources – make justice claims in very difficult circumstances, sometimes not always successfully, in order to alter the configuration of global and local power structures. Danny Ariass position reflects two important countervailing ideas about neoliberalism and development in Southeast Asia, which we will develop in this chapter. First, Ariass critique reflects the contestation of a neoliberal model of mining management expressed specifically by local political actors sidelined in national political debates. Market reforms in the natural resources sector involved designing complex privatization and liberalization policies. The consolidation of a national anti-mining movement indicates the strength of resistance against foreign direct investment (FDI)-led, large-scale mining (as opposed to mining per se). The movement links the diverse efforts of activists, community leaders and the Catholic Church to think about alternative policy paradigms in the mining industry. Civil society actors question the promise of mining-led development, particularly the governments strategy of attracting transnational investments as a way of spurring growth and raising the contribution of mining to the countrys exports, revenues and potential for technological development. In addition to the national movement, local communities and regional elites have also challenged the normative commitment of the government towards private capital participation through a nuanced critique of large-scale mining. These actors have come to constitute a somewhat unified political voice against neoliberalism as a development paradigm.

Global Governance and the Politics of Crisis

The notion of global governance has always been intimately linked to that of crisis. In recent crisis episodes the architecture of global governance has been held responsible for weak or ineffective regulatory mechanisms that failed to either prevent systemic crises or to at least give an “early warning” of impending disasters, while in other episodes global governance institutions have been blamed for poor crisis responses and management. Global governance institutions have also been blamed for failing to expand the scope of their jurisdictions to incorporate new systemic risks and new market players, as well as for their inability to adapt to new political, economic, social and environmental challenges. The framing article for this special issue on “Global Governance in Crisis” examines four key features of global governance in the context of the global financial crisis: (1) the dynamic role played by ideas in making global governance “hang together” during periods of crisis; (2) how crisis serves as a driver of change in global governance (and why it sometimes does not); (3) how ubiquitous the global financial crisis was as an event in world politics; and (4) the conditions that constitute an event as a crisis. Due to the complexity and institutional “stickiness” of the contemporary architecture of global governance, the article concludes that a far-reaching overhaul and structural reforms in global governance processes is both costly and improbable in the short-term.

LEGITIMIZING CLAIMS FOR ‘CRISIS’ LEADERSHIP IN GLOBAL GOVERNANCE

This paper explores the discursive processes of legitimizing leadership claims in the context of the nuclear proliferation crisis. Three complementary analyses of texts are carried out: discourse analyses of United Nations Security Council (UNSC) resolutions and relevant speeches by members of the US administration, as well as a corpus analysis of news media accounts of nuclear proliferation published in prominent US and UK broadsheets. Findings suggest that leadership claims are legitimized through a range of discursive strategies, which are echoed across the different text types. However, a combination and comparison of the different datasets puts these findings into perspective and reveals that the various contexts and text types in which these leadership claims are made differ remarkably in terms of their use of relevant terms relating to leadership and crisis. We argue that this dynamic is best captured by the notion of an (inter)discursive chain of legitimization.

Innovation and the entrepreneurial state in Asia : mechanisms of bond market development

Abstract Bond markets have expanded rapidly in emerging East Asian economies in recent years. Asian policymakers have played a pivotal role in this development. This process presents an interesting challenge to the developmental state literature associated with bank-based financial systems. We argue that it is best to understand the role of the state as an entrepreneurial state in the construction of these markets, focusing on institutional innovation in three mechanisms of state-led market infrastructure: national or local credit rating agencies, mortgage corporations and bond pricing agencies. National credit rating agencies rate the creditworthiness of debt in local currency. Mortgage corporations create markets in securitised housing loans. Bond pricing agencies put a value on illiquid debt instruments to enable mark-to-market portfolio management. Together, these three mechanisms constitute the core determinants of the market (demand for creditworthy products, supply of tradeable assets, and the fixing of a price to those assets). In so doing they influence the nature of market operations, producing outcomes very different from the free market ideal type. We also consider cross-country commonalities and variations in this general pattern.

Economic Governance Beyond State and Market: Islamic Capital Markets in Southeast Asia

ABSTRACT Islamic finance has become an integral part of the financial systems of the Muslim-majority countries of Southeast Asia. At the same time, Southeast Asia has witnessed the emergence of new capital market governance practices and arrangements that are both multi-scalar and multi-sited. This article suggests that rather than only looking at the scale and rescaling of capital market governance in the region, more attention needs to be paid to the shifting balances between regulatory expertise, market practice and societal expectations. Indeed, for governance practices to be considered effective, they have to straddle at times competing demands of authority and legitimacy. This dynamic is nowhere as visible as in the case of Islamic finance, which explicitly involves Shariah experts, trained in Islamic law, in its governance structures. This article explores the novel forms of governance to which this new market has given rise. It argues that Islamic finance – rather than the product of privately held beliefs – has become increasingly bound up with the state apparatus. This facilitates the embedding of Islamic financial principles and ethical concerns throughout capital markets in the region. Yet, Islamic finance has also become increasingly submerged within national development and competitiveness agendas.