Financialization and Hysteresis: The Case of Chile

Abstract

The changing relationship between the financial and non-financial sectors in both developed and developing economies during the past three decades has been labelled ‘financialization’ — a process entailing the “metastasization of financial motives, financial markets, financial actors and financial institutions in the operation of domestic and international economies” (Kotz 2009). In Chile, this transformation has been maligned by all manner of deleterious macroeconomic consequences, including tepid real economic growth, increased financial instability, widening distributional inequality, stagnant productivity and, most notably, a ‘missing link’ between profits and investment (T. Palley 2007). By way of a simple, post-Kaleckian, endogenous growth model, we explicate the following overarching causal conduit between these phenomena: a self-perpetuating cycle of rising inequality, financialization, deficiencies in effective demand, financial speculation, reduced investment, stagnant productivity, slow growth, and so forth (Hein 2015). A remedial policy regime, based on inclusive development and the socialization of investment, is accordingly posited.