Local Finance for Sustainable Local Enterprise Development: The Role of International Development Assistance in Identifying and Promoting Best Practice in a Post-Neoliberal World

Abstract

One of the central claims of the new generation of neoliberal economists that emerged in the 1960s, especially in the USA, was that market-driven private sector financial institutions were by far the most effective at intermediating capital into the most productive uses (Friedman, 1962; McKinnon, 1973: Shaw, 1973). Thanks to newly elected neoliberal-oriented governments in the USA and UK in the early 1980s, this academic viewpoint was soon embedded in global financial policy. The result was that a new form of ‘financialized’ capitalism came into existence (Epstein, 2005). However, ‘financialization’ turned out to be one of the major disasters of neoliberalism because very many financial institutions changed to become very destructive indeed: they no longer operated to help generate new wealth for all through rising productivity, but increasingly operated simply to redistribute existing wealth into the hands of a narrow investment and financial elite. A hugely risky, economically destructive and inequality-driving dynamic was catalyzed into existence (Harvey, 2004; Galbraith, 2014; Piketty, 2014). This paper extends the analysis of the impact of ‘financialization’ to focus on the local financial system that emerged in the neoliberal era, with the geographical focus on the global south. The paper goes on to identify the core requirements of a post-neoliberal ‘best/better practice’ model of ‘developmental’ local finance for local enterprise development. It centrally argues that there is an urgent need (once more) to ensure that scarce financial resources are locally intermediated into the ‘right’ enterprises that have defined productivity-enhancing and development-driving characteristics related to scale, technology, innovation, high skills, vertical and horizontal connections, employee participation, and the ability to develop new organizational routines and recombine assets in order to locate more productive and cooperative ways of working (Reinert, 2007; see also Bateman, 2013b).Using the many examples of successful local financial systems that have emerged since 1945, especially the case of China, the paper concludes that only by urgently reinventing and restructuring local finance as a ‘developmental’ project will it be possible to begin to address the significant damage created by forty years of local neoliberalism.