Fundamental, Regressive, and Structural Financialization before and after the Great Recession

Abstract

The paper investigates three major debates on contemporary economies: (i) if the major components of real economic activity (RECs) stimulate financial development (FND) but not vice versa, (ii) if RECs and FND jointly suppress labor, and (iii) if these two dynamics have incurred any substantial change after the Great Recession of 2008 and 2009. The paper, to this end, (i) introduces a clear-cut definition of financialization from a complementarity-theoretic approach, disaggregating it into three types: fundamental, regressive, and structural; (ii) disaggregates FND into three types: aggregate financial development (AFND), financial organizational development (FOD), and financial market development (FMD); (iii) investigates the causal relationships among RECs and AFND-FOD-FMD, and their separate and joint impact on the compensation of employees (COEs); and (iv) evaluates 12 high-income (HICs), eight upper-middle-income (UMICs), and seven lower-middle-income countries (LMICs) using the Panel Vector Autoregressive Model and Panel Granger Causality Test for the periods 1980-2007, 2008-2018 and 1980-2018. The paper concludes that there was fundamental, regressive, and structural financialization in the HICs in the period 1980-2007 but only regressive financialization in the period 2008-2018, and that there was no clear-cut financialization in the UMICs and LMICs.