Diversity Amid Convergence: State Authority, Economic Governance, and the Politics of Securities Finance in China and India
Ph.D. (Political Science) May, 2006.

This dissertation explains the contrasting patterns of financial reform in China and India. It explains the divergence by establishing "securitization" - the structural shift from credit-based finance (banking) to securities-based finance (stocks and bonds) - as a politically consequential phenomenon that has largely escaped the notice of research in comparative and international political economy. This analysis involves an exploration of the politics involved in the commodification of finance. Late developing states have historically used the management of finance as a crucial lever of economic control and political power. Securitization challenges this model of state-economy relations. It can shape who controls the economy and how they shape it.

This study revises common theories of the developmental state, theories derived from Gerschenkron's emphasis on directed-credit and the state's role in capital formation, in light of securitization's growing importance in the last twenty years. Banking and directed-credit are socially and politically embedded practices in which finance is not a commodity. Securitization "disembeds" finance, as funding, ownership, and control are commodified in the form of stocks and bonds. In the tradition of 'open-economy' analysis, the thesis explains differing responses to a common event - securitization - with reference to international and domestic variables. These variables include the country's position in the world economy, the distributional coalition supporting the state, and the structure of property rights. Based on eighteen months of fieldwork, qualitative analysis of over two hundred interviews, and numerous official documents and financial data sets, the dissertation draws a number of conclusions.

At a theoretical level, the thesis highlights the political consequences of the securitization shift for state authority in the economy, arguing that directed-credit, 1) enhanced state discretion in the management of distributional coalitions; 2) facilitated the perpetuity of poorly specified property rights; and 3) mitigated the consequences of the country's position with respect to external trade and investment. The development and regulation of securities finance is politically and institutionally demanding, provoking struggles over the property rights implications of securitization within the dominant political coalition, encouraging a shift in the way state authority is exercised in the economy, and requiring the capacity for "procedural supervision" in place of the old developmental state's institutions of "distributive intervention."

Empirically, the dissertation demonstrates that China and India responded very differently to the process of securitization, contrary to the expectations of globalization theories that identify finance as a domain in which international forces favoring convergence should be strongest. Some formal indicators, such as trading practices and market growth present an appearance of convergence; but in terms of substantial institutional and market outcomes, the two countries' systems of securities finance developed in very different ways over the 1990s. The thesis also shows that, in contrast to the scholarly depiction of China's authoritarian system as superior to India's democracy in the reform process, in the area of finance, Indian and Chinese reform patterns are mirror images: reform with substantive change in India, reform without substantive change in China. India's securities sector reform has out-performed relative to other Indian sectors and relative to Chinese securities reform. Chinese securities reform has under-performed relative to other Chinese sectors and relative to Indian securities reform.

Finally, most scholars have viewed China's massive foreign exchange reserves and world-topping volumes of foreign direct investment as signs of economic strength. This thesis suggests precisely the opposite: these signs may indicate Chinese vulnerability to the "curse of prosperity." Akin to the institutional problems afflicting oil producing rentier states, the "curse" in China has produced an unhealthy economic and political dependence on foreign investment and exports that has enervated the capital market, leading to deep and durable inefficiencies in the mobilization, allocation, and governance of finance. India, on the other hand, has made a virtue of its weakness, exploiting the "advantages of adversity." With little foreign direct investment, few exports, and (until recently) scant hard currency reserves, India has been forced to develop, in the space of a single decade, world-class securities markets and a rich tapestry of securities governance institutions in order to better mobilize and direct financing and attract foreign portfolio investment.

The dissertation advisors are Peter Katzenstein, Vivienne Shue (co-chairs), Ronald Herring, and Jonathan Kirshner.

More thesis material is available upon request.