occupation Jersey 2007 by Pat Lucas
How over sized financial centres attack democracy and corrupt economies
By Nicholas Shaxson and John Christensen
It is now well known that many countries which depend on earnings from natural resources like oil have failed to harness them for national development. In many cases it seems even worse than that: for all the hundreds of billions of dollars sloshing into countries like oil rich Nigeria, for instance,
such places seem to suffer more conflict, lower economic growth, greater corruption, higher inequality, less political freedom and often more absolute poverty than their resource poor peers.
This paradox of poverty from plenty has been extensively studied and is known as the Resource Curse.
This book asks whether some countries with over sized domestic financial centres may be suffering from a similar, and related, phenomenon.
We find strong evidence that the answer is yes and not just for reasons related to the Global financial crisis that erupted in 2007/8.
Perhaps, more surprisingly, this phenomenon that we are calling the Finance Curse is similar in many ways to the Resource Curse, there are big overlaps in both their causes and their effects.
The Finance Curse has been evident for decades and if untreated it may well endure for years or even decades after the latest crisis has blown over.
Every economy needs its financial plumbing and for decades academic studies suggested that bigger is generally better when it comes to financial sector growth.
The crisis has called all that research into question. New evidence is starting to emerge from the IMF, the Bank for International Settlements and others, revealing that above a certain size finance turns bad.
Our book, drawing on our many years of hands on experience of both resource dependent countries and finance dependent ones, goes far beyond the boundaries of their research to create an unprecedented comprehensive body of evidence about the perils of over sized finance.
Despite the trillions flowing into and through the City of London, for instance, Britain performs worse on major human development indicators – inequality, infant mortality, poverty, and more – than Germany, Sweden, Canada and most of its other rich country peers. Each ailment has many explanations, but over sized finance appears to be a major contributor.
The Finance Curse is a story about “Country capture” where an over sized financial sector comes to control the politics of a finance dependent country and to dominate and hollow out its economy. Some elements of this ‘capture’ are already well understood but our book introduces a wide range of new ideas and analysis.
In large finance dependent countries such as Britain or the United States, the Finance Curse’s causes and effects are masked by background noise in large, raucous democracies.
But in the small finance sectors and tax havens such as the Cayman Islands or Cyprus, these complexities are stripped away and the phenomenon is laid bare in purer, more crystalised forms which are easier to see and understand.
The tax havens, which we have studied extensively, carry important lessons – and warnings for larger finance dependent countries.