The Finance Curse: Building a new knowledge network

Andrew Baker - Faculty Professorial Fellow, SPERI

The idea that a ‘finance curse’ – a more complex version of the ‘resource curse,’ might blight societies around the world, from small offshore tax havens to the hosts of world leading financial centres like the United States and the United Kingdom, was first developed by John Christensen and Nick Shaxson of the Tax Justice Network, the leading campaigning organisation on offshore finance. In the 1990s, development scholars began to note that some developing countries with plentiful mineral resources suffered from overdependence on these sectors. This ‘resource curse’ blights economic development producing politically, socially and economically imbalanced societies.

The finance curse is a concept and analytical framework that suggests a similar set of symptoms are identifiable for countries that host offshore financial centres and have large active financial sectors. Potentially, the finance curse is more pernicious than the resource curse because the problems it produces are less territorially contained. As the global financial crisis of 2008 showed, when things go wrong in financial centres like New York and London, contagion spreads rapidly across borders with devastating effects.

In simple terms the finance curse thesis holds that financial sectors can become too big and too active. Above a certain size and in certain forms finance can generate complex, dynamic and inter-twined economic, social, geographical and political harms.

But why hold a workshop on the finance curse, and why now? One reason is that an interesting stream of work by macroeconomists over the last five years increasingly supports a ‘too much finance’ thesis. A Bank for International Settlements strand of research began with Stephen Ceccheiti and Enisse Kharroubi showing that bank balance sheets over 100% of GDP had negative consequences for growth. They further explored crowding out dynamics in 2015 and have been joined by colleagues who identify a point beyond which financial sector activity starts to hamper growth. Andy Haldane of the Bank of England has drawn attention to the vacuum cleaner properties of oversized financial sectors, sucking in people and capital, and how incentives for short-term returns starve longer term productivity boosting R&D and infrastructure projects.

At the finance curse workshop we will hear from Christiane Kneer about her pioneering work for the Dutch Central Bank on how financial brain drain can damage productivity in the economy. We will also be joined by economists from the Geneva Institute who explored the ‘Too Much Finance’ thesis in an IMF working paper in 2012. They found that when credit to the private sector reaches 100% of GDP it has a negative effect on output growth. Moreover, they identify a ‘vanishing effect’ of financial development where these negative effects are driven not by the costs of crises and volatility, or institutional quality, but are more consistent with a misallocation problem. This research suggests that several countries could actually benefit from smaller financial sectors. Crucially, our keynote speaker Gerald Epstein puts the net cost to the US economy at $22.3 trillion between 1990 and 2023, making finance a net drag on the US economy.

This is important, interesting and highly technical research, but it only goes so far. It is generating data that helps establish this is a real world phenomenon, but it tells us little about how ‘too much finance’ has negative effects on everyday lived social and working experiences. It does not illuminate how hot financial flows and investment activities are shaping urban geography in our cities, social division by region, how processes of extraction operate, or their consequences. Nor does it tell us about the hold finance has over cultural norms, or how public and political debate remains circumscribed. Working out how these various pieces fit together is a much more multi and inter-disciplinary enterprise. That is why on Thursday we will bring macroeconomists together with leading Sheffield researchers including urban sociologist Rowland Atkinson, geographer Desiree Fields and scholar of financialization Adam Leaver, whose research looks at how financial products and networks are structured produces cultures of escalating extraction.

Political scientists will also examine the relationship between finance and public and political spheres. In a recent article in Economy & Society, Duncan Wigan and I note that if the finance curse is a real world material phenomenon, imposing costs on a range of societies, then this also has implications for appropriate political and institutional response. Evidence of finance curse effects would create an imperative for a sceptical precautionary approach to financial innovation and an orchestrated institutional redesign of financial governance and regulation to produce a better resourced and more equipped global and transnational civil society. We found that while demand and interest is growing from campaigning NGOs on macro-structural questions of financial system organisation and its social usefulness, this has not translated into expanded institutional access to key policy locations. In the UK and beyond, institutional access tends to be asymmetrically structured in favour of financial industry groups. Pluralism needs to be actively cultivated and engineered, given the centripetal tendencies the finance curse thesis identifies.

This last point is especially important. Despite having some high powered advocates, the ‘Too Much Finance’ thesis has made little headway in shaping public and political debate. Politicians and regulators are not actively asking whether and how finance should be downsized, or seeking to distinguish between desirable and undesirable financial activities, even in the wake of repeated revelations of abusive practice as in the Paradise Papers. In a context of Brexit, the UK debate is about protecting and promoting the City of London. The role of financial sector activities in fuelling inequality, social stratification and stagnation has not to date played a central role in the gathering interest in inclusive growth, even if a welcome and overdue debate on the purpose of finance is beginning to stir.

The finance curse is a cross – disciplinary research agenda. Our workshop investigates six symptoms: Dutch disease (exchange rate and other local price distortions and their socio-spatial implications;) brain drain labour market distortions and their costs; the macroeconomic costs of rent extraction, systemic risk, misallocation and crowding out; uneven development evident in geographical regional and market concentrations; rising inequality and social stratification; and political capture. The extent to which these symptoms are evident and causally interconnected is a key focus. But crucially, the finance curse is much more than this. It is also a narrative, or form of language that can powerfully re-shape the public debate about finance, its role, its problems and the purpose to which financial system regulation should be deployed.

As Duncan Wigan and I have argued, the finance curse is a potential campaigning resource that can change public and policy mind-sets. For this reason, the event this week is crucially about building conversations and understanding between academics, campaigners (NGOs), financial journalists and policy makers. Representatives from the Bank of England, the Financial Times, Le Monde, Oxfam, War on Want, Global Justice Now, the Tax Justice Network and the world of financial lobbying will all be present. The aim is to not only establish the extent to which the finance curse blights different societies around the world, but also begin building the collaborations and understandings that help set out policy and political strategies for addressing the phenomenon into the future. The aim is to create a new knowledge network that spans academic and policy worlds.