Costing the Country: Britain’s Finance Curse

Yves here. We’ve been pointing to research over the last four years that an over-financialized economy hurts growth and increases inequality. For instance, none other than the IMF issued a paper on the cost to growth of having too much finance in 2015.

But another part of the reason for the tendency for countries to have an overly-well-developed financial sector isn’t simply due to the machinations of industry professionals. The US has pushed hard to make the world safe for what then were America’s investment bankers. The US pushed for the rapid deregulation of the Japanese banks. One of the Bank of Japan’s bright ideas was to pursue policies that would increase asset prices, in the hope of creating a wealth effect that would lead to more consumption. Instead, it made the existing commercial/residential real estate bubbles even worse.

The US, through International Finance Corporation, a part of the World Bank, also pushed for emerging economies to set up capital markets, the better for destabilizing hot money to flow in and out of them.

By John Christensen, an economist and accountant, and director of the Tax Justice Network. Originally published at openDemocracy

A report published today from Andrew Baker of the Sheffield Political Economy Research Institute, Gerald Epstein, University of Massachusetts, and Juan Montecino, Columbia University, NY, suggests that the cost to the UK economy in terms of lost growth potential arising from hosting an oversized financial services industry was in the region of £4,500 billion between 1995 and 2015. In other words, had the City of London been smaller and focused on more useful functions, Britain might have enjoyed a cumulative boost to GDP over this period worth £4.5 trillion. That is equivalent to around £67,500 for every woman, man and child in the UK. With another recession in the pipeline, the spectre of the Finance Curse looms darkly over the UK economy.

In the fallout from the 2007-8 global banking crisis the financial sector lost some of its aura of invincibility. Once the bailouts had been paid, what had previously seemed like rewards for hard work and quick wits began to look like the proceeds of incompetence and criminality on such a scale that it daunted the public authorities. But even if the criminality and self-dealing could be checked by regulation, is London’s massive finance sector nonetheless a drag on the rest of the economy?

This was one of the questions thrown up by my work as economic adviser to the government of Jersey (a secrecy jurisdiction in the British Channel Islands) in the 1990s. Responsible for advising on how to maintain a ‘balanced and diversified economy’, I found myself trying to reverse an incoming tide as the booming offshore banking and trust administration sectors crowded out other industries. With the island’s economy becoming ever more dependent on financial services, political power skewed in favour of the banks and accounting firms, and the government became increasingly captive to those players.

I gave this phenomenon a name – the Jersey Disease – as a nod in the direction of the well-known Dutch Disease which afflicts mineral and oil exporting nations. For all the billions flowing through the island, a significant proportion of the population were (and are) struggling to pay their rents and make ends meet. I published several papers with a focus on Jersey with my research colleague Mark Hampton (see here, here, and here for example).

My interest in the Jersey Disease put me in contact with author and journalist Nicholas Shaxson, who was reporting for the Financial Times on how West African oil exporting countries were succumbing to the widely recognised Resource Curse. Also known as the paradox of plenty, the Resource Curse arises from the paradox that countries and regions which export minerals and oil and gas tend to have lower economic growth and worse development outcomes than countries with fewer natural resources.

In 2007 Nick joined me at the Tax Justice Network, leading to the publication of his best-selling book Treasure Islands, which explored how tax havens have devastated the global economy. We also discussed the overlaps between the Jersey Disease and the Resource Curse, leading to the publication in 2013 of a short monograph titled The Finance Curse: how oversized financial centres attack democracy and corrupt economies in which we explored how the curse appeared to impact larger economies, including the UK. This work formed the starting point for Nick’s latest book (published today) titled The Finance Curse: How Global Finance is Making Us All Poorer.

Our work on the Finance Curse attracted the attention of other researchers. Andrew Baker, for example, wrote on the SPERI blog that the Finance Curse framing provides an effective grand narrative that can help explain apparently disparate forces, including global economic imbalances, regulatory failures, state capture, and more. Duncan Wigan from Copenhagen Business School also discussed these ideas with us, leading to a joint paper in which we concluded:

The Finance Curse hypothesis overturns an entrenched orthodoxy that what is good for the City must be good for Britain. Claims about the financial sector’s gross contribution are overblown, and an oversized financial sector imposes a wide range of costs on the economy, the polity and society, to result in a net negative for the country.”

Alongside our work on the Finance Curse, since the 2008/9 banking crisis researchers at the International Monetary Fund, the Bank for International Settlements and elsewhere, have posited the idea that once household and corporate debt rises above a certain ratio to national income the debt retards growth and productivity improvements. This line of research, known as the too-much-finance question, rests on econometric analysis which suggests that once the level of debt in an economy rises above a tipping point of between 90 to 100 percent of GDP a number of potential harms to economic performance and overall growth are triggered.

These harms might arise from a variety of causes, including misallocation of investment into real estate and wealth extracting mergers and acquisitions; misallocation of skilled labour to financial services (the BIS researchers refer to finance literally bidding rocket scientists away from the satellite industry); and insufficient funding being allocated to research and develop new products and services.

With interest in both the Finance Curse and the too-much-finance hypothesis increasing, in November 2017 we co-organised with Andrew Baker a research workshop at SPERI, and invited Gerald Epstein to provide a keynote address about his ground-breaking analysis of how Wall Street overcharges Main Street USA. The research findings published today stem from this workshop at SPERI in Autumn 2017.

The City likes to argue that it is the engine of the British economy, generating jobs and taxes to boost our prosperity. This research, which is the first of its kind, shows that these benefits are outweighed by the much larger costs imposed on the rest of the economy by hosting an oversized financial industry. The real cost of hosting the City of London and its satellites at Canary Wharf and elsewhere is £4.5 trillion. This net loss stems from misallocation of resources, which is estimated to have cost the UK economy £2,700 billion during this period, and costs arising from the 2008 banking crisis, which are put at £1,800 billion. £4.5 trillion is approximately 2.5 years of average gross domestic product across the period 1995 to 2015.

The research identifies further potential losses amounting to £680 billion arising from rents extracted by the City of London in the form of excess compensation and excess profits. Since at least part of this rent extraction stems from services provided to offshore clients, we do not include these sums in our estimate of the net cost to the UK economy. Other countries are also being impacted by London’s wealth extraction and overcharging.

When compared with analysis of the costs imposed by hosting an oversized financial sector in the USA, this data suggests that the negative impacts on the UK might be two to three times greater than those imposed on the USA. Hosting the City of London causes more harm to the UK economy relative to the harm inflicted by Wall Street on Main Street USA.

Our hope is that this research, and the broader narrative frame provided by the Finance Curse will stimulate a fresh conversation among academics, activists and a wider public about the many pitfalls of hosting an oversized financial industry. Much more research is needed to test our analysis and explore these ideas, but the initial findings support the view that London, a global financial centre, extracts wealth from the rest of the UK economy as well as from the rest of the world. It is not the golden goose claimed by its vast public relations team: from our vantage point it looks much more like a cuckoo in the nest.

Read the new report here

Read Nick Shaxson’sGuardian Long Read on the Finance Curse

Watch this short video explainer on the Finance Curse


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  1. nothing but the truth

    the problem is economists who write such reports will not get consulting assignments/plum jobs in the FIRE sector.

    Politicians are perpetually looking to free ride, so expecting anything from them is out of the question. Media has become a consulting company, only glorifying the powerful.

    In short, capitalism has killed messengers of the truth.

  2. emorej a hong kong

    All of this suggests to me that Jeremy Corbyn has been shrewd to avoid interrupting the Tories’ ever-deeper digging of the Brexit hole, because the resulting downsizing of finance in London will tend to reverse negative economic effects on other industries, as well as weaken finance’s stranglehold over elections and governments’ policy-making.

  3. Anonymous2

    Time will tell. There is a real danger the UK will seek to make up for lost revenue by becoming even more of a haven for hot money than it already is.

  4. The Rev Kev

    Anybody remember that scene from the 1998 film “Deep Impact” where there were scores of helicopters taking off and evacuating people from all the buildings in Washington DC? You could picture the same for the City of London the day after Brexit with the sounds of massed helicopters overhead and calls ringing from the rooftops shouting “Get to da chopper!” but I am afraid that that is not going to happen.
    What will happen is that the City will seek to cash in on all the consequences of Brexit and if you want to know what that will look like, think of Russia in the 1990s. There, whole industries were sold out for pennies on the dollar and before anybody says that that will not happen, I would remind them of Royal Mail and how it was privatized ( at a price of £1 billion short of what it should have been sold at.
    The truth of the matter is that there is so much money flowing through the City of London that the UK government in essence works for the City of London. I predict some hard fought battles coming up ahead as the City of London, under the protection of the UK government, seeks to cannibalize as much of the British isles as possible. They have no loyalty to the UK whatsoever and treat their fellow citizens with disdain. At one protest in the City, these types were seen waving £20 notes at the protesters below to mock them. Finance Curse is right and we are going to see more of it.

    1. icancho

      I have often heard the conjecture that the 90s Russia scenario is EXACTLY what the ultra-Brexiteers have had in mind all along.

      1. witters

        With what came afterwards too? Or is it early fear of that that inspires the Russia/Putin demonisation? Either way, a risky game.

    1. John Somers

      The Guardian piece is worth reading, tho at one point he feels the need to pander to the paper’s identity-politics-obsessed readership by complaining that the fruits of the City’s gouging accrue to “old white European and North American men”. I dare say they do, but I’m not sure if life in the UK would be materially improved were they to be diverted to, say, young Nigerian lesbians. Way cooler, tho…

      1. Bruce

        As a possibly old white North American man I would gladly share some part of my outstanding debt with a lesbian Nigerian petrogarch’s daughter. Or better yet make common cause with the rest of Nigeria and throw the bums out worldwide.

  5. Louis Fyne

    More like headline should read: the Britain’s Oxbridge curse (Oxford + Cambridge).

    Monoculture of ideas, backgrounds and attitudes. The US has a similar problem. Clinton-Bush, et al = Yale, Obama-Geitner, et al = Harvard

    I make this observation as a graduate of fancy pants schools, Harvard and Yale graduates need to be banned from elected office for the next 50 years. (sorry Yves)

    1. Kiers

      also, judging from the anecdotes on TV about blackouts and drinking and worse on campus, it appears you can never really FLUNK out of those institutions!

        1. Altandmain

          Harvard is the worst offender for grade inflation.

          Many of the better-off young people at Harvard appeared to require intense favoritism to reassure them, perhaps because of the less-moneyed achievement and potential that loomed all around. Though some of the anointed developed their capabilities to the full, the institutional imperative to establish a hierarchy between them and us took precedence. Undergraduate honorees included a strangely high number of the well-connected who hadn’t impressed any of us in the classroom. Professors teamed up to prevent certain honors from resulting in public embarrassment; if a Latin orator’s commencement address, for example, was going to draw jeers from anybody who knew Latin, it would be expertly rewritten before he delivered it.

          This is also an issue in high schools now.

  6. David

    “London, a global financial centre, extracts wealth from the rest of the UK economy.”
    Yes, this is what it’s for, and what it’s always been for.
    In Britain (or England really) status and power have always been associated with not having to work for money. Political power was historically held by landowners who collected rents and, lower down, holders of monopolies to provide services to the Crown. Later, this wealth was supplemented by investing family fortunes in the emerging stock market and in property. The best people “had property”, “owned land”, or or were “something in the City.”They didn’t do any actual work, though they might be MPs or Ministers, or members of the Lords for a while. The fact that Britain never had a revolution enabled this pattern to continue effectively to the present day, through buying off the newly rich with the reward of social status if they behaved.
    There was a time, after the Second World War, when this might have changed, and when Britain actually looked for a while as if it might become a modern technological nation, like France or Germany. We had an aircraft industry, a nuclear power programme and even a space programme. Scientists and even engineers were grudgingly admitted into the elite. That changed with Thatcher, whose core constituency was the subaltern rentier class – small-town accountants, property solicitors, estate agents – who made their money facilitating the wealthy in extracting wealth from the rest of us. Among other things, Thatcher was an appalling social-climbing snob, who spent decades perfecting a fake upper-class accent. Over the last forty years, the victory of the rent-seekers over the productive classes, bitterly contested since the 18th Century, has now become complete. Making Money has definitively won over Making Things, and the clock has been turned back hundreds of years. Real wealth now means, once more, owning land or property, owning titles to rent (“shares” as we call them today) or buying monopolies from the state and enjoying the proceeds – privatisation, as we call it. It’s a feature, in other words, not a bug.

    1. icancho

      Excellent summary statement. Once again, I am moved to recommend Kevin Cahill’s “Who Owns Britain”.

  7. none

    > once the level of debt in an economy rises above a tipping point of between 90 to 100 percent of GDP a number of potential harms to economic performance and overall growth are triggered.

    Is that the opposite of what MMT says? If yes, what are the points of disagreement?

  8. VietnamVet

    This is a vicious cycle. As jobs, tax avoidance and manufacturing are off-shored; what’s left is gathered together into riskier financial scams. The big selling point for Wall Street and the City of London is that they are secure places for flight capital rather than Caribbean Islands. The current endless wars serve two masters, to sell more weapons and to move wealth from the war zones to safe havens. The basic dual problem is that wars blow back and the decimating of the middle class brews revolts. Sanctions, tariffs, foreign occupations, offshoring, and financial fraud are highly unstable. Something is bound to crash.

  9. Oregoncharles

    Should be a significant, if long-term, benefit of Brexit. Once the debris stops falling, that is.

    And insofar as ordinary mortals can detect the effect (they certainly notice the huge wealth inequality), it’s one reason for voting Leave.

  10. Matthew G. Saroff

    While there are similarities between the financial industry and the resource, there is a profound difference: Oversized finance is inherently a parasitic enterprise.

    Unlike oil, or gold, or diamonds, or cobalt, there is a point, finance does not create (extract) wealth, but rather it sits astride productive activities and charges a toll.

    At lower levels, this provides a benefit, by bringing suppliers of capital and consumers of capital together, but at current levels, it simply extracts a toll and provides no meaningful benefit.

    This is even more true in the City of London than it is in Wall Street, because tax evasion and tax avoidance are a much larger part of the British financial industry.

  11. Don Scott

    England has “The City” and Canada has natural resources. For years our Petro Currency was substantially overvalued because of the then high price of oil, for which tens of thousands of manufacturing jobs disappeared – primarily to Mexico and the USA. When the leader of the Official Opposition Tom Mulcair merely mentioned Canada’s “Dutch Disease”, our Conservative government and the principal financial opinion writers went nuts condemning him for stating the obvious.
    Now the governing Federal Liberals have doubled down to please Alberta and its massively subsidized tar sands extraction industry and suddenly paid 4x the value for the 50 year old Kinder Morgan pipeline, (some $4.5 billion) and is committed to tripping the pipeline capacity with another government financed $9 billion tripling of the pipeline’s capacity to export the dirtiest oil on earth to imaginary foreign clients. There are no firm export deals, and in years past, as few as 1 to 3 tankers a year sailed to ports other than American, yet they claim this will drive up the value of Alberta thick bitumen due to demand outside of the USA – in a world awash in cheap light oil.

    And now the Feds and the province of BC (under a supposedly social democrat government) have approved a $40 billion LNG pipeline to export natural gas from our methane leaking fracking gas fields in Northern BC, where the leaking is so common, that the resultant natural gas is not much if any cleaner than burning coal.
    And they have the temerity to call this facility LNG Canada when 100% of the investment comes from Europe (Shell 40%), Malaysia (Petronas 25%), China (PetroChina 15%), Japan (Mitsubishi 15% and Korea (Kogas 5%). The only thing Canadian is the location of the plant (which is to be manufactured offshore and only assembled in Canada), the gas and the $6 billion in Provincial Tax subsidies. Will BC and Canada ever mature enough to wean ourselves off exporting natural resources (resource whores) – especially those that emit so much CO2, and develop our own non-resource industries like smaller countries such as the Scandinavian Countries or South Korea or Singapore??

    What’s more, will Trudeau keep claiming Canadian leadership in fighting Global Warming while Canada keeps increasing our GHG emissions faster than almost any other developed nation.

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