From “Resource Curse” to “Finance Curse”? Nicholas Shaxson

1. From “Resource Curse” to “Finance Curse”? Nicholas Shaxson Warwick Oct 21, 2016

2. Two very different subjects? Financial centres and tax havens Oil producing countries

3. Part 1: The “Resource Curse”

4. Resource Curse • Weak version: resources are squandered • Strong version: makes matters worse. My Angola, mid-1990s, “worst war in the world.” Mineral-dependent countries lie on this spectrum

5. Symptoms • “Crowding out,” de-industrialisation • Loss of entrepreneurialism • Dutch Disease • Authoritarianism • Conflict • Corruption

6. Symptoms II • Slower long-term growth • Debt (‘ratchet’) • Inequality / human development indicators • “We must diversify our economy!” • Regional tensions

7. Causes • Dutch Disease: crowds out, brain drain (cause and symptom) • Revenue volatility • Governance: the big one (also cause and symptom) • Top-down flow • The “scramble” • Easy rents • etc

8. Part 2: A “Finance Curse?”

9. A “Finance Curse?” Countries with oversized financial sectors suffer some of the same problems as mineral-dependent ones do, and for many of the same reasons.

10. << Despite the trillions > Our thesis rests essentially on a cost–benefit analysis, which we provide below. While the gross benefits can mostly be measured, many of the costs—such as political capture, Christensen et al. 257 or criminalization—cannot. We argue that the net cost–benefit balance is negative for Britain and that oversized finance is a curse. We challenge others to rebut this, and are confident they cannot without airbrushing out the costs. Consequently, we have the basis for a strong new narrative to challenge dominant finance in Britain. The narrative is a call to arms.

11. At least a weak Curse? Yellow = resource dependent; Red = finance dependent

12. Finance as Net cost to economy? • Overcharged: the High Costs of High Finance (Epstein, 2016)analyses 3 components: for USA: • (1) rents, or excess profits; • (2) misallocation costs, or the price of diverting resources away from non-financial activities; and • (3) crisis costs, • “Adding these together, we estimate that the financial system will impose an excess cost of as much as $22.7 trillion between 1990 and 2023, making finance in its current form a net drag on the American economy.”

13. Growth • “The growth of a country’s financial system is a drag on productivity growth [and] reduces real growth . . . Financial booms are not, in general, growth-enhancing, likely because the financial sector competes with the rest of the economy for resources. (Cecchetti and Kharroubi, 2015)

14. From Resource Curse to Finance Curse (I) • Slower long-term growth Yes (Cecchetti) • Crowding out, de-industrialisation Yes • Dutch Disease Yes (e.g. Ashoka Mody) • Loss of entrepreneurialism + Brain drain Yes • Inequality / human dev indicators Yes • Authoritarianism Less, but • Conflict Less, but

15. RC, FC Similarities (II) • Rent-seeking yes • Debt (‘ratchet’) Yes • Corruption Yes • Revenue volatility yes (e.g. GFC) • Regional tensions yes • Export dependent Partly

16. Key Differences • Cross-border contagion, e.g. GFC • “Competitiveness” discourse: banks are flightier than oilfields (up to a point.) • State capture: with resources it’s a byproduct: flighty Finance requires it. • Financialisation: Extraction from rest of economy. Drilling in your pocket

17. Part 3: Finance Curse meets National Competitiveness

18. Competitiveness Agenda (II) • “We must shower goodies and subsidies on multinationals / the wealthy or they will relocate somewhere else” • Current thesis: a “Third Way” phenomenon

19. The Competitiveness agenda Motherhood + Apple Pie: “The City of London must enhance its international competitiveness” “Britain needs a competitive corporate tax system” Who is questioning this agenda?

20. weasel words: tipping point • “Give mobile capital, multinational corporations, big banks, what they want or they will flee to Geneva or Hong Kong.” (the threat)

21. Competitiveness agenda 3 • Promotes mobile (wealthy + MNCs) at expense of immobile (labour, SMEs, consumers etc) • Extracts wealth, income, power, transfers it upwards • Promotes big, penalises small

22. Competitiveness agenda: Generic harms • Financial Instability (more TBTF) • Steeper Inequality (transfer wealth from small to big) • More oligopoly/monopoly (rewards big vs small, leading to LESS MARKET COMPETITION!) • More crime (if we police it it will run away to Dubai/Panama) • Lower growth (small-big transfer saps demand) • Democratic damage (“we can’t tax or regulate them!”) • Geographic distortions (London 4 Hull 0) • Dutch Disease (obsession with capital inflows)

23. Cross-thematic • “Competitive tax system” • “Competitive financial sector” • “Competitive labour markets” • “Competitive secrecy/confidentiality offering” • Corporate governance • Antitrust / competition law • (Competitive exchange rates is slightly different: whole-economy phenomenon)

24. Who benefits from this competitiveness?

25. Competitiveness agenda:fallacies • Fallacy of composition: focus on one part of economy, at expense of rest(if that sector’s wealth is extracted from the rest, no net benefit, and possibly net damage.) • Martin Wolf: “ The competitiveness of countries, on the model of the competitiveness of companies, is nonsense.”(to get a first sense of this, consider the difference between a failed company and a failed state) • Krugman: “Competitiveness – A Dangerous Obsession” (1994)

26. Competitiveness agenda meets finance curse • If Too Much Finance is bad for Britain, then a more “competitive” financial sector is bad for Britain. • To tackle the Finance Curse, we must also tackle the Competitiveness Agenda

27. treasureislands.org shaxson@gmail.com twitter.com/nickshaxson Thank you