The FT has reported that:
The role of the financial sector in the US, Japan and other advanced economies has grown too big, the International Monetary Fund has warned.
In a new study IMF economists say that emerging economies need to learn the lessons of the 2008 global financial crisis and avoid allowing their banking systems and financial markets to grow faster than regulators can keep up with.
This is the IMF echoing the Tax Justice Network, which has long argued that there is something that it calls the 'Finance Curse'. As it says on its web site:
It is widely recognised that natural resources like oil can become a curse rather than a blessing for some states that produce them. In our seminal publication The Finance Curse, we show how countries that host oversized financial centres can suffer rather similar fates — for many of the same reasons.
Long-established research on the “Resource Curse” focuses on three main areas — all of which can be applied to a degree to finance-dependent economies.
First is the “Dutch Disease,” where large commodity export revenues push up local price levels, making other sectors uncompetitive and crowding them out. High salaries in the dominant sector also create a brain drain from other private sectors, from government, and from civil society, harming the economy, governance and society.
Oversized financial centres can do the same thing in the countries that host them. New research from the IMF and from the Bank for International Settlements cites these as key reasons why financial sector development, beyond a certain point, harms long term economic growth. Far from being the Geese laying golden eggs, as is routinely claimed — they can be Cuckoos in the nest.
I recommend the rest of the TJN article but my point in drawing attention to this is that we now have a new government that is showing no sign of awareness of this issue. Indeed, there was much comment yesterday that the new Business Secretary is a City person who understands and can meet its needs. It was as if no other economic sector was of consequence.
The UK economy has already been hollowed out by finance. The evidence that a great deal of the economy exists to service the needs of finance when, very obviously, finance should exist to service the economy is now all too apparent and is precisely what both the IMF and the Tax Justice Network are drawing attention to.
The risk is not just that finance will continue to squeeze out other, more productive and socially useful activity within the economy, although there is no doubt that it will, but that its continued growth will impose risk of another major financial crisis that will create even greater stress than that of 2008 did. All the signs are that this government has no awareness of this.
To suggest that you worry does appear to be appropriate advice in the circumstances.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Never mind the IMF telling us that the financial sector is too big – it needs to start telling people how it has infiltrated Governments around the world.
I’ve heard American senators say that they have a ‘Goldman Sachs’ government; Mark Carney is ex GS too isn’t he? Loads of objectivity there then?
And what about the ECB? Who are the insiders sitting on the executive of that bank holding back real recovery in Europe by sitting on their hands in order to force countries to ‘reform’ their economies (shorthand term for cutting social security, wage shrinkage and flexible employment contracts).
Just so the investor can have a ‘level playing field’, the rest of us will have to climb mountains that will only get more steep. Capitalism cannot go on like this for ever.
It’s often said in America that it is “a Wall Street government”. There are 5 lobbyists from the finance industry for every congressman.
As it is over here, this is government by lobbyists for banks and corporations, not government for the people.
I get sick of the IMF and its schizoid behaviour: appearing to critique a system that many of its upper echelons subscribe to.
I always suspect this sort of thing is a smoke screen to make this foul organisation appear ‘objective’ while it sets up ‘restructuring’ scenarios that rob populations of their assets and contributes to more wealth syphoning.
In many countries, IMF became an acronym for ‘I’M Fired!’ They have no intention of real reform -let’s wake up to the fact that it is 7 years after the Crash and still these half-hearted, weaselly statements keep emerging.
One of the factors behind the over sizing of the finance sector is the size of pension funds and sovereign wealth funds – not only here in the UK but globally. These funds cycle most of their money through the financial markets…..if we want to shrink the financial markets we need to tackle how pension funds are managed and how they direct their investment…..out of speculative market activity and through new ways of investing directly in the real economy.
UK pension funds control assets valued in total well in excess of UK GDP….that is a lot of money for speculation and for the city trading business.
Agreed
As you know I have written about this