Nick Shaxson ■ OECD: too much finance hurts growth — more on latest paper supporting Finance Curse thesis


From The Guardian:

“Countries with bigger banking sectors suffer weaker growth and worse inequality, according to a report from the Organisation for Economic Co-operation and Development (OECD).

After analysing 50 years of data across its 34 member-countries, economists at the Paris-based thinktank have found that having a large financial sector can slow economic growth, while its highly paid workers exacerbate social inequality.”

OECD credit expansion decilesThe OECD report itself is here. It’s from last June: we wrote about a related OECD report then, but we’re adding more detail here today.

This is the latest in a long line of reports showing similar results – and it notes, as previous reports have done (e.g here), that most OECD countries passed the growth-maximising point long ago.

The effects that the OECD is measuring here are just part of a broader phenomenon that we have been looking into for some years now, which we call the Finance Curse. (This is not just a slogan to tarnish finance: it is so named because of the striking similarities, in both cause and outcome, to the better-known Resource Curse that afflicts mineral-dependent economies.)

The OECD looks at various aspects of how financial sector expansion affects different parts of the population, and it really isn’t pretty, as the graph above shows: in short, the poorer you are, the more that this aspect of financial sector growth will hurt you.

The new report also provides welcome new breakdowns of the different kinds of financial sector expansion, and exploring its effect on growth. For example:

OECD credit and growth

The OECD fingers five channels linking the long-term increase in credit with slowing growth:

  • Excessive financial deregulation
  • A more pronounced increase in bank lending than bond financing

  • Too-big-to-fail guarantees by the public authorities

  • Lower credit quality associated with more lending

  • A disproportionate increase in household credit compared with business credit.

But there are other important aspects of the Finance Curse not even remotely measured here, such as what one might politely call ‘governance’ effects of excess dependence on finance — or what the less polite might call criminalisation. A recent report by the take-no-prisoners financial criminologist Rowan Bosworth-Davies, from a recent Financial Crime symposium in Cambridge, UK, quite accurately summarises how far we have fallen:

“I can say with some degree of certainty now that a very large number of academics, law enforcement agencies, and financial compliance consultants are now joined, as one, in their total condemnation of significant elements of the global banking sector for their organised criminal activities.

Many banks are widely identified now as nothing more than enterprise criminal organisations, who engage in widespread criminal practice and dishonest conduct as a matter of course and deliberate commercial policy.”

This criminalisation is almost certainly unmeasurable – but there is no denying that it results from deliberate policies of trying to increase the size of the financial sector – and it is corrupting the societies of financially-dependent economies, wholesale. (All suggestions as to how to go about attempting to measure this or other governance effects would be most welcome.)

Endnote: Financial sector growth is very often the result of a ‘race to the bottom’ (often described as ‘competition’) between jurisdictions to attract financial capital by offering the laxest regulations, lowest taxes on capital, and so on. This race has major financial stability implications, as we noted in our recent post Why tax havens will be at the heart of the next financial crisis. (See our copious outpourings on the financial stability aspects of all of this here.)

Endnote 2: See our draft Finance Curse paper, with TJN’s John Christensen and Nicholas Shaxson; and Duncan Wigan of the Copenhagen Business School. See also our Finance Curse page, which contains a range of links to other research in this area.

Endnote 3: John Kay’s new book Other People’s Money is recommended reading for all those interested in this topic.

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Comments • 1

  • AvatarHeinrich Müller
    September 18, 2015 - 8:03 am

    Hopefully these results will also impress the political leaders and OECD representatives to come to the only valid conclusion that the actual economic model has to change! From capital driven interests to human capital development. Meaning:
    – taxes for financial transactions
    – prohibition to bet on basic nutrition goods, like rice, corn, wheat, etc…
    – eliminate save havens for capital to eliminate tax evation
    – ensure non privatisation of common goods like education, health care, pensions, public traffic, water, etc…..
    – and so on ……………..

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