Nick Shaxson ■ The Economist has noticed the Finance Curse
Regular readers will know that we have a permanent webpage entitled The Finance Curse explaining how countries with oversized financial sectors suffer a range of harms that are rather similar to a so-called Resource Curse that afflict resource-rich countries, and for a wide range of similar reasons.
“These objections [to the idea that more finance is always good for your economy] are not the same as the argument, familiar from the crisis, that individual banks are too big to fail (or TBTF). This approach is more akin to the idea of the “resource curse” that economies with an excessive exposure to a commodity, such as oil, may become imbalanced. Just as the easy money from drilling for oil may make an economy slow to develop alternative business sectors, the easy money from trading in assets, and lending against property, may distort a developed economy.”
Which is just as we’ve been saying for quite some time now, long before we published our first Finance Curse document in May 2013. The similarities are particularly surprising because the Resource Curse tends to strike the poorest countries hardest; whereas the Finance Curse afflicts countries that are (already) wealthy. Read all about it here.
It has a couple of useful links, notably from Prof. Luis Zingales of Booth School of Business, Chicago University, who argues:
“Academics’ view of the benefits of finance vastly exceeds societal perception. This dissonance is at least partly explained by an under-appreciation by academia of how, without proper rules, finance can easily degenerate into a rent-seeking activity.
and he adds, as a note of caution to academics:
“It is very tempting for us academics to dismiss all these feelings [of anger against bankers on the part of the general public] as the expression of ignorant populism. After all, we are the priests of an esoteric religion, only we understand the academic scriptures and can appreciate the truths therein revealed. For this reason, we almost wallow in public disdain and refuse to engage, rather than wonder whether there is any reason for these feelings.
. . .
there might be some truth in all these criticisms, truths we cannot see because we are too embedded in our own world
. . .
we need to guard against the risks of becoming simple mouthpieces of the financial industry.”
Which is, of course, is just one symptom of the ‘political capture’ that we describe in our Finance Curse thesis.