The Finance Curse. Nicholas Shaxson
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corruption, greater conflict, more authoritarian politics, steeper inequality, and greater poverty than their resource-poor peers. It’s not just that powerful crooks steal the nations’ mineral bounty and stash it offshore, though that is also true. The big point is that all this money flowing from natural resources such as oil can make their populations even worse off than if those riches had never been discovered. In short, more money can make a country poorer. That’s why the resource curse is also sometimes known as the “paradox of poverty from plenty.” The curse affects different countries in different ways; some countries, like Norway, have apparently benefited from their minerals, but few in war-ravaged Angola back in the early 1990s doubted that the minerals were a curse.
As I was writing about the destitution and the bloody carnage in Angola, John Christensen, the official economic adviser to the British tax haven of Jersey, was reading my articles and noticing some weird parallels with what was happening at home. “I was fascinated by this counterintuitive concept that too much oil and gas wealth could make you poorer,” he recalled. Jersey, which was dominated not by oil but by a swollen offshore financial industry based on secrecy and low- or zero-tax facilities, was suffering some of the same symptoms. “The more I read about it, the more I thought, ‘But this is Jersey!’” he said. And he understood a bigger point: it wasn’t just finance-dependent Jersey that was suffering something akin to Angola’s resource curse. Other countries whose financial sector had grown too dominant—such as Britain and the United States—were exhibiting some of these same symptoms. Christensen had by then left Jersey, horrified by the venality and corruption he had witnessed in this little British tax haven, and set up the Tax Justice Network, an organization dedicated to understanding and fighting against offshore finance.
We met in 2006 and began to discuss the similarities between oil-rich countries and finance-dominated ones. We resolved to work together to create a new analysis, which we began to call the “finance curse.”
The nations of Africa’s oil-soaked western coastline provide a good starting point for understanding the finance curse. Traveling extensively in those regions between 1993 and 2007, I watched the oil sector pump up some parts of their economies and drain life out of others. For one thing, high-salaried oil jobs were sucking the best-educated and most talented people out of industry, agriculture, government, civil society, and the media, damaging them all. Something similar has happened in the United States. Back in the 1960s and early 1970s, bankers didn’t earn that much more than teachers or doctors. Then, around the 1970s, this ratio began to rise. By 1990, the average financial sector worker earned three times as much as the average American, a ratio that hasn’t fallen despite the global financial crisis.1 And that’s just the average worker in finance; the top players earn hundreds of times more.
Now “finance literally bids rocket scientists away from the satellite industry,” wrote the authors of a study by the Bank for International Settlements on the impact that the rise of finance has had on economic growth. “The result is that people who might have become scientists, who in another age dreamt of curing cancer or flying people to Mars, today dream of becoming hedge fund managers.”2 As we’ll soon see, America contains many experts in corporate strategy, whose talents lie in reengineering and fixing up failing firms and making them sing again. Yet many if not most of these experts have been sucked into the private equity sector, where they are incentivized to engage not in productive corporate reengineering but in damaging financial engineering that sucks out maximum profits from these firms at the cost of long-term viability. The financial brain drain out of politics and into highly paid finance is also a big reason we have so many mediocre politicians: many excellent candidates have been diverted into banks and hedge funds, their talents washed away by a deluge of money.
In Angola, those clever people who did stay in government soon lost interest in the difficult challenges of national development, and politics became a corrupting, conflict-ridden game of jostling to get access to the flow of oil money. Wall Street has achieved something similar in the United States. Whole swathes of the political classes have turned their attention away from the tough slog of fostering a stronger manufacturing sector or creating a level playing field to allow local media to flourish and prevent its wholesale capture by the billionaire class. Now our politicians are enraptured by the power and wealth and business models of the likes of Citigroup, Goldman Sachs, private equity firms, and hedge funds, which have very different agendas. Big money has captured policy making, and finance has played a central role. With this great shift of political focus, balanced national development has taken a second hit.
The cascading inflows of oil wealth in Angola also raised the local price of goods and services, from housing to ham sandwiches to haircuts, in a “Dutch Disease,” a phenomenon named after the economic dislocation that hit the Netherlands after it made large gas discoveries in the 1960s. This high-price environment caused a third wave of destruction to local industry and agriculture, which found it ever harder to compete with cheaper imported goods. Likewise, large inflows of money into Wall Street and into real estate markets from overseas can raise local price levels, making it harder for many local businesses to compete with foreign firms.3
As if all this were not enough, these curses of resources or finance produce a more destabilizing problem. I remember watching cranes festoon the Luanda skyline at times of high oil prices, then, when prices crashed, I saw weeds grow in the lobbies of half-finished concrete hulks whose owners had gone bankrupt. Massive borrowing in the good times and a buildup of debt arrears in the bad times magnified the problem. The equivalent in the United States was the euphoria of the 1990s that culminated in the global financial crisis. This boom-bust was differently timed and mostly caused by different things, but as with oil booms, it had a ratchet effect. In good times, the dominant sector can curse alternative economic sectors for reasons I’ve already given, and when the bust comes the chaos magnifies the damage. And those lost sectors, once destroyed, aren’t easily rebuilt. Meanwhile, bankers—who famously will lend you an umbrella when it’s dry but want it back once it starts raining—reinforce this instability by turning on the credit taps during booms, creating endless new financial vehicles to help households and businesses take on more debt, amplifying the exhilaration, then whipping away credit when things go bad, deepening the slump.
Alongside all this, there’s another whole array of damage to consider.
In our traditional view of the US economy, wealth is created throughout the economic system by many people and businesses working in diverse fields: in manufacturing, construction, banking, fishing, tourism, or catering, trading with each other in competitive markets. Finance, creating helpful linkages between these players, supports workers, consumers, and businesses alike. Meanwhile, the government supplies the police, roads, schools, sewers, and so on and upholds the rule of law to support all this activity. To pay for these services, governments need to bargain with voting citizens and with businesses to raise the taxes, and this bargaining has, since the days of the Boston Tea Party, fostered healthy lines of political accountability. This is a story of healthy horizontal relationships between the many different actors in an economy. With a mineral-dependent economy, though, it’s different. Return to that image of the river delta: when oil money sluices downward from the top of the political system, rulers don’t need to bargain with their citizens anymore. These are vertical, hierarchical relationships. As it flows downward, the oil money washes away checks and balances, institutions, and accountability, replacing them with a crude political and economic formula: rulers allocate wealth, or permissions to access wealth, downward in exchange for loyalty. And if your citizens complain, the oil money pays for paramilitary police to keep them in their place. This is why oil economies like Russia’s, Venezuela’s, or Angola’s are often rather authoritarian.
Finance, it turns out, is starting to have similar effects in the United States. While America has a vastly more diversified economy than Angola’s, its economy is seeing an ever-larger share of wealth spout out at the apex of the system—not from oil pipes inserted into the ground as in Angola, but from pipes jammed into the lifeblood of the real economy—and into your pocket. Back in the 1950s and 1960s, assets held by the financial sector in the United States were worth around one year’s GDP, and financial corporations earned little more than a tenth of all corporate profits. Now the financial sector’s assets are worth more like five