The Finance Curse: Britain and the World Economy

Outlines harms caused to countries hosting an oversized financial sector Argues Britain is subject to a Finance Curse, which carries many similarities with the Resource Curse, afflicting mineral-exporting countries Provides a narrative and framework to analyse the political economy of finance and financialisation The Global Financial Crisis placed the utility of financial services in question. The crash, great recession, wealth transfers from public to private, austerity and growing inequality cast doubt on the idea that finance is a boon to the host economy. This article systematizes these doubts to highlight the perils of an oversized financial sector. States failing to harness natural resources for development led to the concept of the Resource Curse. In many countries, resource dependence generated slower growth, crowding out, reduced economic diversity, lost entrepreneurialism, unemployment, economic instability, inequality, conflict, rent-seeking and corruption. The Finance Curse produces similar effects, often for similar reasons. Beyond a point, a growing financial sector can do more harm than good. Unlike the Resource Curse, these harms transcend borders. The concept of a Finance Curse starkly illuminates the condition of Britain’s political economy and the character of its relations with the rest of the world.


Introduction
The argument for the utility of finance is well-rehearsed.Liquid and deep financial markets reallocate capital from savers to borrowers, ensuring that funding is directed to those best able to use it.The notion that finance is essential to economic development has a long lineage (Schumpeter 1934).Financial systems act as efficient information processors, centralizing the dispersed knowledge of market participants to generate prices reflecting economic fundamentals.More finance completes markets ensuring an efficient competitive equilibrium (Arrow and Debreu 1954).Finance cannot cause harm since market movements mirror but do not drive changes in the real economy (Friedman and Schwartz 1963).Speculation is ultimately stabilizing (Friedman 1953).Hosting a large financial sector represents the high road to economic success.The sector provides quality jobs and sizeable fiscal dividends to host states.Finance-dependent countries perform well in international rankings of income per capita.Given this, governments should focus on growing the financial sector.This position held considerable sway until the Global Financial Crisis (GFC) when doubts emerged about finance-driven growth models.In the United Kingdom (UK), Adair Turner, former Chair of the Financial Services Authority, nominated some activities conducted in London's financial sector 'socially useless' (Turner 2009).Subsequent analysis from the Bank of England, the Bank for International Settlements (BIS) and the International Monetary Fund argued that beyond a point the growth of finance and credit does more harm than good (Arcand et al. 2012;Barajas et al. 2013).The BIS study concluded: 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) We build on this analysis, arguing that claims for the contribution of an oversized financial system are overblown, and often outweighed by a range of negative effects, in a "Finance Curse."Countries heavily dependent on natural resources are prone a Resource Curse with low growth, crowding out of alternative sectors, poor job creation, extenuated inequality, diminished political freedoms, economic instability, and heightened conflict, rent-seeking and corruption (Karl, 1997;Sachs and Warner, 1995;Thomas and Treviño, 2013).Large inflows of windfall money drive up prices and raise nominal exchange rates making local tradable goods and services uncompetitive in world markets.Skilled workers gravitate towards the betterremunerated sector, leaving alternative sectors and government bereft of skilled staff.Commodity price cycles induce violent swings in state revenues.Resource abundance provides easy rents, so policy makers lose interest in addressing long-term challenges and creating conditions for diversified growth.Revenue from other sectors is unnecessary to sustain power configurations, which severs links between government and citizens (Shaxson 2008).In this winner-takes-all scenario, politics becomes a 'fight for a share of the cake' and overt conflict and repression becomes more likely.
Countries overly dependent on an outsized financial sector display similar characteristics.Britain, whose financial sector is the world's third largest, and the largest by a composite measure of size and interconnectedness, is a case in point (IMF 2010).'Financialisation' has crowded out manufacturing and non-financial services, leeched government of skilled staff, entrenched regional disparities, fostered large-scale financial rent-seeking, heightened economic dependence, increased inequality, helped disenfranchise the majority, and exposed the economy to violent crises.Britain is subject to 'country capture' with the economy constrained by finance, and the polity and media under its influence.The Finance Curse provides a new analytical platform through which to capture this conjuncture.
Our thesis rests essentially on a cost-benefit analysis, which we provide below.While the gross benefits can mostly be measured, many of the costssuch as political capture, or criminalisation 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.Our analysis is probabilistic, not deterministic.We encourage British academics to pursue further empirical work into the concept, identifying its symptoms, the various causal dynamics that may be at work and relationships between them.Christensen has a long professional background in finance, and Shaxson has extensive past experience in analysing the Resource Curse (Shaxson 2008); both are active in the Tax Justice Network (TJN).So the article represents a collaboration between expert activism, academia and professional services.The potential pay-off of this collaboration is to catalyse an authoritative alternative narrative, with accelerated and enlarged impact.The thesis may help British political scientists understand the nature of the British political economy: it points to the sources and exercise of political power in the UK; the form of the British state; the knowledge and mode of reasoning of its personnel; the strategies it pursues; and its relationships with key commercial and financial actors.The Finance Curse carries clear lessons for public policy and regulation in the UK, and beyond.
Below, section one outlines the principle hypotheses constituting the Finance Curse, and shows its similarity to the Resource Curse.Section two questions a 'City is indispensable' narrative, scaling down claims about finance's economic contribution.The third section highlights the harms arising from overdependence on finance, against which the scaled-down claims can be balanced.Section four considers the political dynamics and implications of the Finance Curse, further worsening the cost/benefit balance.Section five suggests that pernicious effects transcend borders; elements of the Curse are transmitted overseas, and the international system powerfully impacts Britain via finance.In conclusion, we reflect on the implications of the Finance Curse for policy and research.

The Finance Curse and its Hypotheses
Arguments in defense of a 'competitive' and growing London-centred financial sector have been deployed to legitimise and promote its expansion.A simple but powerful cost-benefit analysis is offered, but with costs excised.These arguments suggest that the financial sector is key to Britain's economic prosperity and the City of London in particular is economically indispensable.These arguments are so intuitively appealing that many consider it self-evident that expanding the financial sector benefits the national economy.These arguments circumscribe public and elite debate; and counter-arguments leveled against finance are piecemeal, each seemingly unable to penetrate this deep consensus.If this consensus were persuasive, the Finance Curse thesis would be null and void.
The Finance Curse challenges this 'City is indispensable' narrative and rebuts it core claims.Table 1 outlines the core hypotheses of the Finance Curse, showing how it relates to the now well-established thesis of a Resource Curse.Both curses share similar components, in cause and effect, though with notable differences.We offer the table for critical scrutiny, testing and development.The similarities between the two curses are perhaps more surprising: the latter tends to strike developing countries hardest; but the 'Finance Curse' tends to strike developed countries.We must qualify and delimit the scope of our claims, and we invite further research to clarify how the various features of the Finance Curse and its drivers interact across multiple environments, and under what conditions it is likely to exist in strong or weak form.Each cause and effect is stronger or weaker, depending on the level of resource/finance dependence.Causes and impacts interact cumulatively, so the table does not seek to disentangle them.Further research might explore complex and cumulative causation and path dependency.It would also be useful to investigate for each cause and effect the extent to which it is impacted by different aspects of financial sector size/dominance: whether this involves the balance between 'casino' and 'utility'; the mix between patient and short term capital; the extent to which finance is internationallyfocused or domestic; or whether it is credit (or credit growth) as a share of the economyor perhaps some other yardstickthat is most relevant.

Evidence and the 'City is Indispensable' Narrative
Oft-cited lobbyists such as TheCityUK systematically overstate the economic contribution of Britain's financial sector to taxes, employment, financial surpluses, output and productivity.This section (2.1, 2.2) scales down such claims.Section 3 takes these scaled-down claims and sets them against a range of harms that flow from oversized finance.
At first glance, it seems, finance makes you rich.Of the 10 countries topping the World Bank's 2013 GNI per capita rankings, all depend heavily on natural resources or finance.(GNI here is a more appropriate measure than GDP, since GNI excludes artificial profit-shifting by multinational corporations: for countries with large financial sectors relative to the economy, this profit-shifting, which has little bearing on genuine economic activity, can significantly skew the picture.)Under its Atlas method, seven (Monaco, Liechtenstein, Bermuda, Switzerland, Isle of Man, Luxembourg, Macao) are finance-dependent and three (Norway, Qatar, Australia) are resource-dependent.Under the PPP method Kuwait, United Arab Emirates, Singapore and Hong Kong replace Australia, Liechtenstein, Isle of Man and Monaco (World Bank 2014).
Finance also provides income for the state.TheCityUK, a lobbying organization promoting the interests of UK-based financial and related professional services industry, estimated that 'UK financial services contributed £65bn in tax revenue in 2012/13, accounting for 12% of total UK tax receipts'.This is 'enough to cover three-quarters of the projected public sector deficit for 2014 /15' (2014, 5).The jobs contribution is presented as equally impressive with over 2 million employed in finance and related professional services.Of these, 1.3 million are employed outside London.These employees, it says, are highly productive, generating £174bn for the UK, or 12.6% of the total, and a 2013 trade surplus of £55bn, 'larger than the combined surplus of all other net exporting industries in the UK' (Ibid., 4).London's financial sector, on this evidence, is 'the goose that lays the golden eggs'.

Scaling down the gross contributions
This formidable story is at the heart of the "City-is-indispensible" narrative, but it is problematic.First, GNI and GDP rankings reflect a strong selection bias: finance gravitates to already well-governed and wealthy jurisdictions.Additionally, high mean GNI per capita may not translate into broad-based welfare gains: it may be that in Britain, finance-derived wealth merely gravitates to the top and stays there.The United Nation's Human Development Index (HDI) ranks countries according to a combination of education, life expectancy and income per capita levels.The UNDP until 2012 published a statistic called 'Gross National Income (GNI) per capita rank minus HDI rank.'This gives a very rough indication whether high incomes are transformed into tangible benefits at ground level.The data strongly suggests that both financedependent and resource-dependent countries (Kuwait, Oman and Qatar) tend to be poor at translating national income into genuine economic well-being (Shaxson and Christensen 2013, 18).Additionally, a large share of higher-paying jobs in finance-dependent countries, especially smaller ones, accrue to skilled but transient expatriates, raising the question of how much genuine long-term wealth creation is occurring.
A core problem, partly explaining the UNDP data, concerns 'gross versus net' contributions: these estimates airbrush out all the harms we outline in Table 1 and in Section 3 below.Incorporating these means not only a sharply reduced contribution, but potentially an oversized financial sector that may be a net long-term cost.
We also distinguish between mobile and immobile finance.TheCityUK report 40% of the total tax contribution comes from internationally mobile firms (2014,11).On this evidence, any threat of exit would impact only 40% of the sector: 60% cannot move.A key policy question raised here is whether it is a good idea to pursue "competitive" finance sector growth.From this "competitive" perspective, the immobile part is largely irrelevant.What is more, TheCityUK's 40% is likely to be an over-estimate: the purpose is to persuade politicians to accept their demands, 'otherwise 40 percent of the City will disappear'.So this figure is an upper limit and the true figure is likely to be significantly lower.Much of London's attraction is due to language, widespread use of UK common law, geographical position amid key time zones, historical specialisation, local skills, path dependence, access to large nearby markets, infrastructure, interpersonal relations and networks, and clustering effects.Much of it will never exit.As Mainelli puts it in Cooper (2011, 4) 'clustering forces may well be strongest in one of the most weightless of industriesfinancial services'.From the perspective of policy towards nurturing a 'competitive' financial sector, claims for finance's gross contribution should be scaled down according to the mobile-immobile distinction before costs are subtracted.
Further, PWC's 'Total Tax Contribution' informs TheCityUK estimates and is contentious.It includes taxes corporations pay and those paid by others such as customers, suppliers and workers (McIntyre 2006).Pay-As-You-Earn receipts from the banking sector were £17.6bn in 2013-14, compared to corporate tax receipts from the sector of £1.6bn (HMRC 2014, 6).Competing measures of the tax contribution are lower.Engelen et al. estimate the gross contribution of £193bn between 2002-3 and 2007-8, or £32bn per year (2011, 147-48).The 40% scale-down factor would cut the average total tax contribution over these five years to £12.8bn.Applying the scale-down factor to the TheCityUK (2014, 17) estimate of the financial sector corporate tax contribution of £5.4bn, yields a scaled down figure of £2.16bn.Likewise, scaling down TheCityUK employment figure provides gross national employment of 800,000, not over 2 million.Buchanan et al. (2009, 13) estimate direct employment in the sector at 1 million.Half of direct employment in the financial sector is in banking (432,000) and 80% of this in the more locally rooted 'utility' sector.The study concludes, 'finance remains a relatively small source of employment, which has created almost no new jobs over the past fifteen years'.There are further reasons to be skeptical.For example, financial surpluses measured in GDP do not necessarily come into Britain at all: Britain's extensive offshore archipelago only extenuates this phantom feature of financial surpluses.

Private gains as social losses
Reported financial-sector profits are another chimera.Return on Equity in the British financial sector trebled from an average of 7% from 1921-1970 to 20.4% in the ensuing decades (Haldane et al. 2010, 113), but this does not necessarily correlate with net contribution, or the above-cited £174 billion economic contribution.As Haldane and Madouros (2011) of the Bank of England explain: [T]he value of financial intermediation services is significantly overstated in the national accounts . . .High pre-crisis returns to banking . . .reflected simply increased risk-taking across the sector.This was . . .a traverse up the high-wire of risk and return.In what sense is increased risk-taking by banks a value-added service for the economy at large? … Bearing risk is not, by itself, a productive activity.
Profits to finance were thus substantially extracted from the future, via subsequent bailouts and below-potential economic growth.Where the system is overgrown, highly internationalised and crowded, and especially where an implicit or explicit public backstop is available, competition amplifies risk-taking and crisis depth.Accelerated credit creation renders a financial sector vulnerable to Ponzi dynamics.Democratic governments, hoping to take the cream 'before the next election' and to see losses realised later down the line, play along.Payback for the pre-GFC returns to finance materialised as losses when crisis struck.

The economic harms
Against these scaled-down gross contributions of the financial sector, we must now incorporate a range of additional harms create a net cost/benefit balance.Post-GFC, UK Treasury support to banks peaked at £1.1 trillion.These exposures have since shrunk but this support remains a net cost to the UK (NAO 2014).Furthermore, Andrew Haldane estimated worldwide output losses from the GFC equivalent to between $60tn and $200tn and £1.8tn -£7.4tn for the UK (2010, 2).A more recent study (Ball 2014) comparing current estimates of potential output from the OECD and IMF with that for 2007 found an average loss across advanced economies of 8.4%.Britain suffers a potential output loss of 12.5% and a decline in the growth rate from 2.7% to 1.9%.This bloated downside is a function of financial sector size.
The costs of the crisis alone dwarf even the gross contributions of finance, going back years.Financial crisis in turn produces a ratchet effect where ground lost in busts is not regained in booms, as in resource rich countries.'Hysteresis' is apparent, where capital and firm formation slows and workers who lose jobs suffer 'scarring', making reemployment less likely.A former Bank of England senior official commented: Why do we allow our banks to speculate for such a small and doubtful contribution to GDP? Before the financial collapse the bank lobby pointed to its contribution to tax revenues.If the published loans and support supplied by the taxpayer through the Bank of England and the Treasury are summed, the banks are in the red over the last decade.(Potter 2012) In the wake of the GFC we now see new financial sector gains arisingat the cost of incubating future crisis.Not only does finance enjoy a failure subsidy, borne by the majority.Finance enjoys an on-going operational subsidy.Investor beliefs that 'too-big-to-fail' banks will be rescued by government translate directly into lower funding costs.This subsidy was estimated at £100bn in 2009 and £220bn in 2010 (Haldane 2011;Noss and Sowerbutts 2012).Just four banks, Barclays, HSBC, RBS and Lloyds, enjoyed an implicit subsidy estimated at £37.7bn in 2012 (NEF 2013).Surprisingly, 'The problem posed by some banks being too big to fail is greater today than in 2008….the magnitude of the subsidy has generally grown since the crisis.'(Adamati and Hellwig 2013, 12).
Additionally, Britain suffers acutely from the Dutch Disease.Trade surpluses in financial services tend to make the real exchange rate appreciate, creating a higher-cost environment that crowds out other tradable sectors.This curbs economic diversityand diversity provides resilience, capability accumulation and synergies arising from interconnectivity (Hausmann et al. 2011).Sterling's marked decline after the GFC "should" have generated an export boom, yet, despite political commitments to a more 'balanced economy' (as is routine in resource-rich countries), a lack of industrial diversity, partly caused by financial dominance, forestalled export-led recovery driven by alternative sectors.'The UK has a revealed comparative advantage in every service sector, but in only three out of 15 goods sectors: pharmaceuticals, aerospace and chemical and related industries.This is fewer than any other G7 country' (IPPR 2014, 3). From 1970-2008 output in UK financial and business services grew by some 350% in real terms, while real output in manufacturing grew by only around 25 percent, mostly before the late 1990s (Gardiner et al. 2012, 25).A related factor is brain drain, as highly remunerated finance attracts the brightest and best, leaching from and crowding out other private sectors.This further damages economic diversity and dynamism.'Finance literally bids rocket scientists away from the satellite industry.The result is that erstwhile scientists, people who in another age dreamt of curing cancer or flying to Mars, today dream of becoming hedge fund managers' (Cecchetti and Kharroubi 2012, 1).Finance also sucks talent from the public sector, with impacts on state regulatory capacity and policy.
Moreover, an economic sector predicated heavily on easy rent-seeking saps innovation and resilience."Parasitic" rent-seeking is a classic cause and symptom of the Resource Curse, and must be recognised as a core element of the Finance Curse, though mostly for different reasons.'The primary locus of modern rent-seeking is the overblown financial sector, where burgeoning trade in existing assets has overwhelmed the creation of new wealth, attracting scarce talent from elsewhere and creating instability' (Kay 2012).The prevalence of rent-seeking is widely explored but we should add a further element, less well understood: Britain's status as a tax haven and the British Offshore Archipelago (Shaxson 2011) which, as discussed below, feeds enormous (often illicit and abusive) easy financial rents into and through London.
Several other harms we describe may not yet have fully emerged.Notably, 'growth' in Britain has been predicated on a constant expansion of credit supply.Arcand et al. (2012) report that 'GDP growth reaches a maximum when credit to the private sector is at 76 percent of GDP'.Beyond 90%, growth begins to suffer.This becomes statistically significant above 113%.Cecchetti and Kharroubi (2012) suggest that the optimal point is reached when private sector debt passes 100% of GDP.Most advanced countries were far beyond these levels when the GFC struck: credit to the private sector in the USA stood at 195 percent in 2008, and for Ireland, the Netherlands and the UK the figures stood at 220%, 193% and 211% respectively (World Bank 2013).Recent data suggests private sector debt has since expanded.Total UK private sector debt in the second quarter of 2011 stood at over 400% of GDP, with household debt at 98% of GDP and financial sector debt at 219%.British household and financial sector debt was higher than any other G7 member state (Thompson 2013, 476-478).
The nature of credit has been transformed too, with damaging long-term effects.Until the 1980s bank loans to business comprised most loans.Now mortgage loans and loans to financial companies account for over 70% of UK bank loans (Knott et al. 2014, 5).This shift marks the specificity of the UK 'growth' model and weighs further on prospects for long term recovery; 'Financial sector debt was central to UK growth before the crisis and is now an ongoing burden on the UK economy.Exposed bank balance sheets and weak lending make recovery from recession through other sectors extremely difficult' (Thompson 2013, 490).The British government's protracted and so far unsuccessful struggle to persuade banks to target successive quantitative easing programmes towards business lending can be seen as evidence of shorttermism and crowding-out.Bowman et al. (2013, 478) suggest the 'failure of banks either to pass on lower interest rates or to expand lending raises large questions about whether quantitative easing is above all a form of bank welfare'.Policy to boost business benefits the financial sector instead.
The Finance Curse also deepens regional imbalances.Since 2010, 79% of private sector job growth occurred in London.Aberdeen and Edinburgh are the only non-southern cities in the top ten UK cities for innovation; for employment all top ranked cities are in the south (CenterforCities 2014).Annual employment growth in the north averaged 0.6% from 1992 to 2007 compared to London's 1.3%; gross value added grew by 2.9% in the north and 5.6% in London (Gardiner et al. 2012, 16).The north and south have suffered deindustrialization, just as areas outside the orbit of financial flows from natural resources have withered in many resource dependent countries (Shaxson 2008).London is portrayed as the economic 'engine' of Britain, but in part this is possible because the City has 'financialised' business sectors in the regions, extracting profits at the regions' expense (Leaver 2013).
Sectoral and spatial imbalance is accompanied by rising income and wealth inequality, which themselves harm long-run growth.Increases in income in the UK have been concentrated in the top 5 percentiles.Within this group financial sector workers account for 60% of the gains, while accounting for only 5% of the total workforce and 12% of the top decile.Loss of income share is spread evenly across the remaining 90% of workers, hurting manufacturing and public sector workers particularly.Bell and Van Reenen conclude; 'about 60% of the increase in extreme wage inequality is due to the financial sector ' (2010, 16).Given the relative dependence of regions outside London and the South-east on public sector and manufacturing employment, wage inequality is closely linked to sectoral and spatial imbalances.

Politics, Policy and the Finance Curse
That the financial sector achieved regulatory and even cultural capture in the run up to the GFC, and afterwards, is widely recognized.Private interests wrote public policy (Persaud 2003;Wigan 2010).The resulting disjuncture between privately and socially optimal leverage meant excessive risk-taking and dangerous concentrations in counter-party exposures (Baker 2010).Revolving doors between public agencies and private entities, an intellectual consensus around the efficient markets hypothesis, a largely unchallenging media, and vast resources dedicated to influencing regulatory outcomes ensure regulatory capture (Johnson and Kwak 2010;Seabrooke and Tsingou 2014).The outcomes have persisted beyond the GFC with the UK parliamentary enquiry into the LIBOR scandal described by MP John Mann as a 'total whitewash' and the 'Vicker's' bank reforms panned as 'feckless' and 'paying lip service' to reform (The Guardian, 13 July 2012; Financial Times, July 9 2012).The political party system is heavily funded by the financial sector, and the media dominated by its representatives and preferred opinions.The Bureau of Investigative Journalism found that 51.4% of donations to the Conservative party over 2010-2011 came from the financial sector (Mathiason 2011).Analysis of the UK's most popular news programme demonstrates that, 'in reporting the banking crisis, the parameters of debate on the Today programme are set by a narrow group of City sources, regulators, IMF spokespersons and front bench politicians' (Berry 2012, 14).In a two week period surrounding the bank bailouts during which the option of fullscale bank nationalization was effectively erased from the agenda, more than 70% of discussants were City sources (Ibid.,15).Anecdotes abound.For example, Peter Oborne, the Telegraph's chief political commentator, resigned in February 2015, saying that its coverage of the HSBC Swiss tax evasion scandal amounted to a 'fraud on its readers', as it censored critical coverage of the bank to protect advertising revenues.While The Guardian investigated the same scandal, HSBC put its advertising 'on pause.'

The Finance Curse and the World Economy
The Finance Curse differs from the Resource Curse in two main respects.First, political capture by a dominant resource sector is a by-product of the Curse, whereas in finance-dependent countries political capture is deemed necessary to reassure flighty mobile capital of a welcoming, stable atmosphere.Second, the Resource Curse essentially strikes the local economy, with relatively few outwards international repercussions; but the Finance Curse flows in both directions: outwards from Britain, and inwards from the world.
The outward harms come in three main forms.First, the City of London originates and exports financial instability, and played a central role in the GFC.For example, the collapse of the U.S. insurance giant AIG was triggered by a 377-person unit located in London to take advantage of London's "competitively lax" regulation.Joining other U.S. politicians in attacking London as a serial originator of financial crises in the wake of $2bn trading losses at the UK unit of JPMorgan Chase, Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, complained, 'So often it comes right back here, crashing to our shores . . .if the American taxpayer bails out JPMorgan, they'd be bailing out that London entity as well' (Financial Times, June 19 2012).London and the UK's offshore satellites also serve as key nodes transmitting financial shocks internationally.IMF research on the transmission of funding strains from Greece in 2010, for instance, shows British offshore networks playing a central role in transmitting contagion (Moghadam and Viñals 2010, 19).
Second, Britain exports deregulatory 'competitive contagion'.Relaxing rules in one jurisdiction prompts others to adopt equal or deeper measures to stay in the race.From the perspective of financial stability, inequality and the rule of law this is a race to the bottom.For example, a lobbying document published in January 2007 by U.S. Senator Charles E. Schumer and New York City Mayor Michael Bloomberg, entitled Sustaining New York's and the US' Global Financial Services Leadership, urged massive financial liberalisation and deregulation (shortly before the GFC.)It cited 'light touch' London a stunning 135 times in the context of 'competition' to attract financial services activity (Bloomberg and Schumer 2007).Bill Black, a U.S. criminologist, described the HSBC tax evasion and political scandal in 2015 as, 'the inevitable result of the City of London "winning" the regulatory "race to the bottom" and becoming the financial cesspool of the world' (Black, 2015).
The third class of negative effects rippling outwards concerns offshore tax havens.Britain has important 'offshore' characteristics itself, including its 'non-domicile' tax rule, the permissive corporate tax regime since 2010, and a lax company incorporation regime.But Britain also runs a global offshore network of tax havens, dubbed the "UK's Offshore Archipelago" (Haberly and Wójcik 2014) with varying degrees of connection to and control by Britain.This "Spider's web" has London at the centre, surrounded by three Crown Dependencies (Jersey, Guernsey and the Isle of Man,) then seven of Britain's 14 Overseas Territories (including Caymans, Bermuda, and the British Virgin Islands.)These territories are substantially controlled by Britain, and might be considered arms of the City of London: Jersey Finance, the lobbying arm of the Jersey tax haven, has stated that for major financial service players, 'Jersey represents an extension of the City of London' (Jersey Finance 2012).Outside these orbits lie many Commonwealth and other tax havens with close links to London, many with the UK's Privy Council as their final court of appeal.These havens harbour and hide looted assets, facilitate and foster tax abuses, abet financial crime, and promote further competitive contagion.Tax haven effects could be construed as a British "Finance Curse export".
The Finance Curse strikes inwards at Britain's domestic economy too: most dramatically through the discourse of 'international competitiveness' which has helped the financial sector achieve political capture.Policy options are dismissed because they might make the financial sector 'uncompetitive'.This potent, ubiquitous argument contains a double fallacy.First, it is rather meaningless to talk about the 'competitiveness' of a national economy (Krugman 1994, Wolf 2004).The Finance Curse thesis exposes the second, related fallacy: what is good for the City may not be good for Britain: especially where wealth is extracted from the economy rather than adding to it.Yet these two core fallacies are seldom challenged, and false consciousness prevails under the banner of 'competitiveness'.Popularising the Finance Curse thesis could undermine this brittle consensus, unshackling politicians from their fear of implementing policies that voters want.
A second 'inward' international effect is the Dutch Disease, as discussed above: the crowdingout and repression of other tradable sectors by finance, a persistent feature of the British economic landscape (Ingham 1984).
A third 'inward' international effect concerns the British "Offshore Archipelago," which serves as a feeder mechanism attracting capital, and profiting from the business of handling capital, from around the world.So the Cayman Islands, for instance, is an important incorporation centre for affiliates of U.S. hedge funds and private equity firms: the Cayman feeder enables City of London players to get a of the U.S. action.Likewise the two biggest sources of foreign investment (on paper) into China for some years have been the British Virgin Islands and Hong Kong, each closely linked to London.This Offshore Archipelago, a residue of the British Empire, is predicated substantially on financial secrecy and tax-free treatment, and collectively serves (as the formal Empire did) as a vast rent-extracting opportunity for the City.

Conclusion
The Finance Curse hypothesis overturns an entrenched orthodoxy that what is good for the City must be good for Britain.Claims about the financial sector's gross contribution are overblown, and an oversized financial sector imposes a wide range of costs on the economy, polity and society, to result in a net negative for the country.The accelerated rise of finance in recent decades has damaged Britain's alternative economic sectors, as productive activity cedes ground to financial rent extraction.Many of the harms, in cause and effect, are similar to those of a widely studied "Resource Curse" afflicting mineral-rich countries.Under the Resource Curse, rents come from the earthbut under the Finance Curse rents are extracted from the economy and society more broadly.In the face of long term stagnation, historically low productivity levels, an elusive search for growth, huge public and private debt overhangs and ever greater natural and social precarity the time is ripe to consider new paths.A starting point is a new grand narrative, the Finance Curse, to confront and help reverse the political dominance of finance, and to support alternative economic sectors.The language of financial "competitiveness" must be dethroned.
Policy prescriptions arising from the analysis abound.Overarchingly, the financial services sector should be downsized.Macroeconomic policy should be conducted in the interests of a broader set of objectives and constituency.In turn, industrial policy should explicitly target diversification and the spatial diffusion of economic activity.Downsized finance itself will provide the basis for such a transformation with, for instance, finance losing its virtual monopoly on UK talent.Competitive contagion should be tackled with firm domestic commitments to high