How can a large influx of money into a country become a “curse” to its citizens? In this episode, we discuss how the finance curse can crash economies and upend livelihoods in developing nations.
Finance Curse Versus Resource Curse
In an earlier episode we discussed the resource curse, a phenomenon known where discovery of a natural resource can impede economic development, fuel conflict, and create instability. The finance curse is another form of the resource curse, where the resource is human capital in financial services instead of natural resources like oil.
The finance curse generally occurs in international tax havens, or countries where the financial sector exceeds 50% of GDP and government authorities divulge little to no information to foreign tax authorities.
Curse Barrier to Development
Political and regulatory policies of developing countries help create the finance curse. Lack of reasonable regulations engender tax havens that attract foreign financiers, and the financiers’ economic successes increase their political power.
As a result, the financial sector crowds out other economic sectors, which can spark a brain drain of local talent in these other sectors. High wages in the financial sector exacerbate income inequality and lead to local price increases. Moreover, many of these finance sector employees are expatriates, meaning foreigners take a significant amount of the financial gains.
Antigua and Barbuda is a tragic example of the finance curse. One American financier single-handedly became the most powerful employer in the country and subsequently crashed its economy after he was convicted of fraud and his operations were halted.
Role of Developed Nations
The finance curse also hurts developed nations. Wealthy citizens and corporations of developed nations that seek tax havens abroad cost their governments billions of dollars a year in tax revenues. Nations like the United States must work to mitigate factors contributing to this unsustainable phenomenon.
Take a look at some of our favorite articles that we came across while researching this topic:
- Why Tax Havens Are Political and Economic Disasters, Brooke Harrington, The Atlantic
- The Finance Curse, Nicholas Shaxson and John Christensen, Tax Justice Network
- The Quiet Coup, Simon Johnson, The Atlantic