It is widely recognised that natural resources like oil can become a curse rather than a blessing for some states that produce them. In our seminal analysis The Finance Curse, developed by TJN’s Nicholas Shaxson and John Christensen, we show how countries that host oversized financial centres can suffer rather similar fates – for many of the same reasons.

Long-established research on the “Resource Curse” focuses on three main areas – all of which can be applied to a degree to finance-dependent economies.

First is the “Dutch Disease,” where large commodity export revenues push up local price levels, making other sectors uncompetitive and crowding them out. High salaries in the dominant sector also create a brain drain from other private sectors, from government, and from civil society, harming the economy, governance and society.

Oversized financial centres can do the same thing in the countries that host them. New research from the IMF and from the Bank for International Settlements cites these as key reasons why financial sector development, beyond a certain point, harms long term economic growth. (A wide range of other studies supporting the finance curse thesis is available here.) Far from being the Geese laying golden eggs, as is routinely claimed – they can be Cuckoos in the nest.

A second problem is that Resource-rich countries – and finance-dependent ones – suffer wild gyrations in the export revenues of the dominant sector, creating huge booms and busts. The timing of oil booms and busts aren’t the same as the timing of financial booms and crashes, but many of the effects are the same. Those other economic sectors that were crowded-out during the booms aren’t easily rebuilt when the bust comes: it is a ratchet effect.

A third element of the Resource Curse is the most complex: the effects on ‘governance.’ One core reason for bad governance in mineral-rich countries is that minerals like oil provide unproductive economic ‘rents’: easy, unearned money obtained not through skill or effort. When easy rents are available, rulers lose interest in the difficult challenges of state-building, or the need for a skilled, educated workforce, and instead focus on competing for access to a slice of the mineral ‘cake’. An overgrown financial sector, as is now well understood, contains endless sources of easy ‘rents:’ secrecy laws, for instance, provide unearned rents for Swiss bankers, who need do little else apart from watch the money roll in. More grandly, the network of British-linked secrecy jurisdictions scattered around the world, serving as ‘feeders’ for all kinds of questionable and dirty money into the City of London, is another big source of rents for the financial sector. Untold examples of financial rent-seeking exist.

Another reason for bad governance can be crudely summarised like this. Tax makes rulers accountable to citizen taxpayers. Aid dependence makes rulers accountable to donors. Oil dependence makes rulers accountable to themselves. Financial dependence makes rulers accountable to finance. (Read this, or this, for more.)

There are important differences between an oversized financial centre and a dominant natural resources sector. Perhaps most importantly, finance is more mobile than natural resources are. Financial centres do not generally see violent authoritarianism of the kind that can plague poorer resource-rich regions. Yet financial centres create other powerful governance problems. Their ability to threaten to relocate elsewhere if their demands are not met harm democracy andaccountability and allow them to ring-fence themselves from the rest of the economy, political system and society – and also to achieve political ‘capture’ where reform — along with such democratic goods as progressive taxation — become almost impossible. This “capture” is found most strongly in small island states, but it can also occur in larger states such as the UK and the United States, as the film Inside Job reveals.

This is just a taster of this huge, complex issue. Now explore the ebook and paper and other materials in the box, above.