This “finance curse”, as says a report, lowered cumulative GDP by 14 per cent between 1995 and 2015; which would have been much higher with a leaner financial services sector.
A new study states that the UK lost out on £4.5 trillion over two decades because of its huge financial sector, according to a report in Independent.
The study by The Sheffield Political Economy Research Institute says that the “gravitational pull” of the City of London damaged UK’s economic growth as it sucked talent and investment from other productive sectors such as manufacturing and research even as it inflated asset prices, particularly of property.
This “finance curse”, as the paper terms it, lowered cumulative GDP by 14 per cent between 1995 and 2015; which would have been much higher with a leaner financial services sector.
The researchers drew their conclusions based on previous academic studies from economists at the International Monetary Fund and others. These studies have noted that as the level of credit to the private sector increases it generally boosts the economy by allocating funds are allocated to people and businesses that need it.
But once credit to the private sector reaches about 90 to 100 per cent of GDP, a reverse correlation starts and any further rises are a drag on the economy.
The research states that the UK, with its oversized financial sector, has lost a “staggering” £4.5 trillion of economic growth, which is equivalent to two and a half years of GDP or £67,500 per person.
The researchers call for further investigations to establish the size of this effect in the UK and the causes behind it as the results of their research are approximate. However, they state that the largest contributory factor is a misallocation of resources, which they call a “crowding out” of other industries that then leads to the withering away and eventual demise of these industries.
The boom in banking, fund management and other financial businesses In the UK led to a brain drain from other industries. The reason being the huge salaries paid to financial workers when compared to people of a similar educational background in other jobs. The financial services firms have also basked in this reaping an estimated £400bn in excess profits.
The booming profits and salaries pushed up the relative value of the UK’s currency, and as a result making manufactured goods and agricultural products more expensive to overseas buyers. The result was that these businesses have become less competitive or unviable globally as the prices of such goods are set by the international market.
Further, “too much finance” also inflicts the costs of recurrent crises, which the study estimates at £1.8 trillion between 1995 and 2015.
Source: A report in Independent