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Thursday, December 06, 2012

International financial centres: Peering into the future

I did the SIGFIRM Quarterly Lecture at the University of California in Santa Cruz recently:

Also see: Mumbai as an International Financial Centre, a project led by Percy Mistry.

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  1. Sorry for sounding cynical, but the fact that NSE has more trades than Shanghai or NYSE, etc could be indicative of a problem, rather than being indicative of any type of superiority.

    Again, the fact that IBM has about the same number of employees in India vs US means nothing. Its like saying Infosys has 3 times the number of employees as Google, so it is 3 times better?

    Such superficial comparisons don't help with the credibility of the argument. If we are going to compare numbers, we could have just said that India and China have 4 times the population of US, so in the long run they should have a larger role in international finance. Which is surely going to be true in the long run.

    I think there is something unsatisfying about all this analysis based on countries. There is the rise of a plutocracy born out of the adoption and spread of capitalism in major parts of the world (China/India/Russia/Africa, etc). This plutocracy has little allegiance with nationalistic sentiments or governments and is homogenously spread across developed and developing countries. These plutocrats drive most of finance, power and influence and control governments. Think of the US/Europe military-industrial complex being replaced with a globalized plutocracy.

    So, instead of the past economic differentiation based on country lines, I think we might have to think of economic differentiation spanning country borders. The poor in the US might have more in common with the poor in India and the same goes for the rich. The rich in the US and India might both send their kids to Harvard, while the poor in US and India might both look for jobs in India. If you buy this argument of polarization and inequality (which is an inherent feature of capitalism), then you might see un-intuitive outcomes, even with high growth in places like India/China. Bad institutions might persist for longer (than suggested by economic growth) because the elite does not have the incentive to fix the problem, but instead has the option to get the service elsewhere, this perpetuating differences.

    This might be a low probability situation, but I think it is realistic. And, its interesting to hypothesize what/where international finance will be located under this view of the world.

  2. Following up to my previous comment, healthcare is a good example. The leader of the country goes to the US for her healthcare, while India attracts people from Africa and middle east as part of its healthcare tourism industry. Of course, healthcare is a personal service, so there are differences from finance, where things can be done remotely. But, the point is that, it might be interesting to study what India as an international healthcare center might tell us about India as a potential international finance center. Seems to me that there is differentiation based on the economic capacity of the service consumer - if someone is really rich they would prefer to get healthcare in the developed world, whereas if someone is not as rich, but not really poor by Indian standards, then they might want to get healthcare in private hospitals in India. I wonder if such differentiation is possible in finance, and if it may help understand consumer segmentation across different international finance centers.

  3. Sir why do we always look Mumbai as International financial centre? Given local govt in Mumbai is least interested in infrastructure development and more interested in controlling real estate. Why not alternate city as International Financial Centre? think GIFT (

  4. A city often dubbed as the slum capital of the world and does nothing about it, should aspire to become IFC? Well, it could, but would only show capitalism in poor light. In the contrary, the international financial networks should slowly withdraw from inequitable and lawless cities like Mumbai in the interest of capitalism. This could incentivize these cities to come to terms with reality.

  5. How about becoming a proper domestic center first? There's hardly any depth, proper standards, diversity of markets, rule of law for white collar financial crimes, proper regulation and regulators at this point in time within India. Hell, we don't even have full capitalism yet. Lets hope all that gets fixed in the next 5-10 years (and if the pace is the same as the last 5 years, then it will take 25 years to just fix the domestic problems) before we can even deserve to dream about international scope in 25 years. Its a pre-requisite anyway, isn't it? Oh actually it isn't, just like healthcare, as mentioned by someone above, we can always accommodate the rich and their desires. In which case, is it really any use if domestic markets and systems remain broken (like in healthcare)?

  6. Super presentation

    1) I think you comment about Steel ingots also rhymes with blood diamonds.

    2) I wanted to see some comments about Hong Kong

    3) Porting regulatory framework is possible now by acquiring jurisdiction of say London or Singapore. Shipping regularly imports international jurisdiction by mutual agreement. India's common-wealth legal heritage will held us in good stead.

    4) One interesting phenomenon is happening is that real estate prices across cities across the world are converging. This has implications for building IFC. Possibly real estate policy will be most important building block for this.



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