Unregulated finance a danger, report warns
Unregulated finance remains at the heart of today’s hyperglobalised world, and the failure to tame it and address the deep-seated inequalities it has generated threatens efforts to build inclusive economies, according to the United Nations Conference on Trade and Development (Unctad) Trade and Development Report 2017.
The report, titled Beyond Austerity: Towards a global new deal, underlines the fact that, despite all the talk of the urgency of reform at the time of the financial crisis, and recent claims that the financial system is safer, simpler and fairer, regulatory actions have so far done little more than clip the wings of high-flying finance, with lending now somewhat backed by capital and a bit less trading in the shadows.
“The public purse was used generously to prevent the financial sector going under in 2007-08, but the root causes of financial instability have not been addressed by national governments or on a global scale,” said Unctad secretarygeneral Mukhisa Kituyi.
Looking back over the past decades, the grip of finance over entire economies has intensified, as shown by multiple indicators. Total banking sector assets since the 1990s have more than doubled in most countries, with peaks at more than 300% of gross domestic product (GDP) in some Organisation for Economic Co-operation and Development (OECD) economies.
The report estimates that banking in developed countries is a $100-trillion sector, which now exceeds global income. Similarly, trends for developing and transition economies are showing peaks above 200% of GDP in some cases.
The degree of bank concentration remains alarmingly high, a theme highlighted across this year’s report. In many countries, the globally consolidated balance sheets of the top five banks are greater than national income. For many economies, the external asset and liability positions of their domestic sectors are also greater than their GDP.
“This is a shaky state for the global financial system,” said Kituyi.
Financialisation has been accompanied by the rise of indebtedness across the nonfinancial sector, increasing to 188% of global GDP prior to the crisis, according to the report.
Despite the debt-driven growth model ending disastrously in 2008, this trend reached a record 230% of GDP in 2016. With household debt rising and the wage share moving in the opposite direction, the links between indebtedness and insecurity are increasingly difficult to ignore.
The report discusses how these trends are closely related, with inequality worsening. It shows that the income gap between the top 10% and the bottom 40% has widened in the run-up to four out of five financial crises across the world since the late 1970s.
Furthermore, in their aftermath, inequality continued to rise in two thirds of the cases. The mechanisms are complex and vary from country to country, but put succinctly, the story is the “great escape” of top incomes breeds underconsumption, private debt and speculative investment in a context of enhanced capture of regulatory agendas, making the financial system more vulnerable, hence the crises.
In the recovery process, the poor bear the consequences of adjustment as they lose income and employment.