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Finance and the Rich Country Curse

Thursday, 02 January 2014 05:38

Simon Johnson has a good post on how a bloated financial sector is often a curse to rich countries like the United States. The piece can use a small correction.

It gives South Korea as an example of a middle income country in which manufacturing still is a dominant force. South Korea really should be viewed as an advanced country. It's per capita income is higher than Italy's and only about 10 percent lower than the United Kingdom's.

Comments (7)Add Comment
written by Last Mover, January 02, 2014 7:29

Imagine that. If only America had a Samsung to whip the big investment banks in line. But it didn't. It had Apple, nowhere to be found ... except in China.
written by Next Mover, January 02, 2014 8:02

Dean, what did you make of this part of the post?

"There is no sector in the modern United States or Britain that is willing to stand up to big banks in the political arena."
Johnson is 100 percent right
written by Dean, January 02, 2014 8:23
There certainly is no major power base that is prepared to go after finance in the way that many groups are prepared to after unions.
written by skeptonomist, January 02, 2014 8:50
If small countries don't have large financial sectors, the big countries will supply the money, and will try to force the small countries to pay up when the gambles fail. There's nothing new about this - Britain did it through the 19th century and then the US took over. Is it better to be Greece or Cyprus now, or Germany or other countries which are holding the debt? Large unregulated financial sectors are a curse on everyone.
Middle-income countries' financial sectors
written by Claud Alexander, January 02, 2014 9:06
To add to skeptonomist's point above, even if the banking sector is indigenous, it seems plausible that it will often be able to punch above its weight (as measured in Johnson's size-as-share-of-GDP) because any threat of default to First World bondholders can bring the delights of IMF conditionality packages.
In other words, the damage would come not from the direct economic effects of small-country banks' failure, but rather from the possibility that the government will be forced to impose austerity policies to safeguard international creditors, creating as much or more damage than if these banks had represented a larger share of GDP..
Where's JK Galbraith when we need him?
written by David M, January 02, 2014 10:04
I feel like a revived theory of countervailing powers would help a lot of analysis these days. Not just labor versus capital versus consumers, but manufacturing vs. retail, importers vs. wholesalers, etc. It's remarkable how successful finance has been in coopting all other sources of political and economic power, both rhetorically and practically.
and furthermore...
written by David M, January 02, 2014 11:12
Dean's point about South Korea is important, because it shows that the relative power of finance is a matter of what sectors have clout. Johnson framing it as a problem that just happens at a certain GDP level occludes the real political maneuvering needed to keep finance at the top, and makes it sound like there aren't alternatives.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.