The ‘black hole of Geneva’
July 27th, 2010
July 27th, 2010
Markets do not work well when they are not transparent, and nowhere is that more true than in financial markets. If I sell you a banana, I care about the wider market for bananas – whether, for example, the crop has failed in the Dominican Republic, so that I should be raising my prices. I care about you, however, only insofar as you have the money to give me in exchange now. But if I sell you a loan, I care about your creditworthiness and your financial prospects, because I need to know that you will pay me back, or rather I need to price according to the chance that you won’t – so information matters in a whole new way.
It was for formalising the implications of the latter that Joseph Stiglitz won his economics Nobel in 2001 – his Prize Lecture was entitled ‘Information and the change in the paradigm of economics’. Among a range of other papers with various co-authors, it is the model of ‘credit rationing’ that he and Andrew Weiss published in 1981 that provided a powerful new direction for understanding how financial markets can be driven by information asymmetries.
That model, of course, relied upon the banks keeping hold of loans that they had made. Once banks became able to securitise whole tranches of loans, bundling them up and selling them on to others, they found that they no longer needed to care about their customers, any more than if they were selling bananas. And, as the world economy struggles to recover after taking a ride on the resulting banana-skin, we all know how that turned out.
Back in 2005, Raymond Baker – now Director of Global Financial Integrity – wrote a book called Capitalism’s Achilles Heel. In it, he argues that global economic and financial markets are so distorted by illicit flows that we risk losing their benefits entirely – and that the impact on (above all) the poorest countries and people of the world, in terms of lost growth, lost tax revenues, worsening governance and growing corruption, is such as to risk undermining capitalism itself.
It is for this same reason that Christian Aid, and a great many others, have joined the battle for greater transparency. Markets that do not work, and that are characterised by opacity, tend systematically to penalise the weakest participants – from developing countries that are unable at the national level to realise the true value of their natural resource wealth, to citizens living in poverty who are unable to hold the elites and multinational companies to account for how they use that wealth.
The same arguments also apply, of course, to the richest countries and their citizens. Last month an important article by Javier Blas in the Financial Times drew attention to the problem of opacity in commodities markets. Blas identified a ‘statistical vacuum’ in physical commodities markets, which makes for ‘murky’ pricing and a lack of oversight. This problem is paralleled by weaknesses in data gathered at country level, and for the poorest countries – many of which are highly reliant on commodity exports – this can have devastating effects.
In a recent report, Christian Aid highlighted the case of Zambia. One of the poorest countries in the world, with around 80% of its citizens living below the dollar a day income poverty line, Zambia’s economy is dominated by copper exports. According to international trade statistics, around half of these are destined for Switzerland. If Zambia had received the declared Swiss export prices in each detailed category of (largely unrefined) copper product, the country’s GDP would have almost doubled.
The story is complicated, however, by the fact that internationally declared Swiss imports of Zambian copper are a small fraction of declared Zambian exports to Switzerland. This ‘black hole of Geneva’ prevents the citizens of Zambia from holding their government and private companies to account for use of the country’s valuable, but limited natural resources – and so here, and in a great many more of the world’s poorest countries, the ‘statistical vacuum’ represents an enormous obstacle to making markets work for the poor.
The Task Force has identified a number of simple, international measures that would shed greater light on these problems, to the ultimate benefit of most market participants – and especially those struggling against poverty and corruption. And Mr Blas is, of course, absolutely right to call on the G20 to help end the opacity that perpetuates both.
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