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Turner: Liberalisation may have been a failure

Thursday 3 March 2011 - by Nicholas Shaxson

Britain's top financial regulator recognises that keeping Big Finance on a tight leash does not mean sacrificing high growth, writes Nicholas Shaxson, author of Treasure Islands: Tax Havens and the Men Who Stole the World.

In a long speech in February 2011 called 'Reforming Finance: are we being radical enough?', as picked up by the excellent Progressive Tax Blog, Turner said: "There is no aggregate level empirical evidence to support the belief that financial liberalisation and financial deepening has generated superior economic performance."

This was not exactly a new statement - he generated big headlines last year talking about "socially useless" financial services companies. But coming from the chairman of Britain's Financial Services Authority - the financial regulator - this is a stunning, truly stunning, admission, and it bears repeating. Indeed, we should never forget it.

As he puts it: "Empirically it is worth noting that the period of post-war 'financial repression' from 1945 to 1975, apparent both in measures of financial activity and of financial sector remuneration, was one of rapid and steady economic growth which compares well with the subsequent 30 years."

In other words - as I explain in Treasure Islands - growth was higher in the quarter century of "financial repression" after the Second World War, than in the subsequent period of financial liberalisation and 'efficient' international finance. Turner's findings are backed up by many studies, including Kenneth Rogoff's and Carmen Reinhardt's This Time It's Different - a survey of eight centuries of financial crashes and follies.

This correlation of financial 'repression' and high growth proves that it's quite possible to have high growth while keeping Big Finance on a tight leash. It does not prove that curtailing the power and reach of finance will make your economy grow faster - but it certainly does lend support to the idea.

So making international financial flows more 'efficient' might well hamper growth. Given that many tax havens' primary intellectual defences consist of an assertion (whether true or not) that they make international finance more 'efficient' - then clearly their role in the global economy needs to be questioned very closely indeed.

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