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IFCs play key role in boosting growth in developing countries

Tuesday 13 July 2010 - by Andrew Hickley


There is some reason to think that the Sino-French difference over IFCs was a self-interested realisation of the positive contribution made by such centres to the Chinese economy and the consequent alleviation of formerly widespread poverty.

The consistent support that the Chinese government has extended to Hong Kong's finance centre strengthens the impression that it is aware of the benefits international financial services provide for the Chinese economy generally. Despite pre-1997 fears that Beijing might engage in de-stabilising interference in either the finance industry directly, or its broader institutional underpinnings, nothing of the sort has been observed. Current efforts to develop Shanghai as a financial centre provides testimony of the benefits the Chinese government expects to reap from IFCs in the future, at home and abroad.

The tax-neutral environment provided by IFCs is a necessary but not sufficient condition for the role they play. More important are the sophisticated, robust and efficient institutions they host.

IFCs by definition allow outsiders to easily access and profit from these efficiency promoting institutions. Rather than funds being hoarded offshore, they are then re-invested to produce growth. To the degree that developing countries shut themselves off from IFCs, they will tend to prevent both foreign and domestic investors being able to use IFC institutions to benefit the local economy. In the longer term China, India and other developing countries may create the panoply of specialised, complex institutions presently found in IFCs. In the meantime, however, the evidence presented suggests that there is much to be gained by developing countries cultivating closer relations with IFCs to foster growth and reduce poverty.


Explanations of the large IFC-mediated flows into and out of China and India premised on a simple tax-arbitrage logic cannot account for the fact that the tax incentives have largely been withdrawn, but these flows have continued to grow. Because existing explanations fail, it is necessary to look further.

No doubt there are many factors that explain why China since 1978 (and India since 1991) has managed to lift hundreds of millions of people out of poverty. But a key factor that has previously been ignored is the relative openness of developing economies to IFC-mediated flows of capital from both domestic and foreign investors.

This is an extract from International Financial Centres and Developing Countries: Providing Institutions for Growth and Poverty Alleviation.


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