Close your eyes and think of the financial heart of the world. Then what do you see? Endless rows of shiny skyscrapers, frenzied house prices, business jets and airports may pass by. Stock exchanges, major international banks and law firms, luxury cars, shopping streets. And growth, relentless urge to grow.
Capitalism, especially shareholder capitalism, has been transforming and conquering the world at a record pace since the 1980s. Companies have to perform, dividends are sacred, society and the good of the world are often subordinated to the hunger for more. More money, more luxury, more innovation, more technology. More transport and transport too, more pollution and emissions, at the expense of climate and environment.
Countries that tighten the rules, in the field of taxation or in the field of employment conditions or climate, can count on an exodus of companies that can continue to maximize their profits elsewhere with fewer rules. Hard, merciless, for your own gain. Countries that open the door to capitalist business as unregulated as possible see the money and workers pouring in.
The financial heart of the world is therefore not static. It moves, it moves around the globe. It grows in one place and shrinks elsewhere, it splits up, sometimes specializes. And it always survives, so far at least – at the expense of climate and society, it seems. But is that true? Is capitalism really that bad for the good of the world?
Lists
If you ask a random passer-by where the financial heart of the world is now, you will get many different answers. The United States is undoubtedly doing well, as is the city-state of Singapore. Europeans may call Frankfurt, the seat of the powerful European Central Bank, chauvinistic Amsterdammers will call the Zuidas, haughty Parisians business district La Defense. And tax experts point with conviction to the virtually unregulated tax havens in the Atlantic Ocean.
If you ask people who work in the financial sector the same question, as the Global Financial Centers Index (GFCI) does every year, the answer is this: London is the most attractive financial center in the world, followed by New York and Singapore. Hong Kong and Amsterdam complete the top 5. The GFCI ranks the competitiveness of international financial hubs based on a proprietary questionnaire and criteria from the Organization for Economic Co-operation and Development (OECD), the World Bank and the Economist Intelligence Unit, among others.
If you look at the amount of money that flows through a financial center, this leads to a different classification. From research by Duff and Phelps turns out New York accounted for an impressive 43 percent of global stock trading in 2020, worth more than $34 trillion ($34 trillion). London is second, with over $5 trillion in traded value. Size is not everything: the Chinese cities of Shanghai and Shengzen together account for USD 12,000 billion, but that is largely ‘domestic’ money. Both cities lack the political openness of London and New York, and therefore global appeal.
What are we actually talking about when we look for the financial center of the world? The British business magazine The Economists found three key features to identify an international financial center. Firstly, companies must use the city as an international base. Secondly, such a center needs a ‘deep’ capital market, and the financial (read: banking) services that go with it. And third, it must be a place where wealth acquired elsewhere can be managed and invested. The weekly magazine compiled a ranking based on this. The top 3: New York, London, Singapore.
The GFCI puts it more concretely: the financial heart is a city or region with a strategic location in the financial sector. A place where all kinds of parties from that sector, such as banks, trading companies, exchanges and other institutions, are concentrated. A solid infrastructure, stable politics and regulations, attractive tax rules and room for entrepreneurship are other characteristics.
Financial centers according to GFCI (The Global Financial Centers Index)
Economic freedom
If you look at history, you will see that economic freedom for citizens and companies is crucial in the development of a financial center. The freer a country is, economically speaking, the greater the chance that a financial center with global ambitions will flourish. The American Heritage Foundation, a right-wing think tank, sets up every year the degree of economic freedom of countries. That should indicate which place is most likely to form the capitalist epicenter of the world.
If you look at the digital world map of this organization, you will see that the world has become economically freer over the years. At least until this year. According to the Heritage Foundation, the war in Ukraine has made the world ‘quite free’ again.
The foundation uses many criteria to determine the degree of economic freedom. Think of tax burden, free housing, integrity of the government, freedom of business, trade and labor. Not surprisingly, she lists the US, Australia and parts of Europe as the most free, in addition to some parts of Asia and South America. Singapore, Ireland and Switzerland score the highest. They all fall into the category ‘unqualified’. The Netherlands and the US are ‘largely free’. Africa as a whole has been stuck in no man’s land for decades: sometimes more free, sometimes more constricted.
Recognized autocracies such as China and Russia score below par, but they too have experienced periods of freer enterprise in recent years. Countries in the Middle East, looking to shake off their dependence on oil, are emerging as financial services hubs. The United Arab Emirates, including Abu Dhabi and Dubai, are the most free in the region. This year they scored better than the United States, and just below Austria.
Climate vs capitalism
The question then arises of how this economic freedom, that offering space for capitalism, relates to climate change. After all, more activity means more emissions, more pollution, further global warming. However, analysis of the Heritage Index shows that the world’s most “free” countries in economic terms achieve the best scores on the Yale University environmental index EPI.
And the Yale research doesn’t stop there. The researchers also discovered a large correlation between the climate scores and the Ease of Doing Business Index of the World Bank. It is widely regarded as the world’s most comprehensive and reliable measure of the ease of doing business. Higher ratings therein point to better, often simpler regulation for companies and stronger protection of property rights. Here too, the easier it is to do business – the more capitalistic a country is – the higher the climate score on the EPI.
That higher economic growth and more capitalist freedom lead to better climate management, environment and natural resources, seems illogical. Analyzes like those of Yale and other universities however, mainly show damage to the environment in a country at an early stage of economic growth, while after a critical point in that growth, a gradual decrease in that damage becomes visible. Then, it is assumed, awareness of the environment will play a greater role. In non-capitalist countries, environmental degradation appears to be a much more serious problem than in capitalist countries, precisely because democratic control is often lacking.
Is capitalism good for the climate? That is too short sighted. Although in recent years more attention has been paid to it stakeholdercapitalism as a socially responsible counterpart to it shareholder-capitalism – diverse stakeholders (such as staff, local residents, customers) versus just shareholders – the latter is still dominant in the investor and investor world. Recent discussions about stricter rules for, for example, fossil companies or polluters such as Tata and Chemours that pollute their immediate environment with their emissions, immediately lead to threats from companies to leave elsewhere.
Despite these excesses, studies by Yale and others into the relationship between economic freedom and attention to the climate show that there are worse systems than capitalism when it comes to preserving the earth and the climate. You could say that the more autocratic and oppressive, the worse for people and the environment. Perhaps it is with capitalism and economic freedom as with democracy: it is far from ideal, but we have nothing better.
A version of this article also appeared in the newspaper on July 22, 2023.
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