As loathe as I am to admit it, jobs in finance look very sexy on paper. Managing a small business involves running to OfficeMax, the post office, or the bank – nothing that will grab one’s attention. There are no million dollar deals, or headlines in the newspaper announcing the bonus levels of other office managers. During a lunch break, I’ll come across a story about some new merger, or read those stories about the year-end bonuses that will exceed my salary by several degrees. Being a good capitalist, I understand the role that a vibrant financial sector plays in a modern market – allocating capital efficiently, allowing entrepreneurs a new source of investment funds, and rewarding investors who are taking risks with their money.
What I’ve always wondered though, is how prominent should finance be in a nation’s economic profile? You can even go down to the city level – how much role should Wall Street play in New York’s local economy? What role do the futures exchanges play in Chicago today, and what role will they play 20 years from now? For a developing nation like India, how prominent a role can financial firms play? Should the rules governing their behavior be different than in a developed country?
This October 1 issue of Time has an article, Banking on India which reports how Goldman Sachs entered India in 2005, starting out by renting a Hilton hotel suite in Bombay, and two years later, had a hand in two of corporate India’s biggest deals – Vodaphone buying Hutchinson Essar, an Indian cellphone company, for $11 billion and helping ICICI bank do another IPO for $4 billion. The head of the office, L. Brooks Entwistle, exhibits an infectious enthusiasm about the opportunities in India. He has good reason to be. According to the article,
With an economy growing at about 8% a year and corporate earnings a robust 25%, India has become a must-see for multinational investment banks looking for big, bold corporate mergers, acquisitions and financing deals outside the U.S. The country’s total market cap reached $1 trillion earlier this year, up from just $280 billion five years ago. Companies in India’s technology and financial sector are booming, and the world’s investment bankers are paying court. Banks used to “come to India about once a decade, get spooked and pull out,” says industry analyst Janmejaya Sinha of Boston Consulting Group. This time around, “it’s going to take more than parachuting in.”
While there will be beneficial effects on other areas of Bombay’s economy, I can’t help wonder if there wouldn’t be a bigger bang for the buck if there was more attention given to more basic sectors – manufacturing and transport, for starters.
The September 15 issue of The Economist has a special report on financial centers. In developed cities like New York and London, there are already complaints that housing costs are increasingly out of reach, as wealthy finance types price teachers, cops, drivers out of the market. One of the articles notes
Growing prosperity, a bigger tax haul and the cosmopolitan lifestyle of young financial professionals have injected new vitality into places like London, New York and Hong Kong. Yet there is also growing inequality, a steep rise in the cost of living and increasing pressure on middle-class families who are having to live ever farther away from city centres. The income discrepancy between haves and have-nots in the world’s financial capitals has not been this great since America’s “gilded age” in the late 19th century, says Susan Fainstein, an expert on urban issues at Harvard. The trend began in the 1980s and has become stronger, despite temporary blips such as the dotcom bust in 2001. A report on wealth inequality in Britain in July found that the gap between rich and poor is now bigger than it has been for 40 years, with the proportion of middle-class households shrinking.
India already has a substantial disparity of wealth, and while there is always some in a market economy, shouldn’t public policy be geared towards lessening inequality? It would certainly make other reforms more palatable if voters can see that the benefits of reform are not going to a select few.
Of course, India’s politicians often do more harm than good, by not repealing counter-productive restrictions on how much land can be bought by one person or entity, and keeping in place labor restrictions that discourage companies from hiring. Like information technology, India’s financial sector seems to benefit from the fact that most Indian politicians don’t know how it works, so they’ve ignored it. But as India’s financial sector continues to grow, and profits increase, it is bound to attract attention. Hopefully, that attention will be to build on existing strengths, rather than simply redistributing the existing wealth - which wins elections, but does not create profits.
