An October Bloomberg poll on financial centres delivered a surprise: More investors voted for Singapore over London, in large part because of Singapore’s closeness to emerging economies such as India and China. That global capital is getting pulled away from the traditional West is a trend that’s not about to stop. But this structural shift can be quickened if the West manages to push capital away.
On the face of it, the UK government’s announcement last week that it would charge a one-time 50% “super-tax” on bank bonuses in that country appears to be only a question of curbing risk-taking. Yet, what is equally at stake is the status of the City of London as the world’s premier financial centre, and the movement of global capital.
London financiers, who will anyway be paying a 50% marginal tax starting this year on top of the super-tax, have suggested that the 20,000 of them in the City of London will leave in droves for a better environment. These are the financiers who ensure that London, along with New York, provides the deep, liquid markets where companies can raise money. During India’s boom years, the likes of Tata Motors availed of debt thanks to the capital that flocked to London.
Illustration: Jayachandran / Mint
But capital can just as easily flock away. Even in the days of the Bretton Woods system, when controls impeded capital mobility, a 1963 US tax on foreign securities increased demand for dollars held abroad. Now capital is far more mobile and hence, sensitive to changes. That’s simple arbitrage.
Consider that London actually gained financial dominance earlier this decade because of an exodus from New York, sparked by the 2002 US Sarbanes-Oxley law that increased accounting costs for public companies. That law was the result of public outcry against the Enron scandal. The same fate may befall London now, as financiers move to Zurich or Singapore.
How global financial centres are built, and how they can be sustained, is the broader subject here that expert panels—including the Percy Mistry committee in India in 2007—have spent years debating. The general consensus seems to be that such centres don’t come about overnight: They need the right infrastructure, not to mention the right kind of law and culture. So where Dubai may not be an ideal alternative for some reasons, Singapore can. That’s a long-term shift.
But long-term shifts can have short-term triggers: a UK tax or a US law. Rome wasn’t built in a day, but it was destroyed in just a few.
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