Recent decades have seen a dramatic improvement in the standard of living for the world’s worst-off. In 1990, 40% of the world lived in extreme poverty – today, just 10% of the world does. Much of this progress is due to reforms in countries such as China, but it wouldn’t have been possible without another factor: international financial centres.
The British Virgin Islands provide more investment into China than the whole of Europe and North America combined. The Cayman Islands outstrip the United States. Other IFCs – like Hong Kong and Singapore – are the other dominant sources. Why is this, and how do IFCs help development?
IFCs offer strong legal institutions, which are important factors in international development. Varying level of protection of the rule of law explains two-thirds of the difference in national income per capita. Investing through IFCs offers emerging markets these legal institutions, allowing them to attract investment they otherwise would not.
IFCs incentivise holding assets in emerging markets. IFCs facilitate the diversification of investments to spread risk across jurisdictions and asset classes. By encouraging geographic diversification in jurisdictions with differing risk profiles, IFCs encourage investment from developed countries into emerging markets.
Africa needs an estimated $11,000bn in additional investment over the next 25 years, with just a third of that coming from African governments or development aid. That leaves a big gap and need for capital. Trusted legal institutions take decades to put in place, and if Africans aren’t to wait for the investment they need, international financial centres are vital to lift millions more out of poverty.