Recent decades have seen a dramatic improvement in the standard of living for the world’s worst-off. In the last 25 years, 400 million people have been lifted out of poverty. Today, just 10% of the world lives in extreme poverty – down from 40% in 1990.
Much of this progress has been attributed to reforms within countries such as China, and these have played a large role, but it wouldn’t have been possible without another factor: international financial centres.
Table 2: Top ten FDI sources to China 2007
Source: National Bureau of Statistics of China, China Statistical yearbook, Beijing, China; Statistics Press
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 – and ‘mid-shore’ jurisdictions like Hong Kong and Singapore – are the other dominant sources. The same countries dominant investment flows out of China, too. Why is this?
Most developing countries lack the sophisticated legal and professional institutions – whether they’re fair courts, trusted auditors, or stock markets – that are required for international investment.
IFCs offer those institutions to countries that either don’t have them or would be expensive to provide. By investing via companies domiciled in a neutral jurisdiction that provides the fair, impartial, and efficient institutions, the cost of the transaction is reduced. This encourages more investment, which drives economic development.
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.