chapter  3
28 Pages

The “finance curse”

ByChangwen Zhao, Hongming Zhu

Chapter 3 discusses the harm done by an “extractive” financial system or the finance curse. We explore five mechanisms by which an extractive financial system erodes the foundation of the real economy and of economic growth: the siphonic effect, the erosion effect, the interest group mechanism, the corporate financial mechanism and the financial instability mechanism. While analyzing the most important, the “siphonic effect”, a distinction is made between two links of resource distribution: “primary allocation” and “re-allocation”. The “multiplier effect” and the “leakage effect” in “re-allocation” is discussed and the “siphonic effect” is considered as the result of a distortion in the “primary allocation”.