The Paradox of finance-

Over the past thirty years, many developing countries have experienced spurts of economic growth followed by collapses. In the process, some have fallen further behind the advanced economies, while only a few have enjoyed sustained economic growth. This policy brief explores the reasons for these diverse outcomes. It suggests that the countries with the strongest performance are those that have rejected the dominant economic wisdom of trusting their growth prospects to financial markets, and instead have pursued innovative and heterodox policies, tailored to local conditions. This has allowed them to shift resources to activities that are increasingly productive. Meanwhile, many developing countries that have embraced finance-driven globalization (FDG) have seen their ability to achieve this structural transformation greatly reduced. The turn to financialization Beginning in the early 1980s, the extensive de-regulation of the financial sector, the dismantling of controls on cross-border financial activities and moves to open the capital account signalled a radical break with the post-war international pol-icy framework, with capital flows surging ahead of international trade (fig. 1). Subsequently, the proportion of national income accruing to the fi-nancial sector has increased across all countries and regions, financial leverage (the ratio of debt to revenue) has risen sharply, supported by the proliferation of opaque financial products and markets, “shadow ” financial institutions have emerged with heightened speculative behaviour, and corporate and even household governance has increasingly focused on quick returns from speculation on financial assets, exchange rates, real estate, and mergers and acquisitions, often fuelling asset price bubbles. As finance has expanded its command over global resources and tightened its grip over both corporate governance and policymaking, measures of economic “success ” have be-come disconnected from the pressures of mak-ing productive investments, raising productivity and creating jobs. In combination with a general shift to more open markets, this structural shift in the organization of economic activity and the behavioural changes in economic actors can be described as FDG