Intermediation

The yawning gap at the heart of the financial system

Two particularly pernicious and inter-related challenges confront the global financial system. On the one hand, pools of trillions of dollars of savings, particularly in OECD economies, are trapped in sub-optimal investments earning poor returns. On the other, many developing countries face a serious shortage of capital, even for investments that can generate high financial and economic return. The world’s financial system fails to intermediate between the two at any scale. This leads to several perverse consequences.

Long-term investors from rich countries, such as pension funds and insurance firms, have crowded mostly into developed country bonds and stocks. Even truly unconstrained investors such as the giant Norwegian sovereign wealth fund have ninety percent or more of their portfolio invested in such assets. Total allocation to developing countries remains far below the more than 40% (and growing) share of global GDP that they now command. Allocation to unlisted assets in developing countries, which often lack the deep liquid markets that characterize OECD economies, is negligible. Perversely, large pools of savings in developing economies, particularly sovereign wealth funds and foreign exchange reserves, are also after the same listed securities in developed economies.