A surging Hong Kong has dethroned the United States as the financial center with the best financial systems and capital markets in the World Economic Forum’s influential Financial Development Report, which it released Tuesday.
The WEF—the annual powwow of the world’s most powerful people in Davos, Switzerland—says that Hong Kong is the first-ever Asian entity to top the list. The rankings are traditionally released one month before the WEF’s annual meeting and used by participants to set much of the agenda there.
To compile the annual index and report, which finance ministers and bureaucrats use to measure the effectiveness of their economic reforms and to benchmark their nations against their peers, WEF economists use a wide array of data that they silo into seven categories: institutional environment, business environment, financial stability, banking financial services, non-banking financial services, financial markets, and financial access.
Hong Kong’s year-over-year rise to first place from fourth on the overall rankings is an indication of that city-state’s economic vigor and attractiveness as a free and unfettered marketplace, according to the WEF. “The higher the degree of financial development, the wider the availability of financial services that allow the diversification of risks,” write the WEF’s Isabella Reuttner and Todd Glass. “This increases the long-run growth trajectory of a country and ultimately improves the welfare and prosperity of producers and consumers with access to financial services.”
The paralyzing effects of Dodd Frank on the securities markets in the United States—as well as the enormous debt run-up by the Obama administration—is evident in the U.S.'s slide to the No. 2 spot on the rankings this year. According to the WEF report, economic factors, policies and institutions in the U.S. are relatively weak this year, with particular limitations residing in the institutional environment (ranked 13th out of 60 countries) and financial stability (42nd out of 60) pillars.
Aspects of corporate governance (18th) are in need of improvement, especially with regard to its strengthening auditing and reporting standards (25th), the ethical behavior of firms (22nd), and its protection of minority shareholders’ interests (22nd). From a financial stability perspective, the United States continues to be plagued by the banking system (ranked a dismal 53rd out of 60 countries) and currency volatility (41st), according to the report. The lack of efficiency (ranked 34th) of the American banking system can be attributed to high bank overhead costs (ranked 42nd), low profitability (47th), and a large percentage of non-performing bank loans to total loans (35th), according to the WEF.
Another distressing trend in this year’s rankings is the deterioration of corporate governance around the world. About 85 percent of the economies in the comparative sample have declined in overall corporate governance scores since 2008, according to the report. Of the top 10 countries that have declined the most during this time period, four are emerging economies. “This would appear to indicate that these perceived corporate governance issues are global rather than contained within the group of advanced economies — and are potentially of significant concern given the important role that emerging economies are expected to play in future economic growth,” states the report.
Overall scores for commercial access to capital decreased for the majority of the 60 countries in the rankings. The decrease indicates that over 90 percent of countries have not returned to pre-crisis levels of commercial access, according to the WEF report.
“A lack of financial stability, particularly with respect to unsustainable public debt levels and high unemployment, is probably the critical issue responsible for these turbulent times,” says Klaus Schwab, the Swiss professor who founded the WEF more than 40 years ago. “Ultimately, many of the underlying problems can be addressed only by sustainable economic growth. Therefore the need to create an enabling environment that allows for sustainable growth is of equal, if not more, importance than financial stability.”
Next stop, Davos ...
