New Global Financial Order

Is a new world financial order emerging from the economic crisis? Will Asia's rising financial centers displace the long-held dominance of New York and London?

The newly released edition of the Global Financial Centres Index (GFCI), an annual competitiveness ranking of the world's leading financial centers, provides useful data with which to assess the evolving landscape of global finance.

The map above, prepared by Zara Matheson of the Martin Prosperity Institute (MPI), shows the world's leading financial centers based on the GFCI ranking.

London and New York remain the world's leading financial centers. But, Hong Kong and Singapore, which hold the third and fourth spots, are gaining ground, according to the report. Tokyo takes the fifth place and Shanghai has surged to sixth, giving Asia four of the top six spots overall. Chicago, Zurich, Geneva, and Sydney round out the top 10. Toronto, with its strong stable banks, ranks 12th overall but makes the list of the world's eight leading "broad and deep" financial centers.

It's true that big international economic crises -- like the financial panic and Long Depression of the 1870s and the Great Depression of the 1930s -- have a way of upending the geopolitical order and hastening the fall of old powers and the rise of new ones, and we may be in the early throes of such a shift now. But what factors can help us better understand the shifting landscape of global finance today?

In his magisterial book, Capitals of Capital, the economic historian Youssef Cassis writes that financial capitals, once established, "have incredible staying power." The rise of major financial centers correlates with the rise of the nation's economic power, but with a considerable time lag. The United Kingdom lost its position to the United States as the world's largest economy in 1872 and the largest exporter in 1915. By the middle of the 20th century, America's economic output was twice that of all of Europe combined. But it was only after the war that New York unseated London as the world's financial center.

To get at this, my colleague Charlotta Mellander and I looked at the economic might of financial centers themselves and of the nations in which they are located. We ran a basic correlation analysis and generated a series of scattergraphs. The data cover 52 global financial centers. We stress that that these are preliminary, exploratory analyses that simply point to associations between variables. We don't make any claims here about the direction of causality, and we acknowledge that intervening variables may come into play.

There is a clear connection between economic heft and global financial centers. This holds both for the financial center itself and the nation in which it is located. Our measure of metropolitan economic output comes from our research that uses satellite images of the world at night to derive a systematic measure of economic output based on light or energy emissions which we dub as our "light-based regional product" (LRP). A city's global financial center score is reasonably associated with its LRP (.46) and slightly more so with its LRP per capita (.53). Both correlations are substantially higher than for a city's population (.35).

The same basic pattern holds at the national level. Global financial centers are more likely in bigger economies. The GFCI is reasonably associated with economic output measured as gross domestic product per capita. The correlation was .28 when we used the combined score of all of a nation's financial centers, and even higher (.51) when we used the score of its highest-ranked financial center.

Global financial centers are also more innovative. GFCI score is modestly correlated with patenting overall (.28) and slightly more so with patents per capita (.32).

The ability to attract talent has long been a defining characteristic of leading global financial centers. Cassis writes that: "The crucial contributory factor in the financial center's development over the last two centuries, and even longer, is the arrival of new talent to replenish their energy and their capacity to innovate." So we looked at the relationship between global financial centers and a proxy measure for openness to global talent  - data on attitudes toward racial and ethnic minorities from Gallup surveys. And we found a reasonably close association. The correlation was .4 when we used the combined score of all of a nation's financial centers and .51 when we used its highest-ranked financial center.

We also looked at the relationship between global financial centers and another measure of openness -- attitudes toward gay and lesbian people, also from Gallup surveys. And we again found a reasonably close association. The correlation was .27, but not statistically significant for a nation's combined score, and .32 when we used the highest-ranked financial center.

The economic crisis is altering the landscape of global finance, but change in the world financial order occurs slowly and gradually. Global financial centers have long staying power, and shifts at the very top follow long lag times. Asian financial centers, particularly Hong Kong and Singapore, have gained ground on London and New York, and Shanghai has risen rapidly to the top echelons of the global financial system. Our analysis finds a close association between global financial power and economic power more generally at the local and national level - and this bodes well for rising Asian centers, more so for Shanghai than for the smaller city-states of Hong Kong and Singapore. That said, their rise may be hindered from intense and growing regional competition among one another. Our analysis also finds a close association between openness and financial power which may hinder their rise to preeminence. Even though Asian centers, from Hong Kong and Singapore to Shanghai, are striving to improve their talent-attracting game, they still do not offer the level of openness, fluidity, and amenity found in London and New York. The interaction of these two factors -- economic power and economic openness -- will shape the evolution of the global financial system and its pinnacle powers for the foreseeable future.