Financial Service Centers are the new industrial revolution of the late 20th century and the 21st century. Financial services have seen an explosive growth in which modern technology has allowed globalized market economies to take advantage of this new economic revolution. And yet some financial centers are better than others. This is not by mere chance or location, although a location in a specific “time zone” in the world can give an added advantage. Technology however, soon evolves and cancels out time zone advantages in the long run. Today London, or the “City of London”, as the capital’s financial hub is known, transacts around 80 percent to 90 percent of European capital market transactions of any significance. One wonders why Paris, or New York are not competing in the same league as London. Of more importance to the Gulf and to Saudi Arabia in particular, is what lessons can be learned from leading financial centers, to enable the same ripple effect of wealth to materialize in the economy, and thus help in diversifying away from reliance on one natural resource such as oil.
Under more tranquil economic evolutionary circumstances, there have always been a few lucky and determined individuals who have fought against all the odds and come up from nothing to make it and break into the ranks of the worlds super rich and privileged. Globalization has brought a revolutionary change, in the sense that information has been harnessed to assist those most nimble on their feet. Today the club of the super rich is being expanded at a faster pace from all walks of life, and the scale of riches has multiplied out of all proportions to anything experienced in recent historical times. The recent furor about David Beckham’s one million dollars a week earnings for the next five years seems to have missed the point for many — the overwhelming majority of his earnings is not going to be derived from football — a measly $10 million a year — but from PR and merchandising an image and brand. Without technology, financial sophistication and global selling, Mr. and Mrs. Beckham would have earned far less. Globalization helped. Earlier, probably better footballers, missed out.
In Britain today there are around 500,000 people earning a living in the City of London in the financial markets and support industry. It is estimated that those worth more than 100 million pounds — over SR700 million — can be numbered in their thousands and they are a growing club. A lot are shy not to reveal their wealth as they value their privacy, but the younger ones boast of the size of their annual bonuses which run into the millions. There is an old saying in the City of London that the size of the year-end bonuses can be measured by the “Porsche Index” — whereby the number of Porsche cars sold at year-end reflects good or modest bonuses.
Not all those working in the City of London, or in other financial centers, are dealing in financial services. Others are attracted to such centers to offer ancillary services such as lawyers, IT consultants, “life-style” advisors or psychiatrists. In one shape or another, their businesses derives their revenues from the wealth generated by the financial centers, and thus into the wider economy. The better the financial centre in terms of global performance, the more the wider ripple effect for the wider society.
There is more than luck or slick PR behind the glitter of mega bonuses and mind numbing transaction sizes. Years of hard toil, infrastructure building, regulatory oversight, technical and financial skills, education output and perceived ethics are at the core of any successful financial center.
London is blessed by a pool of talented, educated and fairly homogenous workforce that can draw upon British universities to graduate the right balance of a financial workforce that is needed by the City of London. It is also blessed by prudent and respected regulatory oversight bodies to ensure transparency and support, while overseeing ethical standards and that human greed is kept in check. Any aspiring financial center around the world can build the tallest, glitziest and fanciest set of buildings and call it a financial center.
All that transpires, is a de facto real estate project that attracts a dispirit set of tenants who have little in common in the financial sector. In the Arabian Gulf, each of the member countries of the GCC has already established, or is trying to set up, financial cities or centers, with varying degrees of success. Specialization in key niche areas, such as Islamic finance in Bahrain, can ensure survival for the smaller ones, but tying to be everything for everyone will not succeed, as in the final analysis, the size of the supporting domestic economy is a key factor for a viable financial center, unless a location can serve a larger hinterland market such as Hong Kong or Singapore’s financial centers.
The Saudi financial sector has been growing over the years and today accounts for around SR95 billion or nearby 13 percent of GDP at constant 1999 prices. This sector, which includes finance, insurance and real estate advisory, stood at around 2 percent of GDP in the early 1970’s. The number of people employed in this sector was around 94,000 as of 2005, with Saudis representing 28,000 or nearly 30 percent. Of these, around 5 percent were Saudi females. The total number of private sector employees for 2005 were estimated at around 5.362 million and the financial sector employment seems to be a miniscule 1.75 percent. However, it is not the quantity but the quality of the financial sector workforce that counts, as these tend to be amongst the highest paid in the job categories and their impact and “ripple” effect is far more prominent than in the other labor sectors.
Saudi Arabia is now embarking on setting up King Abdullah Economic City. For this to succeed, and become more than an additional real estate project, it is imperative that the same effort goes from now into putting in those sets of necessary “ingredients” that made London so successful.
This cannot be achieved overnight. One quick solution is to import foreign expertise, skills and know-how to create a financial center. This is not in a nation’s long-term interest, but merely creates a “virtual reality” financial center, manned by expensively paid foreigners with little “ripple effect” to the rest of the national economy. History teaches that such situations cannot last forever as the global knowledge based-economies try to match each other. The speed at which some of the Asian Tigers are developing suggests that the pre-eminence of certain financial markets might be short-lived.
(Dr. Mohamed A. Ramady is visiting associate professor, Department of Finance and Economics, King Fahd University of Petroleum and Minerals, Dhahran, KSA)