The two major drivers of financial globalization have been deregulation of domestic financial markets, to induce greater competition in the trading of financial assets and services, and innovations in telecommunications technology to reduce trading costs and settlement risks. Financial globalization has been led by and concentrated in international financial centers (IFCs) that offer traders of financial assets -- cash instruments, such as stocks and bonds, as well as their derivatives, such as futures and options -- more liquidity and lower trading costs than national financial centers.
In 2007 the ruling Justice and Development Party (AK Party) government set developing İstanbul into an IFC as one of its major long-term economic goals. Since then there has been a great deal of debate about that goal. The debate was triggered by the Deloitte Consulting report “İstanbul IFC Feasibility Study,” commissioned by the Banks' Association of Turkey at the request of the government. This report, revised in 2009 to take account of the global financial crisis, later became the basis for the government's official program to promote İstanbul as an IFC.
An IFC is a major hub of international financial markets, where foreign as well as domestic financial assets are traded on a significant scale through the direct participation of major global financial services companies. An important IFC characteristic is that a significant proportion of capital-raising and risk-management transactions are inherently non-local, involving foreign residents and foreign currencies. Major IFCs -- global, as opposed to regional, in their level of development and degree of competitiveness -- provide integrated financial services in all major financial market segments, including foreign exchange, money, capital (equities and bonds), and banking and insurance, which all benefit from economies of scale and scope, as well as agglomeration (clustering) and network effects.
Most IFCs are located in developed countries, providing more than three-quarters of global financial services. London and New York, the two leading IFCs benefiting from their fully convertible and heavily traded global currencies, top all IFC global rankings. However, IFCs in developing countries, especially those in emerging market economies (EMEs), such as China's Shanghai, are becoming increasingly important, reflecting the tectonic shift of global economic weight and power from West to East and from North to South. The Chinese government has set the goal of turning Shanghai into a global IFC by 2020. The ascendancy of IFCs in EMEs has also benefited from the global financial crisis, which has been especially damaging to IFCs in developed countries, especially those in London and New York.
Historically, financial sector growth and the rise of IFCs have been driven by rapid real sector (physical goods) activity, which requires trade and investment financing. Accumulation of wealth, made possible through economic growth and saving, also spurs the supply of financial services for wealth management. Therefore, we expect those economies that grow faster than others to also have faster growing financial sectors and more competitive IFCs. So İstanbul's performance and potential as an IFC ultimately, but not exclusively, depend on the Turkish economy's growth performance and potential.
There are many other requirements for a city to emerge as an IFC. They are discussed by Douglas J. Elliott, a former investment banker, in his article “Building a Global Financial Center in Shanghai: Observations from Other Centers,” published last June by the Brookings Institution. He cautions that “there is no rulebook that will guarantee success if followed scrupulously, since there are only a very small number of such centers from which to draw lessons and they grew in part due to very particular circumstances that could not, and probably should not, be repeated.”
What does the financial world seem to think of İstanbul's performance and potential as an IFC? The biannual “Global Financial Centres Index” (GFCI), compiled by the Z/Yen Group and published by the City of London, helps us with the answer. The number of IFCs ranked by the GFCI -- based on two data sources, instrumental factors (external indices) and an online survey -- has increased from 46 in GFCI1, published in March 2007, to 75 in GFCI6, published in September 2009.
İstanbul first entered the rankings in GFCI6, ranked 72nd, as an “evolving” IFC, ahead of Athens, Budapest and Reykjavik. İstanbul's rank dropped to 74, below Athens but above Reykjavik, in GFCI7, published in March 2010 but jumped to 70, below Riyadh but above St. Petersburg, Budapest, Athens, Tallinn and Reykjavik in GFCI8, published in September 2010. In GFCI9, published last March, İstanbul is ranked 71st, as a “local diversified” IFC, below Riyadh but above Budapest, Athens, Tallinn and Reykjavik.
In GFCI9's regional groupings, İstanbul is the lowest-ranked IFC in the Middle East, with Dubai ranked 28, Qatar 30, Bahrain 49 and Riyadh 70, globally. As to which IFCs are expected to become more important and where new offices are likely to be opened in the next few years, according to GFCI9, the top five -- Shanghai, Singapore, Seoul, Hong Kong and Beijing -- are all from the Far East.
A second source for the answer to our question is the Xinhua-Dow Jones International Financial Centers Development Index (IFCDI), launched in July 2010. Using subjective evaluation and objective data, it ranks a pre-selected sample of 45 IFCs in terms of their competitiveness and capacity for development. Although IFCDI stresses the rise of IFCs in EMEs, neither its latest edition, published last July, nor its previous edition includes İstanbul among the 45.
To sum up, the quest for İstanbul to become even a top regional, forget global, IFC will require time and hard work to fulfill in the face of stiff competition. However, I support that quest since it can, like the quest for EU membership, yield substantial benefits in terms of the reforms it begets along the way, even if it is unfulfilled.