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Can the Financial Sector continue to be the Main Growth Engine in Luxembourg?

Author

Listed:
  • Arnaud Bourgain

    (University of Luxembourg)

  • Patrice Pieretti

    (University of Luxembourg)

  • Jens Høj

    (OECD)

Abstract

The financial sector has emerged as the main economic engine over the past two decades. The comparative advantages of placing financial activities in Luxembourg have mostly been in terms of an adaptive legislative and regulatory framework and low taxation. As a result, Luxembourg is today one of the main international centres for investment funds. Besides the sector’s direct and indirect employment effects, the most important effect is the large tax revenue generating capacity of the sector, accounting directly for over 20% of aggregate tax revenues. On the other hand, these tax revenues are volatile as the sector is highly sensitive to developments in international financial markets. Indeed, past downturns in international financial markets have tended to lead to a sharp slowdown of growth in the economy as well as in revenues, pointing to potential large risks associated with the current turmoil in international financial markets. Besides these short-term considerations, a lower trend growth rate of the sector is likely over the medium term. The main activities of the sector are in middle and back offices dealing with financial administration which, with new IT technologies, will tend to be increasingly outsourced. At the same time, the sector is having problems in attracting highly specialised talent to enter higher value front office activities. Over the longer term, international competition will continue to exert pressures that may eventually erode Luxembourg’s position. The extent of the decline in the sector’s trend growth depends on the ability to maintain and expand the attractiveness of investing and working in Luxembourg. Achieving this will depend on being able to adjust tax, infrastructure, and housing policies to attract foreign talent while updating and increasing the transparency of financial sector regulation.

Suggested Citation

  • Arnaud Bourgain & Patrice Pieretti & Jens Høj, 2009. "Can the Financial Sector continue to be the Main Growth Engine in Luxembourg?," OECD Economics Department Working Papers 660, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:660-en
    DOI: 10.1787/227614871768
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    File URL: https://doi.org/10.1787/227614871768
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    Cited by:

    1. Binsfeld, Nico & Whalley, Jason & Pugalis, Lee, 2014. "Luxembourg a bastion of state ownership," 25th European Regional ITS Conference, Brussels 2014 101425, International Telecommunications Society (ITS).
    2. Binsfeld, Nico & Pugalis, Lee & Whalley, Jason, 2015. "ICT ecosystems in small countries: an analysis of Luxembourg," 26th European Regional ITS Conference, Madrid 2015 127127, International Telecommunications Society (ITS).

    More about this item

    Keywords

    economic growth; financial sector; Luxembourg; public finances;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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