Download Financial inclusion

Financial inclusion (FI),
financial stability and
economic development
SELAMI XHEPA
EUROPEAN UNIVERSITY OF TIRANA
[email protected]
Motivation for this subject:
• Financial inclusion is a development priority for many
development countries – as tool for economic
development;
• Current financial crisis is largely attributed to the
(unsustainable) levels of financialization;
• How we then should move forward in this policy
objective?
Content of presentation
• (1) FI and financialization: conceptual and measurement
issues
• (2) importance of financial inclusion for the economic
development and impacts on poverty and inequality,
• (3) discussion of some controversies with regards to links
of FI with the current financial crisis and social changes
• Conclusions: towards a new banking and development
model?
What is financialization?
• Growing role of finance, financial markets and financial
institutions in the workings of the economy.
• A historical trend of the late 20th century
• Financialization observed at three levels:
• Industry – growing share of finance in the value added
• Firm - sources of profits from financial markets + shareholders
value maximization
• Household – higher incomes for employment in finance
FI and Financialization: measurement
issues
• Financial inclusion is a means to enhance the dimensions
of financialization (Interchangeable use)
• Measurement:
• Quantitative indictors (such as employment in the industry, value
added to the economy, etc.,)
• From “activity centered” concept to that of “accumulation centered”:
where profits are derived (Kippner, 2005)
FI and Financialization: measurement
issues … cont
• ascendance of “shareholder value” as a mode of
corporate governance;
• growing importance of financial markets compared to a
bank based finance;
• increasing political and economic power of the rentier
class;
• explosion of financial trading associated with the
proliferation of new financial instruments
Financialization measured by
organizational change
• the growing trend to outsource certain activities, such as
financial management;
• Negative implication of this change (ascendance of
“shareholder value”) is the growing inequality of pay within
corporations and economy wide.
Growing role of finance in non-financial
firms: post-industrial society
Relative share of corporate profits for the US economy, 19502000
Ratio of portfolio income to cash flow of US non-financial corporations, 1950-2000
Anatomy of financialization – measurement
issues
Anatomy of financialization – measurement
issues
Anatomy of financialization – measurement issues
Anatomy of financialization – measurement issues
A shift driven by fundamental process
• The trend looks basically similar in most developed
capitalist societies, despite finance policy regimes that
were very different in this period.
• in liberal market economies and coordinated market economies.
• in economies with strong welfare states and weak welfare states.
• in places where neoliberals took power early and places where
neoliberals never quite ran the show
Why it is a concern – if there is any?
• At macro level:
• Tepid economic growth?
• Increased financial fragility?
• Reservations with regard to sustainability of the process (public,
corporate and household debt levels)
• Wage stagnation and inequality
Financial depth and growth
• Direct relationships
• Micro data evidence also suggests that better developed financial
systems ease financial constrains facing firms
• More access to finance for firms enhances prospects of growth
• Indirect relationships
• people with no direct access to finance, still have broader
opportunities for employment and better pay
Financial inclusion and development- a
neo-classical paradigm:
• Welfare improving: (Arrow and Debreu, 1954)
Financial inclusion
Efficient allocation
of resources
Reduces cost of
capital
• Better pricing of risk and of economic
outcomes – financial speculation is
stabilizing (Friedman, 1953)
Financial inclusion and developmentsome theoretical discussions:
• Agency problem: relationship of firm and financial
markets (Jensen and Meckling, 1976):
• Key challenge: how to motivate managers maximize shareholders
value
• This aligns interests of managers with those of financial market
participants (compensation policy with stock options)
• The sole purpose: maximize the shareholder value (within the confines
of the law) -- from a societal construction --- aggravate the principalagent problem
Financial inclusion and developmentsome theoretical discussions:
• “q theory” – (Brainard and Tobin, 1977)
• q – market price of capital to its
replacement cost
• q is a signal that efficiently direct firm in
investment and capital accumulation
• A q higher than unity – a signal that
market price exceeds cost of
replacement;
• Capital is in short supply
• This leads to increased investments
Financial inclusion in developing world
• FI – ease of access, availability and usage of formal
financial system
• Importance of FI –
• Efficiency consideration
• Therefore:
• FI: A desirable political objective – greater
social equality
• Enhancing opportunities for the excluded
groups
• Impacts on poverty and inequality
Some policy initiatives
• The G20 made the topic one of its pillars at the 2009
Pittsburgh Summit (G20 2009)
• By fall 2013, more than 50 national-level policy-making
and regulatory bodies had publicly committed to financial
inclusion strategies for their countries
• US Community Reinvestment Act (1997;
• Law on Exclusion (1998) in France
• The German Bankers Association introduced a voluntary code in
1996 providing for an “everymen” current banking account
facilitating banking transactions.
• In South Africa a low cost bank account (Mzansi) was lunch for
financially excluded people (2004);
• Reserve Bank of India has initiated several measures to achieve
greater financial inclusion; etc.
“Great moderation” and financial liberalization in
developing economies
Financialization in developing countries
Saving & Investment, % of GDP
Domestic credit to private sector
Financial flows in developing countries
Structure of financial flows
Relationship between FI and HDI
• Building a IFI:
• Accessibility: number of bank A/C per 1000 inhabitants
• Availability: number of bank branches and ATM/100,000 inhabitants
• Usage: (credit + deposit)/GDP
• Final index is calculated as
Relationship between FI and HDI
• Correlation coefficient of 0.74 and is significant
• SEE countries – a medium level of FI
• But there are exceptions:
IFI
Country Value
HDI
Country
rank
43
Value
0.784
Country
rank
23
Armenia 0.041
47
0.768
27
India
0.198
29
0.611
42
Iran
0.527
9
0.746
34
Albania
0.079
..weak correlation of access to finance
and economic development
World Bank; Finance for All – 2008
Determinants of financial inclusion
• Level of income
• Employment
• Informality
Determinants of financial inclusion
Determinants of financial inclusion
Financialization, inequality and poverty
• Some facts from HDR, 2005:
• Income ratios of 20% high income to 20% low income group exceeds
17 in 21 countries;
• In 22 countries, more than 1/3 of populations lives below the poverty
line
• In Albania, about 46% of population lives with less then 5$(PPP)/day
FI and Income: Stagnation of income
growth
Financialization and poverty
• Conflicting theoretical predictions:
• Enhance growth and reduces inequality : reduced credit constrains
and enhancing opportunities for the poor
• The poor rely on informal market therefore financial markets help
the rich – net effect depends on the level of economic development
Finance and changing income distribution
Growth and lowest income share
Finance and poverty alleviation
FI and inequality
Three main findings (Beck et al):
• Financial development reduces income inequality
• Financial development exerts a positive impacts on the
relatively poor:
• 40% of the impact is due to reduced inequalities
• 60% of the impact through economic growth
• Financial development is strongly related to poverty
alleviation
• Increasingly Robust Evidence of Beneficial Economic
Impact of financial inclusion for the poor (WB, 2014)
Conduits to financialization
Working of financial markets:
• Financial market deregulation;
• Encouragement of foreign financial flows;
• Alteration of monetary policy from the control of credit and
money supply
Enhancing access to credit: from
boring to exciting banking
• Glass-Steagal Act (Banking Act of 1933) and relative
stability on the banking industry.
• Push factors towards deregulation wave of ‘80s:
• Crisis of economic growth;
• Public finance;
• Governance issues and changed profit structure;
• + monetary policy regime changes
•
(pushed by need for reforms or by financial
elites?)
Enhancing access to credit: from
boring to exciting banking
• From credit constrains to democratization of credit market;
• A new business model of making money by making
people more indebted, pioneered by credit card issuers
Monetary policy
• Shift to “inflation targeting’ (IT): a neoliberal market central
banking structure (Epstein) – protecting interests of financial
elites? (obsession with price stability was fed by the
interests of the financial sector (Keynes,1964)
• Fed also uses employment as an indicator for monetary policy
• Lower inflation supports credit growth = employment = economic
prosperity
• Vague relationship between inflation and employment (Philips curve)
• Banks (applying IT policy regime) have to some degree
accommodated concerns for short-term stabilization objectives,
especially with respect to output, exchange rates and, more recently,
financial stability.
Prerequisites for a IT regime:
• absence of other nominal anchors, such as exchange
•
•
•
•
rates or nominal GDP;
an institutional commitment to price stability;
absence of fiscal dominance;
policy (instrument) independence;
policy transparency and accountability.
Political economy of inflation targeting:
• To whom does inflation targeting make the central bank
accountable?
• Not to government but to financial markets.
• BUT: Policy objectives of a central bank are set jointly by
government and central bank and they are both accountable to the
Parliament
FI and the current crisis
• Mostly rightwing: political pressure on banks to force them
to grant credit to the poor, marginalized customers
encouraged them to live beyond their means;
• adding more layers of regulation is helpless and superficial.
FI and the current crisis
• Marxist interpretation of the current financial
crisis, which looks at the higher profit rates of
investment in financial industry as the main
driver to financialization (although they also
recognize the role of financial inclusion).
• re-regulate the industry
A Schumpeterian view of the debate
• equilibrium rests on the interaction between a highly
dynamic and innovative production sector and very
conservative bankers;
• recognized the independence of banking not only from
politics, but also from business sector, or the
entrepreneurial economy
The bottom line: autonomy of financial sector
• Financial innovation (and by extension, financial
inclusion), played an important role in the making of the
current crisis
• In all interpretations, the autonomy of financial sector is
crucial:
• if there is less autonomy, it leads to bank conservatism,
• if there is more autonomy it leads to loss of prudence and therefore
overinvestment in financial sector.
Towards a new banking and development
model
• The great divide between the bankers and the public has
serious consequences for the credibility of the banking
system:
• New rules on compensation policies
• 2B2 Fail and Single European Supervision Mechanism
• functioning of guarantee schemes as public institution
• Moral hazard
• Can this scheme function on private basis?
Towards a new banking and development
model
• How to make supervisors accountable:
• Stress testing and transparency on methodological issues
• Trade-offs with publishing information
• Stop predatory behavior by banks to exploit borrower’s
lack of knowledge
Towards a new banking and development
model
• Too much discretionary powers to bank supervisors may
be misguided;
• Empowering/inducing large private market participants to
conduct diligence and monitor banks (for example,
disclosure of information) may be very powerful
Literature
• Gerald Epstein, 2002, Financialization, Rentier Interests, and Central Bank
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Policy, University of Massachusetts, Amherst
World Bank, 2014, Financial Inclusion and Development: Recent Impact
Evidence(https://www.cgap.org/sites/default/files/FocusNote-FinancialInclusion-and-Development-April-2014.pdf)
Thorsten Beck, Asli Demirgüç-Kunt, Ross Levine, 2007, Finance, Inequality
and the Poor (World Bank and NBER)
Mandira Sarma, Jesim Pais, 2008, Financial Inclusion and Development: A
Cross Country Analysis
GERALD F. DAVIS, SUNTAE KIM, 2015, FINANCIALIZATION OF THE
ECONOMY; Ross School of Business,
Greta R Krippner, 2005, The financialization of the American economy,
Oxford University Press