Towards a Supportive and Stable Financial System for Achieving the MDGs in Asia and the Pacific Kunal Sen, IDPM, University of Manchester, UK Structure of Presentation Why does a stable and supportive financial system matter for the achievement of the MDGs? Finance, Growth and Poverty – the Linkages What do we know about the impact of the financial system on progress towards MDGs? Creating a stable and supportive financial system – some analytical issues Possible policy directions 1
High Interdependence of MDGs Higher household income enables children to go to school and allows households access to health care. Better health and education makes households more productive, raising their incomes. Women’s empowerment leads to better health and education outcomes for children and higher incomes for women. Lower poverty leads to lower environmental degradation. 2
Finance, Growth, Inequality and Poverty – the Linkages Growth Finance Poverty Inequality Finance and the MDGs – Why Economic Growth is Important Financial development can lead to Poverty Reduction via Higher Economic Growth. In fact, the WB estimates that about 80 per cent of poverty reduction is through economic growth. The achievement of most of the MDGs depends in part on poverty reduction. This implies that economic growth may be the single most important factor behind the achievement of the MDGs. However, as we know, it is a necessary condition and not a sufficient condition. 3
However, Financial Development can exacerbate Inequality The stronger the effect of financial development on reducing inequality, for the same elasticity of growth to financial development, the stronger the effect of financial development on poverty. If financial development increases growth and leads to higher inequality, the effect on poverty is indeterminate. The Effect of Finance on Growth Depends on the Level of Inequality (Ozer and Sen 2009) 9 8 7 Average Per Capita GDP Growth 6 5 4 3 2 1 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 Gini Coefficient 4
Financial Development and Economic Growth – the mechanisms The Evidence Strong positive relationship between credit market development) private sector credit as ratio of GDP) and economic growth, taking into account reverse causality and other factors. Similar relationship between stock market development (stock market trading as a ratio of GDP) and economic growth. Also, both markets highly complementary – countries with higher banking development seem to growth almost twice as fast as countries with low banking development in an environment where stock markets are more liquid. And vice versa. World Bank Investment Climate Surveys show that access to finance is the single most important constraint to firm investment and growth in most developing countries. 5
Finance and the MDGs: What do we know? Methodological Challenges Absence of rigorous evidence and properly executed impact evaluations. Need properly selected control group to make comparisions and to avoid selection bias. Need randomisation in certain contexts. Need longitudinal data in most contexts. Most studies in Asia and Pacific only for a few countries – Bangladesh, Indonesia and India. The Initial Initiative on Impact Evaluation (3ie) along with JPAL (MIT) and other such academic agencies beginning to build up a robust evidence base for assessing claims on the effects of finance on MDGs. 6
Finance and Poverty Reduction Access to finance allows poor people to protect, diversify, and increase their sources of income, the essential path out of poverty. Country examples: Borrowers in Indonesia (BRI) increased their incomes by 12.9% compared to increases of 3% in control groups. SHARE clients in India – ¾ of clients saw significant improvements in well-being and ½ moved out of poverty. BRAC members in Bangladesh who stayed in program for more than 4 years increased household expenses by 28 % and assets by 112%. Grameen Bank members’ incomes were 43% higher than incomes of control groups in non-program villages and 28% higher in Grameen villages. Promoting Children’s Education Longitudinal study in BRAC area in Bangladesh found that basic competency in reading, writing and maths among 11-14 year olds in member households increased from 12 % in 1992 to 24 % in 1995. In non-member households, only 14% of children could pass competency tests in 1995. Households who borrowed from SEWA Bank in India saw the enrolment of boys rise from 65 % in 1997 to 70% in 1999. In Indonesia, longitudinal study shows that access to micro credit led to faster weight gain of young children in client households. 7
Improving Health Outcomes Households who have access to finance appear to have better nutrition, health practices and health outcomes than comparable non-client households. In Bangladesh, a WB study showed that a 10% increase in credit to women was associated with a 6.3 % increase in mid-arm circumference of daughters and a positive effect on height for age for both boys and girls. BRAC clients suffer from fewer cases of malnutrition and the extent of malnutrition decreased as length of membership increased. Empowering Women Microfinance programs in particular target women. Women more than men likely to invest in household and family well-being. Access to finance can empower women to become more confident, more likely to participate in family and community decisions and better able to confront systemic gender inequities. Women’s Empowerment program in Nepal found that 68% of its members were making crucial household decisions. TSPI in The Philippines reported that program participation increased the percentage of women who were principal household fund managers from 33 per cent to 51 per cent, as compared to 31 per cent in control group. 8
Environmental Sustainability Poverty reduction itself can be an important driver – deforestation and degradation accounts for 20% of Global GHG emissions Providing finance for low carbon technologies and renewable energy – subsidies to banks which provide these loans? Development banks may play a special role here Some examples: Green Forest : Development Bank of the Philippines; Carbon Fund : Development Bank of Japan; Wind Power : Philippine Export-Import Agency; Rainwater Harvesting : Small Industries Devt. Bank India Global Partnership for Development Vulnerability to crises and MDGs A sudden financial crisis can overturn several years of progress towards MDGs The most striking example is Indonesia after the 1997 financial crisis. International financial architecture – how the IMF responds to crises is crucial in understanding post-crisis effects on MDGs. 9
Creating a stable and supportive financial system – some analytical issues Role of Banks The direct role of commercial banks in promoting MDGs may be limited Adverse selection and moral hazard problems. Collateral as a a screening device. Even when state requires banks to provide credit to small farmers and SMEs through priority sector lending requirements, these banks tend to the largest of SMEs – those just under the size limit (Banerjee, Duflo, Cole 2008). Interest rate controls distort the market – make banks ration credit even more Subsidies may have some beneficial effects on lending, but a costly way to make finance inclusive. State ownership of banks not in the long term interest of financial development, though this may have some benefits in the medium term in terms of increasing households’ faith in banks. E.g, Bank nationalisation and social lending led to decreases in rural poverty in India in 1970s. 10
Role of Stock Markets Statistical evidence shows limited effects on poverty. Could be useful in financing high risk high return entrepreneurs and venture capitalists, but the effect on MDGs is through economic growth rather than directly. More important to ensure that stock markets are properly regulated so that financial crises do not originate in these markets (as occurred to some extent in 1997-1998 in Asia). Role of Bond Markets Could be important as a means of long- term finance to SMEs, which credit and stock markets not particularly well equipped to do. However, principal agent problems more severe in bond markets than credit markets – arms length vs monitored debt. 11
Microfinance Perhaps the most important route by which finance can help in achieving MDGs. Important to keep in mind that modern microfinance goes beyond providing loans to the poor– range of services savings facilities, insurance, transfer payments and even micro-pensions. Access to flexible, convenient and affordable financial services empowers and equips the poor to make their own choices and build their way out of poverty in a sustained and self-determined way. Many modern microfinance programs are sustainable and do not need subsidisation, except perhaps at the initial stages. Microfinance and the Bottom of the Pyramid 12
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