Extending Financial Services to Latin America’s Poor

Monday, May 5, 2008

By Luis Alberto Moreno

The president of Inter-American Development Bank argues that achieving greater “financial democracy” is crucial for achieving greater inclusiveness, improving social cohesion, and generating broad-based growth.?


Economic development, according to the Inter-American Development Bank (IDB), is for people-for citizens. If the benefits of economic growth fail to reach a majority, in the long run there can be no development. Over the past 3 years, Latin America has enjoyed its strongest cycle of economic growth in nearly 30 years. Remarkably, this expansion has been accompanied by low inflation, falling fiscal deficits, and current-account surpluses, and it has occurred amid the most active electoral calendar in the region’s recent history. But conditions for the majority of Latin Americans have not improved substantially. Calls for change are thus being heard again and again. Without change and real improvements in the people’s well-being, the legitimacy of the development effort will continue to be called into question.

Development is a combination of good policies, both macro- and micro-economic. The development of regions such as Southeast Asia, for example, was based largely on the application of numerous microeconomic instruments, backed by stable macro frameworks. In Latin America, despite remarkable achievements at the macro level, we have often neglected the micro dimension of development; we have fallen short in creating and distributing opportunity. The region’s per capita income has barely doubled over the past 45 years, whereas in South Korea it has increased 15-fold. Poverty and inequality ratios have been stagnant in Latin America, and a large proportion of our people still await the promised fruits of progress.

Going forward, we need to focus our attention on expanding opportunities at the base of the economic pyramid, which represents a large majority of Latin Americans. Few areas will be more important in this effort than building deeper, more inclusive financial markets.

The role of Financial Markets and Systems

Financial markets have a key role to play: there is ample evidence of the relationship between their development and economic growth, and I doubt that anyone disputes the link between a system’s depth and coverage and the reduction of poverty. Achieving well-functioning financial markets and institutions, which leverage savings and channel them into productive investments, should be a policy priority for governments and development finance institutions alike.

In brief, financial development enables individuals to make the most of their potential and represents a tool for expanding “financial democracy.” In Latin America, we have made historic strides toward the consolidation of political democracy, but they have not been accompanied by the democratization of means and opportunities. Financial democracy is fundamental for achieving greater inclusiveness, improving social cohesion, and generating broad-based growth. It is therefore crucial for economic dynamism and political stability.

It is crucial, first, because the lack of financial democracy prevents people from gaining access to resources that would enable them to make the most of their abilities and assets and thus condemns them to a cycle of poverty that is hard to escape. At the IDB we estimate that in 12 Latin American countries “dead capital” (untitled assets that belong to the poorest people and cannot be mobilized or leveraged) amounts to $1.2 trillion!

Second, micro, small, and midsize enterprises are economically vital to the region, despite their lack of access to adequate financing. They account for 98 percent of all companies and, depending on the country, from 40 to 50 percent of GDP and 40 to 60 percent of employment.

Third, these companies also have great social significance. IDB analyses show, for example, that 70 percent of the region’s poorest wage earners are owners or employees of microenterprises. This suggests that we have a significant opportunity to reduce poverty in the region by making financial services more inclusive.

Finally, financial inclusion also generates optimism and confidence in the future. It is impossible to understate the importance of access to financial services for population groups that lack the resources both to escape from poverty and to contribute to economic activity, social cohesion, and political stability. A population that plays an active part in the economic process is much more likely to identify with the rest of society and to have a sense of ownership and belonging, thereby contributing to stability. Belonging means having something to lose, and this sense is fundamental to social cohesion.

Unfortunately, financial systems in Latin America do not play a significant role in the lives of most of the region’s inhabitants. The consequent “intermediation gap” is reflected in narrow and shallow financial markets-a phenomenon that inhibits broad-based economic growth and helps to perpetuate inequality throughout the region. Basic financial services, such as bank accounts, credit, and insurance, paradoxically have a higher cost for the vast majority of people at the base of the economic pyramid, and this premium discourages their use.

Continue reading “Extending Financial Services to Latin America’s Poor”?

Source: The McKinsey Quarterly (link opens in a new window)