Indonesia | Economics

Monday, October 16, 2006

Financial development is good for the poor

The development of the formal financial sector is widely thought to be a pro-rich policy. Only financial sector innovations specifically developed for the poor, such as the one developed by M. Yunus, are beneficial for the poor. Well, think again!

The following is from a paper by Thorsten Beck, Asli Demirguc-Kunt, and Ross Levine:
Financial development disproportionately boosts the income growth of the poorest quintile and reduces income inequality. About half of the impact of financial development on the poor results from faster average growth and the other half results from reductions in income inequality. Furthermore, financial development is associated with a drop in the fraction of the population living on less that $1 a day, a result which holds when conditioning on average growth. These results emphasize the importance of the financial system for helping the poor.

This and this are the two books I am currently reading that made me a believer.

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