Friday, July 01, 2005
A Review of Issues Related to the Financial Sector and Poverty Reduction in Latin America and the Caribbean
By: Paul Holden, The Enterprise Research Institute
For: The InterAmerican Development Bank, 2001
The closer focus by the International Financial Institutions on poverty alleviation has led to a search for broader instruments with which to alleviate the lot of the poor. While social programs still command the most attention, other areas not traditionally associated with reducing poverty are receiving closer scrutiny. Financial market operations (with the exception of micro credit programs) have generally ignored the impact, either positive or negative, on lower income groups. However, there is increasing recognition that financial systems can have a substantial impact on poverty. The most significant of these is inflation resulting from the monetization of fiscal deficits – rapidly rising prices can have a devastating impact on the poor. In addition, there are many other potential effects which have less obvious immediate effects but which, over the longer term, can have powerful influence on poverty. These include such factors as; the access of the poor to financial services, the provision of risk and insurance mechanisms for the poor; the structure of interest rates; and the ability of the poor to borrow. In addition, new empirical evidence of the relationship between growth and financial development highlights the potential for financial markets to raise economic growth rates, which in turn reduces the incidence of poverty.
This note examines the most important influences that financial markets have on growth and poverty alleviation. It first sets out the issues and surveys the literature on the links between financial markets and economic growth as well as their effects on poverty and income distribution. It then looks at some possible links between financial markets and poverty, suggesting areas where reforms could most benefit the poorer sections of the community.
For: The InterAmerican Development Bank, 2001
The closer focus by the International Financial Institutions on poverty alleviation has led to a search for broader instruments with which to alleviate the lot of the poor. While social programs still command the most attention, other areas not traditionally associated with reducing poverty are receiving closer scrutiny. Financial market operations (with the exception of micro credit programs) have generally ignored the impact, either positive or negative, on lower income groups. However, there is increasing recognition that financial systems can have a substantial impact on poverty. The most significant of these is inflation resulting from the monetization of fiscal deficits – rapidly rising prices can have a devastating impact on the poor. In addition, there are many other potential effects which have less obvious immediate effects but which, over the longer term, can have powerful influence on poverty. These include such factors as; the access of the poor to financial services, the provision of risk and insurance mechanisms for the poor; the structure of interest rates; and the ability of the poor to borrow. In addition, new empirical evidence of the relationship between growth and financial development highlights the potential for financial markets to raise economic growth rates, which in turn reduces the incidence of poverty.
This note examines the most important influences that financial markets have on growth and poverty alleviation. It first sets out the issues and surveys the literature on the links between financial markets and economic growth as well as their effects on poverty and income distribution. It then looks at some possible links between financial markets and poverty, suggesting areas where reforms could most benefit the poorer sections of the community.