Thoughts about Financial Inclusion
Financial institutions that are in place in any level of society, may it be a village, a state or a country, can be broadly defined into two categories: inclusive and extractive institutions. According to wikipedia, financial inclusion is where individuals and businesses have access to useful and affordable financial products and services that meet their needs that are delivered in a responsible and sustainable way.
On the other extreme, the extractive institutions deny people the access to financial products and services that can be helpful to lift them out of poverty. When a large part of the society is poor without any good institutions that can help them out, the vicious circle of poverty surrounds them for generations. There are countries like North Korea, former Soviet Union being the comic examples of extractive economies where the state forcibly puts people into labor, reap the profits off their labor and allocate the profits wherever the state sees fit. There’s little to no hope in cases like these unless there’s a drastic change like the French revolution of 1789 that can slowly pave way to a fairer system in the long term.
Inclusive institutions and free markets address many of the problems that arise due to extractive institutions, the important one being the allocation of capital based on the market needs and the state sets the rules of the game to ensure certain degree of fairness. This logic seemed to make sense for a really long time from end of the WWII all the way till the subprime mortgage crisis of 2008–09, which was one of the most disillusioning moment in the modern financial history. It was a loud wake up call to the world that financial and technological development has made the global economy more riskier while everyone sternly believed the opposite. If you want the short summary of the housing crisis, here’s Ryan Gosling explaining it a very entertaining fashion. It killed the lazy pipe dream of technology and freemarkets automagically driving the standards of living for the lower end of the society.
While the US touts to be a financially inclusive economy with a lot of options for the consumer to get credit and raise themselves out of poverty, the fact still remains that the top 1% own as much as the entire middle class put together. All the while, student debt in 2019 amounted to $1.6 Trillion. A walk through the many neighbourhoods of San Francisco confirms the deep inequality juxtaposing the world’s richest, advanced tech firms and a large number of street dwellers(not to forget, the needles on the curbside). Similar wealth gap (quite possible worse) can be found in developing nations like India. Rising unemployment levels in India, slowing growth of its economy, retail banks that are going bust are the evolving signs of lack of financial inclusion in the Indian economy.
Are these economies extractive or inclusive? The answer is it’s complicated. Isn’t having some semblance of a democratic regime good enough to classify an economy as a financially inclusive one? The answer to this question is loud NO. No, it’s not enough to be a democratic state to eventually be a financially inclusive economy.
I think we can safely say that financial inclusion is not a boolean value which can be either “yes we do it” and “no we don’t do it”. But, it’s a linear scale with the bottom end being a unregulated free markets based economy. On the top end of the scale, there’s an elusive imagination of a society where poverty is eradicated and everyone enjoys the basic necessities of not just good income and leisure time but also many safety nets like unemployment/disability benefits, great public health care, universal basic income etc.
In the classic geopolitical nonfiction book, Why Nations Fail addresses the exact issue and talks about a general direction of starting financial institutions that are fundamentally inclusive in nature. These institutions then go on to promote inclusion by the power vested in them over time gradually. While Raghuram Rajan’s recent book The Third Pillar : How Markets and the State Leave the Community Behind points out that all economics is actually socioeconomics — all markets are embedded in a web of human relations, values and norms and the community is the basic building block of this web. The third pillar is the community while the other two being Markets and the state. Rajan argues to rethink the relationship between the market and the society and insists for a return to strengthening and empowering local communities as an antidote to growing despair and unrest. This is a ground-up approach as opposed to the other book. But both talk about similar goals that are waiting to be achieved.
After reading these two books and a lot of blogs, my brain was filled with thoughts related to this topic, so I thought I’ll put them down for clarity. If you want to learn more about how to make this world financially more inclusive, I recommend you to read the two books. :)
