Can Financial Market Policies Reduce Income Inequality?
By Glenn Westley (10/01, MSM-112, En, Es) See also Microenterprise
Highly imperfect financial markets are an important source of income inequality in Latin America. Implementing policy changes from a broad agenda of ?second generation? financial reforms that is emerging in the region offers the possibility of helping to reduce this inequality by altering the conditions under which financial markets function. The primary problem whose foundations and ramifications this paper explores in many dimensions is the fact that in most countries in Latin America, banking institutions have shown a great reluctance to serve the lower end of the business market, namely, micro and small enterprises (hereafter ?MSEs? or ?smaller enterprises?). Yet, over 70 percent of all poor earners in Latin America either own or are employed by MSEs. These two facts?that smaller enterprises have few financial services but many low-income owners and employees?together with the important impacts that greater access to the credit and deposit services can have on the income levels of MSE owners and their employees, is the basis for the argument that the financial reforms discussed here can help reduce income inequality.
This paper consists of two parts. Part I presents empirical evidence and discusses likely mechanisms through which provision of additional financial services to smaller firms might lessen income inequality in Latin America, fleshing out the arguments just made. It also presents international cross-section and Latin American evidence that this channel may be an empirically important means for improving the distribution of income in the region. Part II discusses a number of specific reforms aimed at increasing smaller firm access to financial services, namely: improving regulation and supervision of credit unions and microfinance institutions (MFIs); improving the legal and regulatory framework for secured transactions and modernizing supporting institutions; reducing informality; establishing or strengthening credit bureaus; improving the legal and regulatory framework for leasing and factoring; and strengthening credit unions and MFIs.
Last updated: 05/08/07
