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Putting the cart before the horse: why financial inclusion can't exclude economic growth
Financial inclusion is just one area of international development in which the value of economic growth is under appreciated
It's a common scene in cities south of the Sahara. Suited officials sit around conference tables in government ministries, swanky hotels, and bank boardrooms. The topic of discussion is financial inclusion. Actions are debated, obstacles are lamented, and sprawling strategies are spawned.
At one such recent meeting, after hours of discussing the relative value of a countless interventions, one despondent delegate let out a long sigh and raised their hand. With a mixture of frustration and longing, he remarked that all this would be so much easier if only the target beneficiaries had higher incomes.
Well, yes. Of course financial inclusion interventions would be easier if people had higher incomes. It is an obvious thing to say, but this sort of thinking is too often absent from these conversations. In fact, it’s an excellent example of how economic growth is consistently undersold and undervalued in development circles.
For development programmes, economic growth should not be treated as a separate topic. It is a facilitator, an enabler, a catalyst for pretty much any international development intervention under the sun. Want to promote gender equity? Provide well-paying jobs for women to boost their financial clout. Want to improve test scores for village children? Increase the incomes of the parents so their kids don’t go to school hungry. Want to avert Africa’s pensions pitfall? Strengthen the salaries of workers so they can afford to contribute to pension schemes.
We need to do a better job of selling economic growth in this light. At the root of the challenges facing low-income countries is the obvious fact that incomes are, almost definitionally, too low. In the absence of growth, almost any development intervention becomes like trying to sail across a windless lake.
Let’s further explore the example of financial inclusion. The logic is simple. Persuading commercially minded banks to serve those living in poverty is hard because it’s rarely worth their while. The cost of administering their accounts is often higher than the money the bank can earn from the small deposits the poor can make. Persuading the poor to save is hard because poverty shortens their horizons to the next meal. Persuading subsistence farmers to use formal insurance products is hard because the cost of any premium eats into the food that feeds their family.
That’s the theory. Does the evidence agree? The chart below illustrates a basic correlation between financial inclusion (using the imperfect measure of formal financial account ownership) and GDP per capita across 143 countries. It shows, unsurprisingly, that richer countries tend to have higher levels financial inclusion. There are some low-income countries with high account ownership rates, but they are the exception, not the rule. There are very few rich countries that need to worry themselves too with financial inclusion strategies.
Establishing causality from growth to inclusion is trickier. There is plenty of evidence to support the flow of causality in the opposite direction. There’s no doubt financial inclusion is important for the quantity of economic growth (see hereand here for traditional financial inclusion indicators or here for digital financial inclusion). It is probably also important for the quality of economic growth, as financial inclusion has been linked to more inclusive growth.
Unfortunately, there are no academic studies that we are aware of that are dedicated to investigating causality running from growth to financial inclusion. But there are some studies which pick up so called “bi-directional causality” (see here for example) that suggest growth is indeed important for financial inclusion. The lack of studies is itself telling. Again, the importance of economic growth as an enabler and catalyst for development programmes is understudied and thus undervalued.
Overall, it’s likely that here we have another of GPI’s virtuous cycles. Like labour productivity and exports, they reinforce each other. But logic strongly suggests that we probably need to start by growing the economy. Banks can be forced to give accounts to subsistence farmers, but it won’t be easy, especially in countries with low state capacity. And what incentive does someone earning $2 a day have to open a bank account anyway? Without growth, it’s an uphill battle. But increase people’s incomes and everything starts to come together: banks will be lining up to serve them, long term saving becomes viable and formal insurance starts to make a lot more sense. Then more economic growth will follow.
The person who put up their hand in that meeting was an oddly lone voice. It seems obvious that economic growth should be part of any serious financial inclusion strategy. But economic growth as a driver is always absent. The strategies of Nigeria or Zambia, as two examples, mention economic growth in passing but only as an outcome rather than the key input which will determine success or stagnation.
Economic growth shouldn’t be siloed from development strategies or programmes, whether that be financial inclusion, poverty alleviation, education or anything else. It should be front and centre, sold to the international development community as the wind in the sails of their programmes. Economic growth is the rising tide that can lift all boats.
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 Financial inclusion is, of course, a multi-faceted and diverse concept. The World Bank defines it to mean “that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.” Financial account ownership is clearly limited, but we believe it is still useful proxy in this case.
 Note 15 countries were excluded because of lack of account ownership data and 2 were excluded because of a lack of GDP per capita data. GDP per capita data is current USD measure from the World Bank.