In this sense, this chapter presents theoretical discussions about the government’s role in the economy – mainly, in the monetary1 and banking systems, and what influences Economic Growth and Economic Inclusiveness. Moreover, review about what has been written so far about Inclusive Economic Growth and the emergence of FinTech companies in Brazil and China will be presented too.
Since ancient times, money has been determinant in the development of countries’ economies. Indeed, the economic dependence of money is so deep that almost all the countries have thoroughly monetized their economies. “Much (maybe most) of our economic activity requires money, and we need specialized institutions that can issue widely accepted monetary money tokens2 to enable that activity to get underway.”3 Before analyzing these specialized institutions – mainly the monetary and banking systems -, it is important to understand what money means and how has been its relationship with the market and the State?
According to economists such as Adam Smith and Carl Menger, money seems to have emerged as “a spontaneous creation in archaic barter and market processes for facilitating the exchange of goods.”4 In other words, it can be considered a marketborn institution that beholds its own value – likewise a commodity. This explanation is known as either the Commodity Theory of Money or as Market Theory of Money.
Additionally to this epistemological narrative, the classical economists also have contributed to the discussion about the ontological aspects of money. The 4 main functions of money can be summarized as following:
i. unit of account – providing the terms in which debts are recorded and prices as quoted -;
ii. medium of exchange – as a way of payment, used to purchase services and goods 5 -;
iii. vehicle for transferring income that allows real and financial expenditure 6, and;
iv. reserve for payments and investments. 7
While this ontological aspect is still accepted and respected nowadays in the economic field, the classical epistemological approach presented in the Market Theory of Money has been strongly criticized8 during the past two centuries. Indeed, many economists consider this theory “largely fictitious, once historical facts back up the concept of money as a public affair and a prerogative of rulers”9 – concepts lately associated with the State Theory of Money.
Essentially, the State Theory of Money argues “the market economy is a creature of money rather than the reverse; and money is a creature of the state as much as the markets are framed by state powers and law rather than existing in an extraterritorial private nowhereland.”10 Moreover, it also sustains that “that markets do not emerge and develop in a constitutional vacuum free of state powers. Markets build and rest upon a state’s institutional and legal structure, of which the money system is an integral part.”11
Additionally, as Mankiw & Ball (2011) remind us, the money itself have lost it intrinsic value after the governments gradually started to establish its value during the coinage and emission of cash bills and coins. In the past, most societies used commodities with intrinsic value as medium of Exchange, reserve for payments, unit of account, etc. During the economic history, a couple of commodities have became the main medium of exchange – Gold and Silver, transformed in coins, were the most common ones. Later, the governments while centralizing the money’s coinage, slowly started to reduce the amount of precious metals in the composition of each coin, making each coin’s actual value lower than the coined amount showed. This was possible only because the value of money started to be assured by central authorities – kings, warlords. This kind of money with no (or few) intrinsic value associated, rather added by government decrees, is known as Fiat Money and have been used by almost all economies during the past centuries.12
Some argue that the authority to emit and determine monetary policies13 is directly related with the principle of Sovereignty. Jean Bodin, who developed the modern of Sovereignty, claimed that the governmental/royal exclusive right of coinage was one of the most important and essential parts of a State’s Sovereignty.14
Indeed, the capacity to control the emission of money and the amount of money circulating in the economy was also a component of the central ruler’s power. Coining money and determining its value would allow the governments to influence the Economy within a certain territory as well as to collect taxes and tributes.
Furthermore, it also allowed the ruler to exercise monetary sovereignty within the State’s boundaries. Indeed, by determining the currency of the realm, controlling the issuance of money, and benefiting from the seigniorage,15 the central authorities were able to consolidate both their political and economic power within their frontiers and among their population. Additionally, they were also able to create a clear distinction between their economy – by using the same monetary unit of account, following the same monetary guidance and taxes’ imposition established by the same ruler – and other Nation-States’ economies surrounding their territory.
Therefore, is possible to sustain that the whole concept of Modern Nation-State is, somehow, related to the ability of the central government to establish boundaries, impose laws and exercise the monopoly of violence and punishment, tax its population, relate with other foreign authorities, as well as to control the emission of money and endorsement of its value through government decrees or other policies – having monetary sovereignty.16
However, the amount of State’s monetary control has varied during time and among locations. During last half millennium, it is possible to notice that the state’s control has diminished between the 17th century and the 19th Century. This is related with the allowance for private banks to emit their own private paper money (following government’s regulations) and, then, with the emergence of demand deposits – bank money on bank accounts – as a well accepted new way of payment.
Due to the advent of these new financial tools, controlling the amount of money in circulation – produced both by central banks and private banks, including paper money, coins, banknotes and electronic cash – became harder17.
Controlling the monetary system became a central concern for the central governments, especially, during and after the Economic Crisis and recession started in 1929. Many scholars, economists and politicians intensified the debate about to what extent and how a government should intervene in the monetary system. While the Banking School argued that money creation and control should be left to banks, the Currency School urged that the State ought to re-establish its control over the monetary system as soon as possible as well as be the only institution responsible for determining the money supply in the Economy.18
Despite recognizing the important role that central governments have played in the development of the current monetary system, some economists such as F. Hayek have criticized the amount of influence and control States have had in Economy. Hayek claims that the governments have developed a monopoly of money and says that this monopoly was justified as a necessary action towards the consolidation of the State’s sovereign and political power.19 As he argues, the central governments are the only ones who have authority to control the emission of money – paper money and coins – as well as to control the money in circulation through monetary policies and banking regulations. However, should the central authorities – basically certain individual politicians who detained the power during their mandates for a couple of years – have the monopoly of the provision of money?
If we agree that monopoly20 damages the economy, then, the fact that the central government detains the monopoly of money provision is something economists should worry about. The politicians could emit more money or, simply, take it from the economy through open-market operations for instance according with their own political and personal objectives. It is almost impossible to guarantee that this political authorities act focusing in the best economic development of their nations instead of acting politically focused, for example, in the consolidation of their power or in their re-election. If the monetary policies are not properly executed, the money’s value can increase or decrease and, therefore, compromise the economy, the consumption, the demand, and the trust in the economy.
Unfortunately, the competition in currencies within a country’s economy has not been properly examined so far. According to this Nobel Prize winner21, there is no definitive answer to “why a government monopoly of the provision of money is universally regarded as indispensable, or whether the belief is simply derived from the unexplained postulate that there must be within any given territory one single kind of money in circulation.”22
Nevertheless, some experts have argued that the central government’s monopoly of money has decreased during the past two decades especially due to the emergence of digital currencies and electronic payment systems. Consequently, the discussion about money’s monopoly detained by central authorities has reemerged and the government’s influence in the provision of money has been questioned.23
Governments print money, but do not create it. Printing is different from creating, but the authorities influences the amount of money created through monetary regulations.
Along with the emergence and consolidation of government-ruled monetary systems, the traditional banking system has grown and expanded also under the central economic authority’s rules. Despite having more autonomy and freedom to conduct their own activities, both private and public banks have to follow strict guidelines and operate in accordance with governmental regulations. In general, a bank could only provide financial services if it has been granted an especial authorization issued by the government that would allow it to act like a bank – providing loans, and receiving deposits for example.
Some would argue that if the banking system is only one of the many components of the monetary system, why do many economist sustain that the banking system – banks, credit unions and thrift institutions – “are critical in determining the behavior of the economy”?24
The answer for this questions can be found in the following statement: while central monetary authorities – mainly Central Banks – control the money issuance25 within the economy and implement monetary policies, the money itself is created by the bank system26. However, if only the government (or some of its agencies) is allowed to emit money, how could someone argue that the private banks are the responsible ones for creating money? Doesn’t this put into question principles such as State’s sovereignty and monetary authority?
During centuries, the banking system has evolved and been reshaped constantly. Indeed, there were many improvements on it and, nowadays, we can find many sub-variations in the way this system operates in different countries. Despite these variations, the majority of banks still operate under the central government regulations, in a system that is called Fractional Reserve System.
In the Fractional Reserve System, banks are constrained by specific governmental regulations concerning to the minimum amount of deposits – fraction – that they must keep “on hand” as reserve. This required reserve ratio27 defines the amount of assets28 that has to be held as reserve. As consequence, banks do not have permission to keep fewer assets as reserve than the minimum required by the country’s monetary authority.29
Nonetheless, these banks are allowed to use the exceeded assets – excess reserves30 – to provide loans to their customers/borrowers. Those borrowers, for their turn, will invest the money they borrowed and eventually deposit it again – either in the same bank in that they borrowed the loan from or in another bank. When this operation goes over and over, money is generated even though new coins or paper money/cash bills are not issued by the Central Banks or Treasury Agencies.
Therefore, it is possible to say that “Money is created when banks increase (…) account balances in exchange for IOUs31. Put in another way: banks create money by making loans.”32 This is what economists call money generation and it has a limit – in each round of new loans, the amount of money created decreases until no money is generated anymore.33
The mandatory minimum reserve ratio can be changed by a country’s monetary authority in order to adjust the money supply in an economy. The banks, however, can keep their reserves above this minimum required. Having this excess reserves, however, is neither the usual nor the desired by these financial institutions, because the bigger reserves a bank has, the lower these banks will lend through new loans – the reserve ratio is inversely proportional to the amount of money that banks might dispose for offering new loans. The amount of money that is generated by the banking system is, therefore, related with the fraction of deposits (reserve) it has to keep on hand and that it cannot re-lend.
The total amount of money that will be created from an initial increase in the excess reserves (after the first deposit) of Δ𝐸𝑅34 is Δ𝑀 = 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 Δ𝐸𝑅 Å~ 𝑚𝑜𝑛𝑒𝑦 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟. 35
“The money multiplier36 is the relationship between the initial deposits and the ultimate change in total deposits”37 and predicts the rise in the quantity of money that might be generate. As mentioned previously, the money multiplier depends on the required reserve ratio – it is an inversely proportional relation, in which 𝑚𝑜𝑛𝑒𝑦 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 ∝ • 1/required reserve ratio.
If the money creation depends on the amount of initial excess reserves; if the initial excess reserves are the total amount of reserves minus the required reserves; if the required reserves are percentage of total initial reserves and are determined by the governmental authorities; therefore, the money creation is indirectly influenced, determined and mainly regulated by the governmental monetary authority even though the financial institutions responsible for creating money are ultimately the banks. Putting it in another way: the money creation led by banks is ultimately constraint and indirectly defined by the governmental monetary authority once this authority is responsible for defining the required reserve ratio.
As Olney (2010) claims, “The [Central Banks] set a goal for the money supply, but [commercial] banks are the ones who create money. And so it is banks – not the [Central Banks] – that actually determine the money supply. Nevertheless it is [the Central Bank] policy that determines how many excess reserves are in the banking system. And so economists say: the [Central Bank] sets money supply.”38
Despite having this constraint as well as otherrestrictions on the types of loans it can make, the banking system still performs a necessary and important role in a country’s economy: banks are the responsible institutions for creating and providing money in the necessary scale required by economic activities. As Wray (2015) argues, “While our governments are large, they are not big enough to provide all the monetary IOUs we need to mobilize the scale of economic activity we desire. And we (…) are skeptical of putting all monetized economic activity in the hands of a much bigger government. I cannot see any possibility of running a modern, monetized (…) economy without (…) financial institutions that create the monetary IOUs needed to initiate much of the economic activity that we prefer to leave to private initiative. There certainly is a role to be played by the public sector in providing finance (including public banks, national development banks, and direct government loans to support small businesses, students, and homeowners), but there is also a role to be played by nominally private financial institutions.”39
In spite of their influence in a country’s economy, the banking system is not 100% spread throughout the economy. According with reports released by institutions such as the World Bank, the OECD and World Economic Forum, there are around 2 billion unbanked people around the world. If the statistics concerning to both unbanked and underserved banking costumers are taken into consideration, this number increases expressively.
In many developing economies, the traditional banking system has faced troubles to reach each corner of the countries’ territories. There are still many individuals, micro entrepreneurs and Small and Medium-Sized Enterprises (SMEs) left behind the formal banking system. If those left-behind customers and companies were included in this system, the money creation could be expanded, there would be more people taking loans and/or investing their savings, more payments could be conducted through formal payment platforms, and more people could be formally added to the economic process for example.
The introduction of new technologies can be a solution to shorten the distance between the banking system and those excluded from it. Although many commercial banks are investing in the development of digital tools and technological solutions to existing problems, the inclusion of unbanked is, for instance, still slow. This happens, mainly, because of the bureaucratic constraints these banks face to develop and apply new technologies to their daily activities.
On the other hand, many startups and other IT technologies are getting into the financial market by offering new, simple, easy-to-use and cheap digital solutions to problems faced by many bank clients or by those excluded from the system. Even though these new solutions might transform the way people deal with money, invest it, and contract loans, the traditional banking system is still a powerful political, economic and social institution that is able to influence both the monetary and the financial systems in developing countries.
The relation between the traditional banking system and new financial technologies’ providers/startups/companies will be explored later on in this work. Additionally, this research will also explain the impact that new financial tools can bring to a country’s banking system and economy. In addition to that, this paper will also analyze the consequences of these technologies’ application to a country’s Inclusive Economic Growth. However, understanding what economic growth is, what independent variables influence it and how the literature has addressed this topic so far has to be explored first. After that, it will be possible to discuss Inclusive Economic Growth. Only after these deliberations, it will be feasible to look at the development of new financial technologies and their impact on developing countries’ economies, in their banking system and in people’s lives.
Discussing about both the monetary and the bank system was essential for, now, being able to move towards a better understanding of how new financial technologies influence a country’s economic growth and economic inclusiveness. However, it is still necessary to clarify what is considered economic growth in this paper before doing that. Additionally, it is also important to define which variables influence it, and what economic growth theory will be used to analyze this dependent variable – Inclusive Economic Growth.
There are different ways to explain what “Economic Growth” means. Here, it will be defined as an increase in the total amount of output – goods and services – that an economy can produce.40 Economic growth, however, is not a synonym of better income distribution, because it is possible that a country’s economic output keeps growing, and yet its population becomes poorer – the income redistribution is not necessarily directly proportional to the growth of economic output. Additionally, it is important to keep in mind that a growth in the economic output does not always lead to a rise in the consumption. There are cases in which this output is “growing while the consumption is declining. Either because saving is increasing, or because the government is using up more output for its own purposes.”41
There are many factors and variables that might affect the Economic Growth. These variables can be divided into two groups or levels: proximate variables and ultimate variables. In the later, the analysis observes mainly the impact of ideologies, political and social systems, history and other broad social institutions in the economic growth. The former, however, uses models, concepts and variables to measure, describe and predict economic growth. Some of these explanatory variables that drive to economic growth are labor, physical and human capital, natural resources, trade, technology transfer, scale effects and structural changes. Additionally, social factors such as human and social influences are eventually taken into consideration.42
The first studies about economic growth were majorly concerned with proximate variables especially because of the predictive potential that they add to Economics. For Turgot (1766) and Smith (1776), for example, capital accumulation is seen as the primary source of economic growth while the use of land – natural resources included – and technical changes – technology and knowledge – are treated as secondary sources. The Classical Economic Growth Theory can be summed up in the following equation: 𝑌 = 𝑓 (𝑙𝑎𝑛𝑑, 𝑐𝑎𝑝𝑖𝑡𝑎𝑙, 𝑙𝑎𝑏𝑜𝑟). Additionally, they argued that savings would lead to capital accumulation (i. people tend to save; ii. what is saved is always invested either by those who possessed these savings or by those who borrowed them; iii. the incentive to save and invest is the profit return expected; iv. the accumulation of capital, then, makes the growth of economic output and employment possible since the economic system works to its full capacity). Finally, the Smithian approach also sustains that the population growth is endogenous – is related with the need of labor force – and, thus, it is lead lately by the accumulation of capital and economic growth.43
Similarly to Smith, David Ricardo (1817) also understands economic development as a product from the interaction between land, capital and labor. However, he does not have the same vision towards one of these factors of production. When he analyses the role that land plays in the economy, he argues that a) land is limited44; b) not all available land will be necessarily used, and; c) there are some land-saving technologies that can increase the productivity in the same piece of land, but this will lead to the decrease of the rate generated by this same land. Moreover, Ricardo claims that the addition of new technologies and better machineries could lead to a bigger unemployment rate and, as consequence, a decrease in workers wage. As Heinz Kurz (2012) argues, “The construction and introduction of improved machines into the production system can frequently be expected to lead to the displacement of workers and thus what was later called ‘technological unemployment’.”45
The Neoclassic Economic Growth Theory still uses some core assumptions brought by Smith and Ricardo such as the importance of capital and labor for the economic growth. However, Kendrick and Solow, among others, highlight that “technological progress was an extremely important – perhaps the most important – determinant in the growth in output per man.”46
The function that is familiarly used by neoclassical economists to describe the relation between Economic Growth and factors of production is the Cobb-Douglas function: 𝐹 (𝐾, 𝐿, 𝑡) = 𝐴 (𝑡) 𝐾∝(t) 𝐿-1-∝(t) , 𝐴 (𝑡) > 0, 0 < 𝛼 < 1 , where K stands for capital stock, L means labor forces in terms of physical units, t is time period A(t) represents efficiency of labor.47 This function, for instance, uses the aggregate production function as one of its basis: 𝑌 = 𝑓 (𝐾, 𝐿, 𝑡) , where Y is the maximum output produced by capital K and labor L48 in year t.
These equations do not seem to express anything related to the importance or the influence of technology in economic growth. However, they are used to check the impact of inventions and technological advances on this growth after they are deducted to differential equations and to theorems such as the Equilibrium Theorem49 and Stability Theorem50. In other words, the economic equations and theorems derived from these “basic” equations presented before are a way economists found to calculate the impact of innovation51 in a certain production process Y in a determined period of time t, assuming that both capital and labor market are perfectly competitive.52
This, therefore, shows the concern of economists with the need of understanding the role technology and knowledge play in economic growth. By quantifying this influence, they try to create economic models that will be more accurate to predict a country’s economic growth. Moreover, they ultimately aim to provide information that might guide policy makers and investors to take advantage of technological developments.
Nevertheless, the Neoclassical School is strongly criticized by Cambridge Economists embedded in the Keynesian approach. According to these economists, the neoclassical approach commits a huge sin when they consider that individuals present rational behavior once they try to allocate their scarce sources – labor force, time, money – rationally and efficiently all the time. The Cambridge scholars, on the other hand, “believe that individuals are not so calculating – in particular in a world of imperfect competition and uncertainty”. 53 Their claim, in this sense, is that behavioristic models in which social, political and moral rules determine individuals’ behavior should be used to understand people’s economic behavior, and, lately, economic development.
Furthermore, these economists also object to the concept of a capital aggregation and, as consequence, they question the whole neoclassical production function. Actually, some economists of the Cambridge tradition prefer to refer to “alternative methods of production as the ‘Book of Blueprints’; essentially, [they] prefer an activity analysis approach to the study of production”54 and economic growth.
In spite of criticizing some neoclassical core assumptions, these Cambridge economists never doubted that technology and knowledge play a critical role in a country’s economic growth. However, their impact should be taken into consideration from a broader perspective, remembering that individuals do not always behave rationally. Additionally, there are political, social and moral constraints that influence both their behavior and the way technology is applied to economic activities.
In addition to these ideas coming from Cambridge, the Evolutionary Theory of Economic Growth also posed some Neoclassical Theory of Economic Growth’s core assumptions in check. As Nelson and Winter (1974)55 appoint, the neoclassical theory is inconsistent empirically; is based on and focused only in mechanical concepts of equilibrium; do not accommodate some aspects of reality; and presents an inadequate explanation for economic growth.
As an alternative to this neoclassical mechanic approach, Nelson and Winter developed an organic view about economic development. In this theory, the Economic Growth is understood as an evolution of technological advances within the firms. A technology is only applied to a firm’s routine if it can lead to an increase in the profit, capital formation and growth56. After incorporated to the routine, the firm’s profit increases and the firm has, now, more comparative advantage in the market. The other firms see this process and try to apply similar or better technologies in their own internal routines. When this innovation’s processes go over and over several times, they generate more profit, and increase the industry’s productivity. As consequence, there is a boost in the economic growth until new technologies are developed and restart this circle of innovation-profit-economic growth again.57
Although all the approaches mentioned are focused on understanding what Economic Growth is, how it can be studied and what should be taken into consideration in these studies, just recently a deep concern about Inclusive Economic Growth has emerged. Indeed, only on mid 2000’s governments, international organizations, NGOs and scholars have shift their attention to how they should define Inclusive Economic Growth, what are the actions, policies and other requirements that are necessary to promote it, and how institutions could help to foster it.
Although there is not a universally accepted definition for Inclusive Economic Growth, there is a consensus that Economic Growth and Inclusive Economic Growth are not synonyms. While many experts associate the concept of Inclusive Economic Growth with poverty and inequality reduction, others, more recently, would define it as the economic process in which even the most excluded and poor sectors of a society take part in, contribute to and benefit from.
Since 1950’s, scholars have been discussing what is the role that the poorest people can play in the economic activity and how the advantages of economic growth should be redistributed. During more than two decades, it was believed that the benefits generated by the economic growth would be naturally redistributed and that the income inequality would slowly, but constantly, decline. As Kuznets (1955) claims, “in the early stages of development, growth produces inequality, but as per capita income rises, a turning point causes inequality to decline.”
Nevertheless, the decline in inequality did not happen as expected. In fact, during the 25 years after Kozinets’ publication, the income inequality increased substantially in many countries, most of them, developing ones. “Though growth may be good for the poor, high economic growth has not been translated into poverty reduction at commensurate rate”. Because of this clear contradiction between expectation/theoretical prediction and reality, a whole a new debate about Inclusive Economic Growth emerged during the 1990’s and beginning of 2000’s. During this period, inclusive growth would mean the same as a poor orientated economic growth. In other words, Inclusion could be implied in the concept of a pro-poor approach of Economic Growth.
The broad definition of Pro-Poor Growth could be summarized as
“any growth that benefits the poor and, thus decreases absolute poverty.58 Under the broad definition, inequality could rise as the absolute income of the non-poor might be increasing at a rate faster than the poor’s income. Under the narrow definition of pro- poor growth, also called relative pro-poor growth, the poor should benefit proportionally more from growth than the non-poor so that inequality is reduced.”59
Putting it another way, there are two kinds of Pro-Poor Growth approach: the relative and the absolute. On one hand, the former advocates that the incomes of the poor are expected to – or should – grow faster than the incomes of the non-poor (average income or rich segments). On the other hand, the absolute approach argues that improvements in the absolute income of poor would lead to a decline in inequality and poverty no matter if the income of the non-poor segment increases faster or more expressively than the total income of the poor sector.
Even though this debate influenced the studies about Inclusive Economic Growth and shaped the public policies and projects focused on promoting this kind of growth, the reduction of inequality and poverty during the period was under the expected. As consequence, the concept of Inclusive Economic Growth started to be redefined by reshaping and recycling the Pro-Poor approach.
More than redistributing the outcomes of economic growth among all the sectors of a society, especially the poorest and most excluded ones, the new idea of Inclusive Economic Growth started to focus on how the poor and excluded could become a part of the economic process. While the Pro-Poor Growth approach’s emphasis was on growth and on poverty analyses ex-post, the new concept of Inclusive Economic Growth focused on the inequality of assets and opportunities. Moreover, it also claimed that the poorest should be integrated in the formal economic process, otherwise the benefits of Economic Growth would keep being unequally distributed in the society. In fact,
“the focus has shifted from inequality of outcomes (reminiscent of the growth, then redistribution approach), to inequality of assets and opportunities as input to wealth creation. (…) [There is also] a call for redistribution, broadly defined beyond outcomes to include social opportunities with emphasis on participation in the economic process.”60
Klasen (2010) also highlights the participation of poor in the economic process as an important aspect of Inclusive Economic Growth. In fact, Klasen claims that Inclusive Economic Growth is a subset of the concept of Economic Growth itself. Additionally, the scholar also defines two criteria that must be measured in order to estimate how inclusive the Economic Growth is in a certain society or country. These two criteria are: (i) the process (number of people participating in the growth/economic process); and (ii) the outcomes of this process (whether economic growth benefits many people or not; whether it benefits the poorest sectors of a society, etc).61
The importance of the concept of Inclusive Economic Growth has grown so much that even the United Nations officially proclaimed that this should receive more attention from the governments, policy makers and civil society. Indeed, the 8th Sustainable Development Goal (SDG) talks specifically about Inclusive Economic Growth as one of the requirements for obtaining a sustainable development in the long term – 8th SDG: Promote inclusive and sustainable economic growth, employment and decent work for all. In other words, this goal aims to promote economic growth by integrating people to the economic process, and respecting the environment for example.
In addition to what the 8th SDG sustains, the United Nations Development Program (UNDP) also appoints some criteria that must be observed in order to evaluate whether the economic growth is inclusive or not.62 According to the UNDP’s understanding, growth is inclusive if: (i) it happens in the sectors that employ the poor; (ii) occurs in regions where the poor live; (iii) employs more efficiently the production factors, especially, unskilled labor; and (iv) results in reducing prices of goods and services consumed by, but not only by, the poor.
“Indeed, UNDP recognizes this process as being a result of technological and institutional changes that brings about, not only low-skill absorbing opportunities, but increased productivity of the poor. This focus on the poor is highlighted as follows: An improvement in the fraction of bottom half of the population in the mainstream band would indicate inclusion in the mainstream economic activity and vice versa.”63
The World Bank also follows a similar approach to how Inclusive Economic Growth should be understood and fostered. 64 By linking micro and macro determinants of economic growth, the WB argues that this Economic Growth should embrace equality of gender and opportunities, provide some sort of social protection, and include more and more people in the economic process itself. The organization believes that the solution for improving the inclusiveness of growth lies on growth of productivity and efficiency instead of only redistribution of income. Inclusive Growth would be a labor-absorbing growth, and would be associated with an increasing productivity of those already employed.
The Organization for Economic Cooperation and Development (OECD) also has produced many reports about Inclusive Economic Growth. According to the Report on the OECD Framework for Inclusive Growth (2014), the societies perceive multidimensional goals that go far beyond income and economic growths. Therefore, Inclusive Economic Growth should not rely only on income redistribution or pro-poor growth as many proposed during the past decades. Similarly to the UNDP and WB’s approaches, OECD proposes a concept of Inclusive Economic Growth that is associated with the increasing insertion of people – especially the poor – in the economic process and, lately, economic outcome. As the report presents, Inclusive Economic Growth can be summarized as
“a rise in the multidimensional living standards of a target income group in society (also referred to as ‘representative’ household). For illustration, the note focuses on the median household while the method is general and can be applied to all segments of the income distribution (…), such as lower - income households, to allow for country - specific preferences. In this case, a rise in the multidimensional living standards of the representative household would entail a rise in the mean of multidimensional living standards of the most deprived segment of the population. Multidimensional living standards reflect outcomes in income and non-income components of well-being and their distribution across households. Our approach can be seen as a generalization of the concept of social inclusion, which is understood and measured by the degree to which equality (i.e. in terms of consumption, income, jobs or housing) is achieved.”65
While exploring the topics of Economic Inclusiveness and Inclusive Economic Growth, some scholars have also investigated how political institutions affect these variables. Xi (2017)66, for instance, compares democratic and autocratic governments in order to explain how some political institutions such as rule of law, political accountability and property rights can affect economic growth. Acemoglu and Robinson (2012)67 also address the topic of how Democracy and other inclusive institutions can lead to long-term and sustainable economic growth. In fact, they
“elaborate on the premise that inclusive institutions give rise to a democratic advantage in long-run economic performance. Inclusive institutions are present when societies are featured with equal political participation and widely accessible economic opportunities, which help build a stable expectation for business investors and encourage innovations. Political democracy helps growth simply because it is conducive to inclusiveness. By contrast, in nondemocratic societies, institutions are extractive, i.e. political power is monopolized by a small group of elites, who use power to reinforce their economic privileges and grab rents from the disenfranchised group. In turn, under extractive institutions technological innovation is deterred, and growth unsustainable, because incentives for investments and innovations are undermined by the exercise of political powers.” 68
Although Xi (2017), Acemoglu and Robinson (2012), among others address how political institutions can affect a country’s inclusive economic growth, there is still a lack of substantial academic production about how these institutions can affect the development and application of new financial technologies and business models. Actually, more researches should be conducted in order to assess how political institutions, governments, policy-makers and interest groups can influence the development and usage of new financial technologies and, indirectly, to determine how these technologies affect economic inclusiveness.
Theoretically, the democratization of access to bank-related services and products as a consequence of the application of new technologies and business models to traditional financial activities should lead undoubtedly to an expansion of economic inclusiveness. However, the literature produced so far does not provide enough evidence that allow one to prove that this expectation is, indeed, the reality.
Now that the theoretical discussion about Inclusive Economic Growth was presented, it is also necessary to briefly present what has been written so far about the emergence of financial technologies during the last years and how they have impacted Inclusive Economic Growth. Although there are already some productions about the emergence of the so-called FinTech sector in different countries, few academic articles have focused on the analysis of this topic. Indeed, the majority of the work published so far has been written by big consulting firms and have focused in regional FinTech hubs or specific technologies. For example, many reports have focused on the emergence of FinTech companies in countries such as Israel, the UK, the USA, and China. Other works have paid more attention to specific financial technologies developed by innovative startups and new companies – online payment platforms based on peer-to-peer transfers and on QR codes are some examples.
Central Banks, government agencies, private enterprises and international/multilateral institutions have also developed their own studies about the development of new digital technologies applies to the financial world, the impacts of these technologies’ implementation, and what kind of norms and systems should regulate the sector. For instance, a multilateral initiative lead by the Inter American Bank of Development, the Brazilian Development Bank (BNDES) and the Brazilian Securities and Exchange Commission (CVM) has created and financed the Innovation Lab. This Lab has invited different experts and professionals from both the private and public sectors involved with the FinTech sector to discuss how to regulate the sector in order to protect the financial system but also allow the development of new companies and the implementation of low cost and inclusive technologies to this same system. During one of the Lab’s last meeting, a working group was created to debate about this topic and write recommendation draft about regulations that should be applied in order to allow the sector flourish in a safe, low-risky and sustainable way.
Unfortunately, there are just few initiatives such this one and the number of reports and academic articles about the topic is still small. Indeed, the academic production about the impact of new digital technologies applied to financial activities and to the traditional banking system is still incipient. Similarly, there are even fewer publications that eventually mention the influence of these technologies in the expansion of a country’s economic inclusiveness and in its Inclusive Economic Growth. There are even fewer works that observe this topic in Latin American countries and other developing areas. Although there is a bigger number of consulting firms’ reports about the emergence of FinTechs in China, there are just few of them focusing in Brazil. In addition, the number of academic thesis and papers about the influence of the FinTech sector in Inclusive Economic Growth in these countries – Brazil and China – is, so far, unknown if there is any other besides this dissertation.
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