Nevertheless, it is necessary to clarify what assumptions and theoretical framework will be used in this dissertation before answering these questions. Moreover, it is imperative to present the methodology used to conduct this research. Finally, it is also important to define what are the dependent and the independent variables observed in the cases analysed.
The very first assumption is related with humans’ rational nature: Human Beings are considered rational individuals that try to allocate rationally and efficiently their scarce sources such as time, money, and skills. Of course human beings do not act based on their rational decisions all the time. Thus, it is recognized that there are other factors also influencing their economic behavior and choices – social rules, emotions, etc. Despite that, the neoclassical econonomic approach consideres that human beings act rationally in the major part of their time, and, tehrefore, can be considered rational individuals. In addition, this theory pictures these rational individuals foccused on their own interests (self-interests).
Second, Market requires neither a governmental oversight, nor control of its activities. Instead of public regulations, the law of supply and demand is considered the best way to allocate efficiently the scarce resources that individuals possess and product. Nonetheless, market failures might happen eventually. When this occurs, States should rule selflessly and impartially in order to guarantee a smoothie and efficient allocation of resources by the supply-demand law. The rues, laws, norms and policies should interfere the less possible in the Market’s activities and should be only used eventually to correct failures.
Third, Economic Growth is the main key to improve the economic well-being in a society and Economic Growth is considered as a result of the interaction between Labor L, capital K and land Z1 – including natural resources. Additionally, it is influenced by the efficiency of the economy A2, and it is affected by the price paid per unit of output p, capital r, land s – rent –, and labor w – wage. Therefore, there are two equations that will be considered:
• 𝑌 = 𝐴𝑓 𝐾, 𝐿, 𝑍 , fixing the price of output as 1 and measuring all other prices relative to the price of output;
• Δ𝑌 = 𝑚𝑝KΔ𝐾 + 𝑚𝑝LΔ𝐿 + 𝑚𝑝ZΔ𝑍 + 𝐹 𝐾, 𝐿, 𝑍 • Δ where 𝑚 represents the marginal3 product of K, L4 or Z. Considering that in a competitive economy with constant returns “all factors get paid the value of their marginal products. Thus the value of the marginal product of labor, mpL, is just the wage w. Similarly the value of the marginal product of capital will be r, and the value of the marginal product of land the rent s”5.
Therefore, its is possible to rewrite the former equation as the following:
Δ𝑌 = 𝑟Δ𝐾 + 𝑤Δ𝐿 + 𝑠Δ𝑍 + 𝐹 𝐾, 𝐿, 𝑍 ∙ Δ𝐴
Fourth, there are two ways of raising the output per person: i. increasing the amount of land or capital relative to the number of workers6 ; or ii. making improvements in the production process so that the same inputs produce more output. 7 Technological advances, for instance, can contribute with these improvements.
Fifth, the transaction and information costs should not be considered while analyzing a country’s economic growth. Indeed, the markets would be able to provide all the information necessary, allowing, thus, individuals and firms to take asserted decisions – the information would be completely delivered to the actors involved in the economic process and, because of this, there would be no additional cost generated by information asymmetry. In addition, transaction costs would be mitigated by the efficient allocation of resources and rational behavior of economic actors.
Sixth, financial markets, investment firms and banking systems are the key institutions of a society. If they are not preserved, economic growth and investments might be jeopardized.
In regard to the theoretical framework, this research relies on a neoclassical economic framework, once it sees Economic Growth as a product of the interaction of variables such as Labor, Capital, Land, Economic Efficiency, Wage, among others. Thus, the variation in a country’s economic output can be theoretically predicted by applying mathematical models such as the Cobb-Douglas8 function. Additionally, the work developed by Kendrick and Solow will also be used to understand the impact of technological progress in the growth in output per man.9
Furthermore, this research will also use some concepts and ideas developed by different approaches of Inclusive Economic Growth. Indeed, this work considers Inclusive Economic Growth as a particular variation of Economic Growth itself. It recognizes that Inclusive Economic Growth happens when the economic production process involves the most excluded and poor sectors of a society, allowing them to take part in, contribute to and benefit from this process. Although Inclusive Economic Growth is a part of Economic Growth, rarely both the neoclassical approach about Economic Growth and Inclusive Economic Growth framework are used together to evaluate and/or predict a country’s variation of economic output and its externalities from an “inclusive” perspective.
Thus, in order to estimate how inclusive the Economic Growth is in a certain society or country, two criteria developed by works about Inclusive Economic Growth must be analyzed:
(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).10
This dissertation, therefore, will check (a) if the two countries studied are facing Inclusive Economic Growth according with the criteria established by both the neoclassical economic approach and Inclusive Economic Growth theory adopted here; and (b) if so, how the emergence and use of new financial technologies impacted this growth (or Inclusive Economic Growth’s variables).
Theoretically, the implementation of new digital technologies to the financial sector leads to an improvement to a country’s economic environment as well as its economic inclusiveness. In other words, if Inclusive Economic Growth is
“[an] economic growth that creates opportunity for all segments of the population and distributes the dividends of increased prosperity, both in monetary and non-monetary terms, fairly across society’ 11 (…) and increases the participation in the formal economic process of the most excluded sectors of the society”
Then the growth in the number of people accessing formal financial services and the improvement in the quality of this access by providing better products for the historically excluded and forgotten segments – mostly the poor, individual micro entrepreneurs and SMEs – might lead to it.
This Dissertation is based on a qualitative cross-country comparative analysis between two different cases with similar results. By using this method, it was possible to use a limited number of cases to analyze the same phenomenon – Inclusive Economic Growth – even though there were not enough quantitative information at disposal.
Indeed, the analysis here conducted was based on the comparison of two different cases regarding to the development of FinTechs and the regulatory framework constraining it. The cases selected for this study were China and Brazil. These two countries, for research purposes, will be considered most different cases that show the same outcomes in regard to the application of new financial technologies and its impacts in economic inclusiveness.
These countries are considered most different cases, because of significant differences in their population and economy’s sizes; economic growth rate; consolidation of their traditional banking system; existence and capillarity of their shadow banking system; innovation policies and support to technological development; their regulatory framework; among other aspects.
For instance, Brazil presents a smaller economy and population 12 in comparison to China. The Brazilian GDP has been much smaller than the Chinese during the past decade as it can be observed in figure 3.4.1. Indeed, the country has even faced a negative growth rate in some years as a consequence of the Economic and Political Crisis that Brazil is facing.
Additionally, Brazil presents one of the most consolidated traditional banking system in the world – the regulatory banking framework is minimalist, overseen by well-reputed governmental agencies such as the Brazilian Central Banks and the Securities and Exchange Commission of Brazil. As consequence of this rigid and historically strong traditional banking system, the shadow banking in the country did not develop expressively. Finally, differently from China, this South American country does not present consistent, long-term governmental policies whose aim is to incentivize innovation and the development of new technologies in the country. Brazil not only needs better designed innovation policies, but also urges immediate changes in its tax system applied to new business and industry as well as an expressive reduction in all the bureaucracy related to the development of new technologies, registration of new companies and issuance of new patents.
Despite these expressive differences in their economic, regulatory and innovation scenarios, Brazil and China have shown similar outputs in regard to their FinTech sector. The investment in the sector and the number of companies and startups focused on this segment has grown expressively during the past 5 years. Moreover, both the Chinese and the Brazilian governments are investing efforts to develop a modern regulatory framework that will allow these companies to flourish. In addition to that, there are other positive externalities reaching the society in many areas.
Before moving to the phenomenon’s description in the next chapters, however, it is necessary to explain what kind of data was used in this research as well as how it was obtained and analyzed so far. The present work is based on some statistical data collected mainly through secondary sources – consulting companies’ and governmental reports, companies’ press releases and websites, and newspapers.
As there was a big gap of reliable statistical information for the Brazilian case, this case study was mainly based on information gathered together through interviews 13 with professionals from the Brazilian Central Bank (DENOR and Financial Inclusion department), Ministry of Economy (Secretary of Economic Monitoring SEAE/MF and Secretary of Economic Policy), Institute for Applied Economic Research (Ipea), Securities and Exchange Commission of Brazil (CVM), Brazilian Trade and Investment Promotion Agency, Brazilian Banks Federation (FEBRABAN), Equity Investment Group, Bradesco Bank (Innovation and Research Department), Bank of Brazil (Digital Innovation Department), Redpoint E-venture group, Conexão FinTech Consulting Company, Stone Pagamentos, PagSeguro, Meu Dinheiro, Plug and Play (Sunnyvale, CA), among others institutions and companies. On the other hand, the Chinese case was analyzed mostly relying on statistical and qualitative data collected in the above-mentioned secondary sources and on interviews with professionals working in Plug and Play (Beijing).
In addition to specific data concerning the development of the FinTech sector in these two countries, other quantitative indicators were also used to answer the proposed research questions. Some of these indicators are GDP per capita (PPP) growth, Gini Index, number of unbanked people, among other quantitative data mainly provided by international institutions such as the World Bank, UNDP and the OECD, governmental agencies and consulting companies.
In this work, Inclusive Economic Growth is the dependent variable while new financial technologies and regulations governing the economic and financial sectors are the main independent variables.
3.5.1 Independent variables
Hereafter, Economic Growth will be considered “the increase in the total amount of output – goods and services – that an economy can produce.” There are many factors that affect Economic Growth and there are also many ways of measuring it. Here, some indicators such as GDP Growth Rate, GDP per capita growth rate, among other data will be used to measure Economic Growth. Additionally, other information acquired through the use of qualitative methods will also be taken into consideration in order to analyze it.
Nevertheless, Economic Growth and Inclusive Economic Growth are not synonyms. As discussed previously, there is no universally accepted definition of Inclusive Economic Growth. However, for research purposes, this paper will use the following definition of Inclusive Economic Growth:
“‘Inclusive growth is economic growth that creates opportunity for all segments of the population and distributes the dividends of increased prosperity, both in monetary and non-monetary terms, fairly across society.’ 14 Additionally, it also increases the participation in the formal economic process of the most excluded sectors of the society”.
Inclusive Economic Growth, therefore, means that the economic outputs are more equally generated and distributed, and that they reach the most vulnerable and excluded sectors of a society too. This concept is not only about the total growth in an economy’s output or GDP but also, and mainly, about how the excluded segments of the society (poor people) are impacted positively by, can benefit from and contribute to this growth. It is also about how inequality and poverty decrease as a consequence of a more inclusive economy – where more people have access to the formal economy, banking and credit systems, and opportunities to invest. Moreover, it can be said that this concept is about how historically excluded groups become part of the process of building up the Economy and taking advantage of this – how the spillover of economic benefits from growth can reach the forgettable segments of a society.
In the same way that there are more than one single way to promote this Inclusive Economic Growth, there are also many ways to evaluate whether a country’s economic growth is an inclusive one. In this work, indicators such as GDP Growth rate per capita (PPP), and Gini Index are some of the quantitative data used to check (a) the Economic Growth’s distribution among the most vulnerable groups, and (b) the evolution of inequality in a period of time respectively. The reduction of economic inequality and income’s concentration, for example, can be used as a way to measure if the Economic Growth has been, in fact, inclusive during a certain period of time.
Other indexes such as unemployment and poverty rates will also be helpful for analyzing the changes in the economic inclusiveness throughout the years. Moreover, other “measures of ‘multidimensional living standards’15 designed to track societal welfare, and analyze the extent to which growth - in a given country and over a given period - translates into improvements across the range of outcomes that matter most for people’s lives” will also be observed.16
Besides these quantitative data that will be presented in the following chapters, other qualitative analysis will also be conducted to evaluate the impact of the emergence of new financial technologies in a developing country’s economy. The main purpose will be to understand whether these new financial technologies can boost an Inclusive Economic Growth by increasing both the total economic output per person (Purchase Power Parity) and the inclusiveness of the economy.
3.5.2 Dependent variables – New Financial Technologies, regulations governing the economic and financial sectors
In this paper, “New Financial Technologies” refers to all the technologies and innovations applied to the financial sector that were developed recently – after the 1990’s. Moreover, this term can also be applied to any innovation in how people transact money and business, but the most expressive innovations are usually associated with the application and the use of computer technology and the Internet to improve transactions, and to offer new financial services for instance. Specifically in this research, new methods of payment such as electronic and online payment platform will receive more attention than other innovations. This will be done in order to systematize the work and the analysis conducted.
In this study, however, other independent variables must be taken into consideration too: regulations towards the economic and financial fields that constraint or allow the application of those new technologies; public policies17 that incentivize financial innovation; and how established and strong a country’s traditional banking system is and how fiercely it has reacted to emergence of new financial technologies brought by incomer players (startups, IT companies).
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