Finance Is Good For The Poor But It Depends Where You Live Article Review Example
Type of paper: Article Review
Topic: Finance, Investment, Development, Stock Market, Poor, Banking, Poverty, Market
In his article, “Finance is good for the poor but it depends where you live,” Johan Rewilak points out the fact that a person’s financial status was largely dependent on where they resided. He outlined the theory that to have maximum growth, then finance was necessary. The article showed instances in which researchers had come to the conclusion that this was in fact so. He stated that there was much evidence on economic growth and financial development, even though earlier suggestions by critics were that growth was a precursor to finance. The theories on growth and finance were tested empirically and the results showed that finance and a good legal system may in fact cause economic growth. In a recent study, researchers have begun to wonder whether or not the nexus of financial growth had gotten extinct.
The same researcher came to the conclusion that financial development could not enhance growth, so the question would be if the poor can benefit from this said financial development. The article shows that even though financial development could provide the poor with a way to save, in some less developed countries, many people had resorted to storing their monies under their mattress or in hidden jars, instead of putting it in a bank. This act in itself can severely hamper the ability of that household to grow on the social scene. In addition to making the money vulnerable to thieves, remembering where in the house the money was placed could be a difficulty.
In times of macro-economic instability, inflation and other economic problems, a savings account that is indexed for inflation can prevent the savings from fluctuating, or decreasing in value, which can be of great benefit to the poorer class of people. Lack of savings on the part of the poor may result in them wasting their assets that they accumulated, on purchasing unnecessary capital. One example was if someone purchased an oxen for their farm. These type of assets were not able to improve the productivity of the farmer, or to give them any real returns, but were bought because it was easy to do so, even though they were not liquid assets. A savings account in the hands of a poor person may prevent them from poverty by giving them opportunities for using their savings when times got tough. The article stated that an account held at a financial institution could assist the poor person’s child/children to attain a higher level of education, that is, if they had altruistic parents. As a result, mobility across generations and classes could be more easily established.
Rewilak used the stock market to measure financial development. His chosen variable was the capitalization of the stock market. The empirical results suggested that stock markets had the ability to increase growth in an economy. The study highlighted the fact that the services that were provided by stock markets were different from that provided by banks, while he stressed the importance of the stock market. The article stated that research had shown that countries that had well-developed stock markets, also had well-developed banks. Several differences between the stock markets and banks were outlined, as well as the uses of the two. Other research also showed that a well-developed financial sector was important, whether or not the banks or stock markets were also developed. The results showed that growth for the poor was a good thing. The measures used for the stock market, such as ratio of turnover, or value traded, could have been used in the study as they show how liquid the stock market was. The results showed that savers who had stocks could transfer their stocks into cash in a short period of time, but because of limited data, the ratio used to measure the stock market capitalization of GDP was used.
He also stated that South Asia had been successful at increasing the income of the poor with financial development, while the results for Latin America and the Caribbean had proven to be contrary. He alluded to the fact that governments would need an intervention in order to provide financially for the poor, at least for the short term. This would be effective as the poor would not have any large transactions, but this would change once the private sector was ready to assist them, or if their economic situations were to improve. Technological advances would have to be improved for it to be a profitable venture for the institutions, or they would be catered to, if there was a significant change in the earnings of high net worth customers.
Rewilak, Johan. 'Finance Is Good For The Poor But It Depends Where You Live'. Journal of Banking & Finance 37.5 (2013): 1451-1459. Web.