Finance and Inequality

In the current context in which the consequences of the excesses of financial innovations are all too obvious, it is easy to underestimate the positive role played by the financial system. There is indeed a strong body of evidence which links better financial systems (as measured by their size, their depth, their efficiency, and their reach) with faster economic growth. In a recent NBER working paper, Asli Demirguc-Kunt and Ross Levine point to the often-neglected relationship between finance and economic inequality. By giving the poor enhanced access to funding, financial systems play a positive role in alleviating economic inequality and in promoting equality of opportunities. Its excesses aside, subprime lending ought also to be remembered for enabling home-ownership to millions of low-income households.

But, the authors argue, finance can also widen inequalities, by disproportionately enhancing the opportunities of the wealthy at the expense of the poor (for it is the former who possesses enough collateral to borrow). This, they argue has largely been neglected by economists, with the exception of Greenwood and Jovanovich 1990. One can however argue that, better access to funding by the rich, although bad for inequality, can be also be good for poor as this increases their employment opportunities. Indeed, in countries that have experienced sustained growth over several decades, the economic conditions of the poor have improved, often considerably. Hence, it makes more sense to look at how finance reduces poverty rather than inequality.

Demirguc-Kunt and Levine summarise a growing research on the topic and conclude that there is generally a  “strong beneficial effect of financial development on the poor and that poor households and smaller firms benefit more from this development compared with rich individuals and larger firms.” How do they benefit more? For small firms, the benefit is in terms of the ability to borrow when faced with liquidity problems. For poor households, finance allows them to “smooth their consumption”, i.e. to save and borrow whenever they need to, and this allows them to invest in education and to take more risks in general. In a study of Kenyan farmers, Esther Duflo, Michael Kremer and Jonathan Robinson found that, although the use of fertilizers is proven to significantly increase productivity in the growing of corn and even though they do not necessitate a large investment, farmers do not use fertilizers because they cannot even save the little that is required to purchase them and they are very reluctant to deviate from their old ways of farming.

The trouble with the Mauritian Health System

In a  WHO report on the overall efficiency of health systems, the Mauritian Health System ranks 84th out of 191. This is pretty dismal for a country with an annual GDP per head of $11 000 (at purchasing power parity). Indeed, Mauritius came behind countries that have GDP per head of $4000. In practical terms, the inefficiency of the health system is reflected in an infant mortality rate still in excess of 10 per 1000 newborns, and in an average life expectancy which is only slightly above 70.  What is wrong with the Mauritian Health System, a system based on the UK’s NHS (meaning that it is universal and free at the point of use, and is funded by taxes)?  The question is certainly worth asking as Mauritius is set to become the country most affected by the H1N1 flu in Africa. The short answer is that Mauritius spends only 4% of its GDP on health and this is too little by any standard (for instance, most OECD countries spend more than 8% of their GDP on health). So why is so little spent on health care as a % of GDP, while in other areas, such as education and even infrastructure, the gap between Mauritius and middle/high income countries is not that wide?

The reasons are a mix of

1. A lack of public support for a strong publicly-provided health care system. Such a lack of support is often the case in highly unequal societies where the middle class prefer to have recourse to the private sector rather that subsidizing a publicly-provided system.

2. Additionally, Mauritian may not fully realise how much better their health system could be in terms of saving, improving and prolonging their lives. In his recent book “The Idea of Justice“, Amartya Sen explains why individuals may not realise how bad their health systems are:

A person reared in a community with a great many diseases and little medical facilities may be inclined to take certain symptoms as ‘normal’ when they are clinically preventable. Like adaptive desires and pleasures, there is also an issue here of adaptation to social circumstances, with rather obscuring consequences.   (page 285)

3. The presence of strong interest groups whose personal interests lies in a public health system that remains weak. As an example, two days ago, the largest private healthcare provider in Asia, the Indian group Apollo opened its first hospital in Mauritius, in a joint-venture with a politically-influential Mauritian group.

To make matters worse, a major weakness of the Mauritian Health System lies in its primary health care provision, which is generally the first point of entry of patients into the health system. Primary health care is indeed largely dominated by private general practitioners, who have an interest that their patients, who are generally ill-informed, stay within their private system. In a country where improvements to the health system are hardly ever debated, not even during election times, and where Health Ministers are hardly ever chosen among the brightest minds, things are not likely to improve soon.

What makes good parents?

What make good parents? The psychology literature certainly has a lot to say about the topic, but economists have a rather simplistic view of the issue. This is understandable as the aim is not to advise parents but to look at the role played by the family in the economic outcome of individuals and societies. With this in mind, successful parenting can be narrowly defined in terms of the economic success of children (certainly excessively restrictive a definition). Standard economic models (Becker and Tomes 1986)  generally assume that parents make all the choices for their kids and that the economic outcome of an individual depends on the time and money spent by his parents. For  start, this is a gross simplification as other factors, such as culture and peer influence, also play a considerable role, as evidence suggests.  But more importantly, as parents would agree, time and money are not enough; much more is needed. Economists are therefore trying to dig deeper into the “black box” of the family. An important theme emerges so far: successful parents are those who convert “impatient” children into “patient” adults. These patient adults would then make better decisions, in terms of education acquisition, of career choice, of saving for rainy days, etc.