The Financial Sector in the 2020s: Building a More Inclusive System in the New Decade

IMF News, January 17, 2020

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Authors: Kristalina Georgieva
Published: January 17, 2020
DOI: https://doi.org/10.1787/7e1bf673-en

I. Introduction — context and theme

Speech by Kristalina Georgieva, Managing Director, IMF; delivered at the Peterson Institute for International Economics, Washington, D.C., January 17, 2020.
Overarching theme: increasing uncertainty (geopolitical tensions, trade frictions, climate change) and its interaction with economic outcomes and public policy.
Focus of the speech: role of the financial sector in driving or mitigating inequality and the results of new IMF staff research on this topic.

II. Rising inequality and why finance matters

Global between-country income inequality has declined sharply over the past two decades, led by key emerging markets in Asia; this is noted as the first decline in global inequality since the Industrial Revolution.
Within-country inequality has risen in many countries; example: in the United Kingdom the top 10 percent now control nearly as much wealth as the bottom 50 percent.
Climate risk exacerbates inequality: the World Bank estimate cited is that unless the current climate path is altered an additional 100 million people may be living in extreme poverty by 2030.
Financial sector is a critical but sometimes overlooked lever—can produce broadly inclusive opportunities or amplify inequality if poorly managed.
New IMF staff research findings were launched in this speech demonstrating the dual role of finance.

III. Three dimensions of how the financial sector impacts inequality

a) Financial Deepening

Definition: the size of the financial sector relative to a country’s entire economy.
Positive historical role: sustained financial sector growth in China and India during the 1990s helped lift a billion people out of poverty.
Key research finding: there is a point at which financial deepening is associated with exacerbated inequality and less inclusive growth.
Mechanisms for reversal: when financial sectors become very large and complex, benefits accrue more to the wealthy through complicated instruments, influential lobbying, and excessive compensation.
U.S. example statistics: in 2006, financial services firms comprised nearly 25 percent of the S&P 500 and generated almost 40 percent of all profits.

b) Financial Stability

Average economic damage from crises: on average a financial crisis leads to a permanent output loss of 10%.
Climate-related financial risk: estimates cited for potential costs of devaluing stranded assets range from $4 trillion to $20 trillion.
Empirical link: inequality tends to increase before a financial crisis, making widening income inequality a strong predictor of a financial crisis and a lasting effect after one.
Historical and recent examples: the 2007–08 housing bubble and Global Financial Crisis worsened inequality; today 1 in 4 young people in Europe are at-risk of living in poverty as a long-term consequence.
Cross-country historical evidence: a survey of 17 advanced economies covering financial crises between 1870 through 2013 confirms widening income inequality is consistently a strong predictor of crises.

c) Financial Inclusion

Definition: more people and companies having cheaper and easier access to financial services.
Impact on inequality: increasing access to bank accounts strongly associated with reducing income inequality; the largest reductions occur when women are given increased access to finance.
Cross-country contrasts: Sweden—bank account share the same for rich and poor; Indonesia—the richest 20 percent about twice as likely to have a bank account compared to the poorest 20 percent.
Fintech impact example: in Cambodia mobile finance helped generate 2 million new borrowers over the past decade, representing nearly 20 percent of the adult population.
Long-term macro effect: IMF staff research shows a 2-to-3 percentage point GDP growth difference over the long-term between financially inclusive countries and their less inclusive peers.
Inclusion caveat: increased access creates opportunity (saving, entrepreneurship, education) but does not automatically or immediately reduce income inequality.

IV. Trade-offs highlighted across dimensions

Need balance: desire for a robust financial sector without excessive complexity; aim for inclusion that expands opportunity without creating heavy systemic debt risks.
Excessive financial deepening and financial crises can fuel and entrench inequality.

V. Policy recommendations — Safer, Stable, Smarter

a) Safer: high-quality regulation and supervision

Emphasize sustainable and intentional financial sector growth.
Preserve and follow through on post-crisis regulatory reform agenda and international cooperation.
Maintain higher capital and liquidity requirements, easier resolution of troubled banks, and improved transparency and accountability.
Increase financial literacy so people understand financial offers and implications for their families.

b) Stable: private sector and banking role, and climate considerations

Financial sector must price climate impacts into lending decisions to support reach to net zero carbon emissions and Paris Agreement targets.
Stronger disclosure standards will help financial institutions assess climate-related risks, potentially raising loan prices for at-risk projects and reallocating capital.
Rethink collateral-heavy practices: lending decisions could rely more on future cash flows rather than ownership of collateral, enabling broader access to credit.
Lending to small firms increases financial stability and reduces risk compared to lending concentrated in large firms; spreading risk across many firms promotes a more inclusive and healthier economy.

c) Smarter: broaden access while managing risks from fintech

Governments can work with fintech firms to unlock inclusion benefits while managing consumer protection, competition, and anti–money laundering concerns (Bali Fintech Agenda principles referenced).
Evidence: a World Bank study of 135,000 firms across 140 countries showed lending to smaller firms is directly connected to improvements in income inequality because these firms hire workers who need jobs most.
Case study: M-Pesa—started as peer-to-peer mobile payments in Kenya and, starting in 2020, becoming a pan-African financial platform—illustrates gradual, multi-actor work bringing millions of unbanked and underbanked online.

VI. Conclusion — call to action

Increasing inequality will worsen if left unaddressed; fiscal policy is potent but financial sector policies are crucial complements.
Historical lesson: avoid repeating the mistakes of the 1920s in the 2020s by acting now.
Closing appeal and quote: borrow from F. Scott Fitzgerald—“Action is character.” The 2020s can be made a decade of prosperity for all through decisive action.

Speech by Kristalina Georgieva, Managing Director, IMF, Peterson Institute for International Economics, January 17, 2020.

References

https://www.imf.org/en/about/senior-officials/bios/kristalina-georgieva
Staff Discussion Note: Finance and Inequality
People's Republic of China and the IMF
Speeches
PRESS CENTER
The Economic Scars of Crises and Recessions
Inequality and Poverty Across Generations in the European Union
Women in Finance: A Case for Closing Gaps
[Belt and Road Initiative: Two Key Channels to Achieving

Financial Connectivity](https://www.imf.org/en/News/Articles/2019/04/24/sp042519-belt-and-road-initiative-two-key-channels-to-achieving-financial-connectivity)