The links between finance and inequality: channels and evidence
Claessens, Stijn | Perotti, Enrico
This paper focuses on the relationships between inequality and finance. In principle, a better financial system can help overcome barriers, and thereby increase economic growth and reduce inequality. Indeed, a more developed, that is deeper, financial sector has been shown to aid economic growth. Financial reform will only reduce inequality, however, if it improves access for more individuals with growth opportunities. Reforms thus need to broaden, not just deepen financial systems. At the same, as recent theoretical and empirical work has shown, ex ante inequality can hinder welfare enhancing reforms. Concentrated economic and political powers will likely block financial (and other) reforms, or manipulate their design and/or implementation, so that the benefits reach fewer individuals. Also, by design or implementation, financial reforms can lead risks to be allocated unfairly and costs to be socialized, especially around financial crises, further worsening inequality. Furthermore, reforms that do not provide gains for many may be followed by a political backlash that may make even valuable financial sector reforms not sustainable.
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