Jobs And Financial Inclusion

In the aftermath of the global financial crisis and with the mounting pressure of a demographic bulge of young people in many developing countries, the imperative of creating jobs has returned to the forefront of development priorities.  At the same time, global leaders are concerned about inclusive growth and have made financial inclusion one of the pillars of the G20 development agenda.  How are jobs and financial inclusion linked? The answer depends on what type of jobs we are talking about.

For most people in advanced economies, jobs mean formal sector employment with a salary, perhaps even benefits such as health insurance.  For such jobs, the link to finance is macro-economic.  Functioning financial markets are supposed to help mobilize domestic savings and allocate capital to the firms with the highest productive-return opportunities.  Financial intermediation helps economic growth, which in turn creates jobs and higher salaries.  Much of the traditional economic literature and empirical work focuses on these linkages, and there is pretty broad consensus that things work this way under most circumstances.

For most of the developing world today, however, formal sector employment is at best only half the story.

Even in middle-income countries such as Mexico, informal employment is half of total.  In India, it is more than 85 percent . Informal employment includes temporary wage earners:  household help in the cities of emerging markets; daily wage laborers in the construction industry; temporary employees of informal small, businesses. 

To the degree that economic growth might lead to formalization of these jobs, the traditional finance linkages hold.  Today’s reality for informal wage earners, however, is more likely to be characterized with great uncertainty,  long spells without earnings, the need to send money home to the family in the village.  Families that have irregular wage income need to be active managers of their financial lives.  The less security is stemming from employment, and the less society as a whole provides social protection for health issues or in old-age, the more families have to fend for themselves and need financial instruments such as savings, credit, and insurance  to do so.

This is most dramatically true for the hundreds of millions of families in the world that do not even benefit from temporary employment.  They have to create livelihoods for themselves – they are self-employed micro-entrepreneurs - not by choice, but by necessity: the street vendor in Jakarta or rickshaw-driver in Mumbai, or the small artisan just outside of Lima.  In addition, an estimated 500 million smallholder farming families globally are the largest group of people living below USD 2 a day.  In economic terms, all these families are producers and consumers at the same time. They need access to the full range of financial services to create income generating opportunities, build assets, smooth consumption in the face of highly irregular or seasonal incomes, and manage risks.

Half of all working-age adults globally do not have access to formal financial services – an estimated 2.5 billion.  Among the poor, 3 out of 4 are excluded.  They of course live disproportionally in poorer countries.  These families have to turn to the age-old informal financial mechanisms to manage their lives-- family-and-friends, the rotating savings club, and the money lender, the pawnbroker – which can be very unreliable and very expensive.

Without ever thinking in these terms, for them, the linkage between “jobs” and “financial inclusion” is clear and imminent.

--- The author is the CEO of CGAP. You can follow him at @tilmanehrbeck.