Can Financial Market Policies Reduce Income Inequality?

Oct 2001
This paper seeks to answer two questions: How can we further develop a country¿s microfinance industry and what impact might this have on the country¿s income distribution?. Also it presents substantial arguments and data to support the contention that improving the access of micro and small enterprises to financial services could have an important salutary impact on a country's income distribution. To demonstrate this, the paper shows first that many poor own or are employed by smaller enterprises, second that smaller enterprises are indeed poorly served with formal and semi-formal credit, and third that providing financial services to smaller enterprises increases their income and employment and reduces income inequality to an important degree. Using household survey data from 15 Latin American countries, the paper finds that while the microenterprise sector accounts for 56 percent of all earners in the region, it includes 70 percent of the region's poor earners (with 35 percent of the poor earners being single-person-firm owners and the other 35 percent microenterprise employees).