SUMMARY POVERTY IMPACT ASSESSMENT 1. This Poverty Impact Assessment (PovIA) describes the transmissions in which financial sector development both positively and negatively impact poverty in Thailand. The assessment starts with a brief review of the international evidence on the nexus between financial sector development, stability and poverty reduction. Empirical evidence of this relationship for Southeast Asian economies is presented. The assessment then identifies the pro-poor features of the proposed Thailand Capital Market Development Program (CMDP) and describes the transmission in which the CMDP will contribute to poverty reduction in short to medium term economic growth, including inclusiveness and poor in the financial sector and enhancing financial sector stability. 2. Financial sector development helps reduce poverty through at least three channels - higher economic growth, financial sector inclusiveness of the poor and financial sector stability (Figure 1). The first (and indirect) channel is through economic growth. There is unambiguous evidence that financial sector development is a prerequisite for stimulating longer term economic growth. Financial sector development allows different institutions to mobilize savings and redirect to profitable investments. As a consequence, rates of private investment and household consumption increase over time leading to higher economic growth and poverty reduction. The second (and direct) channel is through improving the poor s access to the modern finance sector (i.e., inclusiveness of the poor). Financial sector development directly reduces poverty by facilitating transactions and allowing the poor to benefit from financial services primarily savings products that increase their lifetime income (through interest income) and enhance their ability to undertake profitable investments and other activities. Examples of saving products that help the poor enhance their welfare include the conventional bank deposits (such as savings and term deposits that earn real interest income), special purpose savings products (such as child education funds), microfinance institutions savings and lending products, and pension schemes available to the poor. Other financial sector products that have benefited the poor include mortgage products and the development of the secondary mortgage market that generates financing for low-cost housing. 3. The third channel is through the impact of financial sector development on financial sector stability. Financial sector instability undermines poverty reduction because poor households are much more vulnerable than the rich to unstable and malfunctioning financial institutions (e.g., the payments system) and indirectly though the negative macroeconomic impacts that normally accompany financial sector instability (such as volatility in economic growth and high inflation). 1 This arises because the poor have fewer and less diversified financial assets than the rich that make them particularly vulnerable to macroeconomic shocks. For example, rich households are more likely than the poor to have assets indexed to inflation. A recent IMF working paper estimating the quantitative impact of financial sector development on poverty in 6 developing countries found that: (i) financial sector development raises economic growth and reduces poverty; (ii) financial sector development directly reduces poverty by raising the investment and interest incomes of the % poorest households; and (iii) financial sector instability directly reduces incomes of the poor thereby raising poverty. 2 Financial sector 1 See P. Romer. 1993. Inflation and the Poor, Journal of Money, Credit and Banking, 33(2), pp. 16-78. 2 G. Jeannwney, S. and K Kpodar. 8. Financial Development and Poverty Reduction: Can there be a benefit without a cost?. IMF Working Paper #62. Washington, DC. The authors estimated quite large coefficients on the financial sector development variable a % increase in the broad money (M3) to GDP ratio raises the incomes of the % poorest households by between 3 and %.
reforms that aim to mitigate risks of financial sector instability help reduce the vulnerability of the poor or near poor falling into poverty arising from financial sector crises. Figure 1: Transmission Channels from Financial Sector Development to Poverty Reduction Financial Sector Development (Measured by increasing share of financial assets or M3 to GDP ratio) Economic + Growth + Poverty reduction + +/- - + - Poor households inclusion in the modern financial sector (Measured by increasing savings rates and interest income of the % poorest households) Financial Sector Instability (Measured by large variations in M3 to GDP ratio) + = positive impact, = negative impact, GDP = gross domestic product, M3 = broad money supply Source: Asian Development Bank. 4. Financial sector development can also cause episodes of financial sector instability that hurts the poor. Financial sector instability can arise at different stages of the financial development process. For example, financial system instability may arise during the earlier stages of financial sector development if there is an inadequate prudent financial regulatory and enforcement architecture. Improper policy responses to financial crisis can hurt the poor. For example, unwarranted bank closures tend to hurt the poor the most by exacerbating problems with the payments system and loss of deposits. Hence a well designed deposit insurance scheme that minimizes moral hazard is an important policy instrument to protect the poor from financial sector crises.. Financial sector development is associated with economic advancement in Asia. The experience of Asian economies is consistent with international empirical findings on the nexus between financial sector development, growth and poverty reduction. Figure 2a shows a scatter diagram relating financial sector development to economic development of several East Asian economies. It is apparent from the figure that there is a strong positive correlation between financial sector development and economic advancement in East Asia the correlation coefficient between the two indicators is high at.9. At one end of the spectrum, Cambodia and Lao PDR have low per capita incomes and low financial sector development. At the other
end, Republic of Korea, and Malaysia have higher per capita incomes and more advanced financial sectors. Figure 2: Financial Sector Development, Per Capita Incomes and Poverty Reduction in East Asia (a) Financial sector development and per capital incomes L o g p e r c a p it a l in c o m e s 4. 4 Thailand 3. Indonesia Philippines 3 Cambodia 2. 2 1. Lao Viet Korea, Rep Singapore Malaysia 4 Financial sector assets to GDP % (b) Financial sector development and the incidence of poverty P o v e r t y r a t i o 4 Cambodia 3 2 1 Philippine Lao Viet Nam Thailand Indonesia Korea Rep Malaysia 4 4 Financial sector assets to GDP % Notes: Financial sector development measured by the ratio of financial sector assets (bank loans, bonds, and stock market equity) to GDP. Economic e advancement measured by per capita incomes. Poverty measured by the headcount to total population. Source: CEIC and ADB staff estimates. 6. Financial sector development is associated with continuous poverty reduction in Asia. Figure 2b shows a scatter diagram matching financial sector development and the incidence of poverty in East Asia. It is apparent that poverty rates are much lower in economies with more advanced financial sectors the correlation coefficient between the two variables is -.88. Figure 3a shows the trend in economic growth and poverty reduction in Thailand since 1988. High and sustained economic growth in the 198s and the first half of the 199s (averaging around % per annum) resulted in an impressive reduction in the incidence of poverty both in the urban and rural areas. The national poverty rate fell from 32.6% in 1988 to 11.4% by 1996. Rural poverty fell from 4.3% to 14.9% during the same period and urban poverty fell from 21.8% to.8%. The financial crisis in 1997 and the associated negative macroeconomic impacts resulted in an increase in poverty that continued for four years from the time of the onset of the crisis.
Figure 3: Economic Growth, Financial Crisis and Poverty in Thailand, 1988 to 6 (a) Growth, poverty and the financial crisis (b) Income distribution by income quintile 3 Asian financial crisis 1 6 2 P o v e r t y r a t e % 1 1988 199 1992 1994 1996 1998 2 4 6 8 - - E c o n o m i c g r o w t h r a t e % 4 % t o t a l in c o m e -1 Low income Low-middle Middle Middle-high High income B a h t p e r a n n u m Poverty Incidence Economic Gowth Share of total income Per capita income (c ) Debt and savings rates by selected income (d) Share of households with financial assets groups above $ by selected income groups 8 % o f a n n u a l h o u s e h o ld in o c m e 7 6 4 Firm General Clerical/production Debt to income Gross savings rate Professional/technical % h o u s e h o ld s w it h m o r e t h a n $ 1 a s s e t s 8 6 4 Farm General Clerical/producton Professional/technical Notes: Farm and general proxy for low income, clerical and production proxy middle income and professional and technical proxy high income. Source: CEIC, the Thailand 7 National Household Socio-Economic Survey, National Statistics Office, and ADB staff estimates. 7. Income and financial asset distribution is relatively skewed in Thailand. Almost % of total household income emanates from the percent richest households in Thailand. Conversely, the percent poorest households account for.7 percent of total household incomes (Figure 3b-d). Consequently gross savings rates of the poor are low. Also, low income households holdings of financial assets (bank deposits, bonds, shares etc) are very low with only 8 percent of low income households reporting total financial assets more than $. In contrast more than 6% of higher income households report financial assets greater than $. While low incomes are a major reason for low rates of savings, the relatively shallow
depth of the capital market, high transaction costs in the capital market and limited range of savings products available to the poor are also factors that explain low rates of savings and financial asset holdings among the poor. 8. The Capital Market Development Program has a positive impact on poverty reduction through the creation of direct and indirect benefits to poor households (Table 1 summarizes the transmissions). It will contribute to sustainable reduction in poverty in the short and medium term through three channels. The first channel is through supporting higher and sustained longer term economic growth. By developing the domestic bond market, expanding the stock market, relaxing exchange rate controls, and introducing new financial sector products, domestic financing of public and private investments will increase thereby supporting higher economic growth. The second channel is through inclusiveness of the poor in the modern financial sector. By developing new savings products (such as the retail savings bond) and the national pension scheme and expanding its coverage to the poor, the savings rate and interest income of the % poorest households will increase over time. Developing the secondary mortgage market will generate financing for lower cost housing and benefiting the poor. The CMDP and the Government s Capital Market Master Plan includes planned activities and programs for increasing Thai households financial literacy and awareness of savings products will complement these reforms. The third channel is through improving the regulatory framework for financial sector stability. The CMDP includes several measures for strengthening financial sector stability including enhancing the surveillance and enforcement capabilities of the SEC, establishing the deposit insurance agency, and establishing a coordination mechanism comprising the key financial sector regulators to better detect systemic risks to the domestic financial sector and more effective enforcement of financial sector regulations. 9. The CMDP Design and Monitoring Framework include performance indicators for inclusiveness of the poor in the modern financial sector. These indicators include improved savings rates and holdings of financial assets of the low income households.
Table 1: Poverty Impact Assessment The CMDP will contribute to sustainable reduction in poverty in the short and medium term through three channels. The first channel is indirectly through increase domestic financing of investment to higher economic growth and related opportunities that lead to poverty reduction. The second channel is the increase in financial sector stability through strengthening the financial sector regulatory architecture. The third channel is through increased inclusiveness of low income and poor households in the financial sector development process primarily through increase availability of saving products, increased coverage of pension programs to the poor, and financing for low cost housing. Channel of Effect Effects on the Poor General Specific Direct Short Term Indirect Short Term Medium Run Mitigation or Enhancement Measures Access to Increase in private and Investment will create The Government s Capital Market Master Plan 9- deepened Increase domestic public investment will employment and 13 provides comprehensive measures to support financial financing of public support expansion of generate earning capital market development for economic growth. It markets and and private near-term economic opportunities for the low covers eight areas as noted in para. 6 of the main text investment investment This opportunities and growth. income households and of the RRP and elaborated in the summary sector opportunities will be aided by the poor. analysis web linked document 2. developing the domestic bond market, expanding the stock market, relaxing exchange rate controls, and introducing new financial sector products (such as risk mitigating Access to strengthened financial markets and sector stability financial products) Improved coordination among financial sector regulators, enhanced regulatory and enforcement capabilities of SEC, deposit insurance regime, among other measures will support financial Improved macroeconomic stability (i.e., low inflation and low growth volatility) will reduce risks of external shocks to low income households and the poor. In parallel with the Capital Market Master Plan is the Government s Financial Sector Master Plan phase II (-14), also approved in 9, supports financial system stability. The Bank of Thailand (BOT) in coordination with the Ministry of Finance (MOF) formulated the master plan. It shares the core objectives of the Capital Market Master Plan: (i) reduce system-wide operating costs; (ii) promote competitive financial access and (iii) strengthen financial infrastructure.
Channel of Effect Effects on the Poor General Specific Direct Short Term Indirect Short Term Medium Run Mitigation or Enhancement Measures sector stability Access to assets including capital and know-how Poor to benefit Interest and other from financial investment income of services primarily poor households savings products increase. that increase their lifetime income and enhance their ability to undertake profitable investments and other activities. Increase household savings lead to increase access to finance for investment activities and SME start-ups. Expanded pension coverage to the poor and low income families reducing their probability of falling into poverty in old age. Growing secondary mortgage market will generate financing for low cost housing benefiting low income families and the poor. The government and industry recognize the limited investor base of about 2 million investors (out of a population of 6 million persons) and the need for greater social inclusiveness in capital markets via individual investments as well as pensions. A number of planned activities under the CMDP and the Government s Capital Market Master Plan will be carried out to improve the public s financial literacy, including low income families. The SET has established a subsidiary, the Capital Market Development Fund, to provide investor education and industry training. The Fiscal Policy Office has developed an education strategy to raise awareness of the need for savings and capital market investments (both equity and fixed-income products) as vehicles for pension savings). The strategy is being implemented. Net Impact Channels of effect. The CMDP aims to expand, diversify and support a stable capital market leading to increased domestic financing of investment through improved and prudentially sound capital market where market participants operate efficiently and innovatively. This in turn will lead to: (i) higher and sustainable economic growth and employment creation: (ii) increase savings rate of the % poorest households and (iii) higher incomes of the % poorest households. Time dimensions. The immediate impact of investment will be economic growth and jobs. Over the medium term, an expanded and diversified capital market will increase inclusiveness of the poor in the financial sector development process and benefit them primarily through increase availability of savings products, development of a secondary mortgage market for financing low cost housing, and expanded coverage of pension programs for the poor. Crucial Assumptions Global financial markets stabilize and the domestic political environment stabilizes over the longer term. ADB = Asian Development Bank, BOT = Bank of Thailand, CMDP = Capital Market Development Program, MOF = Ministry of Finance, SEC = Securities Exchange Commission, SET = Stock Exchange of Thailand. Source: Asian Development Bank.