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Finance-growth-and-inequality-bloomberg-london-17-june-2015

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Finance growth and inequality Bloomberg London 17 June 2015

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Finance-growth-and-inequality-bloomberg-london-17-june-2015

  1. 1. FINANCE, GROWTH AND INEQUALITY Catherine L. Mann OECD Chief Economist and G20 Deputy Bloomberg, London, 17 June 2015 www.oecd.org/eco/finance-growth-inequality.htm
  2. 2. 1. Secular trends 2. Finance and growth 3. Finance and inequality 4. Policies for a healthy financial future Structure of the presentation 2
  3. 3. SECULAR TRENDS
  4. 4. Finance has expanded considerably… 3 4 5 6 7 8 9 10 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 OECD Euro area Japan United States Share of financial sector value added in GDP, % OECD shows the simple average of OECD countries for which the data are available. 4
  5. 5. … with a massive increase in lending … 0 50 100 150 200 250 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 OECD Euro area United States Japan Credit by banks and other financial intermediaries, % of GDP OECD shows the simple average of OECD countries for which the data are available. 5
  6. 6. … and stockmarket funding 0 20 40 60 80 100 120 140 160 180 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 OECD Euro area United States Japan Stock market capitalisation, % of GDP OECD shows the simple average of OECD countries for which the data are available. 6
  7. 7. FINANCE AND GROWTH
  8. 8. • Reducing the need for self-financing, hence – allocating capital more efficiently – monitoring investments more professionally • Facilitating international trade • Smoothing cash-flow shocks • Facilitating monetary policy transmission Finance boosts growth by: 8
  9. 9. • Misallocating capital • Magnifying the cost of implicit guarantees • Distorting allocation of talented labor • Generating boom-bust cycles • Heightening the risk of regulatory capture Too much finance can harm growth by: 9
  10. 10. In practice, finance is a key ingredient of growth, but there are limits -1 -0.5 0 0.5 1 1.5 2 2.5 3 30 40 50 60 70 80 90 100 110 120 130 140 Percentagepoints Bank credit, % of GDP -1 -0.5 0 0.5 1 1.5 2 2.5 3 10 20 30 40 50 60 70 80 90 100 110 120 130 Percentagepoints Stock market capitalisation, % of GDP The estimated link with growth of a 10% of GDP increase in bank credit stockmarket funding Dotted lines show 90% confidence intervals. Bank credit also includes credit by other intermediaries. 10
  11. 11. Increases in bank credit and stocks have opposite growth effects -0.5 -0.3 -0.1 0.1 0.3 0.5 Increase in bank credit by 10% of GDP Increase in stock market capitalisation by 10% of GDP Estimated link with economic growth, in percentage points, of an: The error bars show 90% confidence intervals. Bank credit also includes credit by other intermediaries. 11
  12. 12. 1. Excessive financial deregulation 2. Too-big-to-fail guarantees 3. Bank lending outpacing bond financing 4. Household credit outpacing business credit Channels behind the negative link between credit and growth 12
  13. 13. Treating banks as too-big-to-fail appears to hurt growth Percentage point change in real GDP per capita growth when bank credit rises by 10% of GDP The error bars show 90% confidence intervals. 13 -0.4 -0.3 -0.2 -0.1 0 0.1 0.2 Countries where bank creditors incurred losses due to bank failure (2008-12) Countries where they did not
  14. 14. Increases in bank lending have a more negative link with growth than other debt -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 Increase in bank lending by 10% of GDP Increase in other debt by 10% of GDP Estimated link with economic growth, in percentage points, of an: The error bars show 90% confidence intervals. 14
  15. 15. Business credit has a more favourable link with growth than household credit -1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 Increase in credit to households by 10% of GDP Increase in credit to businesses by 10% of GDP Estimated link with economic growth, in percentage points, of an: The error bars show 90% confidence intervals. 15
  16. 16. FINANCE AND INEQUALITY
  17. 17. More finance can promote income • equalisation if: – It relaxes consumption constraints on poor – It encourages work in the formal sector • inequality if: – It flows more freely to the better off – Finance pays particularly dispersed wages Finance can shape inequality both ways 17
  18. 18. Credit and stock market expansions are linked with greater income inequality Change in Gini coefficients for disposable income for a 10 % of GDP increase in: The error bars show 90% confidence intervals. -0.1 0 0.1 0.2 0.3 Credit by banks and other intermediaries Stock market capitalisation Ginipoints 18
  19. 19. Credit is more unequally distributed than disposable income Credit and income shares across the income distribution in euro area countries, 2010 0 10 20 30 40 50 Bottom quintile Second quintile Third quintile Fourth quintile Top quintile Credit share, % Income share, % 19
  20. 20. Lower-income households find access to credit more difficult 0 10 20 30 40 50 60 70 Bottom quintile Second quintile Third quintile Fourth quintile Top quintile Percentage of households expressing difficulty in obtaining credit in euro area countries, 2010 20
  21. 21. The share of financial-sector employees rises with the income bracket Percentage of financial-sector employees in each percentile of the income distribution European countries, 2010 Percentile 0 2 4 6 8 10 12 14 16 18 20 0 10 20 30 40 50 60 70 80 90 100 21
  22. 22. Finance pays more than other sectors for similar profiles, especially at the top Estimated financial-sector wage premium across the income distribution, European countries, %, 2010 0 5 10 15 20 25 30 35 40 45 Bottom decile Second decile Third decile Fourth decile Fifth decile Sixth decile Seventh decile Eighth decile Ninth decile Top decile Dotted lines show 90% confidence intervals. 22
  23. 23. POLICIES FOR A HEALTHY FINANCIAL FUTURE
  24. 24. • Withdraw implicit too-big-to-fail subsidies – break-ups, capital surcharges, structural separation, resolution plans • Implement macro-level financial supervision – debt-service-to-income caps • Improve compensation practices – clawbacks • Reduce tax biases against equity – corporate income tax, lending to businesses (VAT) A healthy future for finance 24
  25. 25. Financial reform is compatible with inclusive growth Growth Equality Win-win Enforce strong macro-prudential controls + + Split TBTF banks or reduce TBTF support through other means + + Recuperate TBTF subsidies through taxation + + Income-enhancing Reduce the debt bias in corporate taxation + Reduce the bias against business loans in VAT + Trade-off Lower barriers to stock market financing + - 25
  26. 26. • Cournède, B., O. Denk and P. Hoeller (2015), “Finance and Inclusive Growth”, OECD Economic Policy Papers, No. 14. • Cournède, B. and O. Denk (2015), “Finance and Economic Growth in OECD and G20 Countries”, OECD Economics Department Working Papers, No. 1223. • Denk, O. (2015), “Financial-Sector Pay and Income Inequality: Evidence from Europe”, OECD Economics Department Working Papers, No. 1225. • Denk, O. and A. Cazenave-Lacroutz (2015), “Household Finance and Income Inequality in the Euro Area”, OECD Economics Department Working Papers, No. 1224. • Denk, O. and B. Cournède (2015), “Finance and Income Inequality in OECD Countries”, OECD Economics Department Working Papers, No. 1226. • Denk, O., S. Schich and B. Cournède (2015), “Why Do Implicit Bank Debt Guarantees Matter? Some Empirical Evidence”, OECD Journal: Financial Market Trends, Vol. 107. The following reports detail the results: 26

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