Week of July 19, 2019

1. The Great Convergence: I want to tell you about a young man in his early 20s. I'll call him M. He has a high school diploma, but it's from a school system where students don't tend to learn very much in the upper grades. M has a semi-skilled job, but it's tenuous and the hours are pretty unpredictable. Public transport in his neighborhood is poor, so he borrowed some money to get a "minimum viable vehicle" in order to get the job. His connection to the formal banking system is negligible. His biggest goal is to save up some money for a better apartment--where he lives now is as safe and reliable as his vehicle, which is to say, not very. He's been saving up for that for awhile, but he keeps his savings with his grandmother. The combination of ups and downs and needs from his extended family has kept that savings from growing much, if at all.
Based on that description, there is no way to tell if M is Manuel from Puebla, Melokuhle from Cape Town, Mohammed from Dhaka, Mentari from Jakarta or Michael from Baltimore. There has been tremendous progress in reducing poverty(and yes in financial inclusion) in most of the world over the last few decades. Meanwhile, in the US, there has been tremendous growth in inequality. More than that, the US economy and the labor market in particular has become much more like that in developing countries. The result is a great convergence: For the bottom 40% of the income distribution in the US, the economic reality they live in is more like that of Mexico, South Africa or Indonesia than the economic reality for the upper part of the income distribution.

2. The State of the US and the World: From a financial inclusion standpoint, there are fewer and fewer meaningful differences in the challenges faced by middle income countries and the US, at least if we care about that bottom 40% of the income distribution. Below is a chart I quickly made based on the latest Findex data, which helpfully breaks out the US lower 40%, comparing it to middle income countries.

Global Financial Inclusion.png

Just taking it at face value, you can see that the differences on a variety of financial inclusion metrics aren't that big. Take a close look particularly at the "No source of emergency funds" metric. Yes, the US has more people with no source of emergency funds than middle income countries on average. The one metric that stands out is the use of formal credit, but that difference is almost certainly due to credit cards. As digital credit grows rapidly in the countries where mobile money systems are functional, expect that gap to close dramatically.
The financial inclusion challenge for many middle income countries is rapidly shifting from one of expanding access to formal services broadly to issues of consumer protection for the masses, ensuring that services offered are appropriate and safe, and of reaching the last mile. Sound familiar?

3. The Corrupted Economy: But there's another part of this story that is less about financial inclusion or exclusion defined narrowly, and more about how the economy functions and what that means for growth, development, opportunity, mobility and even social cohesion.
When we think about the challenges of growth and development in middle income countries the conversation is often about institutions, about access to good jobs, about quality of education, about opportunity and economic mobility for the average citizen. The general understanding is that in these countries there is one set of rules and opportunities for those who are already wealthy, those connected to power (economic and political), and everyone else. Getting a place at a university, getting a government job, getting a formal job at an international, making a powerful friend are like winning lottery tickets that can transport someone from one class to another--but they are allocated like winning lottery tickets. Getting one is a factor of luck and divine intervention. For most everyone not already part of the elite, there is little prospect of upward mobility absent a lottery ticket. Even if you follow the rules, there's little reason to believe the institutions or the powerful are going to follow the rules.
Just as the description of M above applies equally well people in middle income countries and the US, this description of the how the economy and opportunity function are clearly true of the United States. Access to opportunity and mobility is a factor of where you live, and what color you are. Access to justice is a factor of how much money you have and what color you are. Access to a quality education is a factor of how much money you have, which determines whether you get to live in a school district where students learn or one where they don't (and don't you dare break the rules to get access to a good school).
What if you try to follow the rules? Well, you end up with predatory financial products that strip your family of wealth. Or you find out that all the years of hard work were for naught because you trusted institutions to do the right thing. Or you find out that the education you paid for isn't really worth anything and doesn't get you a job with a path to opportunity, just enriches those who deceived you.
Meanwhile, there is a different set of rules for the upper part of the income distribution. Consider just the first two stories of one particular day of Matt Levine's newsletter. First, if you are a very wealthy energy trader and you make a financial mistake, don't worry. There's a system so that you don't bear any consequences. And if you're a wealthy investment banker, don't worry about actually needing to compete for lucrative contracts--the whole system is arranged so that everyone gets a piece of the largess.
But the stories about how corrupt--corrupt in the sense of not being governed by a set of fair and equitable rules--the American economy has become abound. All you have to do is look around.
Say you're a CEO and are getting divorced. That's bound to be terrible for your net worth right? Nope. The company will fix it for you. Or say you're charged with the sad but sacred duty of ensuring that the corporate bankruptcy process is fair to the claimants. It's very important that you don't manipulate that process for your own gain right? Nope, you can do that and without consequence. Or say the Federal government has a program to make sure that lower income people can file their taxes for free, and even goes so far as to simplify the process for a lot of people. That will be good for you right? Nope. A mammoth company will manipulate the whole process to make sure you never end up at the free filing site, and then will use its data to figure out how to force the most people into using a paid version of their software so the whole thing ends up costing you more money. Meanwhile, even pop culture is organized around an elaborate set of corrupt relationships that allow the few to profit wildly.
Even philanthropy is not immune--the fastest growing part of the industry is a way for donor's to take all the benefits of donations immediately while not actually giving any money away, and enriching large asset management companies.

4. American Unexceptionalism: By the way, those concentration camps are still open. Which is another way of pointing out that the great convergence has happened in many different domains. The US economy and it's political system operate far more like our mental models of developing countries.
I'm going to close this edition of the faiV with a link to something that I think everyone concerned about the state of the United States and of the world, and how to respond should read and consider. Last year, Will Wilkinson of the Niskanen Center has pulled together a wide range of research that provides a compelling explanation of how we've come to this moment politically in the US and in many other wealthy and less wealthy nations. It doesn't address what I'm calling the corrupted economy in the US, but if it's right, it should affect how we think about possible paths to fixing things.

5. That's All Folks: Wasn't that enough?

This  Pearls Before Swine  comic comes closest to summing it all up. I'm glad I wrote this in the middle of summer and that many of you will be able to go out in the sunshine, and then get back to work making the world a better place.  Source .

This Pearls Before Swine comic comes closest to summing it all up. I'm glad I wrote this in the middle of summer and that many of you will be able to go out in the sunshine, and then get back to work making the world a better place. Source.


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