Expanding Financial Services for US-Brazil Trade Growth

 Increasing the total income of society through economic growth is one of the best ways to make people happier and less poor. You can improve the quality of growth even more by focusing on results in areas like health, education, and poverty. "Poor people must be given the tools to improve their lives, and governments must help them by making sure they can get the services they need" in order to reach these goals. Brazil has one of the most unequal income distributions in the world much more unequal than the average in Latin America or other upper-middle-income countries. This makes targeted poverty action even more important there. Brazil has a much lower income share for the bottom fifth of the people than the average for middle-income countries. The Brazilian government is very aware of these problems and has promised to cut the number of people living in extreme poverty in Brazil by half by 2015. So how can Brazil's banking system help get rid of poverty and unfairness? It is becoming more and more common knowledge that a stronger and more stable financial system helps the economy grow and lowers poverty.4 Deep and efficient financial markets encourage investment and total factor productivity growth by choosing and keeping an eye on projects, spreading risks, reducing information gaps, making better use of resources, and pushing people to find the best balance between scale, time frame, and technology. For Brazil, it has been shown that higher efficiency could have a big impact on growth (McKinsey Global Institute 1998).

When economies are strong, they can handle changes better

On the other hand, weak financial systems and the financial crises that follow have huge fiscal costs that cut into social spending and, especially if they are paid for by inflation, hurt the poor more than others. Argentina and Mexico, which are neighbors, have weak domestic financial markets that have made the problems in the international financial markets worse, which hurts the poor. It is thought that Brazil's economic problems in 1995 cost the country about 13% of its gross domestic product (GDP).5 Also, financial disasters that aren't handled well mess up the economy badly, lower capital stocks, destroy trust in banks, and slow down efforts to reduce poverty for a long time. Recent problems in Argentina (2002), Ecuador (1998), and Mexico (1995) have made poverty much more common (De Ferranti and Perry 2000). Brazil's financial system is by far the biggest in Latin America. It also has more financial intermediaries than its big neighbors in the region. At almost 140% of GDP, financial assets make up a lot of Brazil's GDP. In Argentina and Mexico, they only make up 81% and 68% of GDP, respectively.6 Brazil hasn't done nearly as well when it comes to financial depth as some big East Asian economies, like China, which has a financial assets/GDP ratio of almost 200 percent even though its per capita income is less than a fifth of Brazil's. 

The ratio of Malaysia's financial assets to its GDP is also 370 percent

But Malaysia's GDP per person is lower than Brazil's: US$3,390 versus US$4,350 in 2000 for Brazil. The interest spread in Brazil is one of the biggest in the world, and most loans are paid back in less than a year. Since at least 1999, the banking system has been very profitable and well capitalized, with capital rates ranging from 8.4% to 9.5%. But beyond the link between financial depth and stability, growth, and avoiding crises, can the financial system also speed up the reduction of poverty through targeted measures that make financial services more accessible to more people? There are big differences in income and wealth in Brazil, which may have shaped the country's financial system. It is the biggest in the area and provides a wide range of services to its customers. But figures show that only about 58 million Brazilians have bank accounts, which is only a third of the population. Another 80 million, or half of the population, are thought to be "bankable."7 Appendix Table A1.2 from the Central Bank shows that almost 30% of all towns do not have a bank branch. More than 70% of cities and towns in 7 states (out of 27) do not have a bank branch. These states are mostly in the north. A1.2: About 1,680 of the 5,600 municipalities in the country do not have any bank offices. Only about 1.5 million Brazilians, mostly those living in cities, can get basic banking services from the about 1,400 credit cooperatives. 

There are not many Brazilian households that can use more complex financial services

There are not many Brazilian households that can use more complex financial services like mutual funds or insurance goods. This is something that Brazil's government is aware of, and since 1999, they have been looking for ways to make it easier for more people to use banking services. Making it easier for people to get banking services should help both consumers and businesses get ahead and be happier.9 By saving money, people can protect themselves against times when they don't make much money or when their income changes without warning. They can also keep up their current level of spending.10 For example, for farmers in rural areas, funds are like insurance that protects them in case of drought or crop failure. Having savings also gives you a way to pay for future expenses, whether they are planned (like for a family vacation or the purchase of a big item like a house) or not. Access to savings and loans could also have longer-term effects on welfare by letting young people borrow money for things like school or other forms of physical or human capital, then pay it back and save for retirement as they get older.