Current Economic Affair

Much of the political discussion surrounding the $700 billion bailout passed by Congress last Friday has revolved around how the plan will affect ordinary “Main Street” Americans. Yet the financial crisis has had an impact world wide. Will the economic “base of the pyramid” — the three to four billion people in the developing world who earn under $3,000 per year — feel the pain?

It is estimated that large portions of many developing countries’ GDPs are held in the informal sector. In Nigeria, for example, it is estimated that two-thirds of the country’s economic output takes place outside of any economic and legal regulation. Unfortunately, this means that many people developing countries (90% in Nigeria, for example) have the dubious “advantage” of being unbanked. They draw income, pay expenses, and hold savings in cash and rarely engage with the formal capital markets in any direct way. While they may not be adversely affected by the financial crisis, people in developing countries are affected by other issues, such as the increase in food prices. That cost was up 40% in 2007 alone according to the UN Food and Agricultural Organization and it has effectively lowered the income of millions of people already living without a financial cushion.

The fact remains that an enormous swath of the world’s population has never had access to the wealth-generating power of capital markets that we, until recently, have taken for granted. This should prompt us to consider how we can best help the world’s poor access the wealth-magnifying capacity of well regulated formal financial markets without exposing them to the type of reckless behavior demonstrated by of some of the major American financial institutions in recent years.