Financial Services Impact on Society
We at National Standard have received many responses to our articles here in The Guardian. One recent letter has asked how, in a world of grand international finance, the new entrepreneur or small business owner can get a better start in today’s world. One general answer is for government agencies to promote access to financial services for everyone. Reliable financial services are also necessary to implement the local portions of infrastructure projects.
Through worldwide financial systems, assets created, housed or saved in one country can be easily moved across nation-state borders. Capital in any form is kept in fungible form (usually in computer systems) that can be transferred and re-constructed in local currencies in every country.
While some constraints exist, and transfers may be subject to local reporting requirements, private banks (not including governments) in all countries have current, combined, inter-country debt exceeding $30 trillion, according to several reports. To what extent does access to this sort of capital enable a greater chance for unlocking the entrepreneur’s potential and enable him or her to reach the full human capacity? How can we measure the impact of financial services to a society?
The political theorist Martha Nussbaum has created a list what she terms human capabilities. These include life, health, bodily integrity, imagination and thought, emotion, reason, affiliation with humans and other species as one chooses, comprise the best goals of a functioning society. This “capabilities approach” measures quality of life (rather than purely financial figures such as GNP) by focusing on the distribution of resources and opportunities by asking: “What are the people actually able to do and to be?”
It may seem obvious that “access to money” would be beneficial, but money is merely a symbolic instrument, and the real question revolves around the uses to which money can be put under given circumstances. Providing access to capital and financial services is one form of empowerment. If people have a safe place to save money and develop accumulated resources, these financial services allow for planning for life’s challenges. Secure savings can reduce anxiety that hampers the individual fulfillment and personal growth at the core of a fruitful life.
There are several areas where access to financial services, including (a) credit and (b) a safe place to put savings, are particularly important.
Opportunities: the chance to invest in either economic or social opportunities. The missed chance is referred to as “opportunity cost” and reflects the inability to take advantage of circumstances as opportunities arise. Access to financial resources allows people to plan ahead and not miss the chance to take place in a new enterprise, or purchase an asset such as equipment or real estate.
Consumption patterns: the timing of income may not match the time when expenses arise. This causes inefficiency and worry. Income may be seasonal or erratic, while food expenditures, or housing expense, for example, need to be as steady as possible. Some expenses may call for large payments (for example, food in bulk, housing or clothing) that may not match income streams, and need either access to savings or credit.
Life Cycle Needs: Marriage, birth, deaths, illness, retirement, education, moving, all require planning and the ability to dispense relatively large sums periodically. If there is no access to financial services then it is tempting to spend money when you have it with no provision for the future.
Emergencies: We are all vulnerable to random events such as fire, crime, illness and accidents. Ideally, saved resources can be inadequate to meet disruptions in our plans, or at least to reduce the bad effects that emergencies have on everyone.
An older problem
Some anthropologists suggest that cities grew up around marketplaces. Marketplaces came first, and villages and cities were built around them to make them a safe place to transact business. Lewis Mumford, in his classic Origin of Cities, has posited that villages and cities arose in part to protect marketplaces from marauders. “The new urban institution, the market, was itself largely a product of the security of urban life.” Markets were protected so that commerce could take place. Enterprise needs to connect to a network of suppliers, buyers and sellers that can fairly distribute materials and keep safe the operation. Isolation means failure.
Mumford says: “Consider the basic extractive, regulative, and distributive capacities central to any modern state. When well-functioning, these basic state capacities, backed by a system of courts, administration, police and military, free us from the need to protect ourselves continuously from physical attack, guarantee access to a legally regulated market, and establish and stabilize a system of rights.”
The marketplace is the essential component of organized society from the beginning of civilization. That is where money was invented. Today there is the identical need to have a safe place in which to transact business, whether it is on the scale of a nation or on the scale of a city or of a village. Access to, and trust in, basic financial services can help not only entrepreneurs but entire families to lead a more organized existence. Regulation of financial institutions is important in order for people to have trust in the financial system.
Inexperienced borrowers are preyed upon by lenders who have no pretense of benefitting the entrepreneur. If usurious interest rates are charged and governments have either no prohibition against the practice, or the local nature of the financial service facilities makes tracking them impossible for government organizations, then it will be harder to use the financial system for society’s benefit.
International finance participants are always interested in a country’s ability to manage its own banking and financial institutions. The implementation of infrastructure projects will require reliable financial services at the local level. Access to financial services is a powerful but still emerging tool. It is just one degree of freedom in a complex social structure that remains important to people’s full expression.
Hugo Barreca is President at National Standard Finance, LLC located in New York City, NY. Mr. Barreca can be reached at HBarreca@NatStandard.com. www.NatStandard.com