Stijn Claessens and Erik Feijen
ALTHOUGH most countries experienced healthy per capita growth rates in the 20th century, extreme poverty and undernourishment are still widespread. In 2001, GDP per capita was, on average, about $21 a day, but more than half the world’s population lived on less than $2 a day and more than 1 billion lived on less than $1 a day. And in the late 1990s, on average, about 20 percent of the world’s population was undernourished—ranging from a high of 70.5 percent in Eritrea to virtually zero in most developed countries. For the international community, both measures of development, or the lack thereof, are critical. They form the number one Millennium Development Goal for 2015: reducing income poverty by half and reducing hunger by half from their 1990 levels. One could even argue that reducing undernourishment should take priority, given that being undernourished—when an individual cannot obtain enough food to meet dietary energy requirements continuously—defines a person’s chances of living.
For a long time, economists have known that higher growth and lower inequality reduce poverty and hunger. They have also known that a better financial sector helps growth and reduces inequality. And in recent years, studies have tied these together, showing that financial development reduces poverty. But does financial development also reduce hunger and, if so, how? Is it just because more developed countries tend to have better-developed financial systems and less undernourishment simultaneously? Or is it because financial sector development promotes economic growth, which reduces income poverty, allowing more people to eat better? Or is it because there are specific channels through which better financial services directly ameliorate undernourishment? The answers to these questions matter to the extent that they can help guide policy interventions aimed at greater financial sector development. We recently undertook a study (Claessens and Feijen, 2006) to explore these questions. Our findings suggest that increased agricultural productivity and investments in agricultural equipment hold the key.
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