Financial Development and Poverty Alleviation in Developing and Emerging Economies

Poverty has remained one of the most significant challenges faced by emerging and developing countries. After witnessing the success of financial development in facilitating economic growth and improving social welfare in developed countries, emerging and developing countries have been striving to develop their financial sectors with the aim of replicating the success. However, the multidimensional nature of both the financial system and poverty, the quadrilateral relationship between finance, growth, crises and poverty, and the difference between country-specific characteristics altogether impeded researchers and policymakers from reaching a consensus on whether financial development is pro-poor. The literature on finance-poverty nexus received minimal attention over the last few decades, and existing literature has bifurcated into two main strands of views. One strand emphasises the positive effect of financial development through the direct and indirect growth channels, whereas the other focuses more on the negative indirect crisis channel and its associated costs for the poor during turbulent periods. The prior view tends to neglect the fact that crises are more likely to happen during economic booms being accompanied by financial development, and the effects of financial instability are exacerbated especially for countries with unsound financial system regulations and weak institutional performance. Once crises occur, the associated costs may pose a devastating effect on the poor. In contrast, the latter view overestimates the fact that crises are only occasional, and their adverse impacts on the poor are curable in the aftermaths if certain policies are appropriately tailored and implemented to minimise such effects. Thus, we are motivated to fill the gap by providing a comprehensive analysis that produces a unified approach for assessing the finance-poverty nexus. This approach is founded not only on a macroeconomic perspective that considers all channels, but also a microeconomic perspective to observe whether, on a household level, financial development is pro-poor