Vision Of The Future: Financial Inclusion 2025 FOCUS NOTE - CGAP

5Trends ShapingEmerging Economiesto support growing populations, and might facenew challenges, such as higher unemployment andincreasing urban poverty.Financial inclusion can also be a means to an end.To better understand the potential for financialElderly populations will increase rapidly duringinclusion to contribute to poor people’s abilitythis time, influenced by increasing life expectancy.to participate in the economy and society, it isHowever, over half of the world’s population will stillimportant to consider broad trends that affect howbe under 35 in 2030 (Euromonitor Research 2015).emerging markets develop and are consideredFigure 6 illustrates the population distributions byrelatively predictable. This section offers a high-age group in select countries. The youth “bulges”level summary of these trends.in Latin America and India, and an even youngerpopulation in SSA, pose strikingly different agedemographics than in North America, Europe,The world’s population is becomingmore urban, with a youthfulpopulation in the South and anaging population in the NorthJapan, and China. This will most likely come withgreater risks of youth unemployment, educationchallenges, and concern for the future workforceof these regions.As shown in Figure 5, the world’s population ofover 7 billion people is expected to reach close to8 billion by 2025 (UNFPA 2013). While more thanGlobal poverty has declined, well-beingis improving, but inequality is on the risehalf of the world’s population live in cities today,this share is projected to reach close to 60 percentOver the past 40 years, global poverty hasin the next decade, with a particular acceleration indecreased:2 today fewer than 1 billion people liveAfrica and Asia (UNFPA 2013). Urban centers willin poverty compared to nearly 2 billion people inbe increasingly challenged to expand infrastructure1975 (World Bank 2016b). Globally, poor peopleFigure 5. The World’s Population TrendsPopulation Trends9(Projected)8World PopulationPopulation (Billions)76Today, 54% of world’s populationlives in an urban area543Urban Population38% of world’s population livedin an urban area in 19752Youth Population*10197519851995*Youth Population ages 10–24Source: World Bank and United Nations 2015.2 The World Bank defines poverty as living on less than US 1.90 per day.200520152025

6Figure 6. The Aging North and the Youthful SouthNorth AmericaFemaleMaleFemaleEuropeFemaleMaleLatin AmericaJapanMaleFemaleFemaleMaleSub-Saharan AfricaChinaMaleFemaleFemaleMaleMaleIndiaSource: UN Population Division, World Population Prospects, 2015.are predominantly rural, young, poorly educated,In fact, inequality has become a new challenge—and mostly employed in the agricultural sector;data show that inequality continues to rise in manythey live in larger households with more children.9countries in terms of both income and assets. ThisAs global poverty has declined, gross domesticlessens the pace at which growth enables povertyproduct (GDP) per capita has increased from lessreduction (Ravallion 2004). Economist Brankothan US 2,000 in 1975 to about US 10,000 todayMilanovic (2012) published a global analysis of the(World Bank 2015a).changes in real incomes across different populationsegments between 1988 and 2008 (see Figure 7).However, improvements in global poverty ratesHis analysis shows that the middle segments andand income levels have not been equal acrosshighest earners saw significant income gains,all regions. China’s economic growth over thewhile the poorest are only slightly better off thanpast 40 years has been the largest contributorin the past. It also provides evidence that thoseto reducing global poverty. In 1990, nearly halfearning between the 75th and 90th percentilesof the world’s poor lived in China. Today, justof the global income distribution have seen very12 percent of the global poor are Chinese. Morelittle increase in income. These earners are therecent progress in Indonesia and India has alsoglobal upper-middle class. They include many fromcontributed to overall poverty reduction. Today,Eastern Europe and Central Asia (ECA) and Latinthe concentration of poverty has shifted to SSA,America, as well as from rich countries (e.g., thewhere half of the world’s poor now reside (WorldUnited States and countries in western Europe)Bank 2016a).whose incomes stagnated (Kawa 2016). In addition,comparison of data with and without China showsGlobally, well-being of individuals seems to bethe large impact that Chinese economic growth hasimproving. For example, according to the 2015had in driving these trends.Human Development Report, the world has mademajor progress with human development over thepast two decades. Today people are living longer,Poor people continue to work inthe rural and informal economymore children are in school, and more peoplehave access to clean water and basic sanitation.Work is central to many elements of economicMore people are connected across local andand social integration in society. At a minimum,global markets because of digital technologiesit enables people to earn a livelihood and to gain(UNDP 2015). But much more progress needs tosome level of economic security. It also givesbe achieved, particularly in SA and SSA, amongthem a sense of dignity and worth (UNDP 2015).women and young people.Work also strengthens societies: it can build social

7Figure 7. The Elephant Chart, with and without China, Showing Real Income Gains(in PPP) at Different Percentile of Global Income Distribution, 1988–2008Real PPP income change (in percent)9080706050Without entile of income distributionSource: Milanovic 2012.cohesion and bonds. By working together, peoplemultiple sources. For example, over 20 percent ofcan accumulate knowledge, which is the basis forUgandan smallholder farmers derive income fromcultures (UNDP 2015).3remittances, 8 percent from retail/manufacturing,5 percent from services businesses, and 12 percentAlthough the importance of agriculture tofrom other wages.4economies may be lessening, it remains animportant source of work. According to theIn addition, most people working in developingFood and Agriculture Organization (FAO) (2016),countries are employed in informal jobs.5 This1.34 billion people globally are working in oraccounts for more than half of nonagriculturalseeking work in agriculture, and most of thisemployment in most regions of the developing worldwork is on family farms. The International Labour(WIEGO 2014).6 However, regional estimates hideOrganization (ILO) estimates that about two-thirdsgreat diversity within a region: informal employmentof the poor were employed in the agriculturerepresents 82 percent of nonagricultural employmentsector in 2012 (Figure 8). Most of this work is onin SA, compared to 66 percent in SSA and 45 percentsmall- and medium-sized family farms, which—asin MENA or 10 percent in ECA. Women are moreis often the case in developing countries—havelikely to be employed in the informal economy thanlimited access to resources and lower productivitymen (WIEGO 2014). And while new evidence shows(UNDP 2015). Thus, many agriculture workersthat the informal economy correlates positivelyneed to supplement their income with off-farmwith growth (Loayza 2016), it leaves many workerswork. CGAP research on smallholder farmers inwithout social protection or job security, which posesSSA confirms that these farmers earn income fromchallenges to combatting inequality and poverty.3 According to anthropologist E. B. Tylor, culture includes knowledge, belief, art, morals, law, custom, and any other capabilities and habitsacquired by man as a member of society (https://en.wikipedia.org/wiki/Culture).4 See CGAP web page, “Financial Innovation for Smallholder Families” mallholder-families).5 ILO defines the informal economy as all economic activities by workers and economic units that are—in law or in practice—not covered orinsufficiently covered by formal arrangements.6 For practical data collection reasons, the 15th International Conference of Labor Statisticians has recommended that agricultural and relatedactivities be excluded from the scope of informal sector surveys.

8Figure 8. Poverty, by Economic Sectorincreased (Figure 9). Middle-skilled jobs are oftennear the top of the income distribution in many100%low-income countries (World Bank 2016e).18.8In summary, a lot of progress has been achieved80%43in the lives of poor people over the past decade.18Poverty is declining, well-being of individuals isimproving, and more poor people are able to work60%than a decade ago. Many have increased access tofinancial services. However, a few trends persist orare emerging that could negatively affect progress.21.5Most poor people continue to be employed in40%agriculture, which is often not a sustainable source65.2of income in itself. Their employment continuesto be informal without offering much security.20%35.5The labor market is also becoming polarized,putting a large part of the workforce at risk. Anduse of financial services remains low. All of nts risk exacerbating the inequality thatis already quite visible in many parts of the world.Rising inequality may also have implications forServicesfinancial inclusion, because the focus on improvingaccess to financial services may not adequatelySource: ILO 2016.address it.Labor markets have increased thenumber of low-skilled and highskilled jobs, leaving the poor withfewer opportunities to move upIn light of these concerns, the new developmentpriorities with the United Nations (UN) SustainableDevelopment Goals (SDGs) have extended thefocus beyond poverty to tackle additional broaderdevelopment challenges including inequality.These broader priorities underscore the needPoor people tend to hold jobs that require mediumto understand how financial services can enableand low skills. According to ILO, in 2012, 53 percentachievement of broader development goals. Thereof the poor were employed in occupations thatis already some evidence that financial services aretypically require middle skills7 and 43 percentimportant enablers for some of the SDGs (Klapper,were employed in low-skilled jobs.8However,because of advances in technology, globalization,urbanization, and other structural factors like thedecline of unions (Santos 2016), the labor marketEl-Zoghbi, and Hess 2016).Forces Shaping theFuture of Poor Peopleis increasingly polarized, potentially leading togreater inequality. Machines, computers, and theCGAP’s driving question for the scenarios thinkinginternet are contributing to the decline in theexercise is: “In what ways will financial servicesnumber middle-skilled jobs in developing countries,influence inequality and economic participation forwhile the number of low-skill and high-skill jobs haspoor people by 2025?”7 According to ILO, middle-skilled occupations require post-secondary, nontertiary education, upper secondary level of education, or lowersecondary level of education (9 to 12 years). Examples of middle-skilled occupations include clerks, craft and related trades workers, plantand machine operators and assemblers, service workers and shop and market sales workers, and skilled agricultural and fishery workers.8 According to ILO, low-skilled occupations require a primary level of education (6 years) or less.

9Figure 9. Annual Average Change in Employment Share, 1995–20122.01.5Percentage points1.00.50–0.5–1.0–1.5–2.0Macedonia,P FG an YRua amte amPh Tu alarSo ilip keyut pinh eDA somM friin H ala caic o ysan nd i aR ure aM pub sau li cTa ritnz iu sU anikr aU ainga enSe d arbEl Bo iaSa livlv i aTh adai orlandIJa ndEgiyp Sr ma at, i L icaAr aab nkR aeC Bh p.os uttKa a anza Rikh caN staa nM mibon i agG oliaPa hanki astaBa Pe nrN ba ruic doaBo rag sts u awEt anhi aopC iahina–2.5High-skilled occupations (intensive in nonroutine cognitive and interpersonal skills)Middle-skilled occupations (intensive in routine cognitive and manual skills)Low-skilled occupations (intensive in nonroutine manual skills)Source: World Bank 2016e.The goal of the scenarios thinking exercise is to1. Will the spread of digital technologies and thedetermine how poor people participate in societydigitization of information flows benefit poorand the economy and how financial services willpeople?influence their participation over the next 10 years.The internet, mobile phones, and a diversity of toolsThe exercise considers many forces that alreadythat collect, store, analyze, and share informationcan be seen today. However, the degree to whichdigitally have spread quickly. The number ofa force will impact the livelihoods and well-beinginternet users has tripled over the past 10 years—of poor people, and the effect of that disruptionat the end of 2015, there were 3.2 billion internetare uncertain. We identified four forces that areusers (World Bank 2016e). On average, 8 in 10likely to have a substantive effect on how weindividuals in the developing world own a mobileanswer the driving question (see Box 1). The forcesphone, including those at the base of the pyramidwere distilled from a much longer list arising from(World Bank 2016e). In fact, more households inresearch and scenarios workshops.developing countries own a mobile phone thanhave access to electricity or improved sanitation(Figure 10).Box 1. Four Forces Identified forScenarios Thinking ExerciseBy 2025 . . .1. Will the spread of digital technologies and thedigitization of information flows benefit poorpeople?2. Will the globalization of capital, information,and ideas change the way poor people engagein society?3. Will poor people continue to move domesticallyDigital technologies have dramatically expandedthe information base, lowered information costs,and created information goods. They have helpedto reduce information asymmetries and increasetrust and transparency, thereby influencing howfirms operate, how people seek opportunities, andhow citizens interact with their government (WorldBank 2016e).and internationally?4. Will the changing world of work affect poorpeople?The volume of data in the world is increasingexponentially. According to the UN (2014a),90 percent of the data in the world have been

10Figure 10. Percentage of the Population with Access to Select Basic Services (1990–2015)% of the population100806040200199019952000Improved waterElectricitySecondary schoolImproved sanitation200520102015Mobile phoneInternetMobile broadbandSource: World Bank 2016e.created in the past two years. New technologiesbetween the elderly and youth. Access costs forhave spurred the volume, level of detail, and speedconsumers also differ greatly: for example, the costof making data available. Mobile phones, socialof a typical mobile phone service can vary as muchmedia, SMS, emails, internet search data, andas 50 times from one country to another (Worldfinancial transactions provide accrued sources ofBank 2016e). Some consumers who do not have a“big data” that reveal new insights that businesseslarge data footprint might be at risk of exclusion.and governments can use to more accuratelymarket to and serve people.Finally, the growth opportunity that digital servicesoffer comes with risks. For example, as largeThe potential of data also creates new challenges.companies increasingly own data on customers,For consumers, data present risks around privacy,there is a threat of excessive concentration of marketanonymity, consent, security, discrimination, andpower and rise of monopolies. A threat of greaterso forth. Data are often in the hands of companiesinequality also exists as digital technologies automatesuch as MNOs, internet providers, and digitaltasks, which in turn might exacerbate competitionplatforms that might be reluctant to share datafor low-skill jobs and push salaries to lower levels.out of fear of threatening customer privacy or theirAnd, there is a threat to citizens’ engagement andcompetitive advantage. Companies might alsoempowerment if governments leverage technologydecide to sell data without client consent.to control information (World Bank 2016e).In addition, a large portion of the populationIn summary, digital technologies offer excitingremains untouched by digital technologies.potential for poor people to be more connectedAccording to the World Bank (2016), nearly 2 billionwith markets, services, and information. They alsopeople do not own a mobile phone, and nearlyoffer the potential to break down geographical,60 percent of the world’s population does notcultural, and social barriers. However, certainhave internet access. Disparities also exist acrossassociated risks, such as the risk of marginalizingincome distribution, gender, location, and age. Forcertain segments, are important to consider,example, in SSA, women are less likely than men toparticularly for the poor. While it is clear that theuse or own digital technologies. A similar gap existscreation of new technological connections will

11Figure 11. Data Created Each Minute of Every Day in 2016150,000,000emailssent/received4,000,000Google searchqueriesreceived400 hoursof new videouploaded onYouTubeEvery minuteof the day3,000,000Facebook postsshared16,000,000SMS sent350,000tweetsSource: Adapted from Domo and Radicati 2016.accelerate in the future, there are a few noteworthyThe world has never been more connected byunknowns:commerce, communication, and travel than it istoday. But, the pattern of globalization is shifting Will the private sector make the necessary(Manyika et al. 2016).investment to connect people in underservedcommunities? Will the government provideAfter 20 years of rapid growth, global traditionalincentives for the private sector to do so?flows of goods, services, and finance are slowing Will connectivity become more affordable for allsegments?down. They reached similar levels in terms of dollarvalue before the 2009 recession but represented Will interfaces become more adapted tojust 39 percent of world GDP in 2014, compared toconsumers’ needs, capabilities, and behaviors?53 percent in 2007 (Figure 12) (Manyika et al. 2016). Will government regulation promote a competiti

Middle East South Asia Sub-Saharan Africa 69 51 94 51 14 46 34 Global Account Penetration: Adults with an account (%), 2014 Figure 3. Bank Account Activity, by Region Source: Findex 2014. High useM edium useL ow useD ormant East Asia & Pacific Europe & Central Asia High-income OECD economies Latin America & Caribbean Middle East South Asia Sub .