Diagrama causa-efecto

Mostly developed in the field of geography, the spatial view supports the idea that poverty is a result of structural asymmetric relations. But based on the investigation of the structural dynamics between the financial system and low income populations, it is also argued that a state of financial exclusion reinforces that asymmetric insertion, and therefore poverty, due to a spatially-mediated mechanism. This way, promoting FI would not eliminate poverty, but it would eliminate that reinforcement mechanism.

According to Leyshon (2009), the first academic references to redlining practices date back to David Harvey in the 1970’s (Harvey and Chatterjee, 1974). The phenomenon literally refers to:

“drawing a red line around areas on a map within which borrowers and properties were to be denied funding, because they were deemed either to have too high a risk of default or that the quality of the area was such that the properties that were borrowed against might decrease in value.” (Leyshon, 2009, p.153).

The basic idea was that, if access to credit was largely determined by income and wealth, the geography of income and wealth would determine the geography of access. A renewed interest in such issues came in the early 1990’s with the work of Dymski and Veitch (1996), two economists interested in the spatial distribution of finance. From this seminal work, a vibrant literature emerged. Using Los Angeles as a case study, the authors investigated the structural causes of the deficient access to mainstream financial institutions in poor communities in the post-World War II period, and its consequences for the population affected. They stressed that the geography of income and wealth was linked to a racial geography. In addition, they argued that a severely regulated institutional environment was largely responsible for the fact that a geography of income/wealth/race determined a geography of access. The relation between those two spheres was circular – in other words, rich areas tended to get richer, while poor areas tended to get poorer due to redlining.

According to Dymski and Veitch (1996), the process of financial deregulation that happened in the 1980’s did not decrease exclusion. On the contrary. The deepening

of financial disintermediation meant that an increasing proportion of firms sought funds directly in the capital market. As a result, banks lost customers and were forced to look for new business strategies. A way out was found in international lending. In the process, there was a large-scale downsizing of the number of branches to face cost pressures, as under the New Deal big clients implicitly subsidized the small ones. The rationalization of the branch network was aided by at-distance credit scoring technologies and new distribution channels, such as telephone and internet banking (Coppock, 2013). A renewed exclusionary process took place, this time being determined by market dynamics instead of state regulation. This way, the phenomenon of regional exclusion from mainstream financial institutions kept on deepening regional inequalities.

This process was thoroughly documented and analysed by a number of studies in other geographical contexts (Leyshon and Thrift, 1993, 1994, 1995; Pollard, 1996). In this literature, the concept of “financial exclusion” was coined and generalized, referring to a process by which economic agents were denied access to the financial system. The evidence was a wave of bank branches closures sweeping industrialized economies. The UK had 36% of the branches closing its doors between 1989 and 2003, while in Australia the estimate is around 20%, considering the 1981-1998 period (Leyshon et al, 2008). Moreover, the closures were not uniform in space. Rural areas were severely affected. In Canada, for example, 75% of rural communities were classified as moderately or highly vulnerable to withdrawal from banking institutions. And within the urban space itself, the inner-cities were much more affected by the process when compared to affluent suburbs (Leyshon et al, 2004).

Leyshon et al (2004) explain the circular movement of poverty accentuation by theorizing about the coexistence of two "ecologies" within the urban space, namely the affluent suburbs and poor inner cities. The super included suburbs were equipped with a dense financial infrastructure. The main ways in which those areas benefited were through increased banking competition; and privileged access to credit and its spillover effects. Regarding the latter, while residents of inner cities were able to make deposits in banks, they had their credit claims denied much more often. In practice, the

consequence was a transfer of resources from poor to affluent regions. This way, the suburbs flourished with incentives to business development; and the continuous flow of resources sustained the market value of properties, by supporting demand and heritage conservation – widening regional disparities.

Another set of studies focused on the strategies used to resist the credit shortage, which Fuller and Jonas (2003) describe as the formation of “alternative financial spaces”. These spaces most commonly refer to credit unions (Fuller, 1998; McArthur et al, 1993), community development banks (Barnekov and Jabbar-Bey, 1993; Taub, 1988) and local exchange and trade systems (Lee, 1999; Williams, 1996, Thorne, 1996). Populations that did not have these options available ended up finding themselves greatly exposed to the action of moneylenders and loan sharks, which left an important role for the investigation of their modes of operation (Leyshon et al, 2006).

In terms of policy prescriptions, the use of direct state support to open up a wider space for those alternative financial institutions is a recurrent suggestion (Pollard, 1996). But the use of indirect state intervention to incentivize mainstream financial institutions as a whole to include low income groups is also highlighted. For example, the literature suggests that the state could facilitate cooperation between mainstream and alternative institutions or incentivize the creation of not-for-profit divisions within mainstream financial providers (Leyshon et al, 2004). This latter point approximates the policy prescriptions of geographers to the ones of the market approach, even though these schools of thought start from very different starting points.

In sum, the construction of a more inclusive financial system is supported by the spatial approach – not as a way of eliminating poverty at its roots, but as a way of fighting the feedback mechanism that reinforce the power asymmetries in class and race relations that cause poverty10. Therefore, even when relational poverty is assumed, a more inclusive financial system is one of the policy prescriptions. The

financialization literature, in turn, adopts a much more critical vision and shows that modern processes of FI did not eliminate that feedback mechanism. This literature is explored next.