TJP

Lack of Efficient Financial Markets Creates Income Disparities

Byron A. Ellis

November 13, 2007

Governments in many U.S. central cities, as well as African countries, do not appear to understand the importance of developing financial markets. As a result, they are not able to match saving-surplus economic units in their communities with citizens that have promising opportunities.

Additionally, many of these governments do not invest in intangible assets, such as education, training, health, and labor mobility. All of these intangibles enhance individual and collective productivity.

Financial assets result from the savings of economic units: citizens, organizations, and governments. It is the difference between current disposable income and current expenditures (consumption).

Financial markets are necessary for the efficient allocation of savings in an economy. For example, savings may be used for investment in real assets (i.e., factories, real estate, warehouses, etc.) or for consumption. Such investment creates community employment and consumption. In the absence of efficient financial markets within a community, capital formation will be scarce and the community productive resources, land, natural resources, and workers will be underutilized.

The income gap between central city residents and the larger community is due to the underutilization of central city resources. As a result, the income potential of African Americans diminishes. And, this phenomenon is occurring even in central cities that have seen significant income growth in the general population.

Many have attributed lack of African American capital formation and income differentials to discrimination. However, Sowell noted, in Markets and Minorities, Basic Books, Inc., 1981, that ethnic minorities income differ widely among themselves, ranging from below to above the national average. Therefore, it is difficult to argue that discrimination can account for the income of minorities earning above the national average. Moreover, capital formation within central cities is not contingent on the larger community; rather on it is a function of community behavior.

Sowell also argued that other factors affect income discrepancy between groups. He noted that one reason for intergroup differences that is often overlooked is that some people invest more time in work than others. Lack of know-how and inability to collaborate within groups and across groups is another contributing factor to the income gap.

So, how can central city, as well as Africans, governments narrow the income gap between the citizens that they govern and the larger community?

Clearly, central city, as well as African, governments need to have a good understanding of macroeconomics and finance. Additionally, they must ensure public investment in education, training, health, and labor mobility. Likewise, they must establish efficient financial markets and encourage capital formation within the community.

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