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Forging a Strong Path Forward to Boost Global Economic Immunity

Power of Ideas
Forging a Strong Path Forward to Boost Global Economic Immunity

In recent years, the global economy has experienced a series of sudden exogenous shocks—the COVID-19 pandemic, the visible war in Ukraine, and global monetary activism. These events exposed not only how fragile the markets are but also the extent of financial and societal inequality that underpins many of the world’s most advanced economies and the threats to global economic immunity.

As jitters around a forecasted recession and uncertain economic climate continue to reverberate, now, more than ever, is the time to better understand how to boost economic immunity, to help geographies around the world become more resilient to these challenges, and to forge a path toward a stronger global environment that enables greater financial inclusion.

To do so, we need to understand the connection between economic immunity and financial inclusion, which is a powerful gauge of which markets around the world are best (and worst) positioned to navigate risk and withstand future financial stress.

Financial inclusion can provide investors clues about markets set for more rapid, inclusive growth.

Measuring Economic Immunity

Through our 2022 Global Financial Inclusion Index, we analyzed 42 global markets to understand the level of financial inclusion support in their populations.

Once governments establish safety nets to support fundamental needs, the Index suggests there are three phases of the evolution of financial inclusion within a given market, which, together, can create a virtuous circle of enhanced financial security.

  • Employer support. Businesses are the primary source of financial guidance and support for employees. In this first phase, many governments lack the resources and infrastructure to provide this comprehensively at a state level.

  • Government support. When the business environment in the market matures and starts fueling a stronger economy, it gives the government greater firepower and resources to introduce measures that promote financial inclusion.

  • Financial system support. These measures lay the foundation for the third phase: Supportive employers and governments help drive progress, complemented by a more developed financial ecosystem, enabling greater participation by diverse groups.

Of course, for the virtuous circle of financial inclusion to remain self-reinforcing, employers, the government, and the financial system all need to keep evolving as their economy—and their society—develops. If a fracture emerges in one phase, it will inevitably impact the others and risk breaking the cycle.

Financial inclusion can provide investors clues about which markets may be set for more rapid, inclusive growth. Most importantly, it can indicate which markets are best built for economic immunity and are less likely to be disrupted given the invisible strength that develops from this model.

It also underscores how and where societies should focus their financial inclusion efforts to become more resilient (i.e., immune to financial shocks).

Thailand and Malaysia: Strong Prospects for Economic Immunity

Both Thailand and Malaysia are examples of countries that rank highly for employer support and have greater balance across all three aspects of financial inclusion. (By contrast, rankings from countries in Latin America show financial inclusion has regressed.)

Thailand is a country that has undergone significant reforms at the state level. For a decade, the Thailand government has been working to establish a National Pension Fund. While it hasn’t formally launched yet, employers are attempting to get ahead of its introduction and are creating greater awareness among employees about the importance of a long-term savings culture that encourages credit creation. This exemplifies how to provide a benefit to all forms of society.

In Malaysia, there has been a push to create a retail investment culture by reducing state-owned stakes in government-linked companies and promoting equity purchases across the population to encourage intelligent risk-taking.

The global macroeconomic challenges will no doubt continue to put stress on these markets. Taking a long-term view, Thailand and Malaysia provide important insights about how economic immunity is possible across developing economies thanks to equitable, inclusive growth that allows them to support financial inclusion for their citizens.

While macroeconomic forces (e.g., inflation, trade, supply chains, demographics, etc.) always determine market growth or contraction, societies that invest in their populations, innovate, and take a balanced approach to financial inclusion should fare better when downturns arise.

The Global Financial Inclusion Index is a proprietary model output based upon certain assumptions that may change, are not guaranteed, and should not be relied upon as a significant basis for an investment decision. Principal Asset ManagementSM is the global investment management business for Principal Financial Group®. Principal Asset ManagementSM is a trade name of Principal Global Investors, LLC.