Up to twelve doctoral candidates will be investigating how the current financial system exacerbates global inequalities as they complete the Finance and Inequality in Times of Polycrisis (EQUALFIN) doctoral degree program. In this interview with campus.leben, Barbara Fritz, professor of Latin American economics at the Institute for Latin American Studies and the School of Business and Economics at Freie Universität Berlin, and doctoral candidate Marla Schiefeling explain the structural difficulties that come with increased interest rates, foreign exchange trade, and risk assessments undertaken by banks.

Professor Fritz, what is EQUALFIN?

The doctoral degree program “Finance and Inequality in Times of Polycrisis,” or EQUALFIN for short, is a joint project between Freie Universität Berlin and HTW Berlin – University of Applied Sciences.

Together we are investigating the extent to which the global financial system contributes to reducing or exacerbating ongoing social, economic, and ecological inequalities. We are looking into inequalities between different regions of the world and countries, but also between individual population groups within individual societies, for example, women or people from an immigrant background. We want to better understand these mechanisms – especially with a view to the manifold crises that have been afflicting the world as of late.

Do you have a specific example?

One would be how central banks raised interest rates after the Covid-19 pandemic. Interest rates are increased in order to stabilize inflation. However, they slow down the economy because it makes it more expensive for companies to borrow money for investments.

For a long time this monetary policy was only considered from a macroeconomic perspective. It was assumed that all societal actors would benefit in the long run thanks to lower inflation resulting in growing trust in the economy, which would in turn lead to an eventual increase in investments. But if you look at the issue from a microeconomic perspective then it soon becomes clear that different segments of the population are impacted in different ways by increased interest rates.

We have known for a long time that the affluent reap much greater benefits from this than the poor. The latter are unable to save much money on the side – if any – so do not benefit from higher interest rates. They also usually do not hold as many qualifications and may even come under increased risk of unemployment because of the dampening effect higher interest rates have on the economy.

The latest research has also demonstrated that inequalities also appear across a number of other levels. An increase in interest rates will have a different impact on people depending on sociodemographic factors such as gender and ethnicity. We want to understand why this is.

What role does the financial system play in tackling climate change?

It is obvious that significant investments are needed in order to get the current climate crisis under control. Several trillions of euros would have to be spent for the transition to renewable energies to succeed. Companies that want to make these investments need partners who will finance them, but these are long-term investments that come with a whole set of uncertainties, especially when we consider the polycrises we are experiencing at present. Who can say what the world will look like in ten years?

This sense of uncertainty only intensifies when we take a look outside of rich industrialized countries. Billions will also have to be invested in the Global South – these states are not able to assume these risks by themselves. We need to think about what a financial system that would share the burden of such risks in a fair way would look like.

Ms. Schiefeling, you have been investigating this issue in your doctoral research project.

Yes, my research postulates that we should not just be tackling the symptoms in making the transition to a climate-neutral economy. We need to take a look at the structures behind decision-making, or in other words the role the financial system plays in how the modern economy works, as it is central in shaping which types of investments are possible, and profitable.

We have observed that the financial sector tends to favor short-term thinking, so that, for example, an investment in fossil fuel infrastructure remains profitable, which only works as long as the high societal costs of climate change are shifted to other actors, generations, and regions.

Which aspects of the financial system have you been exploring in detail?

I have been focusing on the international financial and monetary system. Right now I am especially interested in the accumulation of foreign currency reserves in the Global South.

States with a weak currency need foreign currencies in order to be able to conduct international trade and financial transactions. The same goes for financing important structural reforms – for example, the technology for renewable energies often has to be imported and paid for in US dollars or euros.

At the same time these states also need currency reserves to hedge against economic turbulence. Many poorer states have massive stockpiles of foreign currencies stored in their central banks to secure their own currency against sudden capital flight and devaluation, instead of using them to pay for imports.

Financial instability thus also results in important structural reforms falling by the wayside. I am hoping to look into how we can address this problem systematically by means of a cooperative financial system. I think that it is always important to highlight that our financial system has been created by humans – and that this means we can and should mold it to our needs.

---

Dennis Yücel conducted the interview.The original German version appeared in campus.leben, the online magazine published by Freie Universität Berlin.