5 Financialization as a Determinant of Income Inequality: The Case of Eastern European Countries

The financial sector plays an important role in society and the economy. First, the financial sector provides a secure money savings. Second, it simplifies payments and other transactions. In addition, risk insurance is provided by the appropriate financial intermediaries. Finally, the financial sector plays an intermediary role in redistributing savings and channeling them into investment and real sector financing. The current stage of global economic development is characterized by financialization—an increase in the importance of financial motives and in the number of financial players, financial intermediaries, financial institutions in operations in the domestic and foreign markets; an increase in the share of the financial industry in the world economy, financial controllers in corporate management, financial assets among other assets, securities in circulation and shares among other financial assets; the stock market tends to be a market for corporate control in defining the corporate strategy and fluctuations in the financial markets to determine the business cycles. On the one hand, the development of the financial system is a positive phenomenon, which in the case of its reliability and stability guarantees the provision of all the necessary financial services, including meeting the needs of vulnerable group of population, such as people living in poverty. However, on the other hand, studies show the opposite effect of financial sector development, which is characterized by increasing inequality in the distribution of economic income. This has several manifestations. For example, financial products reward the wealthy and cost the poor, increasing the inequality gap; financial sector has moved into extracting rents from the real sector; capital markets system rewards short-term profit maximization instead of sustainable business practices, etc. The chapter analyzes the development of income inequality, driven by the growing role of the financial sector in the economy. The paper uses Eastern European countries as a case study, and provides a comparative analysis of the level of financialization in developed European countries and the Eastern European countries with lower levels of economic development, as well as a comparison of the impact of financialization on income inequality in the respective country groups. In addition, given the current development of the financial sector, which is under the influence of digitalization and is characterized by an increase in the technologization of financial services, the authors also examine the relationship between these phenomena, in particular between the level of digitization of the economy and the level of its financialization, and the level of technologization of financial services and income inequality.