[From World Bank PSD blog, 4 June 2013]
I am not at all sure I could live on a few dollars a day. Why would I think that those who do need financial education? Yet in any meeting or conference on financial inclusion, someone will clamor for financially educating the poor and all will readily nod. Please allow me to side-step the substance of the issue, for I have no new empirical evidence to bring to the table either way. What I find curious is why the idea that poor people are lacking essential financial literacy skills is so prevalent among the non-poor. Let me propose five reasons.
1. The poor mis-spend
Who hasn’t wondered why it is you can find Coke bottles in the poorest communities in developing countries? Who hasn’t had a pang of doubt upon seeing reams of shiny bags of candy hanging from the shabbiest stalls in the remotest villages? And you’re thinking: my parents didn’t buy me this stuff! Well, it might be because your parents had plenty of other ways to reward you and each other. Think toys, ski trips, family outing to a restaurant, gifts, etc. Next to these things, splurging one day on some candy and a Coke seems downright meaningless. But for many it might be the easiest way to create magical family moments, to transcend a dreary daily routine. If it helps keep the family going and united, it might be a bargain. We musn’t pass judgment on how the poor spend their money, for we cannot imagine the job that they are ‘hiring’ those seemingly superfluous products to fulfill.
A more extreme version of the mis-spending argument revolves around the drinking or other deleterious habits often observed in the field. I cannot imagine that such behavior could be cured by demonstrating the negative ROI on drinking. No amount of financial education will change this state of affairs, solutions must lie elsewhere.
3.The poor are making some clearly sub-optimal financial choices
A third reason why financial education may seem so alluring
as a policy prescription may have to do with our perceptions of how poor people
make investment rather than spending decisions. For instance, many poor people
like investing what little they amass into buying a couple of cows, and yet
learned researchers might show that those cows have a low, or even negative,
ROI. Again, are we sure that we are evaluating such decisions against the right
objectives? The poor person may not be thinking total returns and may not even
view the cow as an investment asset. Rather, it’s a way of making a little bit
of steady income appear every day, in a world where all other household cash
flows are uncertain: an insurance.
4. The poor will over-borrow
A product-specific argument for financial education is that people can harm themselves with too much credit. They might, but then again so might almost everyone else. Cycles of debt exuberance seem to be a fact of life, but they often ride broader socio-economic trends rather than individual ignorance (viz. global financial crisis). The poor are hardly uninitiated as regards debt, as they have lived for centuries borrowing from friends and neighbors and stores and money-lenders. It is true that modern finance may offer them more and easier credit options (such as the credit card) than they’ve ever had before, so we do need to put in place adequate consumer protection mechanisms that prevent lenders from placing credit irresponsibly with over-indebted households. Consumer education is a component of that, but that alone cannot tame the kinds of credit cycles that we have seen over and over again.
5. The poor don’t know how to use formal financial products
A final general argument for financial education stems from how they interact with formal financial products. Let’s assume, in Portfolios of the Poor fashion, that poor people are actually quite savvy in using the informal financial options that are available to them. Still, these options are often not very good, and we need to expose them to formal financial options. Yet when they are given modern electronic accounts, even if complemented with convenient access points nearby, we often observe that they don’t use them much, if at all.
The basic fact we need to face up to is that when people receive an electronic payment into their (bank or mobile money) account, the universal tendency is to withdraw the money immediately and in full, beating a hasty retreat back into cash and the informal. Why can’t they see that it’s better to just keep the money in the account until they need it? It’s indeed tempting to believe that financial education is about giving them the knowledge and tools to be able to take advantage of a new range of superior products which they are unfamiliar with.
It may be that such financial education remains necessary,
but I cannot view this as anything other than a product design failure. People
will need to be educated only if: (i) those products are too complex to understand
or handle, or (ii) effective use of those products requires changing people’s
money management mental models and practices rather substantially. Surely
you’ve had the experience of an amazing new business productivity tool being
introduced at your workplace – except that few people bothered to learn how to
use it and it required changing all business processes to accommodate it. Did
you blame yourself for not using it?
So why the fuss?
All of the above intuitive arguments for financial education
have a strong paternalistic ting. I find it disconcerting that, in the
twenty-first century, they are so seductive to so many people. Particularly
because there is little empirical evidence demonstrating any sustained benefit
from adult financial education programs. And that’s not for lack of trying or
funding: part of its appeal in the donor world stems from how easy it is to set
up programs and conduct randomized control trials around it.