What are financial literacy programs good for?

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Could they help us save the world from future financial crises? If we are to believe the work of economist Robert Shiller and the larger school of behavioral economics, then the answer is "yes", or at least a partial "yes." Households in OECD countries - particularly the U.S. - overleveraged themselves, placing themselves in a precarious position that turned the popping of the housing bubble in the U.S. into a systemic crisis. In theory financial literacy programs will keep households from getting themselves in over their heads, which should help prevent downturns from turning into crises.

But a new article on financial literacy programs in Indonesia in the Finance & PSD Impact newsletter (formerly called FPD Impact) suggests that these programs are overrated - at least when it comes to access to finance. A randomized evaluation of a program that aimed to extend access to savings accounts found that:

...financial incentives are more than two-times more cost-effective than the financial literacy program in inducing financially illiterate households to open bank savings accounts.

The word is still out, however, on whether these programs can be effective in other areas, i.e. keeping households from overleveraging. Perhaps it's time that the evaluation tools of development economists were turned on the developed world.


Ryan Hahn

Operations Officer

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