Poverty Reduction | oikos Blog

I am switching gears a bit as I am moving more towards looking at the impact of financial instruments on household decision-making. This is not a new area of research for me, having already done some fieldwork on microfinance and consumption smoothing. Now I am getting involved in understanding microinsurance and its low levels of demand; the effect of microinsurance on risk-sharing etc.

One of the questions I am interested in is to what extent financial literacy training programs may help beneficiaries make decisions about financial instruments. Improving financial literacy is motivated by the idea that it helps households make better-informed financial decisions and contributes to their well-being. As such, financial literacy training programs have become quite popular both in the developed and the developing world.

However, as with any programs and policies geared towards promoting a certain outcome, one has to ask: is there a causal link between improving financial literacy and well-being or better financial decision-making? The evidence so far has been mixed, and here I share some with you:

Bernheim and Garrett (2003) provide evidence that people who attend financial counseling programs tend to make better financial decisions, especially those attendees with low income and education levels.

Duflo and Saez (2003), on the other hand, find only a small impact of financial education on savings decisions in a randomized evaluation at a university in the US. They randomly offered a small financial incentive to administrative staff at a university to attend an informational session on retirement products. Those receiving the incentive were significantly more likely to attend the training session, and this had only a small impact on their savings decisions, measured as enrollment in tax-deferred retirement accounts.

In another randomized evaluation, Cole, Sampson, and Zia (2009) find no effect of a financial literacy training program designed to promote savings behavior on the overall population in Indonesia. They do find a small increase in the probability that individuals with low initial levels of financial literacy open bank accounts following a short financial literacy program.

As these studies show, one major challenge in studying the impact of a financial literacy program is the design of the program itself: what should they include, how long should they be, and how should they be taught. Knowledge about this can only come from more practice, as we begin to understand what works generally and what doesn’t. For now, we can only say that the jury is still out there.

I will be adding more to this as I continue my research.

Terrace farming in Nepal, courtesy: Paribesh Pradhan

Landlessness and lack of access to land are often at the root of poverty and social exclusion. International aid agencies have provided considerable resources to improve land registration systems in many developing countries, with the common objective of reducing poverty. The main channels through which land rights reduce poverty is by encouraging investments in land and facilitating land rental transactions. Turns out there is one more channel that needs to be taken into consideration when studying the effects of land certification: migration.

In a recent paper by Alain de Janvry, Kyle Emerick, Marco Gonzalez-Navarro, and Elisabeth Sadoulet (2012), the authors analyze the impact of property rights on migration in rural Mexico and show that land certification programs can also lead to increased outmigration from agrarian communities. Assessing the Mexico ejido land certification program which gave out ownership certificates to 3.6 million farmers between 1993-2006, the authors find that households that obtained land certificates were 28% more likely to have a migrant member. At the community level, certificates led to a 5% reduction in population, and the effects were larger in lower land quality environments. Certificates lead to sorting whereby larger famers stay and land-poor farmers leave, particularly in high productivity areas. Despite the outmigration, cultivated land was not reduced because of the program, which is consistent with gains in agricultural labor productivity.

Overall, the evidence shows land certification increases the efficiency of labor allocation across space by inducing low productivity farmers to migrate, while allowing higher productivity farmers to consolidate land. The impact of poverty and social exclusion of such a phenomenon is not clear, but this is something future studies could dig deeper into.

Category Archives: Poverty Reduction

Financial literacy and well-being: what do we know?

Land rights: Enabling people to move in Rural Mexico