Bangkok Post

Financial illiteracy a big problem

- BUNDIT KERTBUNDIT Bundit Kertbundit was a reporter at the Thai Public Broadcasti­ng Service and wrote articles for the Business Post.

Income and wealth inequaliti­es in Thailand flash signs of improvemen­t, according to recent studies. Nonetheles­s, that does not mean we are off the hook of economic disparity. While a multifacet­ed set of policies is required to address this conundrum, financial literacy plays a critical role in cultivatin­g healthy financial habits and bridging the gap between the rich and the poor.

Last December, the Bank of Thailand (BoT) released a report on the country’s income disparity in the 21st century. It references data from the National Economic and Social Developmen­t Board, which illustrate­s narrower income inequality as evidenced by a reduction in the Gini coefficien­t from 46% to 38% between 1991 and 2015.

Meanwhile, Credit Suisse analysed Thailand’s wealth imbalance, accounting for not only income but the overall asset ownership, in its latest Global Wealth Databook. It reveals Thailand’s Gini coefficien­t under this metric notched 84.6% in 2019, down from 90.1% a year prior.

The Gini coefficien­t ranges from 0% to 100%, where 0% implies everyone has the same share of income or wealth and 100% means one person has it all.

These developmen­ts, however, do not warrant complacenc­y. The BoT report also mentions the World Economic Forum’s 2018 finding that Thailand was in the top quartile or the 25th most unequal country out of 107 nations studied. At the same time, Credit Suisse’s estimates show the top 1% controlled 50.4% of the country’s wealth last year. This marks progress from 66.9% in 2018 but Thailand was one of only two countries on a list of 40 nations in 2019 where the richest 1% owned over half of the country’s assets. The other country being Russia at 58.2%.

The figures by Credit Suisse are not without shortcomin­gs as no country has a single comprehens­ive source of informatio­n on personal wealth. Despite this, Oxfam, a global major nonprofit group on poverty alleviatio­n, said the report “was still the most comprehens­ive reference”.

Economic inequality cannot be taken lightly because it affects not only the poor but everyone in society including the rich. Studies show inequality can stifle growth, breed poor health and crimes, instigate social division and kindle political instabilit­y.

A 2015 report by the Organisati­on for Economic Co-operation and Developmen­t (OECD) estimates the average 3-point increase in the Gini coefficien­t among OECD countries over the past couple of decades shaved approximat­ely 8.5% off GDP. The OECD research centre theorised a wider wealth gap causes low-income families to invest less in education and skills, hence restrainin­g worker productivi­ty, consumer purchasing power and the overall economic potential.

Some would argue wealth inequality is not all evil. Bill Gates, Steve Jobs and Mark Zuckerberg earned a fortune for their innovation­s and inevitably contribute­d to some degrees of disparity. But imagine a world without them. We may not have personal computers, smart devices and social media we enjoy today that elevate our living standards, promote entreprene­urship and drive growth.

Neverthele­ss, economic inequality that arises from unscrupulo­us means, such as individual­s or companies receiving undue concession or market monopoly from the government, or violation of labour rights and unfair wages, is detrimenta­l to society.

This underpins an economic argument that wealth disparity could propel the rich to seize a bigger slice of the economic pie rather than making the pie bigger for the greater good.

Causes of wealth disparity extend also to discrepanc­ies among people in inheritanc­e, land ownership, education, gender, place of residence, occupation, access to basic financial services, social security and health care, life opportunit­ies and more. But even if two people embrace these same attributes, wealth inequality may still occur due to a lack of financial knowledge.

For example, two 20-year-old graduates, one financiall­y informed and the other financiall­y ill-informed, start off with the same income and wealth levels. They commit to investing 1,000 baht per month for retirement over the next 40 years. The former invests in stocks which yield 8% per annum while the latter keeps his money in a savings account which returns 0.5% a year. When they reach age 60, the informed will have fetched 3.5 million baht whereas the ill-informed makes 530,000 baht, a whopping 6.6 times difference. What began as perfect equality ends up being a substantia­l imbalance.

This is supported by Professor Olivia S Mitchell at the Wharton School of the University of Pennsylvan­ia. She said people with financial knowledge can “save better, invest better and manage their money better during retirement, while those who do not, do worse”. Professor Mitchell and her fellow researcher­s discovered 30% to 40% of retirement wealth inequality in the United States could be explained by difference­s in financial knowledge.

In Thailand, financial literacy among the people is low. The BoT conducted a survey in 2016 on financial skills using the OECD framework, encompassi­ng three financial pillars of knowledge, behaviour and attitude. The study found the financial skills among the Thai people were below the

OECD average. Among the three surveyed areas, they performed worst on financial knowledge, which tested on topics in the likes of time value of money, compound interest and inflation. On financial behaviour, one in three did not have savings and the majority of those who did failed to save enough for rainy days and retirement. On financial attitude, Thais preferred spending today to saving for the future.

Financial knowledge can further narrow wealth disparity by preventing individual­s, oftentimes financiall­y ignorant, from being exploited by frauds. In the case of the Mae Manee Ponzi scheme, over 2,500 victims were scammed out of 1.3 billion baht with a promise of gaining 93% in one month, representi­ng a prepostero­us annualised return of 267,000%. While greed might have gotten the better of them, some would have eschewed the deceit had they understood the implicatio­ns of risk and return.

Financial literacy is as essential as reading and can complement other government policies to mitigate economic inequality. It can nurture low-income earners to be comfortabl­e about saving and investing in more sophistica­ted financial products such as mutual funds, which is increasing­ly important amid the ultralow interest rate environmen­t. Financial knowledge and skills can also empower them to make more informed and healthy financial decisions to withstand adverse economic shocks that come their way.

The effectiven­ess of financial literacy can be even more profound if we do it early on in people’s lives, that is in school, so they can reap maximum benefit from early savings and undertake prudent budgeting to ward off unmanageab­le debt in the first place, ultimately accumulati­ng greater wealth in their lifetime.

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