Concilium Civitas Almanac 2020/2021 – Professor Anna Zalewska „Financial literacy – a long way to the top” –

Financial literacy – a long way to the top

The power of information cannot be underestimated. The trick, however, is not to possess information, but to correctly understand it and take action accordingly. It is one thing to know that we are in a dangerous situation, another to assess the scale of the danger and yet another to figure out the steps that need to be taken to deal with the situation. Few will doubt that the ability to convert information into appropriate actions has determined the development and, even the survival of life on Earth. Nothing has really changed in this regard, even if the form of information, its content and the range of appropriate actions have all changed. The ability to acquire correct information and to use it to one’s advantage has long been determining the survival and prosperity of individuals and of entire nations.

Our hunter-gatherer ancestors had to understand the woods or savannahs they lived in. To have enough to eat and to feed their children, they had to know where and when the best berries grew and where the plumpest rabbits burrowed. They had to know how to protect themselves from wild animals and dangerous rival tribesmen. The knowledge of when and where to migrate to have plentiful food, how to use natural resources to protect oneself from excessive heat and cold and when to trust or fight, determined our ancestors’ survival.

In the modern world, the ability to adapt to and take advantage of existing conditions has not lost its importance in determining the survival and development of humanity at a national or individual level. While we may no longer need information about which berries are poisonous, we still depend on being able to distinguish true information from false and on being able to understand its meaning and consequences. Searching for berries, hunting rabbits and avoiding being preyed on by bears, wolves and such like, has been replaced by an ability to secure a good job, find good value for money at supermarkets or obtain an appropriate mortgage. To feed ourselves, we now need money instead of a spear. We need a job to earn money, and once we have it, we need the ability to do basic financial planning. We need to be able to budget our spending. We have to be able to decide how much we can spend today and how much we should save for the future.

Whether we realise it or not, our life is a constant stream of financial decisions. Is it better to invest in further education or to find a job as soon as we are legally eligible to join the workforce? Is it better to buy a cheaper mobile phone or a more expensive one? Is it better to buy a house or a flat or to rent somewhere to live? What shall we do with our savings? Shall we put them under a mattress or deposit them in a bank? Which bank should we choose? What type of account?

The financial decisions we make are not restricted to our personal finances. We decide the financial direction of the country we live in by electing politicians and governments. If we vote for a government that disregards the environment, we choose to breathe polluted air. If we vote for a government that underinvests in education and healthcare, we choose to have a poorly educated labour force and substandard health service – a decision that will increase mortality and disability. If we vote for a government that does not support innovation and progress in the name of falsely understood tradition, we choose to stay behind, slowing down the economic, social and technological development of the country. It does not require great imagination to see that by choosing politicians, voters choose how money raised through taxes is spent and the development path their country follows. But to understand potential development paths and to foresee their consequences, people must be both able and willing to assess the alternative economic benefits of these paths. To assess economic benefits, people need to be able to understand basic economic concepts and possess basic numeracy skills.

Thus, our ability to survive as individuals, nations and as a human race depends on our ability to understand the economic conditions in which we live. It also depends on our ability to understand and account for the economic conditions of other countries, even those we do not visit.

Unfortunately, though the world has become more economically and financially advanced, our understanding of the basic economic and financial concepts has not deepened. There is plenty of evidence that ordinary people are lost in a jungle of economic and financial concepts, with little understanding of the world that surrounds them or the processes that rule economic conditions. Thus, they may be less equipped for the world they live in than their hunter-gatherer ancestors once were for theirs.

For years, various international organizations have been conducting surveys to assess people’s so-called financial literacy. Financial literacy is perceived as a set of skills separate from those needed to be deemed ‘literate’, that is, able to read. Financial literacy is not even about being able to read financial texts or statements, but about the ability to correctly understand basic financial concepts such as the time value of money; for example, whether 100 zloty today has a different value than 100 zloty tomorrow. While the modern system of education has practically eradicated illiteracy in middle- and high- income countries, financial literacy remains low even in the most economically advanced ones. Moreover, there are very few signs that financial literacy is improving over time, even though the role of finance in our lives continues to increase rapidly and shows no signs of slowing down.

In 2014 the results of the Standard & Poor’s Global Financial Literacy Survey were published. Over 150,000 individuals from over 140 countries were asked simple questions that tested their financial intuition. The survey was designed to assess whether people possessed an understanding of such fundamental concepts of finance as the reduction of risk through diversification, inflation and compounded interest rates. To test the understanding of risk diversification benefits, the surveyed individuals were asked whether it is safer to put money into one business/investment or to spread their money over multiple businesses/investments. To test their understanding of inflation, individuals were asked whether they would be able to buy more, less or the same amount of goods if their income doubled and prices doubled over the same period. Numerical skills were assessed through questions on interest rates, specifically – if one borrowed $100, would it be better to pay back $105 or $100 plus three per cent? Finally, to assess the ability to understand interest rate compounding, the surveyees were asked two questions. First, if an individual deposited money for two years in a bank account paying an annual interest rate of 15 per cent, would the bank add more money to their account in the second year than it did the first year, or would the bank add the same amount of money in both years? Second, if someone deposited $100 for five years in a savings account that paid 10 per cent interest per year and did not withdraw any money for five years, after five years would they have more than, less than or exactly $150 in their account?

Thus, the survey questions dealt with everyday issues such as interest rates earned on savings accounts and inflationary price changes. They did not require knowledge of any financial terms, sophisticated investment instruments or valuation methods. Yet only 33 per cent of the surveyed individuals answered three or more of these questions correctly – the threshold to be assessed as financially literate. This means that, on average, two in three adults showed a considerable lack of understanding of basic financial concepts. Sadly, this lack of understanding is not even related to mathematical skills, given that only one question required participants to do some calculations (one question required them to calculate three per cent of $100).

Given that these statistics were obtained across a large set of countries, many of which are poor and have poorly developed economies and financial sectors, it should not come as a surprise that considerable differences across countries emerged. The percentage of a country’s population classified as financially literate ranged from 13 to 71 per cent.

Although Poland’s score of 42 per cent was comfortably above the world average, it compared poorly against its closest neighbours. Norway and Sweden had 71 per cent of their adult population classified as financially literate, Germany 66 per cent, Finland 64 per cent, the Czech Republic 58 per cent, Estonia 54 per cent and Hungary 54 per cent. The 42 per cent scored by Polish adults put Poland in the same league as South Africa, which also scored 42 per cent, and close to Zimbabwe, Mongolia and Chile, each with scores of 41 per cent.

Figure 1 plots the results of Standard & Poor’s survey against GDP per capita for 2014 for Poland, its neighbouring countries, as well as Chile, Mongolia, South Africa and Zimbabwe. It is clear that Poland underperformed in its group of ‘preferred’ comparators, i.e. countries with a similar post-communist past and a comparable level of GDP per capita (the Czech Republic, the Slovak Republic and Hungary). Poland is also considerably below the trend line of the group.

Given that financial literacy is quite highly correlated with a country’s wealth, the low score of the Polish adults is worrying. Russian and the Lithuanian adults scoring even worse offers little consolation for this poor performance.

Figure 1

Source: Standard & Poor’s Global Financial Literacy Survey, 2014 and the World Bank

Some may argue that the questions in the Standard & Poor’s survey were too limited in their scope and too few in number to give a true assessment of the financial literacy of Poles. To gain an alternative opinion, let us look at the results of a survey that is based on a much broader assessment of skills and attitudes.

In 2016 the Organisation for Economic Co-operation and Development (OECD) published its own survey of adult financial literacy scores after interviewing 51,650 adults aged 18 to 79 from 30 countries. The OECD survey was more complex and based on a richer set of questions than Standard & Poor’s. It aimed to assess not just financial knowledge, but also attitudes and behaviour. Unfortunately, one of the main conclusions of the OECD survey was that ‘Countries such as Poland and Croatia may need to target knowledge alongside behaviour, to ensure that their populations understand the principles of financial literacy and become more active money managers.’ Poland and Croatia were singled out because their adults scored particularly poorly. In fact, Poland has the lowest combined score for knowledge, attitudes and behaviour of its adult population in the sample of 30 countries.

Figure 2 shows the OECD’s 2016 survey scores for countries surveyed by the OECD that were included in Figure 1 reporting the Standard & Poor’s survey scores. The average bar shows the average of all 30 countries included in the OECD survey.

Figure 2


One could expect that if people are reasonably good at basic maths, they should have little difficulty answering simple questions about percentages and compounding that are used in some financial literacy questions.

Unfortunately, neither Standard & Poor’s nor OECD’s survey assessed the mathematical skills of the surveyed adults. To shed some light on the link between mathematical skills and financial literacy, we can examine the data from the OECD Programme for International Student Assessment (PISA), which assesses the financial literacy and mathematical skills of 15-year-olds who have completed at least six years of formal school education. The PISA survey aims to capture the teenagers’ skills while they are still at school taking compulsory maths lessons. Since the PISA surveys are based on a different methodology (they survey teenagers rather than adults and use different questions) and cover only 21 countries, they cannot be directly compared to the other surveys (Standard & Poor’s and the 2016 OECD survey). They do, however, provide valuable insight into the skillset of the future generation of voters.

Figure 3 plots the PISA financial literacy scores against the PISA maths scores as reported in the PISA 2018 document[1] for the countries discussed above. It is clear that young Poles have a strong mathematical grounding in comparison with teenagers from other countries. And even though their financial literacy skills rank much higher than those of their peers in other countries compared with their adult counterparts, they nonetheless remain below the trend line and a fair distance away from Estonia and Finland – their closest comparators in terms of mathematical skills.

The PISA 2018 assessment divides the youngsters into five groups by their financial literacy. Group 5, the most proficient, consists of those with test scores of 625 points or greater. Group 1, the least proficient, consists of those who scored fewer than 400 points. In Estonia and Finland 19 and 19.9 per cent of students, respectively, were in Group 5, compared to only 11.8 per cent in Poland. However, while in Estonia only 5.3 per cent of young people were in the lowest group, Poland and Finland had similar proportions of young people in the lowest group. In fact, Poland was only marginally better, having 9.5 per cent of 15-year-olds in Group 1, whereas Finland had 9.9 per cent.

Figure 3

Source: PISA 2018 results

So, are these results satisfactory? Do they give some hope? It seems quite clear that the young generation is ahead of the old one judging by international comparisons. This is particularly evident in the examination of scores achieved by the adult populations of Poland and Chile (Figure 1) and of young people (Figure 3). Yet can these statistics give us confidence that young people are, and will be, better equipped to live in the modern world than their parents and grandparents have been? Will young people have a better understanding of their economic environment and be more competent in personal finances? Is there any hope that they may be less perceptive to the populist, economically unsound and flawed arguments of political leaders?

Indeed, there may be some hope, but a lot remains to be done. The relatively higher level of financial literacy of young Poles is not equivalent to a higher level in absolute terms. Whichever way we choose to look at these statistics, fewer than 12 per cent of Poland’s young people understand basic financial concepts and apply them correctly. Over 40 per cent continue to show a low, or very low, level of familiarity and understanding. Over the years they may lose even these feeble skills. Will they have the time and the curiosity to deepen their knowledge to expand their understanding? Where will they search for answers? Who will teach them critical-thinking skills?

The PISA 2018 report writes that ‘fewer than 1 in 10 students in OECD countries was able to distinguish between facts and opinions, based on implicit cues pertaining to the content or source of the information’. This is particularly worrying in the context of improving the young generation’s financial literacy. It is petrifying that only one in ten youngsters is able to critically assess the quality of information that reaches him/her. This inability makes the quality of the information that reaches young people a major issue. Specifically, in the context of financial literacy, what are the sources of credible information that shape the opinions of young people? Parents with weak financial literacy? Financially illiterate friends? The internet’s self-proclaimed financial gurus?

Most disturbingly, the PISA 2018 report states that, in Poland, more than half of the youngsters surveyed were of the opinion that ‘intelligence was something about them that they couldn’t change very much’. The report further concluded that ‘those students are unlikely to make the investments in themselves that are necessary to succeed in school and in life’.

Given the low average level of financial literacy of Polish parents, it may be a bit overoptimistic to think that we can leave it to them to teach their children basic financial concepts. It may also be too risky to leave the education in such fundamentals to the internet. Maybe, it is time to rethink what and how children are taught at school? Only 34.3 per cent of Polish 15-year-olds stated that they had been taught about financial issues at school. This contrasts strongly with the statistics in the PISA 2018 report for the other countries. For instance, 71.5 per cent of youngsters in Finland have reported learning about financial issues at school and in Estonia 50.8 per cent. Even the Chilean statistics are higher (44.8 per cent) than those for Poland. According to the PISA 2018 report, Poland is the only country in the group included in the figure above that does not have a national strategy for financial education.

It is time to change this. The economic transformation of the past decades has not been accompanied by a transformation in the economic education of the wider Polish society. While business schools emerged and new university degrees flooded the market, very little has been done to help ordinary people adjust to the new economic conditions. People’s lack of understanding of the economic world they live in makes their lives more stressful and less successful. It also makes them easy prey to populism, which feeds on people’s ignorance, since it is human nature to search for confirmation of what we want to believe, rather than to look for evidence that proves us wrong. Thus, while the dream of Adam Mickiewicz, one of the most cherished Polish poets, that ‘books find their way under thatched roofs’ has been mostly accomplished, given that 99.8 per cent of Poles are deemed literate, it is time to go one step further and improve financial literacy, i.e. to teach Poles the basic financial concepts of the world they live in.

Let us hope that the national strategies for financial education that are to be designed will reach schools sooner rather than later and that they will make a positive difference. Let us hope they both strengthen the financial literacy of young people and motivate them to explore the economic and financial environment surrounding them, rather than kill their enthusiasm for learning, understanding and consciously participating in economic debates. Improving the financial literacy of the wider Polish population is a necessary step in the process of creating a modern society that knowingly takes part in the economic development of the country and is resistant to populist ideas.