Financial literacy, the ability to understand and use various financial skills, plays a pivotal role in the economic development of a country. Its impact on the Gross Domestic Product (GDP) growth is substantial, influencing individuals, businesses, and the overall economic landscape. A study by the World Bank found that countries with higher levels of financial literacy had higher levels of saving, investment and economic growth. As nations strive for sustainable development, fostering financial literacy becomes a crucial component in shaping a robust and resilient economy.
As the team and I build YABI - the first financial wellness platform in the region, we come across many entities who believe it's a nice to have and financial literacy is the "fluffy" side of CSR.
I want to bring up through this article why Financial literacy is far from being fluffy - it IS the core and with an ever evolving complex financial ecosystem, WILL REMAIN a core factor in accelerating economic growth.
To start with, the OECD's International Survey of Adult Financial Literacy Competencies revealed that a 15% increase in financial literacy correlates with a 1% increase in GDP growth.
As nations strive for sustainable development, fostering financial literacy becomes a crucial component in shaping a robust and resilient economy:
At the individual level, financial literacy empowers citizens to make informed decisions about their personal finances. A population that understands the basics of budgeting, saving, investing, and managing debt is more likely to contribute positively to economic growth. Informed consumers are better equipped to participate in the financial system, leading to increased savings, investments, and responsible borrowing. This can only cause a multiplier effect as the capital goes back into the economy.
2. Entrepreneurial Growth
Financial literacy is a catalyst for entrepreneurial success. According to a study by the Global Entrepreneurship Monitor, financially literate entrepreneurs are 33% more likely to succeed than those with poor financial knowledge. Entrepreneurs armed with financial knowledge are better positioned to navigate the complexities of business, make strategic investment decisions, and manage cash flow effectively. The expansion of these enterprises contributes significantly to job creation and innovation, fostering economic growth.
3. Access to Financial Services
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A financially literate population is more likely to access and utilize financial services, including banking, insurance, and investment products. The World Economic Forum reports that in economies with higher financial literacy, the average use of banking services increases by 14%. This increased participation in the formal financial sector not only provides individuals with a secure place to store and grow their wealth but also strengthens the overall financial infrastructure of a nation.
4. Stability in Financial Markets
Financial literacy promotes stability in financial markets by reducing the likelihood of financial crises. The Federal Reserve found that financially literate investors are 12% less likely to experience investment losses due to market volatility. Additionally, a financially literate population is better prepared to weather economic downturns, as individuals are more likely to have diversified portfolios and contingency plans in place.
With such a strong link between financial literacy and GDP growth, I have to ask: Who should be responsible for promoting increased financial education in a country?
Let’s dive into different countries and different models:
Australia has been proactive in promoting financial literacy through government initiatives. The Financial Literacy Foundation, established by the Australian government, has been working to improve the financial well-being of Australians.
Singapore is renowned for its strong financial sector. The government has consistently promoted financial literacy as part of its broader strategy for economic development. Financial education programs, including those targeted at schools and workplaces, aim to equip individuals with the necessary skills to make sound financial decisions. This has likely contributed to the country's economic resilience and stability.
Canada has also made strides in promoting financial literacy. Initiatives such as the Task Force on Financial Literacy and the Canadian Financial Literacy Database have been implemented to enhance Canadians' understanding of financial matters.
South Korea as implemented financial education programs to enhance the financial literacy of its citizens. These efforts are crucial as the country seeks to build a knowledge-based economy. A financially literate workforce is better positioned to contribute to innovation and economic growth.
While specific statistical correlations between financial literacy and GDP growth may vary and often overlooked, these examples highlight how nations that prioritise financial literacy tend to experience positive outcomes in terms of economic development.
