"Financial Education for Inclusive Development"
Speech by
Rajat Nag
Managing Director General
Asian Development Bank
At the CITI-FT Financial Education Summit
6 December 2007
New Delhi, India
I. Introduction
Thank you, Mr. Jayakumar, for that very gracious introduction.
Distinguished guests, ladies and gentlemen: I am delighted to join you for this important Summit. I would like to thank the organizers for giving me this opportunity to address you today. And I want to express my appreciation to the Citi Foundation and the Pearson Foundation for this very worthy initiative to promote financial literacy and financial inclusion, particularly among the poor and disadvantaged.
As a partner and financier in the Asia and Pacific region's development, ADB takes great interest in issues like these. Much of our work involves the financial sector - whether in capital market and bond market development or through catalyzing microfinance for the poor. But what interests me most about this year's Summit is its focus on Partnerships for Progress and Inclusion. Drawing from this focus, I would like to talk today about inclusion more generally in Asia and the Pacific - why it is important, and what role each of us can play in widening the circle of Asia's growing prosperity to encompass more of the region's poor.
II. From Inequality to Inclusive Development
As you know, the past few decades have been a time of unprecedented economic growth and poverty reduction in the Asia and Pacific region, and dramatic improvements in the standard of living. For example, per capita income in developing Asia, in real terms, grew from less than $170 in 1967 to over $1,000 in 2005. And the proportion of people living in absolute poverty has declined from more than one-third (34.6%) in 1990 to less than one-fifth (18.0%) in 2005. Countries as diverse as Malaysia, the People's Republic of China, Thailand and Viet Nam have achieved remarkable progress as has India in recent years.
Despite this progress, however, an enormous poverty challenge still lies ahead. More than 1.7 billion Asian people still live below the $2 a day poverty line, including nearly 600 million still struggling at $1 a day. And while we celebrate the shining face of Asia - its economic success and growing middle-classes - this other face, the face of Asia's poor, is becoming starker as income and opportunity gaps widen.
A recent progress report on the Millennium Development Goals, or MDGs, shows that while Asia is on track to meet the goal of reducing income poverty by half by 2015, progress against many of the non-income MDGs has been slow. For instance, the MDGs call for the rate of child malnutrition to be reduced by one-half. In Asia and the Pacific, more than 90 million children still suffer from hunger - that is about two-thirds of the world's total. South Asia alone is home to 80 million underweight children. Similarly, 1.5 billion rural residents have no access to basic sanitation and 566 million are without clean water. In urban Asia, the clean water problem has gotten worse as cities swell, leaving 93 million city-dwellers without clean water, compared to 54 million in 1990.
As we know, the tremendous diversity of the Asia and Pacific region is one of its greatest strengths. But the dark side of that diversity is disparity - and the growing divide we see in Asia today between the rich and the poor is troubling. It threatens the very sustainability of growth, as well as national and regional stability. In China, for example, up to nearly 6% of children in Yunnan and Qinghai provinces are underweight, compared to virtually zero in Beijing and Shanghai. Here in In India, as well as in Bangladesh and Nepal, the underweight rates for the poorest quintiles are more than twice those for the richest quintiles, and under-five mortality rates are usually 50% higher or more in rural areas than in urban areas. Access to water and sanitation is also very much a rural issue across the region. In short, a sea of poverty co-exits with islands of extraordinary affluence in many developing Asian countries. And poor women and children and youth have been disproportionately affected.
The only way to close these development gaps is to make the development process more inclusive in three, inter-related dimensions. First is the economic dimension - ensuring that poor and low-income households have the ability and opportunity to participate in and benefit from the growth process. This requires policy makers to create a more conducive environment for private sector growth and job creation, with macroeconomic stability; sound institutional, legal and regulatory frameworks; good governance and rule of law; and well-functioning financial and capital markets. Second is the social dimension - investments in health, education, human resource development and social safety nets to eliminate social inequalities, promote gender equality and women's empowerment, and bring more people, especially the poor, into the process of growth. Third is the political dimension - improving the ability and opportunity for poor and low-income people, including women and ethnic minorities, to effectively participate in the political processes.
III. The Importance of Financial Education for Inclusive Development
Financial education cuts across all three dimensions and, therefore, has a central role to play in inclusive development. Financial literacy allows people to increase and better manage their earnings - and therefore better manage life events like education, illness, job loss or retirement. It also promotes understanding and acceptance of important political reforms, such as health care or pension reforms. While the significance of financial literacy has not yet been fully articulated and recognized by the international development community - or by policy makers and practitioners in developing countries - measures to promote and improve financial education are becoming more frequent.
In our work at ADB, for example, we are building financial education into our microfinance projects. Through our rural microfinance project in Nepal, over 300,000 rural poor women have received training in financial literacy, entrepreneurship development and empowerment. In Pakistan, $20 million from an ADB microfinance loan will be used for an endowment fund to support literacy programs and training for clients and potential clients. And in the Philippines, one outcome of our assistance in the microfinance sector has been the establishment of a National Financial Literacy Program led by the National Anti-Poverty Commission.
Much more, of course, needs to be done. It has been noted that low financial literacy significantly contributes to financial exclusion in general and self-exclusion in particular. It accounts for many low-income households not using insurance and deposit services, for instance, or keeping their savings under the mattress. It prevents people from understanding how inflation affects the real value of money and what options they have to protect against erosion. Many poor people opt out of formal financial systems due to misconceptions about price of credit. Many are unaware of how best to use credit facilities and become over-indebted, including to microcredit facilities where markets have become more competitive in recent years.
Improved financial education can begin to bridge these gaps. It can also strengthen accountability and competitiveness across financial sectors, and reduce elite capture of community level institutions, such as cooperatives, that provide financial services for low-income people. And it can contribute to more efficient use of public resources that are targeted to assist the poor in various ways. Thus, benefits of financial education can be enormous not only to individuals, but to society as a whole.
With increased financial literacy will also come increased demand for financial services for the poor. While there are no comprehensive and reliable data on access to finance for the region, available country-level data indicate an acute problem in this respect. In India, for instance, about 73% of the 89 million farmer-households have no access to formal sources of credit, and about 185 million "potentially bankable" people in rural India do not have a bank account. Many in urban areas also lack access to financial services at reasonable prices. And the situation is similar in most other developing Asian countries.
IV. The Role of Partnerships
Clearly, it will take the efforts of all sectors to address the issue of financial literacy and, on a broader scale, the issue of inclusive development. Governments, with the support of development institutions like ADB, need to foster an enabling environment for all people, including the poor, to contribute to and benefit from the growth process. Here in India, for example, ADB is working with the government to restructure and strengthen the rural cooperative credit system in five states , specifically targeting the high number of poor who do not have access to credit. This $1 billion loan supports one of the largest rural finance systems in the world, with a membership 135 million across India.
The role of civil society is increasingly important, especially to reach the poorest people and those most isolated from the mainstream of society. At ADB, we depend more and more on partnerships to deliver services on the ground - including the microfinance projects I mentioned. As you know, the delivery of services to the poor and excluded can be fraught with cultural and other challenges, which NGOs are in the best position to break through.
Of course, the contributions of the private sector are also tremendously important - as a source of both financing and expertise. In terms of financial education, for instance, who better to provide targeted, quality information than the financial institutions themselves? Considering the varying and inter-related kinds of disadvantage facing poor and low-income people, it is crucial to look at the issue of poverty and inclusion from all perspectives.
V. Concluding Remarks
Let me conclude today by saying that Asia is on the threshold of achieving tremendous prosperity. There are many challenges ahead, not the least of which is to ensure this prosperity is widely shared and sustainable through a more inclusive development approach.
As Muhammad Yunus said after accepting the Nobel Peace Prize last year "…the only thing we have to do is to redesign our institutions and policies, and there will be no people who will be suffering from poverty." Today, I believe those words are very applicable here, in the context of Asia's rapid transformation.
There is much to do to close Asia's development gaps and fulfill its enormous potential, but if all of us - governments, development partners, civil society, educators and the private sector, among others - take these issues to heart, we can ensure that the future truly is one of continued growth and opportunity for the people of Asia and the Pacific.
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