On July 9th 2014, the OECD released the PISA financial literacy assessment of students. It is the first of its kind at that scale: around 29 000 students in 13 OECD countries were surveyed. It is a big step forward in recognising financial literacy as a proper set of skills and knowledge- independently from maths, even though it is strongly correlated to maths and reading performance as the OCDE/PISA reports shows. The OCDE/Pisa website offers a sample of questions – so I tried them. The way Question 5 was phrased worried me greatly. The question is about refinancing a loan with a lower interest rate with a bigger loan. Students have to write two “other financial benefits” for this person (apart from paying off her existing loan). Looking at the numbers, to me, negative consequences stood out – not positive ones: this person would have more debt, on a longer period (2 years and a half) and pay more interest in total (nearly 50% more). Recovering from the shock of the biased question, I fumbled into the 202 page report to find out more: a second question was asked about negative consequence: “What is one possible negative financial consequence for Mrs Jones if she agrees to the Zedbest loan?” Why only “one” consequence versus “three” positive consequences (one given up front, two asked for), and why only “possible” why the first question stated they were “two other financial benefits”?
Looking at the household debts statistics (also published by the OCDE: OECD (2014), Household debt (indicator). doi: 10.1787/f03b6469-en), out of the 30 countries providing statistics, in only two (Germany and Japan), household have reduced their debt compared to their net disposable income since 1995. Focusing on the post-2008 crisis period, in 77% of the countries, households have a higher percentage of debt than in 2008. Mortgages and property market value probably impact these statistics greatly but the database does not offer a detail split between mortgages, consumer credit, students loans, etc… What stands out is that households have to manage debts – more and more: in nearly two-thirds of the countries, household’s debt is in average more than 100% of their disposable income.
More must be done to raise awareness on what it entails to have debt – especially negative consequences – and not only “possible”. Financial literacy curriculum have to be un-biased in the way they tackle debts and interest and include that interest is not a fact, but the way conventional finance operates- it is a human and business choice, not an immutable law. Another concern is how financial literacy is defined: The OCDE defines it as “the process by which financial consumers/ investors improve their understanding of financial products, concepts and risks and, through information, instruction and/or objective advice, develop the skills and confidence to become more aware of financial risks and opportunities, to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being” (OECD, 2005). How does this definition apply to youth without access to any form of financial products or services? Choices like going to the doctor for a check-up, paying an agent to migrate to the city to try to get a job, paying for clean water are decisions that impact youth’s financial well-being and risk level. Money is also far from neutral and it catalyses emotions and unethical behaviours – from jealousy, greed, dispute, theft… – ethics is a fundamental component of financial education which is most often brushed aside or overlooked. Besides, by reducing financial literacy to understanding and choosing financial products and services, we fail to encourage students to use critical thinking about how our financial system operates and how that impacts our lives – positively and negatively.