Cho goals, measurement, and search for best prac

Goals, Measurement, and

Search for Best Practice

OECD/THAILAND SEMINAR ON FINANCIAL

INCLUSION AND FINANCIAL LITERACY IN ASIA

16 DECEMBER 2014

Hong Kyoon Cho

The Bank of Korea

([email protected])

<CONTENTS>

1. What Should Be Our Goals?

2. Why Measurement? – The Korean

Experience and Its Implications

3. A Central Banking Perspective


Humility called for in dealing with financial inclusion and financial literacy; still pre-paradigm phase

What should be done, how to do it, and how much needs to be done, particularly from a central banking perspective

Value judgments in setting conceptual framework regarding what should be our goals


Theme of A Passport to Privilege (Tim Harford,

Financial Times, November 7, 2014)

Citizenship matters far more than it used to be in the 19th century

The Haves and the Have-nots (Branko Milanovic)

80 percent of global inequality is the result of inequality between rich nations and poor nations

Contention that we should tackle the gaps between countries as well as the gaps within countries


Idea of democratizing and humanizing finance (Robert Shiller, the 5th Alvin Hansen Symposium on Public Policy, Harvard University, 2009)

Extending capitalist principles of risk management so that they work for everyone

Cognitive science into a plan for improved human-factor finance

Enhancing economic performance in a sustainable manner from a global perspective by deepening financial inclusion and financial literacy between countries and within them



From a goal-dependent perspective, we cannot but look at the measurement issue; what cannot be measured is unlikely to be easily addressed

What we should measure, why we should measure, and how we should measure

Main features of Korea’s first experience in measuring financial literacy and financial inclusion using the OECD/INFE methodologies



Orthodox OECD/INFE methodologies, elicitation of responses to a standardized questionnaire by face-to-face interviews of 1,068 adults aged 18 to 79 in Korea

High level of awareness of actual financial transactions; active in financial behavior involving actual finance-related actions

Weak grasp of basic concepts relating to finance; deficient pattern of behavior in relation to well-reasoned and sound financial decision-making



Financial attitudes showed an excessive orientation toward the present rather than toward future planning

Differences on the financial knowledge and financial behavior components between socio-demographic strata; level of financial inclusion showed considerable differentiation in terms of social strata



Considered essential to strengthen basic education concerning finance and to bring about change for the better in financial behaviors and attitudes; judged appropriate to adopt a strategy for enhancing financial inclusion

Scope for wide-ranging analyses including studies from a behavioral economics standpoint; financial literacy influences household debt and savings; firmer grasp of households’ consumption, savings, and investment behaviors



As yet insufficient perceptual and practical understanding of financial inclusion issues; cross-country comparative analysis needed of differences in level by stage of economic development

Development of indicators and methodologies for measuring financial inclusion; causes of differences of financial inclusion both between advanced countries and comparatively-developing or underdeveloped countries, and between social strata within each country



Potential obstacles and challenges in designing effective financial inclusion policy; issue of coordination between the main stakeholders

Korea’s need to launch follow-up measurement of financial literacy and financial inclusion employing the OECD/INFE methodologies

Methodology should reflect the innovations in the questionnaire

Scheduled to be undertaken jointly by the Bank of Korea and the Financial Supervisory Service


Philosophy of action in addressing the issue of financial inclusion and financial literacy from a central banking perspective

Need to approach central banking taking an instrumentalist approach in interpreting how effectively the problems facing the economy can be solved

Central bank activism vs. laissez-faire

What their goals are; what tools could be useful in light of them


Level of financial literacy related to monetary policy and financial stability

Low level of financial literacy is likely to cause overly high inflation expectations (Bruine de Bruin et

al., “Expectations of Inflation: The Role of Demographic Variables, Expectation Formation, and Financial Literacy”, The Journal of Consumer Affairs, 2010)

Low levels of financial literacy are also held to be a factor lowering the accuracy of predictions of inflation expectations (Burke and Manz, “Economic

Literacy and Inflation Expectations: Evidence from a Laboratory Experiment”, Federal Reserve Bank of Boston Public Policy Discussion Papers, 2011)


Preference for present-biased consumption may influence high-cost borrowing behavior (Meier and

Sprenger, “Present-Biased Preferences and Credit Card Borrowing”, American Economic Journal, 2010)

Enhancing financial inclusion through strengthening political and social stability could have a positive impact on financial stability; through diversifying lenders and reducing dependency on a specific lender could relieve systemic risks (GPFI, “Financial Inclusion – A Pathway to

Financial Stability? Understanding the Linkages”, Annual Conference on Standard-Setting Bodies and Financial Inclusion, 2012)


Seek to create virtuous circle of goals and instrumentalities, but linked to a zone of twilight

Korea’s central bank has an explicit mandate for financial stability under the revised Act of 2011; a recognition that central banking and financial inclusion serve to heighten cohesion

Malaysia’s central bank required to promote a sound, progressive and inclusive financial system under the Central Bank of Malaysia Act of 2009


Financial stability, financial inclusion, and financial literacy should be aligned with modern central banking, but in an institutional zone of twilight

Central bank’s expertise, experience, and specialization; practical appropriateness in terms of enhancing sustainable economic performance

In searching for the best practice, all stakeholders including the central bank should assume a duty of due care toward continued evolution and innovation in both methodology and approaches


Central banks’ new road since the global financial crisis; rethinking of central banking

No optimal model yet for central banks’ role in financial inclusion and financial literacy; combined wits of society needed to explore pathways

Cho goals, measurement, and search for best prac

Economy & Finance

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