Savings and Asset Development Savings and Asset Development for the Poor in Developing Countries for the Poor in Developing Countries

Sponsored by CGAP and the Global Assets ProjectSponsored by CGAP and the Global Assets Project

The World Bank, Washington DC The World Bank, Washington DC January 23, 2007January 23, 2007

Ray BosharaRay BosharaNew America FoundationNew America Foundation

Washington DCWashington DC

202-986-2700202-986-2700 boshara@newamerica.netboshara@newamerica.net

www.newamerica.netwww.newamerica.netwww.AssetBuilding.orgwww.AssetBuilding.org

www.GlobalAssetsProject.orgwww.GlobalAssetsProject.org

What is Asset Development? What is Asset Development? Public, non-profit, and private strategies to enable poor, low-Public, non-profit, and private strategies to enable poor, low-

income, and moderate-income persons to save and accumulate income, and moderate-income persons to save and accumulate long-term, productive assets—a home, post-secondary education, long-term, productive assets—a home, post-secondary education, investments, land, a small business, and a nest-egg for investments, land, a small business, and a nest-egg for retirement.retirement.

Michael Sherraden, Assets and the Poor (1991):Michael Sherraden, Assets and the Poor (1991):

1.1. Economically, assets are the key to economic security.Economically, assets are the key to economic security.2.2. Asset ownership is associated with positive social, civic, Asset ownership is associated with positive social, civic,

behavioral and psychological effects not necessarily associated behavioral and psychological effects not necessarily associated with income.with income.

““Lack of income means you don’t get by; lack of assets means you Lack of income means you don’t get by; lack of assets means you don’t get ahead.” “Assets are hope in concrete form.”don’t get ahead.” “Assets are hope in concrete form.”

Long-term, inter-generational perspectiveLong-term, inter-generational perspective

Informed by Amartya Sen—assets as the economic proxy for Sen’s Informed by Amartya Sen—assets as the economic proxy for Sen’s notion of “capabilities.”notion of “capabilities.”

Global Context of Asset DevelopmentGlobal Context of Asset Development

3 billion people worldwide lack access to basic financial services (CGAP, 2006). 3 billion people worldwide lack access to basic financial services (CGAP, 2006). By region:By region:

RegionRegion Accounts per 100 peopleAccounts per 100 people

Asia and the Pacific Asia and the Pacific 1717Middle East and North AfricaMiddle East and North Africa 1313Sub-Saharan AfricaSub-Saharan Africa 4 4Europe and Central AsiaEurope and Central Asia 5 5Latin America and CaribbeanLatin America and Caribbean 3 3

OverallOverall 1313

The world’s richest 2 percent hold over half of the entire world’s wealth, while The world’s richest 2 percent hold over half of the entire world’s wealth, while the bottom 50 percent hold only one percent (World Institute for Development the bottom 50 percent hold only one percent (World Institute for Development Economics Research, 2006)Economics Research, 2006)

Many countries have public policies that actively build wealth for at least the Many countries have public policies that actively build wealth for at least the upper-half of the population. The goal of asset development is upper-half of the population. The goal of asset development is inclusion inclusion in those in those policy systems, or the creation of policies that build wealth for the world’s poor.policy systems, or the creation of policies that build wealth for the world’s poor.

Value Added of Assets Approach to Combating PovertyValue Added of Assets Approach to Combating Poverty

U.S. & advanced economiesU.S. & advanced economies• Income is defining feature of anti-poverty policiesIncome is defining feature of anti-poverty policies• Assets ignored—and often penalized, while subsidized for non-poorAssets ignored—and often penalized, while subsidized for non-poor• Assets approachAssets approach: remove barriers to and offer incentives for : remove barriers to and offer incentives for

accumulating savings and assets by the pooraccumulating savings and assets by the poor

Social Protection and Sustainable Livelihoods (Moser, 2006)Social Protection and Sustainable Livelihoods (Moser, 2006)• Social Protection: Focus on protecting the poor and vulnerable against Social Protection: Focus on protecting the poor and vulnerable against

negative risks and shocks negative risks and shocks • Sustainable Livelihoods: Sustaining activities required for means of Sustainable Livelihoods: Sustaining activities required for means of

livingliving• Assets approach:Assets approach: Creation of positive opportunities for sustainable Creation of positive opportunities for sustainable

asset accumulationasset accumulation

MicrofinanceMicrofinance• Microfinance: recent and growing focus on savingsMicrofinance: recent and growing focus on savings• Assets approach:Assets approach:

Savings that lead to assetsSavings that lead to assets Asset ownership is associated with positive outcomes not Asset ownership is associated with positive outcomes not

necessarily associated with incomenecessarily associated with income

Major Trends Relevant to Asset DevelopmentMajor Trends Relevant to Asset Development

Microfinance Microfinance (Littlefield, 2006)(Littlefield, 2006)• Wireless – changing financial architectureWireless – changing financial architecture• Demographics – high population growth rate in poor, developing nations; labor Demographics – high population growth rate in poor, developing nations; labor

and related remittances flowand related remittances flow• Emerging economies (Brazil, Russia, India, China, etc) who are charting their Emerging economies (Brazil, Russia, India, China, etc) who are charting their

own course, not taking advice from the Westown course, not taking advice from the West• Social activism – global campaign to eliminate debt, greater emphasis on Social activism – global campaign to eliminate debt, greater emphasis on

consumer protection, efficiency, transparency, and lower costs.consumer protection, efficiency, transparency, and lower costs.

Social Policy Social Policy (Sherraden, 1996)(Sherraden, 1996)• Increasing use of individual asset accounts to achieve social policy goals—a Increasing use of individual asset accounts to achieve social policy goals—a

“global ownership society”“global ownership society”• Growing use of commercial financial services to manage these accountsGrowing use of commercial financial services to manage these accounts• Significant risk that the poor will be excluded, given lack of accounts, access, Significant risk that the poor will be excluded, given lack of accounts, access,

savings, and financial know-howsavings, and financial know-how

““Financialization” of Capital Financialization” of Capital (Mahajan, 2006)(Mahajan, 2006)• Over the past few centuries, all forms of capital—human, physical, natural, Over the past few centuries, all forms of capital—human, physical, natural,

social—have become “financialized: they have prices and titles permitting social—have become “financialized: they have prices and titles permitting exchange, and thus have become tradable.exchange, and thus have become tradable.

• Financial capital becomes central to acquiring all other types of capital. Financial capital becomes central to acquiring all other types of capital. • Thus, enhancing access to financial assets is key to helping the poor realize Thus, enhancing access to financial assets is key to helping the poor realize

economic security and opportunity. economic security and opportunity.

Individual Development Accounts (IDAs) in the U.S.Individual Development Accounts (IDAs) in the U.S.

CCan the Poor Save in IDAs?an the Poor Save in IDAs?Number of Accountholders: 2,364. Mean participation: 24.5 monthsNumber of Accountholders: 2,364. Mean participation: 24.5 months

Schreiner et al., 2002Schreiner et al., 2002

Savings PerformanceSavings Performance

Average monthly deposit: $19 Average monthly deposit: $19 net, $40 grossnet, $40 gross

With average match of 2:1, total With average match of 2:1, total savings was $700 per yearsavings was $700 per year

Withdrawals:Withdrawals:• 46% home purchase/repair46% home purchase/repair• 23% microenterprise23% microenterprise• 18% small business18% small business

64% made unmatched 64% made unmatched withdrawalswithdrawals

51 cents was saved for every 51 cents was saved for every dollar that could have been dollar that could have been matchedmatched

Regression ResultsRegression Results

Income not correlated with savingIncome not correlated with saving

Each dollar increase in monthly Each dollar increase in monthly savings match cap is associated savings match cap is associated with a 40-50% increase in with a 40-50% increase in average savingsaverage savings

Total amount matched (match Total amount matched (match cap) matters more than match cap) matters more than match rate (e.g., 1-1 vs. 2-1)rate (e.g., 1-1 vs. 2-1)

Financial education is correlated Financial education is correlated with greater savings, but only up with greater savings, but only up to 10 hoursto 10 hours

Participant characteristics matter Participant characteristics matter littlelittle

What is the Effect of IDAs on Savings and Asset Accumulation?What is the Effect of IDAs on Savings and Asset Accumulation?Sample size: 840 (412 treatment, 428 control). Time: 48 months Sample size: 840 (412 treatment, 428 control). Time: 48 months

Mills et al., 2004 Mills et al., 2004

HomeownershipHomeownership Significant positive effect, esp. for Significant positive effect, esp. for African AmericansAfrican Americans

Real assets and total assetsReal assets and total assets Positive effect for subgroups that Positive effect for subgroups that experienced increases in experienced increases in homeownershiphomeownership

Retirement savingsRetirement savings Positive for African AmericansPositive for African Americans

Liquid assetsLiquid assets Negative (due to acquiring other Negative (due to acquiring other assets)assets)

LiabilitiesLiabilities Negative (due to acquiring other Negative (due to acquiring other assets)assets)

Net worthNet worth No measured effect (but this finding is No measured effect (but this finding is disputed)disputed)

Educational attainmentEducational attainment Significant positive effect (whether Significant positive effect (whether one had taken a non-degree course)one had taken a non-degree course)

The Verdict on IDAs in the U.S.The Verdict on IDAs in the U.S.

The poor can save and accumulate assets in IDAs The poor can save and accumulate assets in IDAs (Schreiner et al.)(Schreiner et al.)

IDAs had their intended effect on homeownership IDAs had their intended effect on homeownership and other asset-building outcomes (Mills et al.)and other asset-building outcomes (Mills et al.)

IDAs may have important and positive IDAs may have important and positive psychological and behavioral effects (McBride et psychological and behavioral effects (McBride et al.)al.)

IDAs are too costly, and IDAs are too costly, and notnot the route to “scale” the route to “scale” in the U.S.in the U.S.

H&R Block “Express IRA” Savings Experiment in the U.S.H&R Block “Express IRA” Savings Experiment in the U.S.Retirement Security Project, 2005Retirement Security Project, 2005

15,000 clients randomly offered matching deposits on IRA 15,000 clients randomly offered matching deposits on IRA contributions. Results:contributions. Results:

Match rateMatch rate Take-upTake-up Average IRA ContributionAverage IRA Contribution 0 %0 % 3 % 3 % ---- 20 %20 % 10 % 10 % 4 times control4 times control 50 %50 % 17 % 17 % 8 times control8 times control

Conclusions:Conclusions:

Higher match rates significantly raise IRA participation and Higher match rates significantly raise IRA participation and contributions.contributions.

Professional tax assistance, information provision, and ease of Professional tax assistance, information provision, and ease of saving can play important roles in encourage saving.saving can play important roles in encourage saving.

Don’t know which was more powerful: the effect of the tax Don’t know which was more powerful: the effect of the tax professional or the effect of the matching contribution.professional or the effect of the matching contribution.

Research on Asset EffectsResearch on Asset EffectsSummarized by Sherraden, 2005Summarized by Sherraden, 2005

Holding assets at 23 is associated Holding assets at 23 is associated with later positive outcomes such with later positive outcomes such as better labor market as better labor market experience, marriages, health and experience, marriages, health and political interest. (Bynner & political interest. (Bynner & Paxton, 2001)Paxton, 2001)

The presence of the asset appears The presence of the asset appears to matter more than the to matter more than the monetary value of the asset. monetary value of the asset. (Bynner & Paxton, 2001)(Bynner & Paxton, 2001)

The presence of small wealth at The presence of small wealth at critical times can have critical times can have “transformative” effects on the “transformative” effects on the life course. (Shapiro, 2004)life course. (Shapiro, 2004)

Parental wealth is positively Parental wealth is positively associated with cognitive associated with cognitive development, physical health, and development, physical health, and socio-emotional behavior of socio-emotional behavior of children – even in very poor children – even in very poor families. (Williams, 2003)families. (Williams, 2003)

Wealth seems to be a better Wealth seems to be a better predictor of well-being as children predictor of well-being as children grow older, while income is a better grow older, while income is a better predictor when they are younger. predictor when they are younger. (Williams, 2003)(Williams, 2003)

Low-income, single mothers’ assets Low-income, single mothers’ assets are positively associated with are positively associated with children’s educational attainment. children’s educational attainment. (Zahn and Sherraden, 2003)(Zahn and Sherraden, 2003)

Income is associated with Income is associated with educational achievement when educational achievement when assets are not in the model. assets are not in the model. However, income becomes non-However, income becomes non-significant when assets are significant when assets are included. (Zahn and Sherraden, included. (Zahn and Sherraden, 2003)2003)

Assets lead to positive attitudes and Assets lead to positive attitudes and behaviors, and positive attitudes behaviors, and positive attitudes and behaviors lead to assets may and behaviors lead to assets may be a glimpse of a “virtuous cycle” be a glimpse of a “virtuous cycle” wherein household development is wherein household development is a reinforcing feedback loop. a reinforcing feedback loop. (Yadama and Sherraden, 1996)(Yadama and Sherraden, 1996)

New Directions in Savings TheoryNew Directions in Savings Theory

Program -> Product -> PlanProgram -> Product -> Plan

Institutional Determinants of Savings (Sherraden, Schreiner, and Institutional Determinants of Savings (Sherraden, Schreiner, and Beverly, 2002)Beverly, 2002)• AccessAccess• InformationInformation• Incentives (tax break or match)Incentives (tax break or match)• Facilitation (someone does it for you)Facilitation (someone does it for you)• Expectations (match caps)Expectations (match caps)• Limits (contribution limits)Limits (contribution limits)

These external features explain savings – These external features explain savings – notnot income, and income, and notnot preferences. Incentives may matter preferences. Incentives may matter lessless, and expectations , and expectations moremore. .

Convergence with behavioral economics: inertia; having things Convergence with behavioral economics: inertia; having things done for you; and fewer choices are likely to significantly improve done for you; and fewer choices are likely to significantly improve savings.savings.

Children’s Savings AccountsChildren’s Savings Accounts

Existing PoliciesExisting Policies

UKUK: Child Trust Fund: Child Trust Fund

SingaporeSingapore: Baby Bonus & : Baby Bonus & Child Development Child Development AccountsAccounts

CanadaCanada: Education Savings : Education Savings ProgramProgram

HungaryHungary: Baby Bonds : Baby Bonds

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Proposed Policies /Proposed Policies / Current ProjectsCurrent Projects

KoreaKorea: Child Development : Child Development AccountsAccounts

U.S.U.S.: Various universal CSAs : Various universal CSAs policies proposed; SEED policies proposed; SEED demonstration proiectdemonstration proiect

New ZealandNew Zealand: KiwiSaver Plus: KiwiSaver Plus

AustraliaAustralia: Nest Egg Accounts: Nest Egg Accounts

UgandaUganda: Child Development : Child Development Accounts demonstration Accounts demonstration projectproject