Inclusive Growth

A Look at Financial Control and its Perception around the World

As a new measure, Financial Control allows for a better understanding of whether people are making sufficient use of financial services.

A Look at Financial Control and its Perception around the World

July 31, 2018

Research translation:

Gallup, in partnership with the MetLife Foundation and Rockefeller Philanthropy Advisors, recently published the results of a survey examining the global financial health of more than 15,000 people across ten countries. The sample spanned both developed and developing economies: Bangladesh, Chile, Colombia, Greece, Japan, Kenya, South Korea, the United States, the United Kingdom and Vietnam.

The survey is the first to introduce the concept of financial control, “the extent to which people perceive they are in control of and can influence their financial situation,” as a measure of financial health. Financial control is composed of four variables: “locus of control (belief of having power over events in one’s life); resilience (confidence in ability to come up with solutions and apply knowledge so as to not be overly affected by small shocks); self-efficacy (extent to which people believe that their effort influences future outcomes); and autonomy (perception of having decision-making power).” According to Gallup, “this new measure, along with the wide range of other questions included in the survey, will allow for a better understanding of whether people are making sufficient use of financial services, and using their knowledge of and access to those services, to take control of their finances and improve their overall financial health.” Respondents were asked to respond to ten different dimensions of financial behavior in order for researchers to produce a composite indicator of financial control.

Survey respondents were considered to be financially secure if they could “cover all of their basic needs (such as food, housing and transportation) for more than six months if they lost their income and had to survive only on their savings or things they could sell” and, if making payments to “pay back the money they owe does not make it difficult for them to pay for the other things they need.” In contrast, those deemed insecure would only be able to cover basic needs for one month in a similar situation and making payments to pay the money back would be “very difficult”.

The results of the survey provide important insight into financial health globally. Though the report notes that financial health “means different things to different people,” Gallup defines financial health as the “balance of spending, saving, borrowing and planning.”

Of note is the conclusion that based on 2016 GDP per capita purchasing power parity, GDP has no clear relationship with the perception of financial control. For example, Vietnamese and Greek respondents indicated similar levels of perceived financial control despite Greek GDP per capita being four times larger than that of Vietnam. This was also observed when comparing Bangladesh and Japan, with the latter’s GDP being twelve times as large as the former’s.

The survey also noted perceptions of financial control do not always align with perceptions of financial security. For example, in Bangladesh and Chile, only 7 percent and 10 percent of respondents, respectively, are financially secure. In comparison, in Japan, 50 percent of the respondents are financially secure. Yet, in all three countries, approximately one-third of respondents perceive they have financial control.

Additionally, lower perceived financial control was the most significant predictor of financial insecurity in seven of the 10 countries examined (the exceptions are Bangladesh, Vietnam and Kenya, all of which reported “region of the country” as the most significant predictor of financial security). It is worth noting that the seven countries are all developed or emerging economies whereas the three exceptions are developing economies. That Bangladesh, Vietnam and Kenya reported “region of the country” as the most significant predictor of financial insecurity indicates substantial disparities in financial health across geographies; the most likely explanation for this is an urban-rural divide and the related inequality of access to opportunity, information and income. Of additional predictors, being younger and having less education were the most significant predictors of financial insecurity across all countries studied.

The Center’s perspective:

Trapped in a cycle of poverty, half of the world lives on less than $2.50/day – the 30 percent of those who manage to escape fall back into poverty due to a dearth of tools that enable economic resilience. In this case, a lack of financial control quickly leads to financial insecurity.

Gallup’s reporting that lower perceived financial control is the most influential predictor of financial insecurity offers food for thought. A preliminary response might prompt a consideration of banked versus unbanked individuals, assessing measures of financial control against these two variables. However, Gallup notes that “perceived financial control has no clear relationship with account ownership.” Indeed, across all countries studied, the percentage of account ownership far exceeded the number of respondents that expressed perceived financial control. This mirrors trends that the Center has reported on previously – namely that while account ownership has increased, transformative financial inclusion demands the usage of these accounts. Leora Klapper, a Senior Fellow at the Center and lead author of the World Bank’s 2017 Global Findex, recently noted that while India has added approximately 300 million to the formal financial system, usage indicators are still lagging; this hampers sustainable financial security and long-term economic mobility.

The Center for Inclusive Growth is engaged in several programs that are focused on creating an enabling environment for the adoption and use of financial products. In 2017, the Center partnered with the Government of India’s Ministry of Electronics, Information, & Technology to create an animated video series with a female protagonist, called BuddhiMoney (smart money). BuddhiMoney provides valuable business acumen and financial literacy knowledge in an appealing and memorable format. The four-part video series focuses on access to market and financing opportunities for strivers and is designed to help 10,000 micro and small jewelry artisan businesses in Jaipur, India expand their operations. Similarly, recognizing that MSMEs account for more than 95 percent of all enterprises in Indonesia and more than half of these are women-owned, the Center partnered with Commonwealth Bank and Women Investment Series (WISE) to host masterclasses focused on increasing business acumen and connecting women entrepreneurs to formal credit. Projects such as these are driving adoption and usage, growing levels of financial security and financial control.

On another note, Gallup’s finding that Bangladesh, Vietnam and Kenya all reported “region of the country” as the most significant predictor of financial insecurity demands further comment. The Center’s theory of change is rooted in the belief that access to the networks that power the modern economy is critical to catalyzing inclusive growth. These networks can be as basic as roads, electricity and water or more advanced – such as education, training and social support systems. Transit, for example, is a network that is critical to productivity and economic mobility. Indeed, learnings from the Center’s multi-city U.S. tour “On the Frontlines of Inclusive Growth” affirmed that cities where residents can move easily, affordably and reliably from one place to another tend to have greater productivity and upward mobility. With this in mind, the Center recently partnered with Grameen America to develop an algorithm that optimizes routes and, thus, reduces commute time for Grameen staff visiting different client groups across New York City by 32 percent. Investing in smarter transit is critical to advancing inclusive growth and providing people with the opportunities they need to feel financially secure. Finally, the Center also regularly invests in research that seeks to understand how to reach hard to reach populations and connecting them to the networks that can facilitate financial inclusion and catalyze inclusive growth. Center-funded research from The Reach Project at the Munk School of Global Affairs is unveiling new approaches to help those who are hardest to reach.

It is with deep sadness that we share that our friend and colleague Manu Bhardwaj passed away unexpectedly. Manu led our research initiatives during a critical stage in the Center’s history and in the last weeks of his life, showed an incredible optimism about the possibilities new technologies portend for solving issues of inequality and exclusion. He was a valued member of our team, as well as a son, brother, and a cherished friend.

Manu viewed his work at the Center as an extension of his long-held commitment to public service. Manu’s family invites his friends and colleagues to consider donating to the Center for Democracy & Technology, a nonprofit organization that champions global, online civil liberties and human rights by driving policy outcomes to keep the internet open, innovative, and free. This was a cause near and dear to Manu’s heart. For more information and to make a donation, please click here.