Savings and Asset Development for the Poor in Developing Countries Sponsored by CGAP and the Global Assets Project The World Bank, Washington DC January 23, 2007 Ray Boshara New America Foundation Washington DC

What is Asset Development? Public, non-profit, and private strategies to enable poor, low- income, and moderate-income persons to save and accumulate long-term, productive assetsa home, post-secondary education, investments, land, a small business, and a nest-egg for retirement. Public, non-profit, and private strategies to enable poor, low- income, and moderate-income persons to save and accumulate long-term, productive assetsa home, post-secondary education, investments, land, a small business, and a nest-egg for retirement. Michael Sherraden, Assets and the Poor (1991): Michael Sherraden, Assets and the Poor (1991): 1.Economically, assets are the key to economic security. 2.Asset ownership is associated with positive social, civic, behavioral and psychological effects not necessarily associated with income. Lack of income means you dont get by; lack of assets means you dont get ahead. Assets are hope in concrete form. Long-term, inter-generational perspective Long-term, inter-generational perspective Informed by Amartya Senassets as the economic proxy for Sens notion of capabilities. Informed by Amartya Senassets as the economic proxy for Sens notion of capabilities.

Global Context of Asset Development 3 billion people worldwide lack access to basic financial services (CGAP, 2006). By region: 3 billion people worldwide lack access to basic financial services (CGAP, 2006). By region: RegionAccounts per 100 people Asia and the Pacific 17 Middle East and North Africa13 Sub-Saharan Africa 4 Europe and Central Asia 5 Latin America and Caribbean 3 Overall13 The worlds richest 2 percent hold over half of the entire worlds wealth, while the bottom 50 percent hold only one percent (World Institute for Development Economics Research, 2006) The worlds richest 2 percent hold over half of the entire worlds wealth, while the bottom 50 percent hold only one percent (World Institute for Development Economics Research, 2006) Many countries have public policies that actively build wealth for at least the upper-half of the population. The goal of asset development is inclusion in those policy systems, or the creation of policies that build wealth for the worlds poor. Many countries have public policies that actively build wealth for at least the upper-half of the population. The goal of asset development is inclusion in those policy systems, or the creation of policies that build wealth for the worlds poor.

Value Added of Assets Approach to Combating Poverty U.S. & advanced economies Income is defining feature of anti-poverty policiesIncome is defining feature of anti-poverty policies Assets ignoredand often penalized, while subsidized for non-poorAssets ignoredand often penalized, while subsidized for non-poor Assets approach: remove barriers to and offer incentives for accumulating savings and assets by the poorAssets approach: remove barriers to and offer incentives for accumulating savings and assets by the poor Social Protection and Sustainable Livelihoods (Moser, 2006) Social Protection: Focus on protecting the poor and vulnerable against negative risks and shocksSocial Protection: Focus on protecting the poor and vulnerable against negative risks and shocks Sustainable Livelihoods: Sustaining activities required for means of livingSustainable Livelihoods: Sustaining activities required for means of living Assets approach: Creation of positive opportunities for sustainable asset accumulationAssets approach: Creation of positive opportunities for sustainable asset accumulationMicrofinance Microfinance: recent and growing focus on savingsMicrofinance: recent and growing focus on savings Assets approach:Assets approach: Savings that lead to assets Savings that lead to assets Asset ownership is associated with positive outcomes not necessarily associated with income Asset ownership is associated with positive outcomes not necessarily associated with income

Major Trends Relevant to Asset Development Microfinance (Littlefield, 2006) Microfinance (Littlefield, 2006) Wireless – changing financial architectureWireless – changing financial architecture Demographics – high population growth rate in poor, developing nations; labor and related remittances flowDemographics – high population growth rate in poor, developing nations; labor and related remittances flow Emerging economies (Brazil, Russia, India, China, etc) who are charting their own course, not taking advice from the WestEmerging economies (Brazil, Russia, India, China, etc) who are charting their own course, not taking advice from the West Social activism – global campaign to eliminate debt, greater emphasis on consumer protection, efficiency, transparency, and lower costs.Social activism – global campaign to eliminate debt, greater emphasis on consumer protection, efficiency, transparency, and lower costs. Social Policy (Sherraden, 1996) Social Policy (Sherraden, 1996) Increasing use of individual asset accounts to achieve social policy goalsa global ownership societyIncreasing use of individual asset accounts to achieve social policy goalsa 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, savings, and financial know-howSignificant risk that the poor will be excluded, given lack of accounts, access, savings, and financial know-how Financialization of Capital (Mahajan, 2006) Financialization of Capital (Mahajan, 2006) Over the past few centuries, all forms of capitalhuman, physical, natural, socialhave become financialized: they have prices and titles permitting exchange, and thus have become tradable.Over the past few centuries, all forms of capitalhuman, physical, natural, socialhave become financialized: they have prices and titles permitting 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 economic security and opportunity.Thus, enhancing access to financial assets is key to helping the poor realize economic security and opportunity.

Individual Development Accounts (IDAs) in the U.S. Can the Poor Save in IDAs? Number of Accountholders: 2,364. Mean participation: 24.5 months Schreiner et al., 2002 Savings Performance Savings Performance Average monthly deposit: $19 net, $40 gross Average monthly deposit: $19 net, $40 gross With average match of 2:1, total savings was $700 per year With average match of 2:1, total savings was $700 per year Withdrawals: Withdrawals: 46% home purchase/repair46% home purchase/repair 23% microenterprise23% microenterprise 18% small business18% small business 64% made unmatched withdrawals 64% made unmatched withdrawals 51 cents was saved for every dollar that could have been matched 51 cents was saved for every dollar that could have been matched Regression Results Regression Results Income not correlated with saving Income not correlated with saving Each dollar increase in monthly savings match cap is associated with a 40-50% increase in average savings Each dollar increase in monthly savings match cap is associated with a 40-50% increase in average savings Total amount matched (match cap) matters more than match rate (e.g., 1-1 vs. 2-1) Total amount matched (match cap) matters more than match rate (e.g., 1-1 vs. 2-1) Financial education is correlated with greater savings, but only up to 10 hours Financial education is correlated with greater savings, but only up to 10 hours Participant characteristics matter little Participant characteristics matter little

What is the Effect of IDAs on Savings and Asset Accumulation? Sample size: 840 (412 treatment, 428 control). Time: 48 months Mills et al., 2004 Homeownership Significant positive effect, esp. for African Americans Real assets and total assets Positive effect for subgroups that experienced increases in homeownership Retirement savings Positive for African Americans Liquid assets Negative (due to acquiring other assets) Liabilities Net worth No measured effect (but this finding is disputed) Educational attainment Significant positive effect (whether one had taken a non-degree course)

The Verdict on IDAs in the U.S. The poor can save and accumulate assets in IDAs (Schreiner et al.) The poor can save and accumulate assets in IDAs (Schreiner et al.) IDAs had their intended effect on homeownership and other asset-building outcomes (Mills et al.) IDAs had their intended effect on homeownership and other asset-building outcomes (Mills et al.) IDAs may have important and positive psychological and behavioral effects (McBride et al.) IDAs may have important and positive psychological and behavioral effects (McBride et al.) IDAs are too costly, and not the route to scale in the U.S. IDAs are too costly, and not the route to scale in the U.S.

H&R Block Express IRA Savings Experiment in the U.S. Retirement Security Project, ,000 clients randomly offered matching deposits on IRA contributions. Results: 15,000 clients randomly offered matching deposits on IRA contributions. Results: Match rate Take-up Average IRA Contribution 0 % 3 %-- 0 % 3 %-- 20 % 10 %4 times control 20 % 10 %4 times control 50 % 17 %8 times control 50 % 17 %8 times controlConclusions: Higher match rates significantly raise IRA participation and contributions. Higher match rates significantly raise IRA participation and contributions. Professional tax assistance, information provision, and ease of saving can play important roles in encourage saving. Professional tax assistance, information provision, and ease of saving can play important roles in encourage saving. Dont know which was more powerful: the effect of the tax professional or the effect of the matching contribution. Dont know which was more powerful: the effect of the tax professional or the effect of the matching contribution.

Research on Asset Effects Summarized by Sherraden, 2005 Holding assets at 23 is associated with later positive outcomes such as better labor market experience, marriages, health and political interest. (Bynner & Paxton, 2001) Holding assets at 23 is associated with later positive outcomes such as better labor market experience, marriages, health and political interest. (Bynner & Paxton, 2001) The presence of the asset appears to matter more than the monetary value of the asset. (Bynner & Paxton, 2001) The presence of the asset appears to matter more than the monetary value of the asset. (Bynner & Paxton, 2001) The presence of small wealth at critical times can have transformative effects on the life course. (Shapiro, 2004) The presence of small wealth at critical times can have transformative effects on the life course. (Shapiro, 2004) Parental wealth is positively associated with cognitive development, physical health, and socio-emotional behavior of children – even in very poor families. (Williams, 2003) Parental wealth is positively associated with cognitive development, physical health, and socio-emotional behavior of children – even in very poor families. (Williams, 2003) Wealth seems to be a better predictor of well-being as children grow older, while income is a better predictor when they are younger. (Williams, 2003) Wealth seems to be a better predictor of well-being as children grow older, while income is a better predictor when they are younger. (Williams, 2003) Low-income, single mothers assets are positively associated with childrens educational attainment. (Zahn and Sherraden, 2003) Low-income, single mothers assets are positively associated with childrens educational attainment. (Zahn and Sherraden, 2003) Income is associated with educational achievement when assets are not in the model. However, income becomes non- significant when assets are included. (Zahn and Sherraden, 2003) Income is associated with educational achievement when assets are not in the model. However, income becomes non- significant when assets are included. (Zahn and Sherraden, 2003) Assets lead to positive attitudes and behaviors, and positive attitudes and behaviors lead to assets may be a glimpse of a virtuous cycle wherein household development is a reinforcing feedback loop. (Yadama and Sherraden, 1996) Assets lead to positive attitudes and behaviors, and positive attitudes and behaviors lead to assets may be a glimpse of a virtuous cycle wherein household development is a reinforcing feedback loop. (Yadama and Sherraden, 1996)

New Directions in Savings Theory Program -> Product -> Plan Program -> Product -> Plan Institutional Determinants of Savings (Sherraden, Schreiner, and Beverly, 2002) Institutional Determinants of Savings (Sherraden, Schreiner, and 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 – not income, and not preferences. Incentives may matter less, and expectations more. These external features explain savings – not income, and not preferences. Incentives may matter less, and expectations more. Convergence with behavioral economics: inertia; having things done for you; and fewer choices are likely to significantly improve savings. Convergence with behavioral economics: inertia; having things done for you; and fewer choices are likely to significantly improve savings.

Childrens Savings Accounts Childrens Savings Accounts Existing Policies UK: Child Trust Fund Singapore: Baby Bonus & Child Development Accounts Canada: Education Savings Program Hungary: Baby Bonds ` Proposed Policies / Current Projects Current Projects Korea: Child Development Accounts U.S.: Various universal CSAs policies proposed; SEED demonstration proiect New Zealand: KiwiSaver Plus Australia: Nest Egg Accounts Uganda: Child Development Accounts demonstration project