For many Latin Americans living in cities, credit cards have become indispensable in their daily lives, and it is likely that in a few years a vast majority of the population will have access to them. With the expansion of banking services and technological innovations, the gap in access to financial services is rapidly closing. According to Findex data, between 2011 and 2017 the percentage of people with a bank account increased from 39% to 55% in Latin America and the Caribbean.
With this progress, more people will be able to save securely and have the possibility of accessing resources to expand a business or acquire a home. But there is also the other side of the coin: Many people use credit cards to buy things they don't need at high interest rates. It is not unusual for people to reach retirement age without savings and deep in debt.
Faced with this challenge, many governments and organizations are promoting financial literacy initiatives. The curricula are designed to teach students how to save, avoid unnecessary indebtedness and keep track of their income and expenses. However, an analysis of multiple programs around the world indicates that they rarely are effective. This can be attributed to a number of factors such as low class attendance, poor participation and the difficulty of changing the financial habits of adults.
In view of this, some programs are focusing on teaching personal finances to children and young people in schools. The intuition behind this strategy is that by making it part of their school curriculum, they create a captive audience, reducing participation problems. In addition, as children and young people are still developing habits, learning at this stage could lead to long-term behavioral changes.
While it sounds like a promising alternative, there is no clear evidence of its effectiveness to motivate governments and organizations to invest in such programs. “The literature on experimental design evaluations of these programs in young people is very scarce. You can count them with the fingers on one hand and none have long-term analyses,” says Veronica Frisancho, senior economist in the IDB's Research Department.
For Frisancho, the opportunity to contribute to closing this knowledge gap arose in 2016, when the government of Peru, in alliance with national banking organizations, launched a program called Finanzas en mi Colegio (Spanish for 'Finances in my school'). In its initial stage, the program focused on 150 schools with students between the ages of 14 and 16. To generate an experimental analysis, a universe of 300 potential schools was defined, so that for every school that received the program, another that had very similar conditions could be used as a comparison. Next they randomly chose which school would receive the classes and which one would not.
The treated schools received workbooks, training and guides for teachers and were asked to include the financial education content as a replacement of the hours dedicated to economics in a History, Geography and Economics course, while the control schools completed the regular economics class. The evaluation of the program was carried out with an exam, a questionnaire at the beginning and end of the school year, and the administrative records of the Ministry of Education.
The study found that the program was very effective. The impact on financial knowledge is equivalent to an improvement of 14.8 points in the PISA test, where Peru was in the next-to-last place, and reduced the gap with the next country in the ranking, Chile, by 51%. Young people also reported greater use of a budget to track their spending and price comparison before buying something. The intervention also encouraged students to talk more with their parents about household financial decisions and succeeded in modifying the pattern of their spending. In general, the percentage of spending dedicated to entertainment and clothing went down, while the percentage for home purchases, savings and other items rose.
One of the most interesting aspects of the program is that regular teachers are trained to teach the personal finance classes. This caused the teachers themselves to change their behavior and have a better financial performance, including an increase of 10 percentage points in the proportion of teachers comparing prices before making a purchase and by 9 percentage points the proportion of teachers that saves money. The impact of the pilot was even greater in the proportion of teachers that saves in a formal financial institution, which increased 14 percentage points.
"The connection for the teacher with the issues of their day to day, such as managing their pension accounts, motivated them to really care about the curriculum," says Veronica Frisancho. "This enhanced their learning and helped the students to have better results."
In addition, she points out that teachers had important changes in how they access credit several years after the intervention. “In another study that I am working on based on this data, we monitored the teachers. What we found is that they have more debt with formal financial institutions and reduced the probability of defaulting,” she says.
The next step is to examine the long-term impact on the lives of the students. At the end of the intervention, she asked 400 of them to keep a journal of expenses that they have filled in the first semester of 2019. “With this data, taken more than 3 years after the pilot, I can see longer term effects; I can see if they stayed in school or went to work, and what kind of decisions they made,” says Frisancho.
Verónica Frisancho points out that these types of programs could have a series of positive effects that cannot be observed with this study, but that could be transformative for the lives of these young people. “The most interesting thing for me is to see where else this program has an effect. Now that the students saw that investing is better than spending, maybe they will decide to stay in school longer. It could lead to a series of decisions that is affected by a different way of thinking and decision making,” she says.