Financial illiteracy a big problem

Income and wealth inequalities in Thailand flash signs of improvement, according to recent studies. Nonetheless, that does not mean we are off the hook of economic disparity. While a multifaceted set of policies is required to address this conundrum, financial literacy plays a critical role in cultivating healthy financial habits and bridging the gap between the rich and the poor.

Last December, the Bank of Thailand (BoT) released a report on the country's income disparity in the 21st century. It references data from the National Economic and Social Development Board, which illustrates narrower income inequality as evidenced by a reduction in the Gini coefficient from 46% to 38% between 1991 and 2015.

Meanwhile, Credit Suisse analysed Thailand's wealth imbalance, accounting for not only income but the overall asset ownership, in its latest Global Wealth Databook. It reveals Thailand's Gini coefficient under this metric notched 84.6% in 2019, down from 90.1% a year prior.

The Gini coefficient ranges from 0% to 100%, where 0% implies everyone has the same share of income or wealth and 100% means one person has it all.

These developments, however, do not warrant complacency. The BoT report also mentions the World Economic Forum's 2018 finding that Thailand was in the top quartile or the 25th most unequal country out of 107 nations studied. At the same time, Credit Suisse's estimates show the top 1% controlled 50.4% of the country's wealth last year. This marks progress from 66.9% in 2018 but Thailand was one of only two countries on a list of 40 nations in 2019 where the richest 1% owned over half of the country's assets. The other country being Russia at 58.2%.

The figures by Credit Suisse are not without shortcomings as no country has a single comprehensive source of information on personal wealth. Despite this, Oxfam, a global major nonprofit group on poverty alleviation, said the report "was still the most comprehensive reference".

Economic inequality cannot be taken lightly because it affects not only the poor but everyone in society including the rich. Studies show inequality can stifle growth, breed poor health and crimes, instigate social division and kindle political instability.

A 2015 report by the Organisation for Economic Co-operation and Development (OECD) estimates the average 3-point increase in the Gini coefficient among OECD countries over the past couple of decades shaved approximately 8.5% off GDP. The OECD research centre theorised a wider wealth gap causes low-income families to invest less in education and skills, hence restraining worker productivity, consumer purchasing power and the overall economic potential.

Some would argue wealth inequality is not all evil. Bill Gates, Steve Jobs and Mark Zuckerberg earned a fortune for their innovations and inevitably contributed to some degrees of disparity. But imagine a world without them. We may not have personal computers, smart devices and social media we enjoy today that elevate our living standards, promote entrepreneurship and drive growth.

Nevertheless, economic inequality that arises from unscrupulous means, such as individuals or companies receiving undue concession or market monopoly from the government, or violation of labour rights and unfair wages, is detrimental to society. This underpins an economic argument that wealth disparity could propel the rich to seize a bigger slice of the economic pie rather than making the pie bigger for the greater good.

Causes of wealth disparity extend also to discrepancies among people in inheritance, land ownership, education, gender, place of residence, occupation, access to basic financial services, social security and health care, life opportunities and more. But even if two people embrace these same attributes, wealth inequality may still occur due to a lack of financial knowledge.

For example, two 20-year-old graduates, one financially informed and the other financially ill-informed, start off with the same income and wealth levels. They commit to investing 1,000 baht per month for retirement over the next 40 years. The former invests in stocks which yield 8% per annum while the latter keeps his money in a savings account which returns 0.5% a year. When they reach age 60, the informed will have fetched 3.5 million baht whereas the ill-informed makes 530,000 baht, a whopping 6.6 times difference. What began as perfect equality ends up being a substantial imbalance.

This is supported by Professor Olivia S Mitchell at the Wharton School of the University of Pennsylvania. She said people with financial knowledge can "save better, invest better and manage their money better during retirement, while those who do not, do worse". Professor Mitchell and her fellow researchers discovered 30% to 40% of retirement wealth inequality in the United States could be explained by differences in financial knowledge.

In Thailand, financial literacy among the people is low. The BoT conducted a survey in 2016 on financial skills using the OECD framework, encompassing three financial pillars of knowledge, behaviour and attitude. The study found the financial skills among the Thai people were below the OECD average. Among the three surveyed areas, they performed worst on financial knowledge, which tested on topics in the likes of time value of money, compound interest and inflation. On financial behaviour, one in three did not have savings and the majority of those who did failed to save enough for rainy days and retirement. On financial attitude, Thais preferred spending today to saving for the future.

Financial knowledge can further narrow wealth disparity by preventing individuals, oftentimes financially ignorant, from being exploited by frauds. In the case of the Mae Manee Ponzi scheme, over 2,500 victims were scammed out of 1.3 billion baht with a promise of gaining 93% in one month, representing a preposterous annualised return of 267,000%. While greed might have gotten the better of them, some would have eschewed the deceit had they understood the implications of risk and return.

Financial literacy is as essential as reading and can complement other government policies to mitigate economic inequality. It can nurture low-income earners to be comfortable about saving and investing in more sophisticated financial products such as mutual funds, which is increasingly important amid the ultra-low interest rate environment. Financial knowledge and skills can also empower them to make more informed and healthy financial decisions to withstand adverse economic shocks that come their way.

The effectiveness of financial literacy can be even more profound if we do it early on in people's lives, that is in school, so they can reap maximum benefit from early savings and undertake prudent budgeting to ward off unmanageable debt in the first place, ultimately accumulating greater wealth in their lifetime.