Ray Boshara New America Foundation Washington DC 202-986-2700 boshara@newamerica

1. Savings and Asset Development for the Poor in Developing Countries Sponsored by CGAP and the Global Assets ProjectThe World Bank, Washington DC January 23, 2007 Ray Boshara New America Foundation Washington DC 202-986-2700 boshara@newamerica.net www.newamerica.net www.AssetBuilding.org www.GlobalAssetsProject.org

2. 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 assets—a home, post-secondary education, investments, land, a small business, and a nest-egg for retirement. • Michael Sherraden, Assets and the Poor (1991): • Economically, assets are the key to economic security. • Asset ownership is associated with positive social, civic, behavioral and psychological effects not necessarily associated with income. “Lack of income means you don’t get by; lack of assets means you don’t get ahead.” “Assets are hope in concrete form.” • Long-term, inter-generational perspective • Informed by Amartya Sen—assets as the economic proxy for Sen’s notion of “capabilities.”

3. Global Context of Asset Development • 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 Africa 13 Sub-Saharan Africa 4 Europe and Central Asia 5 Latin America and Caribbean 3 Overall 13 • 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 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 world’s poor.

4. Value Added of Assets Approach to Combating Poverty U.S. & advanced economies • Income is defining feature of anti-poverty policies • Assets ignored—and often penalized, while subsidized for non-poor • Assets 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 shocks • Sustainable Livelihoods: Sustaining activities required for means of living • Assets approach: Creation of positive opportunities for sustainable asset accumulation Microfinance • Microfinance: recent and growing focus on savings • Assets approach: • Savings that lead to assets • Asset ownership is associated with positive outcomes not necessarily associated with income

5. Major Trends Relevant to Asset Development • Microfinance (Littlefield, 2006) • Wireless – changing financial architecture • Demographics – 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 West • Social activism – global campaign to eliminate debt, greater emphasis on consumer protection, efficiency, transparency, and lower costs. • Social Policy (Sherraden, 1996) • Increasing use of individual asset accounts to achieve social policy goals—a “global ownership society” • Growing 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-how • “Financialization” of Capital (Mahajan, 2006) • Over the past few centuries, all forms of capital—human, physical, natural, social—have 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. • Thus, enhancing access to financial assets is key to helping the poor realize economic security and opportunity.

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

7. 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

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

9. H&R Block “Express IRA” Savings Experiment in the U.S.Retirement Security Project, 2005 • 15,000 clients randomly offered matching deposits on IRA contributions. Results: Match rateTake-upAverage IRA Contribution 0 % 3 % -- 20 % 10 % 4 times control 50 % 17 % 8 times control Conclusions: • 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. • Don’t know which was more powerful: the effect of the tax professional or the effect of the matching contribution.

10. 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 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) 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 children’s 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) 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) Research on Asset EffectsSummarized by Sherraden, 2005

11. New Directions in Savings Theory • Program -> Product -> Plan • Institutional Determinants of Savings (Sherraden, Schreiner, and Beverly, 2002) • Access • Information • Incentives (tax break or match) • Facilitation (someone does it for you) • Expectations (match caps) • Limits (contribution limits) • 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.

12. Existing Policies UK: Child Trust Fund Singapore: Baby Bonus & Child Development Accounts Canada: Education Savings Program Hungary: Baby Bonds ` Proposed Policies / 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 Children’s Savings Accounts