Wealth, Income and Education

I’m swamped with work today, so this will be a filler post to tide you guys over until I can get into meatier things.

I’ve been advocating more attention be paid to the early years of education, rather than focusing primarily on tertiary education, as I believe its a more effective way to create a more productive Malaysian workforce.

Here’s some supporting evidence (abstract):

How Does Your Kindergarten Classroom Affect Your Earnings? Evidence From Project STAR
Raj Chetty, John N. Friedman, Nathaniel Hilger, Emmanuel Saez, Diane Whitmore Schanzenbach, Danny Yagan

In Project STAR, 11,571 students in Tennessee and their teachers were randomly assigned to different classrooms within their schools from kindergarten to third grade. This paper evaluates the long-term impacts of STAR using administrative records. We obtain five results. First, kindergarten test scores are highly correlated with outcomes such as earnings at age 27, college attendance, home ownership, and retirement savings. Second, students in small classes are significantly more likely to attend college, attend a higher-ranked college, and perform better on a variety of other outcomes. Class size does not have a significant effect on earnings at age 27, but this effect is imprecisely estimated. Third, students who had a more experienced teacher in kindergarten have higher earnings. Fourth, an analysis of variance reveals significant kindergarten class effects on earnings. Higher kindergarten class quality — as measured by classmates' end-of- class test scores — increases earnings, college attendance rates, and other outcomes. Finally, the effects of kindergarten class quality fade out on test scores in later grades but gains in non-cognitive measures persist. We conclude that early childhood education has substantial long-term impacts, potentially through non-cognitive channels. Our analysis suggests that improving the quality of schools in disadvantaged areas may reduce poverty and raise earnings and tax revenue in the long run.

I don’t need to comment much on these research findings do I?

But while I’m on this subject, I’d also like to push one more item onto the education reform agenda – financial literacy. I dissed Robert Kiyosaki’s book “Rich Dad', Poor Dad” last week, but he did make one point in the book I really liked, which is teaching kids about money. Commerce/accounting isn’t enough, and one day seminars don’t cut it.

Financial literacy includes knowing the structure of the financial system and what each intermediary does, what the various financial  instruments are for, how to budget and manage money, and basic knowledge about investment and financial planning. These are life skills that REALLY matter, yet are not taught in our schools in a practical sense. To underscore the importance of this, here’s another working paper from the NBER (abstract):

Financial Literacy, Schooling, and Wealth Accumulation
Jere R. Behrman, Olivia S. Mitchell, Cindy Soo, David Bravo

Financial literacy and schooling attainment have been linked to household wealth accumulation. Yet prior findings may be biased due to noisy measures of financial literacy and schooling, as well as unobserved factors such as ability, intelligence, and motivation that could enhance financial literacy and schooling but also directly affect wealth accumulation. We use a new household dataset and an instrumental variables approach to isolate the causal effects of financial literacy and schooling on wealth accumulation. While financial literacy and schooling attainment are both strongly positively associated with wealth outcomes in linear regression models, our approach reveals even stronger and larger effects of financial literacy on wealth. Estimated impacts are substantial enough to suggest that investments in financial literacy could have large positive effects on household wealth accumulation.

A wider understanding of financial literacy means we will have to deal less with things like this:

Rising concerns over household debt and bankruptcies among young M'sians

PETALING JAYA: Rising concerns over household debt and bankruptcies among the young have prompted several suggestions on how to tackle the problem at source.

Apart from the expected curbs on property loans and possible limits on credit card usage, other steps include the creation of a personal credit scoring system, enhanced education and awareness among consumers as well as the financiers themselves.

RAM Ratings head of financial institution ratings Promod Dass said: “Based on the latest available Bank Negara statistics, household debt to gross domestic product (GDP) has marched upward from about 64% in 2008 to around 76% last year.

“This level is similar to that in Singapore and far lower than in Japan, the United States and Britain which are well above the 100% threshold…

…According to CIMB Investment Bank Bhd chief economist Lee Heng Guie, property loans make up about 50% of household loans, auto (27%), personal uses (8.9%) and credit cards (6.3%)…

…“There should be more awareness on educating households on how to manage their debt,’’ said Lee…

…The Credit Counselling and Debt Management Agency (AKPK) has pointed out that during the past year, almost 50% of the 3,000 individuals who approached the agency for credit counselling each month were aged between 30-40 years.

Another 15% were in their 20s.

According to the agency, problems over car loans and credit card advances were the top two reasons young Malaysians sought credit counselling.

There are a few programs on financial planning and financial literacy, offered by for instance FPAM and MFPC, but these are more often tailored for budding professionals rather than a general literacy course.

I think its about time to put it directly into the school curriculum, and the earlier kids are exposed to this, the better.

Technical Notes

1. Chetty, Raj, & John N. Friedman, Nathaniel Hilger, Emmanuel Saez, Diane Whitmore Schanzenbach, Danny Yagan, "How Does Your Kindergarten Classroom Affect Your Earnings? Evidence From Project STAR", NBER Working Paper No. 16381, September 2010
2. Behrman, Jere R., & Olivia S. Mitchell, Cindy Soo, David Bravo, "Financial Literacy, Schooling, and Wealth Accumulation", NBER Working Paper No. 16452, October 2010