Australia has the highest financial literacy rate in the Asia-Pacific region
26 Apr 2016
Australia ranks number one in the region and ninth in the world in terms of financial literacy, with almost two-thirds of our adults understanding basic financial concepts, according to Standard & Poor's Rating Services (S&P’s), Global Financial Literacy Survey. Australia’s high score in the study reflects the nation’s world-class educational system, specifically in the finance discipline.
Our superior ranking in the global financial literacy rate is consistent with many other strengths identified in Austrade’s latest Benchmark Report (BMR). In the table of Workforce Skill Base Comparison of Austrade’s BMR, Australia’s secondary education enrolment rate is listed as the highest in the world and the tertiary education enrolment rate the fifth strongest out of 187 economies1. Meanwhile, the availability of Australia’s finance skills is impressively rated as the fifth highest out of 61 economies2. Financial literacy also tends to be correlated with mathematical achievement.
Financial education is increasingly important in today’s dynamic and complex financial market, and financial knowledge is seen as an essential life skill for the average individual and family. Reforming welfare systems, changing demographics, and the increased sophistication and expansion of financial services have all contributed to a greater awareness of the importance of ensuring that consumers and investors of all ages are financially literate.
Our Central Bank, the Reserve Bank of Australia (RBA), in a research paper has particularly addressed the importance of financial literacy in the Conference on Deepening Financial Capacity in the Pacific Region. The RBA concludes that financial literacy matters on many levels:
- Financial education is increasingly important for people’s financial well-being. The RBA highlights in its paper that financial knowledge helps individuals and families manage their financial affairs, raise their chances of achieving financial goals, and therefore improve their standard of living. In other words, financial ignorance can carry an invisible lifetime cost.
- Financial literacy makes a major impact to the soundness of the financial system. The RBA believes that borrowers in a financially educated society will be less likely to take on more debt just because credit is easily accessible. The Bank argues the borrowers will have a much better chance of riding out an economic recession without defaulting on their debt repayments. This, in turn, will help minimise the bad debt experience of financial institutions and therefore, help strengthen the health and efficiency of the financial system.
- Financial knowledge also makes a significant contribution to the economic performance. The Bank said, “Economic development is very much about the successful channelling of domestic savings into productive investment opportunities.” The Bank notes that any market economy will function much more effectively if their citizen is financially knowledgeable. An efficient economy is one in which participants maximise their risk-adjusted returns so that resources flow to their most productive use relative to risk, leading to higher longer-term growth rates.
S&P’s assessment measured financial literacy across more than 140 economies around the globe. Data were collected via the Gallup World Poll, and researchers from the World Bank Development Research Group and the Global Financial Literacy Excellence Centre at George Washington University conducted the analysis. The findings represent the world's largest, most comprehensive measurement of financial literacy to date.
More than 150,000 randomly selected individuals in these economies were asked to answer four multiple-choice questions regarding risk diversification, inflation, numeracy (interest) and compound interest. If individuals could correctly answer three out of the four questions, they were deemed to be financially literate. Based on this test, only one third or of adults worldwide, on average, are financially literate. However, a lack of financial literacy is not a problem only in the developing world. Consumers and investors in many developed economies also fail to demonstrate a strong financial knowledge to understand the financial landscape, manage financial risks effectively and avoid financial difficulties.
Here are some of the interesting findings in the S&P’s latest study:
- Scandinavian countries have the highest financial literacy rates globally, with Denmark, Norway and Sweden at 71 per cent each. Israel (ranked fourth globally or 68 per cent), Germany (seventh or 66 per cent), the Netherlands (seventh or 66 per cent) and Finland (10th or 63 per cent) are also among the most financially literate countries in the world (see chart below).
- Among English-speaking economies, Australia ranks number nine in the world, with 64 per cent of adults deemed financially literate, behind Canada (fourth globally or 68 per cent) and the UK (sixth or 67 per cent). Our ranking is ahead of New Zealand (11th or 61 per cent) and the US (14th or 57 per cent).
- Financial literacy rates differ enormously between the major advanced and emerging economies in the world. On average, 55 percent of adults in the G7 economies are financially literate. The rate is well above the average rate of 28 per cent for the major emerging economies of BRICS (Brazil, Russian Federation, India, China, and South Africa).
- Even across the G7 countries, financial literacy rates range widely, from 37 percent in Italy to 68 percent in Canada. Disparities exist among the BRICS, too, with rates ranging from 24 per cent in India to 42 per cent in South Africa.
- The survey also finds that financial literacy rises with higher educational attainment—which is strongly associated with mathematical skills, age and income. In major developed economies, 52 per cent of adults with secondary education are financially literate. Among adults with primary education attainment, that rate is lower at 31 percent. A similar divide separates adults with secondary education and adults with tertiary education: 73 percent of adults are financially literate. The findings are similar in the major emerging economies.
- S&P’s also notices wide discrepancies between adults living in the richest 60 per cent of households in each country versus those in the poorest 40 per cent. For instance, Australia sees a disparity of 73 per cent literate (wealthiest households) versus 50 per cent (poorest). Similarly, the US has the respective rates of 64 per cent and 47 per cent.
- Overall understanding of financial concepts tends to be high in countries where 15-year-old students performed well on the OECD’s 2012 Programme for International Student Assessment mathematics test (2014). While overall there is a positive relationship, some notable exceptions are evident, such as South Korea (only one third of adults are financially literate), China (28 per cent) and Vietnam (24 per cent).
1 Source: World Economic Forum’s Global Competitiveness Report 2015–16/BMR page 28
2 Source: Institute for Management Development, World Competitiveness Yearbook 2015/BMR page 28