Knowledge Changes Fate: Can Financial Literacy Advance Poverty Reduction in Rural Households?

Abstract

Poverty reduction and inclusive growth in poor rural areas attracted the increasing attention of governments and scholars around the world. We investigate financial literacy by conceptualizing its impacts on rural households’ poverty reduction, considering current and long-term economic income dynamics. Using a database from 2015 to 2017 China Household Finance Survey, we find that financial literacy has current and long-term effects on promoting rural households’ status by eliminating and effectively improving poverty (dynamic effects). Second, this study reveals that financial literacy and education have a significant complementary effect on rural households’ poverty reduction. The study distinguishes financial literacy from knowledge obtained through general education. Third, financial education is shown to significantly improve rural households’ financial literacy on and enhance poverty reduction. The policy implications of our findings include that the governments and financial institutions are also required to rigorously measure, understand and improve financial literacy. Reform of financial regulatory systems must include a national strategy for education projects and improvement in the quality and supervision of financial products and services.

Does Financial Literacy Affect Household Financial Behavior? The Role of Limited Attention

“…This study considered various control variables based on the prior studies ( Korkmaz et al, 2021 ; Xu et al, 2021 ), including age, age square, education level, marital status ( Married ), health status ( Health ), risk attitude, and other demographic characteristics ( Lei et al, 2013 ; Zhao et al, 2016 ; Shu, 2018 ; Tang et al, 2021 ; Zhao and Qu, 2021 ). Family characteristic variables included the following: Number of children in the family (age<15), number of elderly in the family (age > 60), family size, homeownership, owning two or more houses, total family income (natural logarithm), and total family assets (take natural logarithm).…”

“…We employed the OrderedProbit model to test the dynamic impact of financial literacy on financial literacy as captured by Equation 3. Y_i represented the change in financial behavior ( Xu et al, 2021 ). To be specific, Y_i was equal to 1 if residents engaged in financial behavior in 2017 but did not do so in 2015 (i.e., financial behavior = 0 in 2015 but financial behavior = 1 in 2017), Y_i was equal to 0 if the residents’ financial behavior had not changed (i.e., financial behavior = 1 or 0 both in 2015 and 2017), Y i was equal to −1 if residents did not engage in financial behavior in 2017 but did so in 2015 (i.e., financial behavior = 1 in 2015 but financial behavior = 0 in 2017).…”

“…In fact, some financial information (e.g., earnings announcements) is relatively less accessible to the public due to information asymmetry and high processing costs relative to media coverage ( Oliver et al, 2022 ). For example, rural households with lower financial literacy may not actively participate in the financial market fairly and enjoy the benefits of financial services ( Mahendru, 2020 ; Xu et al, 2021 ). In this regard, interpreting some information in daily-time financial decisions becomes challenging for individuals who lack relative financial knowledge.…”

“…Scholars acknowledge that households with high financial literacy are more likely to become involved in stock investments ( van Rooij et al, 2011 ; Hsiao and Tsai, 2018 ), have a regular bank account ( Klapper et al, 2012 ), evaluate financial products and optimize household asset-allocation rationally ( Bianchi, 2018 ), make reasonable pension plans ( Lusardi and Mitchell, 2010 ; Clark et al, 2017 ), and become actively involved in credit card consumption and lending behavior in the current. However, limited literature has discussed the long-term and dynamic effects of financial literacy on household financial behaviors ( Xu et al, 2021 ). Hence, our research attempts to fill this gap.…”

“…The literature mainly discusses the impact of financial literacy on current financial behaviors ( Hsiao and Tsai, 2018 ; Tian et al, 2020 ), which mainly neglects the long-term and dynamic nature. Therefore, we discuss the relationship between financial literacy, limited attention, and financial behavior by focusing on the long-term and dynamic nature of the study ( Xu et al, 2021 ).…”