The interconnectedness between international financial literacy and economic stability has become an increasingly urgent topic for policymakers and financial leaders around the globe. Having weathered the international financial crisis of 2008, as well as several serial financial downturns, the critical nature of this relationship has been made glaringly highlighted.
These events and others like them have prompted a careful examination of the role that financial literacy has on economic stability on a worldwide stage. There are both immediate and long-term implications of this relationship for global monetary systems, national economies, and individuals.
Understanding Financial Literacy
At its core, financial literacy means having the ability—or the capacity—to comprehend the vast range of economic concepts, many of which are abstract. This refers to investing, borrowing, supply and demand, saving, and budgeting.
Financial literacy empowers an entity, whether an individual person, an organization, or a business, to shore up financial stability, make sound financial decisions and, ultimately, contribute to broader economic health in the home, the community, the region, the nation, and the world. Note that financial literacy has both a “trickle-up” effect, as opposed to a “trickle-down” effect.
Healthy Economies Depend Upon Its Citizens’ Capacity For Financial Literacy
A key factor to consider is that a nation’s economy partially depends upon the financial choices that its citizens make. Consider that when a nation’s citizens save, avoid debt traps and invest wisely, they don’t contribute negatively to debt statistics.
On the other hand, when citizens fail to understand the importance of budgeting, spend recklessly, fall deeper and deeper into debt, take out high-interest loans, and default on their loan payments, this leads to financial crises in the individual’s life that ultimately ripples upward to the nation’s economy.
Financial government bodies make decisions based on economic data from various sectors, including debt, jobs data, and more. Those decisions, such as the prime interest lending rate and minimum wage rates, have trickle-down effects that impact everyone, from corporations to individuals.
Those decisions also affect international lending rates and decisions that have a global impact.
From a bird’s eye view, a financially literate population contributes positively to the stability of both national and international monetary systems.
Financially literate individuals can start new businesses, pay bills on time, successfully take out results-oriented loads such as working capital loans, facilitate healthy marketplace competition, and help to foster innovation.
A financially literate populace can also support a nation as it works to avoid risks, reacting thoughtfully and calmly to market signals. It can also reduce the likelihood of speculative bubbles and risky financial moves that can put the entire financial system in jeopardy.
Ensuring Financial Literacy And Economic Stability
Many economic leaders and global financial entities know the relationship between international financial literacy and economic stability. Yet, there still exist gaps in the world. This disparity is most obvious between first-world and second and third-world nations.
In part, this can be attributed to levels of education, access to technological resources, regulatory frameworks, perceived lending risks, and access to financial resources.
The World Bank and other controlling governmental entities are critical in resolving this disparity. These entities have the power and resources to educate individuals, and provide platforms and other resources that can help to promote international economic stability through financial literacy.
By working together, with a joint understanding of this relationship, positive change is within reach.
About Ilia Zavialov
Ilia Zavialov has over a decade of experience as a Financial Services Professional in the financial services industry, including banking. Zavialov has held several leadership positions at major financial institutions and brings a depth of wisdom to economic issues facing the world.
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