Financial Education Summit Mexico City, March 3, 2011 DEVELOPMENT, FREEDOM AND EQUITY: ‘THE REACH OF FINANCIAL EDUCATION ‘Amartya Sen 1 The great Mexican poet and writer, Octavio Paz, made the wonderful remark, “To read a Poem is to hear it with our eves; to hear it is to see it with our ears." A great poem engages all ‘our faculties. We are simultaneously informed, aroused and energized by the moving nature of the thought that a poem can convey. There is, | believe, something of the inspirational quality of Poetry in the very idea of development, which is aimed at making ordinary people lead lives of much greater freedom and fulfilment. This, by the way, is not the depressingly narrow view of development that some textbooks in mainstream economics offer, concentrating only on the growth of national income and gross national product (the GNP), but a much broader understanding of development in terms of expanding human freedoms and capabilities of human beings. In achieving development in this larger sense, we can make good use of incomes and national products, and - as | will presently argue - also of good financial institutions, but the inspirational aspect of development is not one of financial accounting but of valuational understanding. In fostering financial education, with which this meeting is directly concerned, we have to go much beyond the soundness of finance to the profound importance of human freedom. The different institutions - financial, economic, political and social - that can facilitate development have to be assessed and designed in line with our basic objectives, what ultimately matter. We have to grasp these concerns, including the potential richness of human lives that is.Page 2 so often impoverished by circumstances beyond the individual's control, and consider the different instruments, including financial facilities and financial education that can help advance social justice and fairness. The poetry of development has to be grasped first, and this has to guide the prose of institutions, arrangements and learning. The prose need to be good too - the meeting today is much about that - but it also has to be inspired and motivated by the vision of @ better world with greater human freedom. 2 The relationship between freedom and development has been debated - exp tly or by implication - for a very long time. While some see freedom as a great ally of progress, others are fearful of individual freedom as a spoiler of development and as a source of adversity. The latter group can entertain disparate beliefs, held by different (and often conflicting) schools of thought, with very different diagnoses of the alleged poison: democratic rights, civil liberties, freedom of market transactions, or basic social opportunities (such as the emancipation involved in women's being schooled). Their common suspicion of freedom can lead to the advocacy - and imposition - of unfreedom of one kind or another, in political, economic, or social fields. It is important to counter, in a comprehensive and congruous way, the diverse manifestations of this scepticism about freedom, which can be found plentifully across the contemporary world, and | have attempted to contribute to that task in a book called Development as Freedom, In contrast with each of these distinct views, a good starting point for the analysis of development can be the basic recognition that freedom is both (1) the primary objective, and (2) the principal means of development. The former is an evaluative claim and includes appreciation of the principle that the assessment of development cannot be divorced from the lives that people can lead and the real freedoms that they enjoy. Development can scarcely be seen merely in terms of enhancement of inert objects of convenience, such as arisePage 3 in the GNP (or in personal incomes), or industrialization, or technological advance, or social modernization. These are, of course, valuable - often crucially important - accomplishments, but ‘their value must depend on what they do to the lives and freedoms of the people involved. The relation between freedom and development goes, however, well beyond this constitutive connection. Freedom is not only the ultimate end ‘of development, it is also a crucially effective means. This acknowledgment can be based on empirical analysis of the consequences of - and interconnections between - freedoms of distinct kinds, and on the evidence that freedoms of different types typically help to sustain each other. What a person has the actual capability to achieve is influenced by economic opporturities, political liberties, social facilities, and the enabling conditions of good health, basic education, and the encouragement and cultivation of initiatives. These opportunities are, to a great extent, mutually ‘complementary, and tend to reinforce the reach and use of one another. ‘A freedom-centred view of development has several advantages over more conventional views. First, it provides a deeper basis of evaluation of development, allowing us to concentrate ‘on the objective of individual freedom rather ‘than merely on proximate means such 2s the ‘growth of GNP or industrialization or technological progress. The enhancement of lives and liberties has intrinsic relevance that distinguishes it from, say, the enlargement of commodity production or of other materials of convenience. Second, since freedoms of different kinds contribute to enhancing freedoms of other kinds, a freedom-centred view also offers instrumental ‘insights. By focusing on the interconnections between freedoms of different types, it takes us well beyond the narrow perspective of seeing each freedom in isolation. We live in a world of many institutions (involving ‘the market, the banks, the government, the judiciary, the political parties, the media, and so on), and we have to see how they can supplement and strengthen each other, rather than getting in each other's way.Page 4 Third, this broad perspective also allows us to distinguish between (1) repressive Interventions of the state in stifling liberty, initiative and enterprise, and in crippling the working of individual agency and cooperative action, and (2) the supportive role of the state in enhancing the effective freedoms of individuals (for example, in providing public education, health care, social safety nets, good macroeconomic policies, and in safeguarding industrial competition and epidemiological and ecological sustainability) Finally, the freedom-centred view captures the constructive role of free human agency as an engine of change. t differs radically from seeing people as passive beneficiaries of cunning development programs. The need to overcome that misleading image of development is as strong today as it has ever been. & In this pursuit, how much can we draw on the large philosophical literature on justice? | think we can make good use of this important branch of human reasoning, but in order to do this appropriately, | believe, we have to go beyond the dominant mainstream philosophical theories of justice. Having argued against too much reliance on mainstream economics, | fear | have to argue also against too much reliance on mainstream philosophy. ‘The on-going philosophy of justice is very strongly dependent on a particular way of ‘thinking that was largely initiated by Thomas Hobbes in the seventeenth century. This leads to an ‘overwhelming concentration on identifying perfectly just social arrangements, and teke the characterization of "just institutions" to be the principal - and often the only identified - task of ‘the theory of justice. This way of seeing justice is woven in different ways around the idea of an imagined "social contract" - a hypothetical contract that the population of a sovereign state are supposed to be a party to. Major contributions were made in this line of thinking by Thomas Hobbes in the seventeenth century, and later on by, among others, John Locke, Jean-JacquesPage 5 Rousseau and Immanuel Kant (though Kant in particular also offered ideas that went well beyond the device of an assumed social contract). The contractarian approach has become the dominant influence in contemporary political philosophy, led by the most prominent political philosopher of our time, John Rawls, whose classic book, A Theory of Justice published in 1972, presents a definitive statement on the social contract approach to justice. In contrast, a number of other Enlightenment theorists (Adam Smith, the Marquis de Condorcat, Mary Wollstonecraft, Karl Marx, John Stuart Mill, for example) took a variety of approaches that differed in many ways from each other, but shared a common interest in making comparisons between different ways in which people's lives may go, jointly influenced by the ‘working of institutions, people's actual behaviour, their social interactions, and other factors that significantly impact on whet actually happens. These authors may not be in what is regarded today as mainstream philosophy, but they have explored what is, | believe, a particularly relevant perspective for understanding issues of justice in the world. 4 four concentration has to be on the actual lives of people, the question that immediately arises is how to understand the richness and poverty of human lives. The approach | have tried to pursue has largely focused on the freedoms that people actually enjoy. This differs sharply from many other approaches to assessing the demands of justice, for example, looking for the fulfilment of certain formal rights that people should have (on which institutional libertarians focus), whether or not these rights can be actually exercised. Many of these rights can, of course, fhave an instrumental rule in advancing more free social lives, but the pursuit of justice can hardly stop there. It is, for example, nice and reassuring to know that the state or anyone else would ‘not prevent a destitute from going to Capri or Acapulco to have @ good holiday. But the society may have to go a bit beyond securing the individuals’ right to do what they can do on their own,Page 6 ‘and consider what it can reasonably do to facilitate the freedom of the people to achieve what they have reason to value. If it is important not to be restricted by the reading of freedom within institutional libertarianism, the need to go beyond the mental metrics of utilities in the form of pleasures or esire-fulfilments is surely another important issue. The evaluative exercise of taking note of people's actual freedoms cannot be avoided by concentrating instead only on some features of ‘mental reactions, such as pleasures, happiness, or desire-fulflment, as utiitarians, from Jeremy Bentham onwards, have proposed. Even if chronically deprived persons, for example the hopelessly poor, or the chronically unemployed, or subjugated housewives, learn to come to terms with and accept cheerfully their deprived life styles (underprivileged people without hope of liberation often try to do just that to cope with the inescapability of the deprivation involved), that cultivated cheerfulness will not eliminate the real deprivation from which they will continue tosuffer. In pursuing the perspective of freedom, there are of course many difficulties to be addressed and problems to be resolved. Freedom has many aspects - many faces - and it is necessary both to distinguish between them and to choose the focus of analysis depending on the nature of the problem that is being addressed. For example, in dealing with the issue of torture and its unacceptability as a means to other - allegedly more important - ends (pursued in the contemporary world by many powers, including some leaders of the global establishment), what would be particularly important is to see the relevance here of the classical libertarian aspects of freedom, arguing for the immunity of every human being from forcible infliction of dain and humiliation by others, including the state. ‘There is greater relevance of other aspects of freedom when the focus is, instead, on ssues of economic and social advantage and in general on the inequality of the lives that Jifferent people are able - or not able - to lead in any society. These aspects of freedom can bePage? ‘captured better bya fuller assessment of what is called, in the new literature, "capability," which reflects the actual opportunities a person has - to do this or be that - things that he or she may value doing or being. Obviously, the things we value most are particularly important for us to be able to achieve. But the idee of freedom also respects our being free to determine what we ‘want, what to value, and ultimately what we decide to choose. Itis easily checked that means such as incomes and other resources, while valuable in the pursuit of capabilities, are not themselves indicators of the capabilities and freedoms that people actually have, The real opportunities that different persons enjoy are very substantially influenced by variations of individual circumstances (e.g., age, disability, proneness to illness, special talents, gender, matemity) and also by disparities in the natural and the social environment (eg., epidemiological conditions, extent of pollution, prevalence of local crime). Under these circumstances, an exclusive concentration on inequalities in income distribution cannot be adequate for an understanding of inequality - even of economic inequality, broadly defined. Consider an example. Being disabled has a double effect, in reducing the person's ability to earn an income (what can be called the "earning handicap") and in making the conversion of income into good living that much harder, thanks to the costs of prosthetics and of arranging assistance, and the impossibility of fully correcting certain types of disadvantages caused by disability (what can be called the "conversion handicap"). For example, a person who happens to be, say, crippled by an accident or by illness may need assistance, or @ prosthesis, or both, and even then the person would, in all probability, not become as able to move around freely as someone without that disability. The conversion handicap refers to the disadvantage that a disabled person has in converting income into good living. A system of poverty removal thatPages concentrates only on the lowness of income, in particular whether @ person's - or family's ~ income is below the poverty line (and this is the main approach across the world), will catch the earning handicap, but not the conversion handicop, and this could make the poverty relief programme fundamentally inadequate and ineffective. Let me illustrate the influence of conversion handicap with some results from poverty studies in the United Kingdom obtained by a briliant young student at Cambridge, Wiebke Kullys, in an illuminating Ph.D. thesis (she died tragically shortly after completing her dissertation - from a virulent type of cancer). Taking 2 poverty cut-off line at 60% of the British national median income, Kukiys found that 18 percent of individuals lived in families with below-poverty- line income. If attention is now shifted to individuals in families with 2 disabled member, the percentage of such individuals living on below-poverty-line income rises to 23. This gap of about 5 percentage point would largely reflect the "earning handicap" associated with disability of the affected members of the family and the earning disadvantage of others in the family who have to care for the disabled. if now "conversion handicap" is introduced, and note is taken of the need for more income to ameliorate the disadvantages of disability to the extent it can be ameliorated (through prosthetics and other counteracting arrangements), the proportion of individuals in families with disabled members jumps up to above 47 percent - 24 percentage point higher than the poverty ratio of 23 per cent when note is taken only of earning handicap but not of conversion handicap. Indeed, the bulk of the poverty even in terms of inadequate incomes, without taking note of the irremediable aspects of capability disadvantages of the disabled (no ), turns out to be due to the conversion handicap, going well matter how good the prosthesi beyond the earning handicap on which the standard poverty statistics concentrates. This can make the standard poverty relief programmes inadequate, one-sided and unfair. We have to take an interest in the overall capabilities that any person enjoys to lead the kind of life that the person has reason to want to lead, and this requires that attention be paid toPage 9 his or her personal as well as environmental characteristics, going beyond the income statistics. Indeed, the nature of every serious economic and social problem may be significantly influenced by taking the importance of freedom and capabilities seriously. And this requirement applies to the scope and content of financial education too, and also to the diagnosis of the needed financial instruments to enhance human lives. 6 What about power - another concept much invoked in political discussions? It should be obvious that power is, in many ways, a similar idea to capability. To say that a person is powerless in reversing the kind of negiect that he has been experiencing can also be expressed in ‘the language of capability: he is not capable of reversing the neglect from which he suffers. There is clearly much common ground here. And yet there is some evocative strength and rhetorical force in the language of power that the word capability, which is really @ term of art, cannot fully match. | am impressed, for example, to find that Henry Kissinger made the momentous diagnosis (2s The New York Times reports): "Power is the great aphrodisiac.” It is possible that the remark throws more light on Henry Kissinger than it does on power, but there is a really serious issue here. The role of power looks very different from the perspective of the very powerful than it does from the position of being largely powerless and downtrodden. And it is the subjugation and helplessness involved in the latter perspective that is particularly relevant for the social éthics of justice and equity. Even though the idea of power from both perspectives can be, in an analytical sense, Placed within the framework of capabilities, that is no more than a formal proposition. As a ‘matter of fact, the language of power can help to lead us to a better understanding of a divided ‘world, in addition to generating some critically important evocation - and even to justified anger. For example, Mary Wollstonecratt's wrath and bitter irony about gender hierarchy played a veryPage 10 Positive role in demanding attention to the kind of cool reasoning she also provided in her classic book, Vindication of the Rights of Woman in 1792. When capability failure is related to being ‘overwhelmed by the contrary actions of others, there is something more than a loss of capability that has to figure in a robust political analysis. itis not surprising that those who are particularly concerned with social divisiveness and the necessity of confrontation have tended to find much Use for the rhetoric of power, by referring to the domination, for example, of the ruling classes in stratified societies, or of men over women in sexist cultures. Take Steve Biko's remarks on “powerlessness” in the apartheid-based South Africa in the 1970s: these remarks were quoted in his trial in 1976 - not long before the apartheid regime Killed him. Biko said, with evident frustration but also great insight: "Powerlessness breeds a race in the sanctity of his toilet; who shout ‘Baas’ ‘of beggars who smile at the enemy and sweer at hi boss} willingly during the day and call the white man a dog in their buses as they go home." If capability failure of any kind is a matter of concern, those related to people's inability to act freely ‘or speak openly because of the power of others has special urgency and political salience. Consider Aneurin Bevan's famous comment, "The purpose of getting power is to be able to give it away," which Michael Foot separates out for special attention in his marvellous biography of Bevan. The remark may initially appear to be a conundrum, but it can be used to make several different unusual points, as Bevan himself did. | tend to take the remark as an eloquent articulation of the fact that the underdogs of society may seek power not so much to use it - not particularly over others - but to make sure that others do not have power over them. ifferent from not having that power at all. Toheve power without usingit is absolutely ‘The perspective of power can be particularly important for the capability generated by financial facilities and knowledge that work against exploitation — or even deception - by the more privileged. The power perspective fits very firmly into the capability approach, which points to the importance of having the freedom to do something whether or not one chooses to do it.Page 11 To that point, we have to add the recognition that the language of power can be very effective in drawing attention to the adversarial aspects of interdependences involved in social relations. This is an important concern in the advancement of freedom and capability, since societies involve conflicts as well as togetherness and mutual support. 7 |lend this presentation with a few remarks on the importance of financial education. Why bother about financial education? it 1s an Important question to ask even as we engage in ‘enlarging financial education and knowledge. Well, the first issue to acknowledge is the close constitutive link between financial education, on one side, with freedom, capability and power, on the other. Knowledge is typically freedom-enhancing which gives power to people who are powerless, and this basic connection is ‘a central issue in financial education. A person may be powerless because of acute poverty and destitution, and there we have to see the role of financial knowledge in making a person have greater means and earning, However, people with some means may stil fail to have what they could have because of not knowing how to use what they actually own. The development of a financial culture - on which Benamex has tended to put much emphasis in its past work - can be both very important and also extremely dependent on the acquirement of knowledge and understanding that allows sensible use of what one does actually possess. And to the extent that this restrains people's freedom and capabilities, this can be a very important problem to address in a development agenda. In this sense, financial education is important for all existing users of financial facilities and for all those who would be able to use financial facilities if these ‘opportunities were available to them for use. This group covers nearly the whole population of each nation in the modem world, and this is really a grand task.Page 12 ‘Second, if financial education is important for the users and potential users of financial institutions, it is also critically relevant for the planning and administration of financial institutions on which the facilities of the users and potential users would necessarily depend. If use demands knowledge and education, so does the difficult art of devising appropriate institutions and arrangements for facilitating use, and through that advancing human freedoms and capal For example, the handicaps of disability, about which | spoke earlier, demand special attention, and this is extremely important since one person in ten in the world have substantial disabilities ‘of one kind or another. The terrible neglect of people with physical or mental problems often ‘reflect social ignorance, rather than the vileness of humanity, Third, many of our activities not only influence our own lives, but also those of others, and there is an inescapable presence of society in our individual decisions. Taking a socially positive and constructive view of institutions and arrangements can help to better the configuration of interpersonal relations. Of course, the market mechanism is an important part of such relations, ‘and that mechanism needs assistance when there are unnecessary barriers (arising, for example, from financial or economic mistrust], but it also needs restraining when market-based decisions adversely affect the lives of others, The market mechanism can be - and often is - an enormous engine of progress, and while that role of markets need recognition and support, the constructive role of markets does not eliminate the limitations of purely market-based activities when they are very narrowly geared to individual profits, often to the exclusion of broader concerns of social . And there also exist other interpersonal relations that work quite outside the market mechanism (those that govern, for example, social cooperation on a voluntary basis), and they too deserve the attention of financial planners for their work. Fourth, there is now justifiable concern about the destruction of the environment resulting from human activities of various kinds, and financial education has to take note of the Possibility that adverse environmental results may be generated by some activities supported byPage 13 financial facilities. Financial education has to include training for critical scrutiny of the supported activities from the point of view of environmental preservation and sustainable development. Finally, equity is an important social value that has to be a part of the assessment of any Package of financial arrangements. | am not talking here about the dream world of full egalitarianism, but about the need for recognising that the presence of lerge inequalities in freedom of different people (split along the lines, for example, of race, class, gender, caste) may be morally and politically unacceptable and seen as wrong. It can also be socially disruptive, and as has been clear from recent research (for example by Professor Michael Marmot and others}, social and economic inequality can also be bad for the health - and even for the survival probabilities - of the underdogs of society. Financial education has to take note of these interdependent concerns and anxieties. In the constructive context of reading poetry, Octavio Paz, whom | quoted at the beginning of this lecture, thought that hearing poetry makes us "see it with our ears.” In a more grim context that of poverty and inequality - William Shakespeare had invoked the same imagery. King Lear told the blind Gloucester: "A man may see how this world goes with no eyes.” Lear went on to {ell his blind friend: "see how yond Justice rails upon yond simple thief. Hark, in thine ear: change places; end handy-dandy which is the justice, which is the thief?" Lear urged Gloucester, "look with thine ears." Financial facilitators, inspired by the vision of social justice, have to see the unequal world in which we live, and must try to address - to the extent they can - the injustice involved in social stratifications. Even though the top dogs of society have much more money to invest and greater immediate involvement with finance, nevertheless the freedom of the underdogs must be a significant part of the engagement of financial education that combine justice with efficiency. The underlying subject of today's meeting is, thus, intricate as well as profoundly important.