Economic system and financial literacy: Evidence from North Korean refugees

Abstract

We compare the financial literacy of two groups of Koreans living in South Korea, namely, native-born South Koreans and North Korean refugees, who were born and raised in contrasting economic systems. Examining the financial literacy of North Korean refugees and its changes over time after their settlement in a capitalistic society underscores the importance of institutional environments in developing financial literacy. We find that North Korean refugees, with very limited access to financial markets in their home country, are significantly less financially literate than native-born South Koreans. The gap is significant even after controlling for cognitive ability, which is also starkly different between the two groups. The financial literacy of the refugees increases over time during their settlement in South Korea, but the magnitude of such improvement is insubstantial. Our findings suggest that financial literacy is developed at the early life stages and cannot be easily modified at the later stages.