Opinion, Berkeley Blogs

The Importance of Applied Finance Literacy

By David Zilberman

new cocoa plantation

My dissertation assessed the impact of water quality regulation in the San Joaquin Valley. We wondered if farmers would adopt cleaner practices and invest in wastewater management under alternative regulations and to what extent the regulations are burdensome economically. I went to the valley and interviewed many farmers and realized that some of the solutions would be affordable and that the farmers tended to consider adopting cleanup options. Still, they were worried they would not be able to finance them. I interviewed the banks and found that obtaining finance for these activities would be challenging and require some financial creativity that most farmers, and even bankers, lack. Our analysis suggests that a policy package to meet environmental objectives while keeping the industry viable includes expanding credit availability to farmers. Over the years, as I investigated solutions to environmental problems, I found that implementation would require attention to financial considerations. Later, I started working on the economics of supply chains, especially designing supply chains to introduce alternative energy or new irrigation technologies. Again, by speaking with practitioners, I saw that we need to develop financial mechanisms that enable us to implement these practices in the real world. These experiences taught me that policymakers and entrepreneurs should be financially literate to be effective.

            Twenty-five years ago, I founded the BEAHRS Environmental Leadership program, which educates mid-level environmental leaders about designing and implementing new projects. As part of the course, I had a segment on marketing and supply chain and presented a small segment on finance and found that the students were excited; I realized that they needed to know more about this topic. Later on, I co-founded the Master of Development Practice at Berkeley, where we emphasize project design and multidisciplinary collaboration that helps translate scientific knowledge into new projects. Again, I realized that MDP students need some financial education. Fortunately, I got to know Professor Glenn Yago from Milken Innovation Center, who has dedicated his life to financial literacy and has written textbooks on the topic. He started an elective course on development finance in our program. Last year, this elective was expanded to two classes, one providing the foundation of finance and development and the other helping students develop their projects to solve major environmental and poverty alleviation problems. His courses became popular and attracted people from the Master of Development Practice, Master of Engineering, and even the business school. Furthermore, his institute has a 6-month internship program, where people go into the field in developing countries and try to design and implement projects with an emphasis on a solid financial foundation. Two of my students participated in this program and considered it a life-changing experience. The MDP moved from the College of Natural Resources to the Goldman School. Like the ELP and MDP students, the Goldman students lack financial training, are interested in it, and would benefit from financial literacy.

            Finance in Berkeley is part of the business school. It is taught mainly to students who will be executives in the private sector or leaders in the public sector. There is, of course, value in training for those groups, but it should not be restricted to the selected few. While financial instruments–including consumer loans, mortgages, and different types of bonds that finance new creative initiatives–have been crucial in improving human conditions and enhancing technological change. Most of the public is hostile towards finance. They are suspicious of financial tools, which is a result of ignorance. Furthermore, policymakers and development practitioners may make major mistakes due to lacking basic financial literacy. My experience with Glenn Yago and his program convinced me that schools of public policy and programs for practitioners in development and other fields must have training in finance. This is not high finance but applied finance, which is essential for developing an enterprise and implementing innovation to improve the world. Schools of policy, development, and other applied disciplines should have faculty members who conduct research addressing some of the challenges of finance for the public sector, development, and financial communication and inclusion issues. There are at least 10,000 students in different development programs in the U.S., 30-40,000 in schools of public policy, and there are other master programs that have thousands of students, all of which can benefit from what I call Applied Finance Education. Furthermore, it will be essential to develop an intentional consortium of applied finance, where people can meet, share ideas, learn from their experiences, and build networks of teachers and practitioners who have laid the foundation for applied finance tools that will help us overcome issues of climate change, food security, loss of biodiversity, and inequality.

            I hope that we in Berkeley expand financial education and research beyond the business school and provide an example that will spread throughout the University, the United States, and worldwide.