A new research study provided insights into how the poor people in four Thailand provinces increased their net worth and pull out of poverty. Poor people in developing countries who used their existing assets most productively were more successful at pulling themselves out of poverty.
The new research study was presented by economists Anan Pawasutipaisit of Thammasat University and Robert Townsend of Massachusetts Institute of Technology. The paper, Wealth Accumulation and Factors Accounting for Success appears in the current issue of the Journal of Econometrics.
The paper suggests that poor people who skillfully manage their assets are especially successful in improving their net worth. The economists discovered that, over the course of their 7-year study, poor households grew their net worth by an average of 22 percent per year while rich households grew by just 0.09 percent.
Pawasutipaisit and Townsend identified these trends through an extensive survey that was taken from more than 500 Thai households across four provinces every month between 1999 and 2005. From this data, Pawasutipaisit and Townsend created detailed, financial accounts for each home.
The economists discovered that the ability of poor families to increase their wealth was strongly related with their rate of saving and, even more so, with their ability to create a high return on assets.
The economists said many of the successful households reinvested their money in their small businesses and farms, suggesting that they are well aware of the source of their success.
The data seem to show pretty conclusively that successful households are not just lucky, said Robert Townsend. They are doing something systematic, month after month, year after year. The next step, of course, is to figure out what the associated skills and attitudes really are.
The growth of net worth can be decomposed household by household into the savings rate and how productively that savings is used, the return on assets (ROA).
ROA is, in turn, positively correlated with higher education of household members, younger age of the head, and with a higher debt/asset ratio and lower initial wealth, so it seems from cross-sections that the financial system is imperfectly channeling resources to productive and poor households.
The economists said household fixed effects account for the larger part of ROA, and this success is largely persistent, undercutting the story that successful entrepreneurs are those that simply get lucky.
Persistence does vary across households and in at least one province with much change and increasing opportunities, ROA changes as households move over time to higher-return occupations, the economists said.
But for those households with high and persistent ROA, the savings rate is higher, consistent with some micro founded macro models with imperfect credit markets.Indeed, high ROA households save by investing in their own enterprises and adopt consistent financial strategies for smoothing fluctuations, the economists said.
More generally growth of wealth, savings levels and/or rates are correlated with total factor productivity and the household fixed effects that are the larger part of ROA.