Escaping Poverty

Economists have developed a wealth of tools in recent decades. But few scholars have applied those methods to an important social question: how do poor people manage their finances?

Economics professor Robert M. Townsend is shedding light on the issue through a unique long-term study of the poor in small villages in Thailand. Townsend’s work shows that having a sound financial strategy emphasizing saving significantly helps families escape poverty, and education is also linked to advances in wealth.

A new working paper based on data from the survey shows that 43 percent of rural households realized lasting gains in net worth over a seven-year period, and that 81 percent of that accumulation was due to the saving of income, as opposed to gifts or money sent by family members working overseas.

“There is not a poverty trap in these Thai villages,” says Townsend. “There are strategies people can pursue to increase their own wealth.”

The paper, “Wealth Accumulation and Factors Accounting for Success,” was written by Townsend and Anan Pawasutipaisit of Thammasat University in Thailand and published in the March issue of the Journal of Econometrics. The conclusions are based on a pioneering survey, which Townsend initiated in 1997, of household finances in 16 Thai villages; this paper covers monthly data for 531 households from 1999 through 2006.

The villagers in the survey tend to be farmers, fishermen, laborers, or small-business owners. The heads of successful households tend to be younger than those of the families that do not increase their worth, and gains in wealth correlate to the highest level of education achieved by a family member, as opposed to the family’s median educational level. The crucial factor, says Townsend, is “the ability or talent of one individual” who can change a family’s economic trajectory.

Moreover, the data show that financially successful households tend to remain successful. Among those people starting businesses, for instance, it is not the case that “successful entrepreneurs are those that simply get lucky,” Townsend and ­Pawasutipaisit write.

Townsend’s survey is now adding questions about financial literacy and entrepreneurial tendencies to create a more detailed profile of households that escape poverty.