Tracing Families’ Escape From Poverty

Thank you for observing and evenmeasuring the obvious.  The first andobvious task that must be undertaken by the state is to ensure every child getseducated as far as they are reasonably able. Fiat currency management lets you do this.

A step beyond this is to providecredit for all levels of society starting from the lowest echelon.  The trickle up impact is huge and swift.

The reverse has never properlybeen made to work.  Latin America and Africa have made a science of all that.  The Muslim world is only now beginning toshow signs of understanding.

Once Castroism ends, Cuba willswiftly become the single richest country in the Latin sphere, because he dideverything else right except let go.

The greatest folly of the Westhas been to supply money to governing elites. They inevitably buy the appropriate Swiss bank account and no credit isestablished at all.  Yet we keep doing itover and over again. 

A far better plan is simply goand pay school fees through high school everywhere aid is needed and ensurethat the curriculum content meets western standards.  Parents simply apply, vouchers are issued andschools bring in the vouchers to the aid office to acquire the cash.  It would be pretty hard to make this acorrupt process and you can count on religious organizations to provide bootson the ground.

The other great lesson here isthat one must empower the poor in every way possible.  Their rising strength will raise all boats.

Tracing families’ escape from poverty

Economist’s study shows how the poor in developing countries becomewealthier.

Peter Dizikes, MIT News Office

http://web.mit.edu/newsoffice/2011/thai-wealth-0110.html

January 11, 2011

Robert Townsend, the Elizabeth and James Killian Professor of Economicsat MIT.

January 10, 2011

For all the detailed tools developed to study finance in past decades,relatively few scholars have brought those methods to bear on a pressing socialquestion: How do poor people manage their finances?

Now, a long-term study of the poor in small villages in Thailand isshedding light on the issue. Having a sound financial strategy, including acommitment to saving money, has a large impact on lifting families out ofpoverty, the research reveals. Moreover, advances in wealth are linked tohighest level of education obtained by a household member, as well as awillingness to try new ventures.

The study, based on a unique set of data collected under the direction of MITeconomist Robert M. Townsend, shows that among rural households, 43 percentrealized significant and lasting gains in net worth over a seven-year period,and that 81 percent of that wealth accumulation was due to savings of income,as opposed to gifts or remittances, that is, contributions the family did notearn.

“There is not a poverty trap in these Thai villages,” says Townsend, theElizabeth and James Killian Professor of Economics at MIT. “There arestrategies people can pursue to increase their relative wealth.”

The findings are summarized in a new working paper, “Wealth Accumulation andFactors Accounting for Success,” written by Townsend and Anan Pawasutipaisit ofThammasat Universityin Thailand,and slated to be published in the Journal of Econometrics. The conclusionsare based on a pioneering survey of household finances in 16 Thai villages thatTownsend initiated in 1997. This paper takes monthly data from 1999 through2006, for 531 households, and represents a unique view into the month-by-month financiallives of rural villagers in a country that has demonstrated substantialeconomic growth in recent years, yet still has substantial pockets ofpoverty. 

The Thai villagers in the survey tend to be farmers, fishermen, laborers or runsmall businesses. Households that do get ahead have some generally sharedcharacteristics. The heads of households tend to be younger than in thefamilies that do not increase their worth. Additionally, gains in wealthcorrelate specifically to the highest level of education obtained by a familymember, and not the family’s median educational level, as Townsend notes. 

“It’s not the average wisdom of household members pulled together,” saysTownsend. Rather, he notes, “It’s suggestive that it is the ability or talentof one individual” that can change a family’s entire economic trajectory.

Moreover, the data show financial success to be a persistent feature of certainhouseholds, meaning it is not the case that “successful entrepreneurs are thosethat simply get lucky” due to one good crop or fish harvest, as Townsend andPawasutipaisit write in the paper. But new ventures are sometimes behind theaccrual of wealth. In one survey village, the household with the highest annualrate of return on assets (17 percent) was headed by a corn farmer whose wifeinsisted that they try raising dairy cows instead, sensing that owninglivestock would be more profitable in their area; the idea came in part after amilk cooperative sent workers to educate villagers about cows.

“This work really lifts the veil on the lives of low-income people that hadbeen hidden, largely because we don’t usually collect data with thisfrequency,” says Jonathan Morduch, a professor of public policy and finance atNew York University. “Once you do that, you see that people are not passivelyaccepting their fates. We see a lot of consumption smoothing — people’s incomesare going up and down, but they’re borrowing, saving, insuring with each otherand reducing risk in an informal way. People are actively seizingopportunities. That’s exciting and important to know.”

Townsend has also summarized some of his research in a 2010book, Households as Corporate Firms (CambridgeUniversity Press), written witheconomist Krislert Samphantharak of the Universityof California, San Diego. Now, as the survey continues,Townsend and Christopher Woodruff, another economist at the University ofCalifornia, San Diego, are trying to further define just what it is that makessome households more entrepreneurial-minded and able to generate a higherreturn on assets than others. Currently the survey is asking questions aboutfinancial literacy and risk-taking tendencies in an attempt to create a moredetailed profile of the types of households that escape poverty as a result oftrying new businesses.

How do small gains feed a large economy?

In turn, another area of ongoing research for Townsend and his colleagues isthe attempt to take the microeconomic data from individual households andvillages, and use it to flesh out the macroeconomic analysis of Thailand’seconomy as a whole. 

“It’s easy to think of Thailandand countries like it as producing GDP [gross domestic product] from thefactories which line the highways as you enter Bangkok,” says Townsend, referring to firmslike Ford and Nike with large operations in the area. But multinationals andincorporated businesses only account for 20 percent of Thailand’snational income. “We already know that households as firms are a big buildingblock of the national economy,” he adds. “We want to understand the evolutionof that as the economy itself gets bigger. Where did the bigger, domesticallyowned Thai firms come from? Did they grow from some interesting earlierexistence?”

The financial activities of people in the more rural areas of Thailand arelinked to the larger economic situation in the country in other ways as well.Households in many Thai villages run businesses that do not earn as great arate of return as, for instance, savings accounts; some of the more financiallysavvy Thai households put their savings into banks. 

“And then that money becomes somebody else’s loan,” says Townsend. “In the United States,people talk about Main Streetand Wall Street as if they are separate. But we think it’s really important tounderstand how these financial institutions and markets are put together, andhow that fabric is woven into the national-level economy. That’s a very bigpart of our ongoing research.” 

Some funding for the research was provided by the John Templeton Foundation,the Bill & Melinda Gates Foundation, and the National Institute of ChildHealth and Human Development.