January 10, 2011

Economist’s study shows how the poor in developing countries become wealthier

Robert Townsend, professor of Economics at MIT, looks at How poor people manage their finances? The findings are summarized in a new working paper, “Wealth Accumulation and Factors Accounting for Success”.

A long-term study of the poor in small villages in Thailand is shedding light on the issue. Having a sound financial strategy, including a commitment to saving money has a large impact on lifting families out of poverty, the research reveals. Moreover, advances in wealth are linked to highest level of education obtained by a household member, as well as a willingness to try new ventures.

Among rural households, 43 percent realized 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



* gains in wealth correlate specifically to the highest level of education obtained by a family member, and not the family’s median educational level

* mew ventures are sometimes behind the accrual of wealth. In one survey village, the household with the highest annual rate of return on assets (17 percent) was headed by a corn farmer whose wife insisted that they try raising dairy cows instead, sensing that owning livestock would be more profitable in their area; the idea came in part after a milk cooperative sent workers to educate villagers about cows.

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

I believe similar mechanisms are behind people moving from middle class to great affluence. It is more likely to be the result one exceptional member who decides to help being the rest along.






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