How the poor successfully lift themselves out of poverty

A new paper by Anan Pawasutipaisit and Robert M. Townsend identifies how poor people in Thailand successfully lift themselves out of poverty:

The paper, "Wealth Accumulation and Factors Accounting for Success" appears in the current issue of the Journal of Econometrics. It suggests that poor people who skillfully manage their assets are especially successful in improving their net worth. The authors 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.

This means that those households who used their existing assets most productively were more successful at pulling themselves out of poverty. 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 also allowed the authors to identify traits that the most successful households tended to share in common: more highly-educated household members, a younger age of the head of household, a higher ratio of debt to assets, and a preference for formal financial markets over informal ones. But the largest source of variation in the rate of return on assets was household-specific and uncorrelated with any of these variables. This suggests there is great persistence among the most successful households.

"The data seem to show pretty conclusively that successful households are not just lucky," observes author Robert M. 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."

Most of the qualities identified in the research paper can probably benefit the poor anywhere in the world. When the paper cites a higher ratio of debt to assets, I assume it's referring to borrowing for capital investment, not American-style consumer debt.

A strong work ethic, a strong education ethic, a strong frugality ethic, and a strong entrepreneurial ethic are essential to improving one's economic well-being. Ethic is a key word here. Parents need to teach their children that these qualities are important, and they need to live it themselves as well.

The full paper can be found here.