Povery Traps- Week 7

Question 1

What is a poverty trap

Answer 1

Countries or individuals that start poor remain poor, through self-reinforcing mechanisms.

Question 2

Poverty trap formula

Answer 2

Y=s*.f(A,k)

Investment (capital accumulation) = savings (as MPS increases we can invest more)

K* is steady capital stock-K* is the level of income associated with a poverty trap.

Z is level of income needed to be exceeded before higher saving rates (s** rather than s*) is possible.

K* is below capital stock line, so capital stock is falling at this point.

Everywhere to the left of K, capital is increasing as investment>depreciation so that is where income is increasing. To the right of k (but less than z), investment<depreciation so income is falling. These are the natural dynamics that mean we always end up back at K*. Same idea applies for k**.

Question 3

Poverty trap graph

Answer 3

Y-axis=investment, depreciation
X-axis= capital per capita

Depreciation (n+δ)k = 45 degree line

Low investment s*
Higher investment s** (when income exceeds Z as mentioned before)

Question 4

Note: s* and s** (savings rate) can be replaced by rates of technology i.e a* a**

Telling them story that both being only accessible with capital exceeding the threshold.

Or can be broadly defined as institutions, policy and legal structure. (Can be any variable that prevents the transition to the high income stable equilibria)

Question 5

Policy philosophy in terms of the model

Answer 5

Move from K capital per capita, to the Z.

After natural dynamics will bring k* to k. (Investment>depreciation so income increases up to k)

Question 6

Overall views on traps existing (4)

Answer 6

Mixed: works for some countries i.e poor until meet threshold and get rich quickly e.g South Korea but not all countries.

A lack of longitudinal studies, so tracking income is hard and prone to error as a result.

Also many studies found no evidence of S-shaped relationships between income and asset dynamics (depreciation/investment), dismissing poverty trap.

Graphical evidence shows most countries from 1960-2010 having GDP growth around 2.2% per year, suggesting there hasn’t been rapid growth among poor compared to richer countries. NO GROWTH ACCELERATION FOR POOR COUNTRIES THAT OVERCOME TRAPS.

Question 7

Mechanisms (6)

Answer 7

Savings-based traps (as showed in diagram)
Nutritional poverty traps
Lumpy investments and borrowing constraints
Mental poverty traps
Behavioural poverty traps
Geographical poverty traps

Question 8

Savings based poverty traps

2 evaluations? And use figures for one of them.

Answer 8

A certain level of income required for savings rate to increase.

2. Empirical evidence from Kraay and Mckenzie shows savings can become fairly high at low income. Using 2.2% growth, the mere average growth rate, takes just 46 years to reach threshold: so most countries should just grow their way out of traps!

Also, found savings rates increase sharply at low levels of development, implying the low equilibrium doesn’t emerge.

Question 9

Nutritional poverty traps (early rationale for S-shaped poverty trap)

Answer 9

Not enough calories to work productively enough to do more than just survive. (Weak>can’t grow much food, can’t grow much food=weak, cycle)

Too low calorie deficit to work productively to break out of trap.

Question 10

Evaluation of the idea of a nutritional poverty trap by Subramanian and Deaton

Answer 10

Consuming calories are actually cheap relative to local wage in most countries. Less than 5% of wage in Maharashtra

Question 11

Lumpy investments and borrowing constraints (Banerjee and Duflo)

Answer 11

Considers 2 discrete technologies; one more productive than the other, but requires upfront purchase.

So only person with initial capital (rich) can buy it, ends up at high locally stable equilibrium.

Poor can’t due to borrowing constraints/credit markets, so stuck with other technology and resides at the low locally stable equilibrium

Question 12

Evaluation of Banerjee and Duplo’s idea of lumpy investments and borrowing constraints (2)

Answer 12

1. Start-up capital graph shows many production choices, graph shows many firms start with low start up capital. 10% of firms start with $100 or less.
2. If borrowing constraints the problem, micro finance should have alleviated the trap. However evidence shows no impact on business growth or poverty.

Question 13

Mental poverty traps

Answer 13

Idea of limited brain capacity. Being poor leaves less space in brain basically. (Less mental bandwidth)

Being poor, links hunger and poverty, resulting in poor decision making. Cognitive abilities are worse when poor. Prevents clear, forward-looking decision making.

Question 14

Example of mental poverty trap (Shah, Mullinaithan Shamir)

Answer 14

Farmers experiment. Post harvest farmers are less worried, so have better cognitive functioning.

And more mental effort going to daily needs, leaving less attentional resources for other problems e.g growing their firm.

(Thinking about one thing takes away your ability to do something else)

Question 15

Wrap up: multiple locally stable equilibrium- a good one k** and bad k*

Question 16

Ghatak’s warning on policy towards poverty and eval.

And what is the main priority towards policy

Answer 16

If not traps exist and poverty is not permanent, interventions can slow down escape from poverty. (Adverse unintended consequences) This “big push” would not boost incomes permanently.

However, if it does exist, there is a strong economic and moral argument to experiment with interventions.

So the main priority is understanding why they are poor, as it will determine whether a poverty trap exist or not (Exists if capacity curve intersects from below!!!)
E.g poor bc of low savings rate.

Question 17

Policy measures to escape poverty traps in general

Answer 17

Social safety net- provide payment supplementing meagre earnings.
Eval: Araujo finds pure money intervention only short term results.

Asset accumulation e.g giving land

Question 18

Policy measures for households with midrange capabilities

Answer 18

Micro-finance to buy fixed-cost assets necessary for business.

Question 19

Why should we use systemic interventions that address underlying structural causes of poverty traps?

Answer 19

Because they also can generate indirect equilbrium benefits.

Question 20

Example of this?

Answer 20

Bandiera

Asset building program in Bangladesh also improved labour markets by increasing wages for non-program participants.

(So systematic intervention that targets structural causes of poverty traps also indirectly create benefits-externalities)

Question 21

Importance of feedback loops

Answer 21

Coevolving human capabilities and capital stocks through poverty graduation programs.

Improves tangible and psychological assets.

Question 22

Wrap up: what does Smith highlight to consider, and what is this uphold to?

Answer 22

While we focus on getting people out of poverty, also need to prevent people falling into poverty.

Upholds to ‘paradox of social protection’, where maintaining resilience of non-poor to poverty is equally important to long term poverty elimination.

Question 23

Behavioural poverty traps cases

Answer 23

Poverty affects decision making.

Banerjee and Mullainathan- look at temptation and non-temptation goods. individuals are present-biased and unwilling to take on small high return investments, thus keeping them poor.

Question 24

Geographical poverty trap and how to solve, and evaluation?

Answer 24

Remote rural areas=isolation, limiting available production technologies. Then, can’t afford to move out

Policies facilitating more internal migration. Eval: reluctance due to congestion concerns etc