THE ECONOMICS OF POVERTY TRAPS
AND PERSISTENT POVERTY:
POLICY AND EMPIRICAL IMPLICATIONS
Christopher B. Barrett and Michael R. Carter
Seminar at
University of California at Riverside
May 24, 2012
Motivation
Persistent poverty is a 1st order development concern.
What to do about it?
- depends crucially on the causal mechanism(s):
* slow, steady growth from low base?
* immutable poverty (unique low eqln)?
* avoidable state (low level eqln trap)?
- challenge of sorting structure from stochasticity
The fact that appropriate policy response to persistent
poverty turns on the causal mechanism necessitates
both careful theorizing and thoughtful empirics.
Various Mechanisms
Poverty Traps:
“any self-reinforcing mechanism which causes poverty
to persist” (Azariadis and Stachurski 2004, p. 33)
A range of structural mechanisms (co-)exist
- Individual/hh-level
- Meso-/macro-scale
- Inter- or intra-generational
- Single or multiple equilibrium
Consider some simple theoretical illustrations of basic options
Theory Basics
Persistent poverty w/o a poverty trap
Welfare
Welfare
Dynamics
Dynamics
With
WithUnconditional
Conditional
Convergence
Convergence
Welfare
dynamics
w/single
non-poor dynamic
equilibrium
Well-beingt+1
Interpretation: Slow, neoclassical
growth from a low base …
“convergence clubs”?
W*
Pov.
line
Policy implications: perhaps
intervene to accelerate progress,
but not necessary.
W0
W*
Well-beingt
Theory Basics
Poverty trap w/unique dynamic equilibrium
Welfare
WelfareDynamics
Dynamicsw/single
With
WithUnconditional
Conditional
Convergence
Convergence
Welfare
dynamics
poor dynamic
equilibrium
Interpretation: Can include geographic poverty
traps, physical/cognitive disability traps,
discrimination based traps, low-level institutional
traps, etc.
Well-beingt+1
Well-being
t+1
W*
Pov.
Pov.
line
line
Policy implications: Intervene to prevent
phenomena (e.g., early childhood programs,
infrastructure investments in LFAs).
Humanitarian social protection transfers.
W*
WW0 0
W*
W*
Well-beingtt
Well-being
Theory Basics
Poverty trap w/multiple dynamic equilibrium
Nonlinear path dynamics with multiple stable dynamic equilibria and
at least one unstable dynamic equilibrium (threshold effects)
Well-beingt+1
Chronic
poverty
region
Transitory
poverty
region
`
Interpretations: Multiple equilibria,
short-lived interventions can have
permanent consequences. Many
candidate mechanisms:
- “Big push” coordination failures
- Nutritional poverty traps
- Multiple financial mkt failures
- Nontradable inputs (e.g., soils)
Policy implications: High returns to
properly targeted interventions,
including redistributive measures.
Well-beingt
MFMF Model
One useful fairly general poverty trap model
Multiple financial markets failures (MFMF):
ì¥ t
ü
max E0 íå d u ( cit ) ý
c,A
î t=0
þ
subject to :
x (Ait , q t ) = F(Ait , a i ) + (1- t )q t Ait
it
F(Ait,a i )=max[ F h (Ait,a i ), F (Ait,a i )]
cit £xit
Ait+1=xit -cit
Where c = consumption, x = income, A = assets, α= ability, δ= discount rate, θ=
asset shock, τ = depreciation rate, Fh= high technology (w/fixed cost),Fℓ= low
technology (no fixed cost).
MFMF assumption: no borrowing and no insurance options available.
MFMF Model
Key implications of MFMF model:
6
M ic a w b e r
A sse t S to c k , A it
T h re sh o ld
4
S in g le E q u ilib riu m
S in g le E q u ilib riu m ,
P o v e rty T ra p
N o t C h ro n ic a lly P o o r
2
M u ltip le E q u ilib riu m
P o v e rty T ra p
0


In trin sic A b ility , 
Figure 1: Multiple and Single Dynamic Equilibria in Ability-Asset Space
MFMF Model
Key direct implications of MFMF model:
1) Endowments are expected fate.
2) Risk matters and shocks have permanent
consequences
3) SE and ME poverty traps can co-exist
4) Systemic change matters
A burgeoning literature looks for ME poverty traps
based on 1 and 2. That search is complicated by 3-4.
MFMF Model
Key behavioral implications of MFMF model:
1)
2)
3)
4)
Asset smoothing in response to shocks
Highly nonlinear risk taking patterns
Multplier effect of small, targeted asset transfers
Crowding-in effects of risk reduction measures
Some papers have been looking at these behavioral
implications … that may be more fruitful than testing
the direct implications of the MFMF model.
Empirical Testing
The challenges of direct tests (the search for
threshold effects in welfare dynamics):
1) Which poverty trap? Fail to find ME doesn’t mean
there isn’t a SE poverty trap.
2) Disentangling true state dependence from
heterogeneity is very difficult. Example: education
3) Lucas critique and underlying parameter instability
4) Econometric challenges: sparse data around
thresholds; can easily appear as heteroskedasticity
with positively autocorrelated errors; centering of
data and estimating distant equilibria, etc.
5) Asset index construction sensitivity
Etc., etc.
Empirical Testing
An alternative: Indirect (behavioral) testing:
1) Tests for asset smoothing: Hoddinott (2006 JDS),
Barrett et al. (2006 JDS), Carter & Lybbert (JDE
in press)
2) Implications for informal credit: Santos & Barrett
(JDE 2011)
3) Implications for herder behavior (Toth AJAE r&r)
4) Smallholder fertilizer application behavior
(Marenya and Barrett 2009 Ag Econ, AJAE)
Summary
Understanding why poverty persists for long
periods of time is a key project in dev’t econ
1) Need to recognize there exist many candidate
theories and major challenges in empirical testing
among those theories.
2) But need to get it right in order to identify and
design interventions appropriate to context.
3) Next generation of work will focus more on
behavioral tests and less on direct tests for thresholds
in well-being dynamics.
Thank you
Thank you for your time, interest and comments!