Christopher B. Barrett and Michael R. Carter

Seminar at University of California at Riverside

May 24, 2012

THE ECONOMICS OF POVERTY TRAPS AND PERSISTENT

POVERTY:POLICY AND EMPIRICAL

IMPLICATIONS

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.

Motivation

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

Various Mechanisms

W*

Pov.line

W0

W*

Well-beingt+1

Well-beingt

Welfare Dynamics With Unconditional ConvergenceWelfare Dynamics With Conditional ConvergenceWelfare dynamics w/single non-poor dynamic equilibrium

Persistent poverty w/o a poverty trap

Theory Basics

Interpretation: Slow, neoclassical growth from a low base … “convergence clubs”?

Policy implications: perhaps intervene to accelerate progress, but not necessary.

W*

Pov.line

W0

W*

Well-beingt+1

Well-beingt

Welfare Dynamics With Unconditional ConvergenceWelfare Dynamics With Conditional ConvergenceWelfare dynamics w/single poor dynamic equilibrium

Poverty trap w/unique dynamic equilibrium

Pov.line

Well-beingt+1

Well-beingt

W*

W*W0

Interpretation: Can include geographic poverty traps, physical/cognitive disability traps, discrimination based traps, low-level institutional traps, etc.

Theory Basics

Policy implications: Intervene to prevent phenomena (e.g., early childhood programs, infrastructure investments in LFAs). Humanitarian social protection transfers.

Well-beingt+1

Chronic poverty region

`

Transitory poverty region

Nonlinear path dynamics with multiple stable dynamic equilibria and at least one unstable dynamic equilibrium (threshold effects)

Well-beingt

Poverty trap w/multiple dynamic equilibrium

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.

Theory Basics

One useful fairly general poverty trap modelMultiple financial markets failures (MFMF):

MFMF Model

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.

Key implications of MFMF model:

MFMF Model

Figure 1: Multiple and Single Dynamic Equilibria in Ability-Asset Space

Intrinsic Ability, 0

2

4

6

Ass

et S

tock

, Ait

Micawber

Threshold

Single Equilibrium

Poverty Trap

Multiple Equilibrium

Poverty Trap

Single Equilibrium,

Not Chronically Poor

Key direct implications of MFMF model:

1) Endowments are expected fate. 2) Risk matters and shocks have permanent

consequences3) SE and ME poverty traps can co-exist4) 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) Asset smoothing in response to shocks 2) Highly nonlinear risk taking patterns3) Multplier effect of small, targeted asset

transfers4) 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.

MFMF Model

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 instability4) 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 sensitivityEtc., 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)

Empirical Testing

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.

Summary

Thank you for your time, interest and comments!

Thank you