Poverty Trap - The Rattrap of Poverty
A low development or a developing country aims to reduce its poverty levels by targeting policies to benefit the needy. To adequately do so, it is crucial to recognize the causes and effects of the inherent poverty trap, which this article intends to do.
Shereein Saraf
October 5, 2020 / 8:00 AM IST
A low development or a developing country aims to reduce its poverty levels by targeting policies to benefit the needy. To adequately do so, it is crucial to recognize the causes and effects of the inherent poverty trap, which this article intends to do.
A poverty trap is a vicious system of being entrapped in poverty due to a lack of capital – money, physical or human. Consider a poor household – a farm laborer with three children – a boy and two girls. The timid farmer works day and night for a landlord, earning a meager wage. His wife looks after the household, along with her two daughters. Their elder son, who studied up to middle school, works at a construction site. His earnings help the family to make ends meet.
This story represents a rural household in a developing country and illustrates the issues that lead to the poverty trap. The landless farm laborer has no asset to lend in exchange for credit, preventing him from funding the education of his children. He is uneducated or lowly educated himself to understand the importance of education in social mobility. Even if he does know how critical enrolling in school is, he doesn’t have the means.
Moving a step back, we can also reason that low levels of income, leading to lower savings, will result in a poor nutritional status. It, along with lower education, will impact the work capacity and capability of the individual, leading to low wages and lower savings eventually. A vicious cycle is, thus, created – the poverty trap.
Poverty is not only a lack of money but also a deprivation of capability. (Sen, 1999) The cycle of poverty, as explained above and reiterated here, is a testimony to this statement. A poor household, with low or no savings, finds it unable to eat square meals, retaining paltry nutrition. It leads to lacked education level and work capacity, engaging as unskilled or semi-skilled labor. Again, it leads to lower wages and savings.
If there is nothing to save, there is nothing to invest in the future generation. It creates an inter-generational poverty trap, which is difficult to escape without any intervention. We can interestingly visualize this concept using the analysis by Esther Duflo and Abhijit Banerjee.
In the development economics literature, the poverty trap is illustrated as an S-shaped curve, plotted between inherited income, or income today, and income from work, or income tomorrow. It could further be understood, using the diagram, as follows – The 45-degree line denotes equal money income today and tomorrow. Thus, the curve cutting the 45-degree line from above indicates a higher income tomorrow than today and vice-versa.
Using the notations from the diagram, we can map y0′ to reach y1′, then y2′ and finally y3′ (point A). Similarly, if one starts from yo” level of income, he climbs up the income ladder to y1” (point C). On the other hand, if one is at y1, a downward spiral is created to reach y2, and finally, y3′ (point A). This part, in particular, is the poverty trap. Note that it is as and when the curve cuts the 45-degree line from below.
Points A and C form stable equilibria as we reach these points, irrespective of the side, we start mapping our income path. Using similar logic, point B is the unstable equilibrium. (As we move away from B, irrespective of the side we start mapping our income from)
Hence, if the shape of the curve changes, how we conceive the trap would alter. If the curve shifts upwards, not cutting the 45-degree line from below at the least, there will be no poverty trap. Similarly, if there is a concave-shaped curve (an inverted L-shaped curve), there will again be no poverty trap. On the contrary, if this curve was to shift downwards, everybody ends up in a poverty trap. If you find it confusing to visualize, the two diagrams below will help you out.
We can apply a similar analysis to the domains of nutrition and education too. An S-shaped nutritional curve with nutritional status on the vertical axis and income level on the horizontal axis provides a similar nutrition poverty trap. On the other hand, a concave-shaped or an inverted L-shaped curve denoted no poverty trap. To construct an education poverty trap, replace the vertical axis by the level of education.
This concept essentially is put into practice to help the poor out of the trap, leading to an optimal social outcome, and not for redistributive policies. Redistribution is a better policy when there is no poverty trap. Measures like cash transfers to the distressed make a suitable example of how such an intervention can lead to a sizable impact. A long-run solution to this would involve employment generation – for both the skilled and the unskilled – ushering income security and an increase in savings. It must further accompany the establishment of formal credit markets, insurance, and affordable healthcare, education, and appropriate skill development to escape this rattrap of poverty.