Poverty Trap and Innovation (Part-1)

Even before Covid, jobs have been deconstructed, displaced, disrupted - some are durable - so change is inherent. Life is not linear, what you dream most likely isn't always what will happen. The world we live in is experiencing various crisis including economic crisis. Hence poverty trap (Here I elaborate the poverty trap, following the framework introduced by Prof. Esther Duflo). Is there a way to be out of the trap? On personal level, addictions will keep you stay in poverty trap, so do consumption & lifestyle. Not so much if we are producing though. Will education guarantee the exit? Mindfulness- being aware of how our actions affect others are criteria of a noble person. How then you will cherish your life. (Tambun, 2021)

It is important to know whether there is a  poverty trap or not, because a poverty trap opens  the possibility of a “big push”: a small action  could have big benefits. So it may be the socially  optimal thing to do for example in health (e.g.: free bed-nets) or in agriculture (e.g. free fertilizer one season) (Duflo, 2011)

On the other hand, if we are in the case without poverty trap, helping the poor in this way will  simply be a form of redistribution, but it won’t  produce efficiency gains. (Duflo, 2011)

Poverty and innovation are complex and multi-dimensional, influenced by a variety of factors. While poverty could limit access to quality education and resources, which are essential for fostering innovation, some argue that constraints and challenges can also spur creative solutions. Therefore, the relationship between poverty levels and innovative capacities isn't straightforward and could be influenced by other factors like government policies, culture, and access to international markets.

In the context of nutrition provision, Prof. Esther Duflo’s work (she, along with Abhijit Banerjee and Michael Kremer, was awarded the Nobel Prize in Economics in 2019 for their experimental approach to alleviating global poverty) acknowledges the crucial role that adequate nutrition plays in breaking the poverty trap. Malnutrition can have long-lasting impacts on cognitive development, physical health, and productivity. Improving access to nutritious food and implementing targeted interventions to address malnutrition, especially during critical periods such as early childhood, can have significant positive effects on breaking the cycle of poverty. Yes yes: culture eats strategy for breakfast BUT more importantly the fulfillment of basic needs as simple as having breakfast or having access to basic food provisions, is essential for individuals’ well-being and survival. While the two concepts are distinct, they do share a common thread in highlighting the significance of foundational elements. Just as organizations require a healthy and supportive culture to effectively implement strategies, individuals need their basic needs met before being able to fully engage in higher-order activities. Without meeting these fundamental needs, it becomes challenging for people to focus on higher-level thinking or advance their thoughts such as talking about single use plastic, climate change, artificial intelligence, machine learning and robotic.  These are things to prioritize in less developed countries: Improve Access to Nutritious Meals, Provide Financial Assistance, Equality Access to world-class education and Address Systemic Poverty “The belly carries the feet” - Midrash Rabbah, Bereshit 70 (Tambun,T. 2023)

A. Using System Dynamics to Understand Poverty Trap

System dynamics is a method for understanding, designing, and simulating complex systems. The causal loop diagram (CLD) is a tool used in system dynamics to visualize how different variables in a system are interrelated. The poverty trap can be conceptualized using a causal loop diagram to illustrate the reinforcing and balancing feedback loops that keep individuals or communities in a state of persistent poverty. (Bureš, 2017)

Building a causal loop diagram (CLD) for the poverty trap involves understanding the reinforcing (R) and balancing (B) feedback loops within the system. Here's a basic overview:

1. Basic Poverty Reinforcing Loop (R1)

• Parameters: Income, Expenses, Savings

• Relationship: Lower income leads to lower savings after covering basic expenses. Lower savings mean fewer opportunities for investments (like education or starting a business), which then leads to lower future income.

2. Education Reinforcing Loop (R2)

• Parameters: Income, Education Investment, Future Earning Potential

• Relationship: Lower income results in less investment in education, which decreases future earning potential, leading to even lower income.

3. Health Balancing Loop (B1)

• Parameters: Income, Health Expenses, Health Status, Work Capability

• Relationship: Lower income might lead to inadequate health expenses, resulting in poorer health. Poorer health reduces work capability, leading to decreased income. However, if a person or community can invest sufficiently in health, this loop can also act as a reinforcing loop, with better health leading to improved work capability and thus higher income.

4. Social Safety Nets Balancing Loop (B2)

• Parameters: Income, Government Assistance

• Relationship: As income decreases, the individual or family might qualify for more government assistance (like subsidies or direct aid), which can help stabilize or increase their income.

5. Debt Reinforcing Loop (R3)

• Parameters: Income, Debt, Debt Service

• Relationship: Lower income can lead to more borrowing. As debt accumulates, a larger portion of income goes towards debt service (interest and principal payments), leaving less money for essential expenses and investments, and thus perpetuating the cycle of low income.

Interactions between Loops:

• R1 & R2: If the basic poverty loop (R1) is dominant, it might lead to less investment in education (R2), reinforcing the cycle.

• R1 & B1: Poor health (B1) can exacerbate the basic poverty loop (R1) by reducing one's ability to work and earn.

• B1 & R2: Poor health can also impede education by causing school absences or reducing the ability to learn, linking B1 and R2.

• R1 & B2: If social safety nets (B2) are strong enough, they can counteract some of the effects of the basic poverty loop (R1), providing a floor to how low income can drop.

• R1 & R3: The basic poverty loop can push individuals towards borrowing, initiating the debt loop (R3).

This CLD is a simplified representation of the poverty trap. Real-world scenarios can be more complex, with many additional variables and interactions. However, using such models can help policymakers and stakeholders identify leverage points in the system where interventions might be most effective.

Here's another simplified explanation of a poverty trap:

1. Reinforcing Loops (R):

Low Income: (Having a low income means limited access to resources) -> Limited Education: (Low income can lead to limited access to quality education because families might not afford schooling or children might be needed to work) ->Low Skills: Limited education results in lower skills -> Lower Income

Low Income ->Poor Health: Low income can lead to poor nutrition and inadequate healthcare -> Decreased Productivity: Poor health and low skills reduce an individual's productivity -> Low Income: Decreased productivity leads back to low income.

This is a reinforcing loop because the effect reinforces the cause. For instance, low income leads to limited education, which further results in low skills, making it even harder for individuals to escape the cycle and earn a higher income.

1. Balancing Loops (B):External interventions, like aid or policies, can introduce balancing loops that counteract the reinforcing loops. For instance, if aid results in better health facilities or free education, it might break one of the chains in the reinforcing loop, helping to elevate individuals out of the cycle of poverty.

NOTE on drawing a causal loop diagram:

• Variables are represented by nodes.

• Arrows represent causal relationships. An arrow from A to B means A affects B.

• "+" at the arrowhead indicates a positive relationship (an increase in A leads to an increase in B or a decrease in A leads to a decrease in B).

• "–" indicates a negative relationship (an increase in A leads to a decrease in B).

To visualize the poverty trap:

• Draw nodes for "Income", "Education", "Skills", "Health", and "Productivity".

• Connect these nodes with arrows, labeling them with "+" or "–" based on the relationships described above.

• Label the main reinforcing loop as "R" and any balancing loops you introduce as "B".

1. Nodes: Draw circles for each of the main variables: "Income", "Education", "Skills", "Health", and "Productivity".

2. Reinforcing Loop: Draw an arrow from "Income" to "Education" and label it with a "-". This indicates that low income leads to limited education.From "Education", draw an arrow to "Skills" and label it with a "-". This means limited education leads to low skills.From "Skills", draw an arrow to "Productivity" and label it with a "-". Low skills result in decreased productivity.From "Income", draw another arrow to "Health" and label it with a "-". Low income can result in poor health.From "Health", draw an arrow to "Productivity" and label it with a "-". Poor health can decrease productivity.Finally, from "Productivity", draw an arrow back to "Income" and label it with a "-". Lower productivity can lead to reduced income. This completes the reinforcing loop.

3. Balancing Loop (if you want to introduce interventions): Introduce new nodes for "External Aid", "Health Facilities", and "Free Education".Draw an arrow from "External Aid" to "Health Facilities" and label it with a "+". This means more aid can improve health facilities.Draw an arrow from "Health Facilities" to "Health" and label it with a "+". Improved facilities lead to better health.Draw another arrow from "External Aid" to "Free Education" and label it with a "+". More aid can lead to more opportunities for free education.Draw an arrow from "Free Education" to "Education" and label it with a "+". This indicates that free education opportunities can improve overall educational access and quality.

B. Poverty Trap XY graphs

Esther Duflo, along with Abhijit Banerjee, has extensively researched the dynamics of poverty and has used XY graphs to illustrate some of the concepts related to poverty traps. An XY graph can provide a clear visual representation of two interrelated variables and how they impact each other.

Here's how you might conceptualize a poverty trap using an XY graph, drawing inspiration from Duflo's work:

1. Axes: X-axis: Represents an individual's initial capital or wealth.Y-axis: Represents the individual's future capital or wealth (e.g., after a period of time, like a year).

2. S-Shaped Curve: Draw an S-shaped curve on the graph. This curve represents the relationship between initial and future capital.The bottom flat part of the S represents a situation where increases in initial capital don't lead to significant increases in future capital. This is the "trap" where individuals remain poor even if there's a slight increase in their initial capital.The middle, steeper part of the S represents a transition phase. Here, increases in initial capital can lead to more significant increases in future capital. Individuals in this phase can potentially escape the poverty trap if they receive the right boost.The top flat part of the S represents a situation where individuals have enough initial capital, and additional increases don't necessarily lead to proportional increases in future capital.

3. 45-Degree Line: Draw a 45-degree line (a diagonal line from the bottom-left corner to the top-right corner of the graph). This line represents a situation where initial capital equals future capital.Points below this line indicate situations where future capital is less than the initial capital, suggesting a decline in wealth.Points above the line indicate situations where future capital is more than the initial capital, indicating growth.

By comparing the S-shaped curve with the 45-degree line, you can visually identify the regions of the graph that represent the poverty trap. Specifically: where the S-curve lies below the 45-degree line, especially in the lower flat part, represents the poverty trap. Even if individuals increase their initial capital slightly, their future capital doesn't grow sufficiently to move them out of poverty.

What can we conclude ?

•There is something specific about the curve we worked on:

•The S-Shaped curve intersects the 45 degree line from below:

•For poor people, income grow slowly, so slowly that income tomorrow  is belowincome today: the poor become poorer (up to a point)

•At some point, the rate of growth of income start increasing: income  yesterdaybecomes larger than income today: the middle class and the  somewhat rich continueto be rich.

•There is an XUSD that distinguish between misery in the trap and probably nirvana (?)

•Note that a double feedback loop (e.g. poor nutrition lower your  income, and low incomesmeans you cannot buy a lot of food) does  not always need there is a poverty trap: therelationship has to be  sufficiently strong: this is an error many policy makers make!

C. Escaping the Poverty Trap

Escaping the poverty trap is a complex process influenced by a multitude of factors, both internal (personal choices, capabilities) and external (economic conditions, policy decisions). While it's challenging to pin down a single "main" contributing factor, several key elements are widely recognized as playing significant roles in helping people leave poverty:

1. Education: Access to quality education equips individuals with knowledge and skills necessary for better employment opportunities. Improved literacy and numeracy can lead to higher incomes and better health outcomes.

2. Healthcare: Good health enables people to work and earn a living. Access to quality healthcare can prevent treatable illnesses from becoming debilitating or fatal.

3. Access to Capital: Microfinancing and small loans can allow individuals to start small businesses or invest in education or healthcare, leading to higher future earnings.

4. Infrastructure: Basic infrastructure like roads, electricity, and clean water can increase productivity and improve living conditions. Reliable transportation can provide access to jobs and markets.

5. Employment Opportunities: Creation of job opportunities, especially those that offer fair wages and good working conditions, is essential.

6. Social Safety Nets: Government programs that provide assistance during tough times, such as unemployment benefits or food assistance, can prevent people from falling deeper into poverty.

7. Empowerment: Empowering marginalized groups, especially women, can lead to better family health, increased education, and improved economic outcomes.

8. Legal and Property Rights: Ensuring that people have legal rights to their property and can rely on the judicial system can lead to increased economic activities and investments.

9. Policy and Governance: Effective and non-corrupt governance can facilitate economic growth, ensure the provision of public goods, and protect vulnerable populations.

10. Community and Social Cohesion: Community-based initiatives and support systems can help individuals cope with shocks and provide mutual assistance.

It's essential to recognize that these factors are interconnected. For instance, education is more effective when students are healthy, and healthcare is more effective when patients are educated about their conditions. A multifaceted approach that addresses several of these factors simultaneously tends to be more effective in helping individuals and communities escape the poverty trap.

Effectiveness of various interventions in education (Duflo, 2011)

They have done extensive research on poverty alleviation, and education is a significant area of their work. They've particularly looked into the effectiveness of various interventions in education. They have studied topics such as:

1. Teacher Attendance: They found that monitoring teacher attendance can have significant impacts on student learning outcomes.

2. Remedial Education: Targeted support for students who have fallen behind can significantly improve learning outcomes.

3. Learning Resources: Provision of textbooks and learning materials doesn't always directly translate to better results, suggesting that the quality of teaching and the relevance of materials are crucial.

4. Incentives: They've studied the effects of both student and teacher incentives. For example, in some cases, providing girls with uniforms reduced dropout rates.

5. Health and Education: Duflo and her colleagues found that simple health interventions, like de-worming, can have significant positive effects on school attendance and future earnings, highlighting the interconnectedness of health and education in the context of poverty.

Through these studies, they emphasize that while education is undeniably essential, the quality and relevance of education, as well as complementary factors like health, play a crucial role in how education can help individuals escape the poverty trap.

REFERENCES

Bureš, V. (2017). A Method for Simplification of Complex Group Causal Loop Diagrams Based on Endogenisation, Encapsulation and Order-Oriented Reduction. Systems, 5(3), 46. https://doi.org/10.3390/systems5030046

Duflo, E. (2011). The Challenge of World Poverty, in-Class Material Class 14-73, Massachusetts Institute of Technology: Cambridge.

OpenAI (2023). ChatGPT (GPT-4, August 3 Version) [Large language model]. Response to query made by Toronata Tambun August/14/2023. https://chat.openai.com/chat

Tambun, T. (2021, November 4). Poverty Trap: What’s In It For Me To Know This? YouTube. https://www.youtube.com/watch?v=3nbxoWJgJAE&list=PLn0ElH7lQPUTFON9gdpJFeu3iGUxS-fjX&index=13

Tambun, T. (2023). "Real Breakfast Please!", LinkedinPost, https://lnkd.in/gP8UngGB