Well-Being Dynamics and Poverty Traps

TLDR: The authors review the theoretical and empirical evidence on single equilibrium and multiple equilibria poverty traps at macro-, meso-, and especially, micro-levels and find sufficient evidence to support the poverty traps hypothesis, suggesting that policies designed to interrupt those self-perpetuating mechanisms merit serious attention.

Abstract: A sound understanding of poverty traps—defined as poverty that is self-reinforcing due to the poor's equilibrium behaviors—and their underlying mechanisms is fundamentally important to the development of policies and interventions targeted to assist the poor. We review the theoretical and empirical evidence on single equilibrium and multiple equilibria poverty traps at the macro-, meso-, and, especially, microlevels. In addition we review the literature exploring the various mechanisms that have been posited to perpetuate poverty. We find sufficient evidence to support the poverty traps hypothesis, suggesting that policies designed to interrupt those self-perpetuating mechanisms merit serious attention.

Figures

Figure 3: Multiple equilibrium well-being dynamics with conditional transition distributions

Figure 2: Well-being dynamics with a single equilibrium poverty trap for one subpopulation

Figure 1: Well-being dynamics with no poverty trap

Full text

Well-being dynamics and poverty traps
Christopher Barrett, Teevrat Garg and Linden
McBride

January 2016

Centre for Climate Change Economics and Policy
Working Paper No. 250

Grantham Research Institute on Climate Change and
the Environment
Working Paper No. 222


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Well-Being Dynamics and Poverty Traps
Christopher B. Barrett
Cornell University
Teevrat Garg
Grantham Research Institute on Climate Change and the Environment,
London School of Economics and Political Science
and
School of Global Policy and Strategy,
University of California, San Diego
Linden McBride
Cornell University
January 2016 draft
Prepared for invited submission to the Annual Review of Resource Economics, volume 8 (2016).
Keywords: chronic poverty, development, market failures, multiple equilibria, safety nets
Acknowledgements: We thank Geoff Barrows, Leah Bevis, Larry Blume, Michael Carter,
Sommarat Chantarat, Jean-Paul Chavas, Paul Christian, Brian Dillon, John Hoddinott, David
McKenzie, Hope Michelson, and Russell Toth for helpful comments and discussions that
have shaped our thinking, without implicating them for any errors that might remain. Garg
acknowledges funding from ESRC Centre for Climate Change Economics and Policy and
the Grantham Foundation for the Protection of the Environment.

Abstract
A sound understanding of poverty traps—defined as poverty that is self-reinforcing due to
the poor’s equilibrium behaviors—and their underlying mechanisms is fundamentally
important to the development of policies and interventions targeted to assist the poor
and/or eradicate poverty. We review the theoretical and empirical evidence on single and
multiple equilibria poverty traps at the macro, meso, and, especially, micro levels. In addition
we review the literature exploring the various mechanisms that have been posited to
perpetuate poverty. We find sufficient evidence to support the poverty traps hypothesis,
suggesting that policies designed to interrupt those self-perpetuating mechanisms merit
serious attention.
1 Introduction
The world has witnessed historically unprecedented rates of escape from poverty over the
past generation (Chen & Ravallion 2010, Ravallion 2013). At the same time, the most severe
forms of human deprivation – often lumped under the shorthand of ‘ultra-poverty’ – have
grown more spatially concentrated, especially in rural sub-Saharan Africa and in a few
pockets of rural South Asia, and appear remarkably persistent (Barrett 2014). The increased
recognition of concentrated, persistent, ultra-poverty has rekindled longstanding scholarly
interest in poverty traps, which arise when poverty becomes self-reinforcing due to
behaviors that perpetuate low standards of living.
At the same time, panel data sets that observe the same individuals or households over time
have become more plentiful, especially in developing countries. Because the study of
economic dynamics requires data that track economic units – individuals, households,
countries, etc. – over time, the emergence of panel data has opened up areas of micro-level
study of well-being dynamics that were infeasible a generation ago. The combination of
rekindled research interest and newly feasible empirical inquiry has sparked a vibrant line of
research around well-being dynamics and poverty traps over the past decade or so. This
paper summarizes the essence of that literature.
Research on poverty traps focuses on understanding why some people, communities, and
even entire nations remain mired in grinding poverty while others have enjoyed rapid
improvements in standards of living. The hope is that an improved understanding of such
heterogeneous well-being dynamics can help inform the design of interventions that might
put individuals, households, and nations on a more favorable trajectory out of poverty and
towards sustainably higher standards of living. Because “poverty” is an elusive concept, the
literature mixes various measures of well-being based on flows of income or expenditures
with measures of assets and/or human education, health, or nutritional status. But the
essence of the problem is invariant to the particular well-being indicator used.
The poverty traps hypothesis is especially important because of its policy implications.
Where no poverty trap exists, poverty is necessarily a transitory phenomenon, although it

may take a painfully long time to resolve, especially if bad luck strikes frequently. This
transitory poverty can arise due to short-term adverse income shocks to a non-poor
expected standard of living – what Carter & May 2001 term ‘stochastic poverty’. But it can
also be associated with steady improvements anticipated from equilibrium investment
patterns that lead to structural escapes from poverty. Given the cost inherent to
interventions – not least of which due to the general equilibrium welfare losses associated
with taxation and administration – and the ever-present risks of failure, interventions aimed
at accelerating the escape from intrinsically transitory poverty face a formidable burden of
proof as to their likelihood of delivering net positive returns to society. Many empirical
studies of household income dynamics in developing countries find that a very large
proportion of poor households move in and out of poverty over short periods of time,
implying that most poverty is transitory (Baulch & Hoddinott 2000). If that is generally true,
the policy argument for intervention becomes harder to make.
By contrast, when poverty persists indefinitely in the absence of intervention such that
expected standards of living at any reasonable time horizon are below a poverty line, a
poverty trap exists, and the case for intervention becomes far stronger. Initiatives that could
move people out of a poverty traps such as interventions to induce investment in or
protection of productive assets, adoption of improved production technologies, participation
in more remunerative markets, entrepreneurial risk-taking, and so on attract particular
interest because they are seen as opportunities for short-term interventions to precipitate
permanent changes in well-being trajectories. In the presence of (at least some forms of) a
poverty trap, poverty appears unnecessary and avoidable, making response ethically
compulsory and economically attractive. Therefore, it matters greatly from a policy
perspective whether the poverty traps hypothesis is true.
2 Conceptualizing poverty traps
The dynamics of poverty arise naturally from the coupled dynamics of asset accumulation
and technology adoption in the face of risk and uncertainty. In this framework, ‘assets’ are
broadly defined as the state/stock variables used to generate income, including future
income against which one might borrow. This includes both public and private goods and
encompasses financial, human, natural, and social capital. Technologies map stocks of assets
(e.g., land) and flows of inputs (e.g., labor) into flows of income or other goods or services
of value (e.g., time with friends). This encompasses both production and exchange
technologies (i.e., market and non-market means of transacting) and the institutions that
support them. Risk and/or Knightian uncertainty surround both asset stocks (i.e., their laws
of motion) and technologies (e.g., prices, yields).
The initially poor can readily grow their way out of poverty if they accumulate productive
assets or adopt more remunerative exchange or production technologies that increase future
income. In a textbook world with complete and competitive markets, the poor have strong
incentives to accumulate and adopt. These dynamics underpin neoclassical economic growth
theory and its familiar prediction of convergence towards a unique, dynamic equilibrium rate
of steady state growth in well-being (Barro & Sala-i-Martin 2004). But when poor initial
conditions – commonly manifest in meager asset holdings and the use of relatively
inefficient production or exchange technologies – instead induce behaviors that reinforce

Frequently asked questions

Q1. What have the authors contributed in "Well-being dynamics and poverty traps" ?

The authors review the theoretical and empirical evidence on single and multiple equilibria poverty traps at the macro, meso, and, especially, micro levels. In addition the authors review the literature exploring the various mechanisms that have been posited to perpetuate poverty. The authors find sufficient evidence to support the poverty traps hypothesis, suggesting that policies designed to interrupt those self-perpetuating mechanisms merit serious attention. 

Q2. What is the only effective poverty reduction policy response to a single equilibrium poverty trap?

Short of changing the underlying biophysical or socioeconomic environments that give rise to the unique, poor equilibrium, the only effective poverty reduction policy response to a single equilibrium poverty trap is a transfer program of indefinite term. 

Q3. What is the main idea behind multiple equilibria poverty traps?

Multiple equilibria poverty traps fundamentally require some exclusionary mechanism(s) that bar units from acquiring – by whatever means, whether borrowing, investment, etc. – the assets or technologies necessary to ensure endogenous convergence towards a non-poor steady state equilibrium over a reasonable time horizon. 

Q4. What is the effect of longer spell length on the assessment of well-being dynamics?

Naschold & Barrett (2011) find that shorter spell length is correlated with findings of spurious—because stochastic—income mobility that is canceled out in longer spells. 

Q5. How do they find evidence of asset smoothing among poor households?

They find an asset threshold of 0.6 tropical livestock units, below which asset accumulation slows and eventually stops; they also find a pattern of asset smoothing among the poorest households. 

Q6. How do they find evidence of poverty traps in rural Kenya and Madagascar?

Using both structural income and an asset index to observe welfare dynamics, Barrett et al. (2006) find evidence of poverty traps in rural Kenya and Madagascar. 

Q7. What are the main reasons for the low take up of SRI technology?

Moser & Barrett (2006) find low take up of SRI technology among poor Malagasy farmers due to seasonal familylabor and liquidity constraints. 

Q8. What are the common evidence for multiple equilibria poverty traps?

While most evidence for multiple equilibria poverty traps are from meso and micro level studies, multiple equilibria welfare dynamics have been observed at the macro level as well. 

Q9. What is the significance of the poverty trap hypothesis?

The poverty trap hypothesis is fundamental to development policy not only because the existence of poverty traps provides a moral imperative for intervention, but also because the nature of the poverty traps and the mechanism(s) that give rise to it must guide the design of any such intervention. 

Q10. What are the reasons why one might fail to observe a poverty trap?

there are several reasons why one might fail to empirically observe a poverty trap where it does exist, as the authors explain below, so that the absence of evidence is not evidence of absence. 

Q11. What is the implication of income and asset smoothing?

An additional behavioral implication of income and asset smoothing among those within a poverty trap is lower expected marginal returns on assets. 

Q12. What are the variations on the classic problem of the commons?

These are variations on the classic problem of the commons in which communities, as a result of coordination failures, overexploit natural resources, degrading the resource below a recoverable threshold and compromising communities’ future livelihoods (Baland & Platteau 1996, Hardin 1968, Ostrom 1990). 

Q13. What do they show that the efforts to improve the soil quality become?

They demonstrate that once the soil quality of a parcel of land has fallen below this productivity threshold, efforts to improve the soil quality become economically irrational.