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 1 st order development concern ID: 1029765
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1. Christopher B. Barrett and Michael R. CarterSeminar at University of California at RiversideMay 24, 2012The Economics of Poverty Traps and Persistent Poverty:Policy and Empirical Implications
2. 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 stochasticityThe fact that appropriate policy response to persistent poverty turns on the causal mechanism necessitates both careful theorizing and thoughtful empirics. Motivation
3. Poverty Traps: “any self-reinforcing mechanism which causes poverty to persist” (Azariadis and Stachurski 2004, p. 33)A range of structural mechanisms (co-)existIndividual/hh-levelMeso-/macro-scaleInter- or intra-generationalSingle or multiple equilibriumConsider some simple theoretical illustrations of basic optionsVarious Mechanisms
4. W*Pov.lineW0W*Well-beingt+1Well-beingtWelfare Dynamics With Unconditional ConvergenceWelfare Dynamics With Conditional ConvergenceWelfare dynamics w/single non-poor dynamic equilibriumPersistent poverty w/o a poverty trapTheory BasicsInterpretation: Slow, neoclassical growth from a low base … “convergence clubs”?Policy implications: perhaps intervene to accelerate progress, but not necessary.
5. W*Pov.lineW0W*Well-beingt+1Well-beingtWelfare Dynamics With Unconditional ConvergenceWelfare Dynamics With Conditional ConvergenceWelfare dynamics w/single poor dynamic equilibriumPoverty trap w/unique dynamic equilibriumPov.lineWell-beingt+1Well-beingtW*W*W0Interpretation: Can include geographic poverty traps, physical/cognitive disability traps, discrimination based traps, low-level institutional traps, etc.Theory BasicsPolicy implications: Intervene to prevent phenomena (e.g., early childhood programs, infrastructure investments in LFAs). Humanitarian social protection transfers.
6. Well-beingt+1Chronic poverty region`Transitory poverty regionNonlinear path dynamics with multiple stable dynamic equilibria and at least one unstable dynamic equilibrium (threshold effects)Well-beingtPoverty trap w/multiple dynamic equilibriumInterpretations: Multiple equilibria, short-lived interventions can have permanent consequences. Many candidate mechanisms:“Big push” coordination failuresNutritional poverty trapsMultiple financial mkt failuresNontradable inputs (e.g., soils)Policy implications: High returns to properly targeted interventions, including redistributive measures.Theory Basics
7. One useful fairly general poverty trap modelMultiple financial markets failures (MFMF):MFMF ModelWhere 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.
8. Key implications of MFMF model:MFMF Model
9. Key direct implications of MFMF model:Endowments are expected fate. Risk matters and shocks have permanent consequencesSE and ME poverty traps can co-existSystemic change mattersA burgeoning literature looks for ME poverty traps based on 1 and 2. That search is complicated by 3-4.MFMF Model
10. Key behavioral implications of MFMF model:Asset smoothing in response to shocks Highly nonlinear risk taking patternsMultplier effect of small, targeted asset transfersCrowding-in effects of risk reduction measuresSome papers have been looking at these behavioral implications … that may be more fruitful than testing the direct implications of the MFMF model.MFMF Model
11. 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
12. An alternative: Indirect (behavioral) testing:Tests for asset smoothing: Hoddinott (2006 JDS), Barrett et al. (2006 JDS), Carter & Lybbert (JDE in press)Implications for informal credit: Santos & Barrett (JDE 2011)Implications for herder behavior (Toth AJAE r&r)Smallholder fertilizer application behavior (Marenya and Barrett 2009 Ag Econ, AJAE)Empirical Testing
13. Understanding why poverty persists for long periods of time is a key project in dev’t econ1) 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
14. Thank you for your time, interest and comments!Thank you