1. Christopher B. Barrett and Michael R. Carter Seminar at University of California at Riverside May 24, 2012 T HE E CONOMICS OF P OVERTY T RAPS AND P ERSISTENT P OVERTY : P OLICY AND E MPIRICAL I MPLICATIONS

2. Persistent poverty is a 1 st 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

3. 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

4. W*W* Pov. line W0W0 W*W* Well-being t+1 Well-being t Welfare Dynamics With Unconditional ConvergenceWelfare Dynamics With Conditional Convergence Welfare 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.

5. W*W* Pov. line W0W0 W*W* Well-being t+1 Well-being t Welfare Dynamics With Unconditional ConvergenceWelfare Dynamics With Conditional Convergence Welfare dynamics w/single poor dynamic equilibrium Poverty trap w/unique dynamic equilibrium Pov. line Well-being t+1 Well-being t W*W* W*W* W0W0 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.

6. Well-being t+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-being t 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

7. One useful fairly general poverty trap model Multiple financial markets failures (MFMF): MFMF Model Where c = consumption, x = income, A = assets, α= ability, δ= discount rate, θ= asset shock, τ = depreciation rate, F h = high technology (w/fixed cost),F ℓ = 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: 1)Endowments are expected fate. 2)Risk matters and shocks have permanent consequences 3)SE and ME poverty traps can co-exist 4)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

10. Key behavioral implications of MFMF model: 1)Asset smoothing in response to shocks 2)Highly nonlinear risk taking patterns 3)Multplier effect of small, targeted asset transfers 4)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

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 instability 4) 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 sensitivity Etc., etc. Empirical Testing

12. 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

13. 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

14. Thank you for your time, interest and comments! Thank you