The economics of poverty traps part one: Complete markets

This paper lists theoretical reasons why neoclassical models of one-sector growth imply that nations with identical economic structures need not converge to the same steady state or balanced growth path, and outlines the empirical significance and policy implications of conditional nonconvergence. We survey poverty traps in both convex and nonconvex economies with complete market structures. Among the potential causes of traps are subsistence consumption; distorted international trade in intermediate inputs; demographic transitions when fertility is endogenous; technological complementarities in the production of consumption goods, financial intermediation services, manufactures, or human capital; coordination failures among voters; various restrictions on borrowing; indivisibilities in human capital formation or child rearing; and monopolistic competition in product or factor markets.     

Poverty Dynamics,Violent Conflict,and Convergence in Rwanda

This paper analyzes the poverty impact of the violent events that affected Rwanda in the 1990s. The main objective of the paper is to identify systematically potential mechanisms linking violent conflict with changes in poverty across provinces and households in Rwanda before and after a decade of violence. In accordance with emerging literature on the long‐term economic effects of violent conflict, we find empirical evidence for economic convergence between richer and poorer Rwandan provinces and households following the conflict shocks. Using a small but unique panel of households surveyed before and after the conflict period, we find that households whose house was destroyed or who lost land ran a higher risk of falling into poverty. We do not find much evidence for an economic effect of violent deaths at the household level due to substitution effects of labor within the household. Non‐violent deaths however seem to increase income per adult equivalent for the survivors. Results are shown to be robust to sample selection and IV models.     

Fuzzy Chronic Poverty: A Proposed Response to Measurement Error for Intertemporal Poverty Measurement

A number of chronic poverty measures are now empirically applied to quantify the prevalence and intensity of chronic poverty, vis‐à‐vis transient experiences, using panel data. Welfare trajectories over time are assessed in order to identify the chronically poor and distinguish them from the non‐poor, or the transiently poor, and assess the extent and intensity of intertemporal poverty. We examine the implications of measurement error in the welfare outcome for some popular discontinuous chronic poverty measures, and propose corrections to these measures that seeks to minimize the consequences of measurement error. The approach is based on a novel criterion for the identification of chronic poverty that draws on fuzzy set theory. We illustrate the empirical relevance of the approach with a panel dataset from rural Ethiopia and some simulations.     

Consumption versus asset smoothing: testing the implications of poverty trap theory in Burkina Faso

Despite solid theoretical foundations for the notion that poor, borrowing-constrained households will intertemporally manage assets to smooth consumption, the consumption-smoothing hypothesis has not always withstood empirical scrutiny. This paper reassesses the intertemporal asset management problem with a poverty trap model and shows that we would expect to see asset smoothing, not consumption smoothing, in the neighborhood of critical asset levels at which optimal accumulation behavior bifurcates. We then employ threshold estimation techniques to empirically confirm the co-existence of consumption and asset smoothing regimes using a household panel data set from West Africa. Households above the estimated threshold almost completely insulate their consumption from weather shocks, whereas those below the threshold do not. These results not only indirectly provide evidence of the existence of poverty traps but also speak to the level and incidence of the costs of uninsured risk.     

Informality and Long‐Run Growth

One of the most salient features of developing economies is the existence of a large informal sector. In this paper, we use quantitative theory to study the dynamic implications of informality on wage inequality, human capital accumulation, child labor, and long‐run growth. Our model can generate transitory informality equilibria or informality‐induced poverty traps. Its calibration reveals that the case for the poverty‐trap hypothesis arises: although informality serves to protect low‐skilled workers from extreme poverty in the short run, it prevents income convergence between developed and developing nations in the long run. Then we examine the effectiveness of different development policies to exit the poverty trap. Our numerical experiments show that using means‐tested education subsidies is the most cost‐effective single policy option. However, for longer time horizons, or as the economy gets closer to the poverty trap threshold, combining means‐tested education and wage subsidies is even more effective.     

Periodicals Received

This paper reports the results of an empirical test of the hypothesis that three mechanisms of poverty reduction-improved market opportunities, government cash transfer payments, and government in-kind transfer payments have differential impacts on the relative return to legal and illegal activity and, in turn, on the rate of property crime. In addition, the paper reports empirical tests of the hypothesis that these differential impacts of market and government policy mechanisms vary by type of property crime.

Employing measures of each of these mechanisms, time series models for Burglary, Auto Theft, and Robbery are estimated from yearly, national, Uniform Crime Report (UCR) data for the period 1959 through 1995. The results indicate that poverty reductions due to improved market conditions have similar impacts on each type of property crime. However, the direction and magnitude of the impact of different government policy mechanisms varies between and within particular types of crimes. The paper concludes with an application of these findings to recent legislation, The Temporary Assistance for Needy Families Act (TANF), which overhauled the federal public assistance program.     

Escaping Poverty: Risk-Taking and Endogenous Inequality in a Model of Equilibrium Growth

Recent macroeconomic models of income distribution generate equilibria characterized as poverty traps. These models specify a production indivisibility such that, due to problems of asymmetric information in credit or capital markets, poor agents are never able to acquire the resources necessary to overcome the indivisibility. In the context of an equilibrium growth model, this paper demonstrates that faced with such constraints, poor, risk-averse agents have incentives to voluntarily take on risk in the hopes of exiting poverty. Each period they remain in poverty, they sacrifice a small amount of current consumption to pool resources for this risky activity. Risk-taking, economic mobility, and the distribution of income are generated endogenously. Furthermore, beginning from identical endowments, “initial” inequality also emerges endogenously. It is shown that voluntary risk-taking eliminates many potential steady-state equilibria of this and other models—those that exhibit individual poverty traps. All agents (or dynasties) expect to escape at some future date, perhaps after an extended spell in poverty.     

Nonlinear economic growth: Some theory and cross-country evidence

This paper aims to test the existence of different growth regimes, that is of different relationships between growth rate and income level. We propose a simple nonlinear growth model and test its empirical implications by estimating Markov transition matrices and stochastic kernels. We show that growth is indeed nonlinear: a first phase of slow or zero growth is followed by a take-off and, finally, by a phase of deceleration. We discuss the relevance of these results with respect to the issue of convergence and reversibility of development, in the light of models of structural change and technological diffusion.     

Symbolic values, occupational choice, and economic development

Channeling human resources into occupations with high social productivity has historically been a key to economic prosperity. Occupational choices are not only driven by the material rewards associated with the various occupations, but also driven by the esteem that they confer. We propose a model of endogenous growth in which occupations carry a symbolic value that makes them more or less attractive; the evolution of symbolic values is endogenously determined by purposive transmission of value systems within families. The model sheds light on the interaction between cultural and economic development and identifies circumstances under which value systems matter for long-run growth. It shows the possibility of culturally determined poverty traps and offers a framework for thinking about the transition from traditional to modern values.     

Scale effects found!

A key feature of early endogenous growth models is their prediction of scale effects – the larger the economy, as measured by population, the number of firms or employment, the faster the economy should grow. However, empirical work has failed to support the existence of scale effects. As a result, much human capital has been expended in order to ‘fix’ this problem by eliminating scale effects in endogenous growth models. We contend that econometric techniques used in the empirical search for scale effects are inconsistent with growth theory. Using data from US states and an econometric technique that better matches growth theory by allowing each economy to have its own steady state, we provide empirical support for the existence of scale effects. Results call into question the need to reformulate the first models of endogenous growth.     

The double trap: Institutions and economic development

The empirical growth literature has established that institutional quality is a deep determinant of economic growth. We examine whether institutional quality in low income countries converges to the level witnessed in high income countries, or whether they are trapped in convergence clubs that stagnate or even deteriorate over time. Using the log-t-test suggested by Phillips and Sul (2007), we find evidence of multiple equilibria in institutional quality, with several countries stuck in poor quality institutions traps. We further find that per capita incomes of some of the developing countries are also stuck in low-level traps. Finally, using bivariate probit estimations, we establish that poor institutional traps are major determinants of low income traps. These results indicate that these countries are caught in a double trap where their incomes are stuck in low-level traps from which it is difficult to escape, because the institutions that enable growth are also stuck in low-quality traps.     

POVERTY TRAPS WITH LOCAL ALLOCATION TAX GRANTS IN JAPAN

This essay investigates poverty traps related to Local Allocation Tax (LAT) grants in Japan. LAT grants, which are transfers of funds from the central government to local governments, make efforts for enhancing regional economic growth, due to the calculation of the LAT grants. Using a simple dynamic model, we show that LAT grants lower regional income and are a disincentive to localities to increase their estimated tax revenue. Using panel Granger (non‐)causality tests, we find empirical support for asserting that there are poverty traps due to the LAT grants in Japan.     

Poverty,competition, democracy,and ownership: A general equilibrium model with vertical preferences

We consider a general equilibrium model where individuals are simultaneously workers, consumers, and shareholders, with two possible market structures: Monopoly and Duopoly, and two extreme ownership structures: egalitarian and concentrated. Considering three standard poverty indicators, the questions are, whether more competition generates more or less poverty for a given ownership structure; and whether a democratic choice between Monopoly and Duopoly leads to the alternative with less poverty. When the ownership is concentrated, we show that Duopoly generates less poverty than Monopoly and the majority votes for the alternative with less poverty. When the ownership is egalitarian, Duopoly may generate more or less poverty and democratic choice alleviates poverty regarding at least one poverty indicator and worsens poverty regarding at least another one, the three poverty indicators never converging. An empirical study on the effect of competition on poverty supports to some extent our theoretical findings.     

Decentralized payments for environmental services: The cases of Pimampiro and PROFAFOR in Ecuador

Few payment for environmental services (PES) schemes in developing countries operate outside of the central state's umbrella, and are at the same time old enough to allow for a meaningful evaluation. Ecuador has two such decentralised, consolidated experiences: the five-year old Pimampiro municipal watershed-protection scheme and the twelve-year old PROFAFOR carbon-sequestration programme. We describe and compare the two cases, using a common PES definition and methodology, drawing on both primary interview-based information and secondary data. We find that both schemes have been relatively effective in reaching their environmental objectives, in terms of having probably high additionality levels and low leakage effects. A strong focus on the targeted environmental service and a strong degree of conditionality seem to be two key factors explaining these achievements. Although neither scheme has targeted poverty alleviation or other side objectives, both are likely to have improved PES recipients' welfare, mostly through higher incomes. We highlight several observations with more generalised relevance and lessons for the design of PES schemes.     

水资源管理制度改革、农业生产与反贫困

根据我们在黄河流域四个大型灌区的实证研究发现，传统上村级的集体水资源管理制度正在逐渐被用水协会和承包管理所代替。由于改革具有很明显的自上而下的特征。因而很多改革流于形式；而只有那些建立了有效节水激励机制的水资源管理制度才能实现节水的目标。我们进一步的实证研究表明。具有节水激励机制的水资源管理制度的改革会导致小麦单产的降低，但不会对玉米和水稻的单产以及农民收入产生显著影响，而且贫困状况也不会因此而恶化。     

The long-run impact of bombing Vietnam

We investigate the impact of U.S. bombing on later economic development in Vietnam. The Vietnam War featured the most intense bombing campaign in military history and had massive humanitarian costs. We use a unique U.S. military dataset containing bombing intensity at the district level (N = 584) to assess whether the war damage led to persistent local poverty traps. We compare the heavily bombed districts to other districts controlling for district demographic and geographic characteristics, and use an instrumental variable approach exploiting distance to the 17th parallel demilitarized zone. U.S. bombing does not have negative impacts on local poverty rates, consumption levels, infrastructure, literacy or population density through 2002. This finding indicates that even the most intense bombing in human history did not generate local poverty traps in Vietnam.     

A panel data test for poverty traps

This article develops a threshold panel data nonlinearity test for poverty traps. The new testing strategy extends the work on nonlinearity tests for panel data by considering threshold nonlinearities in the fixed-effects components. Monte Carlo simulations are conducted to evaluate the finite-sample performance of these tests. The tests are applied to the relationship between Gross Domestic Product (GDP) per capita and capital stock per capita. Our application to a panel of countries for the period 1973 to 2007 uncovers the presence of two regimes determined by the level of capital stock per capita. The conclusions from our test also support the existence of a poverty trap determined by a capital stock per capita level at the 11% quantile of its pooled worldwide distribution.     

Imitation and evolutionary stability of poverty traps

This paper develops a bioeconomic model applying evolutionary game theory to the notion of poverty traps. We study the evolution of the social norm of being either a high-type or low-type in a dynamic environment where agents are driven by an imitative behavior. History matters because given initial conditions, agents imitate according to their current success in payoffs and the current profile of economic agents in the economy. We define a poverty trap as an evolutionarily stable strategic profile and steady state of the replicator dynamics. We show that in poor economies with a large fraction of low-type agents imitative strategies do not support a take-off into sustained growth. To achieve that take-off, society should subsidize critical parameters of the expected payoffs such that economic agents may change the initial conditions and the economy gets a critical mass of high-type economic agents, and so to overcome the poverty trap.     

Can natural disasters have positive consequences? Investigating the role of embodied technical change

It has been suggested that disasters might have positive economic consequences, through the accelerated replacement of capital. This possibility is referred to as the productivity effect. This effect is investigated using a model with embodied technical change. In this framework, disasters can influence the production level but cannot influence the growth rate, in the same way than the saving ratio in a Solow-like model. Depending on reconstruction quality, indeed, accounting for embodied technical change can either decrease or increase disaster costs, but is never able to turn disasters into positive events. Moreover, a better but slower reconstruction amplifies the short-term consequences of disasters, but pays off over the long-term. Regardless, the productivity effect cannot prevent the existence of a bifurcation when disaster damages exceed the reconstruction capacity, potentially leading to poverty traps.     

Poverty traps in a frictionless world: The effects of learning and technology assimilation

We study an endogenous growth model of technology assimilation through an adaptive learning process defining the accumulation of technological knowledge among both workers and industrial clusters. The assimilation of new technology and the arrival rate of innovations are both based on the distance from the technological frontier to the current technological development level of the country. We illustrate how, even if technological innovations become immediately available to all countries, and absent educational and institutional frictions among countries, differences in technological development levels allow for the existence of poverty traps leading to the economic stagnation of technological laggards.