Tuesday, 7 October 2014

The Poverty Trap

Some people argue that poor countries stay poor because they are in a poverty trap of health and nutrition. According to this idea, labour capacity increases more than proportionately in income at the absolute bottom where one dies if not fed, then less than proportionately during a stage of living just above the minimum, and then more than proportionately again as "good health" is reached. In the graph below, nutritional intake is captured by the red line. If income (the "S-shaped" curve) is below point B, corresponding capacity to work leads to a nutritional intake which lowers capacity to work (and income) the next day (or whichever period one considers), eventually leading the individual to Point A ("the bad equilibrium", or poverty trap). This is because the point on the red line which corresponds to the capacity to work for an income below point B is associated with a reduced income (one may draw lines on the graph to see this). Above point B, capacity to work is increased by more income, leading to a stable point at C ("the good equilibrium").
However, this relationship suggests that most of the truly poor around the world spend the vast majority of their income on victuals. However, this is false; many studies show that the highest fraction spent on food by the very poor typically does not exceed 70 per cent, and that they could get a great deal more nutrition out of the money spent by rearranging their food outlays, akin to how richer people would eat more on the same money if they buy chicken and vegetables rather than caviar and smoked salmon. Why the world's poor do not consume more food is still up for debate. It may be that they would benefit, in which case the above curve could be very useful, but it may also be that they are spending their money rationally and that something else is preventing them from getting rich.

That something else may not be a poverty trap and it could not be one based on nutrition, but it may be one based on something other than victuals. Here is one example: When Westerners go to very poor countries like Haïti or India, they may be surrounded by indigents asking for alms. Maybe natives living amidst these people - including potentially every indigent individual - correctly deduce that they would face a similar situation if they did something to improve their productive capacity and thereby raise their income. Unlike Westerners, natives have ties to other indigents and may find it prohibitively expensive to refuse to help them.

If they know how to increase production, there would be no problem, because everyone could just do it and even if the destitute neighbours "tax" away all the surplus with cries for help, learning from the successful ones means that this "tax" will shrink over time. However, if the poor do not know precisely how to be more productive, they will face a choice between the status quo or experimentation. Experimentation could result in great success or abject failure, but any success will be greeted by clamour for donations by the hapless neighbours who experimented differently or not at all, while failure may mean death.

Maybe the deep poverty that still persists is simply a result of this sort of coordination failure?

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