poverty trap

What is a poverty trap?

A poverty trap is a mechanism that makes it difficult for people to escape poverty. A poverty trap occurs when an economic system requires a lot of capital to escape poverty. When individuals lack this capital, they may also find it difficult to obtain, creating a self-reinforcing cycle of poverty.

key takeaways

  • A poverty trap is an economic system in which it is difficult to escape poverty.
  • The poverty trap is not just a lack of economic means. It is caused by multiple factors, such as access to education and healthcare, that together keep individuals or families in poverty.
  • Famed economist Jeffrey Sachs has argued that public and private investment need to work together to eliminate poverty traps.

Understanding the Poverty Trap

Poverty traps are caused by many factors, including limited access to credit and capital markets, extreme environmental degradation (which depletes agricultural production potential), governance corruption, capital flight, poor education systems, disease ecology, lack of public healthcare, war and poor infrastructure.

In order to escape the poverty trap, some argue that sufficient assistance must be provided to poor individuals so that they can acquire the critical capital necessary to lift themselves out of poverty. This theory helps explain why some aid programs that do not provide a sufficiently high level of support may be ineffective in lifting individuals out of poverty. If the poor do not have access to sufficient capital, they will be dependent on aid indefinitely, and if it ends, they will be set back.

Recent research has increasingly focused on the role of other factors, such as healthcare, in maintaining social poverty traps. Researchers at the National Bureau of Economic Research (NBER) have found that countries with poorer health are more likely to be trapped in a cycle of poverty than other similarly educated countries.

Researchers at the University of Gainesville, Florida, collected economic and disease data for 83 of the world’s least and most developed countries. They found that people living in areas with limited human, animal and crop disease were able to escape the poverty trap compared to those living in disease-prone areas.

The role of the public and private in addressing the poverty trap

in his book The End of Poverty: The Economic Possibilities of Our Time, As a way to combat poverty traps, aid agencies should act as venture capitalists funding startups, suggests Jeffrey Sachs.

Sachs suggested that, like any other startup, developing countries should get all the aid they need to start turning around the poverty trap. He pointed out that the extreme poor lack six major types of capital: human capital, business capital, infrastructure, natural capital, public institutional capital and intellectual capital.

Sachs adds in his book:

“The poor start with very low levels of capital per capita and then find themselves impoverished because the proportion of capital per capita actually declines from generation to generation. When population is growing faster than capital, the declining amount of capital per capita is accumulating… The problem with per capita income growth is , whether net capital accumulation is sufficient to keep up with population growth.”

Sachs hypothesized that the public sector should focus on investing in:

  • Human capital – health, education, nutrition
  • Infrastructure – roads, electricity, water and sanitation, environmental protection
  • Natural Capital – Protecting Biodiversity and Ecosystems
  • Public Institutional Capital – Well-functioning public administration, justice system, police force
  • Part of intellectual capital – scientific research in health, energy, agriculture, climate, ecology

Business capital investment should be the domain of the private sector, Sachs said, claiming the private sector would use capital more efficiently to develop the profitable businesses necessary to sustain growth sufficient to lift entire populations and cultures out of poverty.

Examples of poverty traps

One of the most important considerations when researching poverty traps is the amount of government assistance to get a family out of their current situation.

Consider the situation of a family of four consisting of a parent and two children below legal working age. The family earns $24,000 a year and the parents work for $10 an hour. According to the latest federal poverty guidelines, a family of four is considered poor if their income is less than $27,750.

In a simple example, let’s assume that the government begins disbursing $1,000 in monthly aid. This raises the family’s annual income to $36,000. While capped at $1,000, government assistance decreases as household income increases. For example, if a household’s income increases by $500 to $2,500 per month, government assistance will decrease by $500. Parents must work an extra 50 hours to make up the shortfall.

The increase in working hours creates opportunities and leisure costs for parents. For example, they may end up spending less time with their children, or they may have to hire a babysitter while they are away. The extra hours also mean parents won’t have the leisure time to improve their skills in exchange for a higher-paying job.

The aid amount also does not take into account the family’s living conditions. Because they were poor, the family lived in one of the most dangerous neighborhoods in the city without access to proper health care. In turn, crime or susceptibility to disease can push up their average monthly expenses, rendering the increase in household income practically useless.

real world example

In the real world, Rwanda, a country ravaged by genocide and civil war until recently, is often cited as an example of a country that addresses poverty traps by identifying factors other than income. The African country is focusing on healthcare and insurance to increase average daily calorie intake.

However, some researchers Charge to the national government Lower the measurement threshold for successful presentations.

What causes the poverty trap?

Several factors make it difficult for people to escape poverty. Lack of capital is the main cause of the poverty trap, and education, infrastructure and healthcare are also poor.

Why is it so hard to get out of poverty?

Many things that can lift people out of poverty require one thing that poor people don’t have: money. For example, without money, it is difficult to obtain a decent education and acquire new skills to improve job prospects and earning potential. There’s also a shortage of free time for problem solving and happiness, as every hour that isn’t sleeping is devoted to making money and surviving.

How many people in America live in poverty?

According to the U.S. Census Bureau, 37.2 million people in the United States lived in poverty in 2020, accounting for more than 11 percent of the population.

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