The Poverty Trap

The two diagrams above (x-axis: income today, y-axis: income in the future) represent two simplistic models of poverty. The S-shaped curve on the left is the source of the poverty trap. On the diagonal line, income today is equal to income tomorrow. For the people in the poverty trap zone income tomorrow is less than income today (the curve is below the diagonal line). When people lack capital, they may also find it difficult to acquire it, creating a self-reinforcing cycle of poverty.

The diagram on the right does not have a poverty trap. These individuals make more money over time, until they hit diminishing returns.

“The most important message from the theory embedded in the simple diagrams is thus that theory is not enough: To really answer the question of whether there are poverty traps, we need to know whether the real world is better represented by one graph, or by the other. And we need to make this assessment case by case: If our story is based on fertilizer, we need to know some facts about the market for fertilizer. If it is about savings, we need to know how the poor save. If the issue is nutrition and health, then we need to study those. The lack of a grand universal answer might sound vaguely disappointing, but in fact it is exactly what a policy maker should want to know–not that there are a million ways that the poor are trapped but that there are a few key factors that create the trap, and that alleviating those particular problems could set them free and point them toward a virtuous cycle of increasing wealth and investment.” -Abhijit Banerjee and Esther Duflo


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