Economics of Poverty Traps and Persistent Poverty: An Assetbased Approach

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Economics of Poverty Traps and Persistent
Poverty An Asset-based Approach
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Introduction

• Why we need an asset-based approach to poverty
• Using the Asset Poverty Line to unpack standard
  poverty transitions
• Poverty Traps and the Dynamic Asset Poverty
  Threshold
• Multiple methods to identify the dynamic asset
  poverty threshold
• Persistent poverty reduction strategies

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Why an Asset-based Approach to Poverty

• The macroeconomically-oriented reforms of the
  Washington Consensus constitute an implicit
  theory of pro-poor growth or structural poverty
  transitions
• Getting Prices Right through trade liberalization
  should raise the price of poor households most
  abundant asset (unskilled labor)
• Getting Institutions Right by securing private
  rights to productive assets should enhance asset
  accumulation by poor households and,
• Deregulation should enhance the capital and
  insurance access of poor households, further
  boosting accumulation
• Key question has emerged about the sufficiency of
  these reforms
• Are these structural poverty transitions taking
  place?
• Do we need to get the microeconomy right before
  these macro reforms will work?
• That is, is it necessary to create a more
  inclusive economy by enhancing the access of low
  wealth people to markets from which they are
  traditionally excluded, especially credit and
  contingency market?

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Why an Asset-based approach to Poverty

• Note that standard income/expenditure based
  poverty measures look only at the outcome of this
  process, rather than the dynamics of assets
  returns themselves
• Unfortunately income and expenditures are noisy,
  imprecise indicators of assets (show a lot of
  churning), it is hard to distill structural
  processes from them
• More importantly, as the work of the CPRC has
  shown, the chronically poor are different from
  the non-chronically poor
• If we are to address persistent poverty, we thus
  need an approach that permits us to identify
  chronic poverty and understand its origins

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Using the Asset Poverty Line to Unpack Poverty
Transitions

• Increasing availability of longitudinal data
  makes it possible to address persistent poverty
  in Africa (see recent Hoddinott survey)
• Like to make 3 points
• Standard longitudinal analysis confounds
  stochastic transitions with structural
  transitions
• Asset poverty line can help us unpack these
  transitions
• However, asset poverty line leaves open the
  longer term issue of persistent or chronic poverty

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Stochastic transitions (churning from B to
u(A)) Structural Transitions via accumulation
(A to A) Structural transitions through higher
returns (u(A) to C)
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Poverty Traps and the Dynamic Asset Poverty
Threshold

• So will structurally poor be able to move ahead
  over time?
• Using the language of macro growth literature,
  can ask if poor households will catch up and
  converge with their neighbors, or are market
  economies internally generating divergence big
  time?
• From an economic perspective, key question will
  be whether or not household returns to productive
  assets (land, labor, etc.) increase in wealth
• Are a variety of reasons that such a relationship
  could exist
• Technological increasing returns to scale
• Minimum investment levels (indivisibilities)
  or,
• Uninsured risk
• For illustrative purposes, focus on reason 2 to
  explain general principals of poverty traps and
  dynamic asset poverty thresholds

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• No problem if perfect financial markets exist
• If not, key question becomes savings strategies
  that are feasible for households below AL

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Multiple Methods to Identify Dynamic Asset
Poverty Thresholds

• Economic theory of poverty traps thus suggests a
  dynamic asset poverty threshold could exist
• Key to understand it, but how do we identify it?
• Papers that follow will employ mix of
  quantitative and qualitative methods to identify
  this threshold
• Econometric strategies to estimate patterns of
  asset dynamics
• Qualitative and mixed methods designed to
  understand what it takes to be positioned to move
  aheadand sustainably stay aheadin the emerging
  market economies of Africa
• It is clear that analysis of income expenditure
  poverty inadequateneed an asset-based approach

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Persistent Poverty Reduction Strategies

• Will let individual studies speak to their
  particular methods
• Foreshadowing our discussion tomorrow, worth
  remarking on the general optic that this dynamic
  asset approach suggests that we take on policies
  and programs designed to address persistent
  poverty
• Address root financial market constraints
• Cargo Net Policies
• Safety Net (relief as development) Policies
• Common theme is to create a situation where time
  and markets work for all, making possible
  structural poverty transitions

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