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THEECONOMICSOFPOVERTYTRAPSANDPERSISTENTPOVERTY:POLICYANDEMPIRICALIMPLICATIONS
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ChristopherB.Barrett [email protected]
UniversityofCalifornia,[email protected]
May2012revisedversion
Acknowledgements:WethankBrianDillon,AnnemieMaertensandHopeMichelsonforhelpfulcommentsonanearlierdraft.Anyremainingerrorsareoursoleresponsibility.
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TheEconomicsofPersistentPovertyandPovertyTraps:EmpiricalandPolicyImplications
Thealternativemechanismshypothesizedtogeneratepovertytrapsoftenhavequitedifferentempiricalandpolicyimplications.Afterbrieflyreviewingthesedifferentmechanismsandtheircoreimplications,weexploreindepthonesuchmechanism,thatofmultiplefinancialmarketfailures.Weshowthatthismechanismimpliesbehaviorsthatwouldberationalonlyinthepresenceofsuchapovertytrapmechanism.Theseimplicationsenableempiricaltestsindirectlyinbehavioraldata,ratherthanthemoretraditionalapproachofdirecttestingforpovertytrapsbasedonassetdynamics.Theuniquepolicyimplicationsofthismodelarealsotestableusingexperimentalmethods.Basedontheseobservations,wereviewrecentempiricaleffortstotestforpovertytraps,bothdirectly,byexploringassetdynamics,andindirectly,bytestingforthebehavioralandpolicyimplicationsofdifferentpovertytrapmechanisms.
I. IntroductionPunctuatedbytheambitiouseffortsoftheChronicPovertyResearchCenter(2008,2011),1numerousstudiesutilizelongitudinaldataonindividuals,householdsandcommunitiestodocumenttheextentofpersistent(or“chronic”)poverty.Correspondingly,therehavebeenanumberofeffortstoexpandconventionalpovertymeasuresintomeasuresofchronicpoverty(see,forexample,CalvoandDercon2009,Foster2009).Increasinglywidespreadobservationsofpersistentpovertyatthemicroscalefeedresearchers’andpolicymakers’interestinpovertytraps.However,aswearguedinanearliercontributiontothisjournal(CarterandBarrett,2006),theobservationthataparticularfamilyispoorformultipletimeperiodsdoesnotmeanthattheyarecaughtinapovertytrap,nordoesitbyitselfidentifytheappropriatepolicyintervention,whichnecessarilydependsonthemechanismsthatcauseandsustainpersistentpoverty.Inthatearlierwork,wesuggestedthatanasset‐basedapproachcouldhelpempiricallyidentifyanddistinguishamongdifferenttypesofpersistentpovertyandguideappropriatepolicy.Inthispaper,wedrawonrecenttheoreticalandempiricalinsights,includingthoseofferedbythepapersinthisspecialissue,toextendandrefinecentralmessagesfromourearlierwork.Were‐emphasizethecentralityofassetdynamicsandassociatedinvestmentincentives,aswellasthattheappropriatepolicyresponsetopersistentpoverty—andthemoralcompulsionandeconomicjustificationtorespondtoit—dependsfundamentallyontheunderlyingcausalmechanisms.Similarly,strategiestoempiricallyidentifypovertytraps–asubsetofpersistent1CPRC(2011)estimatesthatin2005between336and472millionpeoplewerechronicallypoorworldwide.
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poverty–dependonthemechanismsatplayasdoappropriatepolicyresponseswhenapovertytrapexists.Theintrinsicallyconditionalnatureofbothempiricalandpolicyanalysisofpersistentpovertyandpovertytrapshasreceivedinsufficientattentiontodate(includingbyourselves).Afterreviewingarangeofcandidatemechanismsthatcangenerateobservationsofpersistentpoverty—someofwhichimplypovertytraps,andothersofwhichdonot—wefocusonwhatwehypothesizeisthemostcommonplacemechanism,whatwecallthe“multiplefinancialmarketfailures”(MFMF)theoryofpovertytraps.DrawingonrecentanalysesofacanonicalMFMFpovertytrapmodel,wediscusskeybehavioralandpolicyimplicationsofthismodel.TheseimplicationssuggestnovelempiricalstrategiesthatcanbeusedtotestfortheexistenceofMFMFpovertytrapsindirectly,bylookingforbehaviorsthatwouldberationalonlyinthepresenceofaMFMFpovertytrap,inlieuofmoretraditionalapproachesofdirectlytestingforpovertytrapsbystudyingassetdynamics.Thisindirectapproachtotestingfortheexistenceandsourceofpovertytrapsprovidesawayaroundtheformidableidentificationchallengesposedbydirecttestsofthepovertytraphypothesis.Wethentakestockofwhatweknowabouttheempiricalimportanceofpovertytraps,reviewingthecontributionstothisspecialissueaswellasotherrecenteffortsthattestthebehavioralandpolicyimplicationsoftheMFMFtheoryofpovertytraps.II. AlternativeStructuralMechanismsthatUnderliePersistentPoverty
andPovertyTrapsThecoreideaunderpinningtheterm“chronic”or“persistent”povertyisthatanobservedhousehold’s2incomeorexpenditures—theworkhorsemoneymetricflowindicatorsofwell‐being—consistently,oratleastonaverage,fallsbelowapredeterminedpovertyline.3Persistentpovertyisapowerfuldescriptor.Butitintrinsicallylacksananalyticalfoundationnecessarytomountawellthoughtoutpolicyresponse;oneknowslittleornothingaboutwhysuchhouseholdsarepersistentlypoorwithoutprobingfurther.Indeed,strictlyspeaking,observedpersistentpovertyisneithernecessarynorsufficienttomotivateintervention.4Considertwooft‐observedexamples.Persistentpovertymayreflectslowgrowthfromalowinitialstandardofliving,suchthattheobservedhouseholdispoorthroughouttheperiodofobservation.Theprevailingpathdynamicsoftheeconomicsystemmightimply,however,thatthehouseholdisexpectedtoexitpovertysoonaftertheperiodofobservation;itslong‐runstandard2Thelogicappliestoanyobservationalunit,fromindividualthroughmultinationalaggregates.Inthispaper,weusetheterm“household”merelyasconvenientshorthand,nottoimplythesephenomenaonlyoccurathouseholdscaleofanalysis.3Thiscanreadilybeexpandedtonewer,lessmainstream,multidimensionalmeasuresofpoverty(BourguignonandChakravarty2003,Duclosetal.2006,AlkireandFoster2011).4Thispointhasanimportantcorollary:observedeconomicmobilitydoesnotimplysustainable,structuralimprovementinlivingconditions(NascholdandBarrett2011).
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oflivingisnotpoordespiteitspersistentpovertywithinthedatasointervention–especiallylongaftertheperiodofobservation–maynotbenecessarytorelieveitspoverty.Bycontrast,inpaneldatawithjusttwoorthreerepeatedobservations,oneroutinelyfindshouseholdsthatenjoynon‐poorincomeorexpenditurelevelsduringeach—oratleastthelatter—surveyperiod(s)duetotemporarygoodfortuneeventhoughtheirassetholdingssuggesttheyareunlikelytoremainnon‐poorforlong(CarterandMay2001,NascholdandBarrett2011).Onewouldnotwanttorecommendagainsttargetingsuchhouseholdsforassistance.Thesetwocases—thepersistentlypoorpoisedtoescapepovertysoon,ortheconsistentlyluckywhosegoodfortunewillalmostsurelyrunoutsoon—helpmotivateaninterestinthestructuralfoundationsoflong‐termdeprivation.5Whyarepeoplepersistentlypoor,whataretherightpolicyinstrumentstoaddressthosemechanisms,andwhoaretherightsubpopulationstotargetwithinterventions?Hencesocialscientists’longstandinginterestin“povertytraps”,whicheconomiststypicallydefineas“anyself‐reinforcingmechanismwhichcausespovertytopersist”(AzariadisandStachurski2004,p.33).Apovertytrapisthusaboutstayingpoor,notjustaboutbeingpooratafewmomentsintime.Povertytrapsresearchthereforefocusesonidentifyingandexplainingtheexistenceoflowwell‐being“basinsofattraction”withinaneconomy.6Furthermore,giventhefocusontheunderlyingstructurethatshapeshouseholds’well‐beingdynamics,povertytrapsresearchnaturallyemphasizestheevolutionofthestockofproductiveassetsthatproducesperiod‐specificwell‐being,howevermeasured.7Theliteratureidentifiesavarietyofstructuralmechanismsthatcangeneratepovertytraps.Someoperateattheleveloftheindividualorhousehold,whileothersoperateatthecommunity,regionalornationalscales.Thesemechanismscanoperateonintra‐orinter‐generationaltimescales.Somearesingleequilibriummechanismsinthesensethatthereisnotanon‐poorequilibriumavailabletothehousehold(ortotheregion,etc.)giventheexistingtechnologiesofproductionandincomegeneration.Othersaremultipleequilibriummechanisms,meaningthatbothpoorandnon‐poorequilibriaareavailable.Whatmattersinmultipleequilibriummodelsisthecriticalthresholdortippingpointthatdetermineswhetherthe
5ForthisreasonauthorssuchasCarterandMay(2001)andCarterandBarrett(2006)havearguedthatpovertytrapsmustbeapproachedempiricallythroughthelensofassetsratherthanincome.InSectionIIIofthispaper,weexplicitexplorepovertytrapmechanismsthroughthelensofanassetmodelofpoverty.6Formoreelaborationonthedynamicalsystemsbehindpovertytraps,inbothformalandinformalterms,seeAzariadisandStachurski(2004),Dasgupta(2004),CarterandBarrett(2006)orBarrett,TravisandDasgupta(2011).7AsCarterandBarrett(2006)explain,therearealsoimportantpracticalconsiderationsthatfavoranasset‐basedapproach,relatedtorelativeeaseofmeasurementofassetsascomparedtoexpendituresorincome.
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householdreachesthepoor(povertytrap)ornon‐poorequilibrium.AsweillustrateinSection3,singleandmultipleequilibriamechanismscancoexist,withsomehouseholdsfacingonlyasingleequilibrium,whileothersconfrontmultiplepossibilities.Thedistinctionsbetweenscalesandsingleversusmultipleequilibriapovertytrapsisoffarmorethanacademicinterest.Themultiplepossiblemechanismsbehindpovertytrapshavevariedimplicationsforempiricalstrategiestoidentifyapovertytrapandforprescriptionsforpoliciesaimedathelpingthepoorescapefromtraps(Barrett2008).Theremainderofthissectionorganizesabriefreviewofdifferentmechanismsandtheirdistinctiveimplications.
(a) SingleEquilibriumPovertyTrapsSomepovertytrapsmaybecharacterizedbyasinglestablestate(ordynamicequilibrium)atalowlevelofwell‐beingtowardwhicheveryoneconverges.Macro‐scaletrapscanoriginatebecauseofinstitutionalphenomena(Acemoglu,JohnsonandRobinson2001,2002)ordisadvantagesofphysicalgeographythatafflictallresidents(JalanandRavallion2002,Bloom,CanningandSevilla2003),leadingtogeographicpovertytrapsthatengulfwholenationsorregions.Muchofthemacroeconomicdebateabout“convergence”andpovertytrapsrevolvesaroundsuchphenomena.Thiskindofpovertytrapcanbeunderstoodastheresultofa“technology”—broadlydefinedtoincludetheinstitutionalandorganizationalformsofproductionandexchange—thatisinsufficientlyproductivetogeneratenon‐poorstandardsofliving,conditionalongeography,climateorotherfixedendowments.Theremaylikewiseexistsinglestablestatesspecifictoindividualsorgroupsofindividuals,perhapsduetoseverementalorphysicaldisability,tosystematicdiscriminationandsocialexclusion,ortosomeothermechanismthateffectivelyprecludessuchindividualsfromattainingandmaintainingahighlevelofwell‐being.8Thekeyisthatindividualspossesssomeimmutablecharacteristic(s)thatsortindividualsintogroups,withsomegroupsnaturallyboundforahighlevelstablestateandotherstowardalowlevelone.Ittakestimetosortamonggroupsbutthereis,inlong‐runexpectation,effectivelynodurabledifferenceamongindividualswithinagivengroup.Ineitherthemacroormicrocasesofpovertytrapswithsinglestablestates,persistentpovertyappearsasthenaturalconsequenceofanimmutableconditionspecificto(perhapsmany)households.Ahumanitarianimpulsenaturallymotivates
8Asbutoneexampleorasingleequilibrium,thefetaloriginshypothesispositsthatadultcognitiveandphysicalpotentialarelargelydeterminedinutero(AlmondandCurrie,2011)or,morebroadly,withinthefirst1000dayssinceconception(WorldBank2006).Inthecontextofthispaper,thishypothesissuggeststhatthenumberofpeoplecaughtinsingleequilibriumpovertytrapscanbereducedthroughprenatalandearlychildhoodhealthandnutritioninterventionsthatenablechildrentorealizetheirfullgeneticpotentialasadults.
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interventionsonbehalfofsuchpeoplesbutthefundamentalstructurethatleadstopersistentpovertycannotberemediedwithoutwholesalesocietalortechnologicaltransformationtoimprovethelong‐runprospectsforsuchhouseholds.
(b) MultipleEquilibriumPovertyTrapsMultipleequilibriummechanismscreatepovertytrapsthatarequalitativelydifferentthanthosegeneratedbysingleequilibriummechanisms.Suchpovertytrapsarecharacterizedbymultiplestablestatesaccessibletoindividualhouseholds,withatleastoneequilibriumassociatedwithapoorstandardoflivingandanotherwithahighlevelofwell‐being.Well‐beingindicatorsaredynamicallystablewithinaregionofthepossiblestatespace,meaningthatperturbationsthatchangeastatewithintheregionmerelychangetheshort‐termpathtothesamelong‐termstate.Theexistenceofmultiplesuchregions,correspondingtomultiplestablestates,impliestheexistenceof“thresholds”or“tippingpoints”attheboundariesbetweenthoseregions.Minorinitialinter‐householddifferencesthatleavetwohouseholdsveryclosetoeachother,yetonoppositesidesofathreshold,naturallyleadtodivergenceaseachhouseholdfollowsthepathinherenttoitsownbasinofattraction.9Undermultipleequilibriumpovertytraps,individualssufferunnecessary,remediabledeprivation,makingaparticularlycompellingcasetodeviseandfieldinterventionstoaddressthesemechanisms.Withintheclassofmultipleequilibriumpovertytraps,thereexistseveralpotentialmechanismsthatcangiverisetosuchstructure,eachwithdistinctempiricalandpolicyimplications.Letusbrieflyconsiderjustafewsuchmechanismssoastoillustratetherangeofpossiblestructuralcausesofmultipleequilibriumpovertytrapsandtheinherentchallengeofidentifyingapovertytrap’soriginsorantidotewithoutsomestrongpriorinformationonthelikelycauseofthephenomenon.SectionIIIwillthendelvedeeplyintoonetypeofmultipleequilibriumpovertytrapmechanism,exploringindetailitsimplicationforboththeempiricalinvestigationofpovertytrapsandforthedesignofanti‐povertypolicy.Atamacroscale,the‘bigpush’theoryofRosenstein‐Rodan(1943)(formalizedbyMurphy,ShleiferandVishny,1989)isaprimeexampleofamultipleequilibriumpovertytrap.Inthismodel,atechnologyisavailablethatallowstheeconomytoindustrializeandtherebyreacha‘non‐poor’livingstandard.However,coordinationproblemsbetweenfirmsmakeitpossiblefortheeconomytobecomemiredatalowstandardofliving.Thepolicyimplicationsofsuchamultipleequilibriumpovertytrapareclear.Ifsuchatrapexists,thengovernmentscanigniterapidgrowththroughcoordinatedinvestmentviaindustrialandtradepolicytopromotesavings,exportsandrapidfactorproductivitygrowth,asoccurredinseveraleastAsiancountriesinthe1960s‐80s.
9CarterandBarrett(2006,2007)andBarrett(2008)discusstheimplicationsofsuchsystemsindetail.Ifsufficientnumbersofpeoplesufferunnecessarydeprivation,thewholeeconomycanfallintoapovertytrap(BarrettandSwallow2006).
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Attheintermediatelevelof,say,acommunity,astill‐differentmechanismcangiverisetoapovertytrapwhenpeoplederivenon‐materialvaluefrominterpersonalrelationships.Ifthereisanassociationalpropensityamongsimilarindividuals—thepoornetworkmainlywithotherpoorpeople,andtherichwiththerich—thenmultipleequilibriacanresultnaturallyfromeithersignalingorlearningeffects(Montgomery1991;Calvó‐ArmengolandJackson2004)aswellasfromtheabilitytotapsocialnetworkstoovercomethefixedcostsofadoptionofimprovedtechnologieswhenthepoorlikeaccesstofinancialmarkets(ChantaratandBarrett2012).Indeed,socialnetworksandnormscangeneratestrong,ifsometimessubtle,pressurestoconformtotraditionallocalpractices,inwhichcaseinnovatorsmayberegardedasdeviants,therebyretardingtechnologicalchange(Barrett2005a;MoserandBarrett2006).Thosesortsofnetworkeffectsareaspecialcaseofmoregeneralspillovereffects—forinstanceduetodiseasetransmission(Bondsetal.2010)orwatermanagement(Ostrom1990)—thatcaneasilyleadtocoordinationfailuresinwhichthereexistParetoinferiorequilibriaandoftenmultipleequilibria.Suchlow‐levelequilibriacaneasilybecomeinstitutionalizedthroughformalorinformalrulesandnorms,suchaspropertyrights,socialnormsregardinginformaltaxationorpatternsofcontributionstopublicgoodsorinformationsharing,thatthenguideindividualandgroupbehavior(EngermanandSokoloff1997;Platteau2000;Acemogluetal.2001;Barrett2005a;BarrettandSwallow2006;Bowlesetal.2006).Aswith“bigpush”macrotheoriesofpovertytraps,thesemeso‐scalecoordinationproblemsrequireconcertedeffortstoalterinterhouseholdinteractions,forexamplebychangingtherulesofcollectiveaction(e.g.,wateruserules),orbycoordinatingbehavioralchange(e.g.,adoptionofavisiblynon‐traditionaltechnology)amongacriticalmassofhouseholdsandmakingthatcoordinatedchangecommonknowledge(e.g.,throughfarmerfieldschools)soastotipgroupbehaviorintoanewequilibrium.Atthescaleoftheindividualorhousehold,oneoftheearliest,well‐developedtheoriesofmultipleequilibriumpovertytrapisthatbasedontheideathatphysicalworkcapacitydeclinesmorerapidlythanwagesoncethewages(andthenutritionitcanbuy)fallsbelowacriticallevel(DasguptaandRay,1986,1987andDasgupta1993,1997).Inthesimplestversionofthistheory,allpotentialworkersareidenticalandownnoassets.Inequilibrium,asubsetofthemwillobtainemploymentandenjoyahigherstandardoflivingthantheirunluckycompatriotswhoarerationedoutofthelabormarketandbecomestuckatalowlevelofliving.Initsmorecomplexversion,potentialworkersmayownsomeproductiveassets(thereturnstowhichgivethemafloororbaselevelofnutrition).Rationingofjobsinthiscasewilloccurinorderofassetownership,withthebest‐endowedpotentialworkershiredfirst.Inequilibriumtherewillbesomecriticalassetholdingsuchthatthosewithatleastthatlevelobtainemploymentandreachanon‐poorstandardofliving,whilethosebelowthatcriticallevelwillremainmiredinpovertyandmalnutrition.ThedynamicextensionofthismodelbyStreufertandRay(1993)
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showsthatthistippingpointcanpersisteveninadynamicmodelinwhichindividualscanautarchicallysave10andbuildtheirassetstocksovertime.Aneconomywithmultipleequilibriumpovertytrapsexplicitlyviolatesamoralprincipleofhorizontalequityastheinitiallysimilarfacestronglydivergentfutures,dependingontheequilibriumwheretheyendup.Furthermore,thefactthatinitialdifferencesinendowmentscanleadtomarkedlydifferentfuturesimpliesavoidablehumandeprivation,afeaturethatdoesnotexistwithsingleequilibriumpovertytrapsduetoindividuals’immutablecharacteristics.Thisaddsapowerfulefficiencyargumentforinterventiontotheequityorhumanitarianimpulsethatmotivatesallinterventionstoreducepoverty.AsdevelopedbyDasguptaandRay(1987)andStreufertandRay(1993),apolicythatredistributesassetstothosebelowthethresholdwillrenderthememployableandnotonlyimprovetheirlifeprospects,butalsoboosttheaggregateproductivityoftheeconomy.11Yetanothertypeofmultipleequilibriumpovertytrapcanresultfromthenon‐tradabilityofessentialproductiveinputsthatcancauseinitialconditionstoshapeincentivestoinvestortoadoptimprovedtechnologies.Thatistheessentialmechanismbehindnaturalresourcedegradationpovertytrapswhereinsmallfarmersendowedwithmarginalorfragilesoilshavenoincentivetopurchaseandapplyfertilizersortoinvestinsoilconservationmeasures,creatingadownwardspiralofdeterioratingsoils,lowerproductivityandpeopletrappedinpoverty(ShepherdandSoule1998;Antle,StoorvogelandValdivia2006;MarenyaandBarrett2009a,b;Stephensetal.forthcoming).Meanwhile,modestlybetterendowedneighborsinvestinfertilizersandsoilconservation,therebymaintainingyieldsandsoilquality,crowdingincomplementaryinvestments(e.g.,inlivestock)andleadingtoahigherstandardofliving.Smalldifferencesinafarmer’sinitialbiophysicalconditionstherebyleadtolarger,permanentgapsinproductivityandwell‐being.Afurthermechanismthathasbeenattractingincreasingattentioninthepastfewyearsconcernsthepossibilityofbehavioralanomaliestoleadtopersistentlyinefficientactivities,inthelimittopovertytraps.Individualsmayfacepsychologicalincentivesorconstraintsonbehaviorrelatedtoself‐controlproblems,habits,addictionsandother“irrational”behaviorsthatcausethemmaterialharm.Ifthoseareimmutable,theycanleadtosingleequilibriumpovertytrapsofthesortdiscussedabove,muchlikeapermanentcognitiveorphysicaldisabilitymight.Butifsuchbehaviorscanbealteredthrough“nudges”(ThalerandSunstein2008).tothechoicesandconstraintsagentsface,mostcommonlythroughcommitmentdevicesofsomesort,thenmultipleequilibriacanemerge(BanerjeeandMullainathan2010).Thisis,forexample,Dufloetal.’s(2011)explanationofAfrican
10NotethattheStreufertandRay(1993)analysisisafinancialmarketsfailurestory,notdissimilartotheMFMFmodelwepresentinsectionIII.11Thisassetredistributionwouldnot,however,beParetoefficientasitwouldbeimpossiblefortherecipientsoftransferstocompensatethelosersasdoingsowouldeliminatethenutritionalandemployabilitygainoftheassettransfer.
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farmers’failuretoinvestinfertilizersofferinghighexpectedreturnsoninvestment,orofAshrafetal.‘s(2004)findingswithrespecttosavingsbehaviorinthePhilippines.Anew,butrelatedstreamofliteratureconsiderswaysthatthekeydriversofpersistentpovertyinstandardpovertytrapmodels(shocksandlowassetlevels)maycausepreferencestoendogenouslychangeinwaysthatcangeneratepovertytraps.Laajaj(2012),forexample,usesideasfromsocialpsychology(cognitivedissonance)tocreateamodelinwhichindividualswithweakassetpositionsreactpsychologicallybyshrinkingtheirtimehorizonstoavoidputtingtoomuchweightontheir“gloomyfutureprospects.”Laajajgoesontoshowthatarandomizedinterventionthatenhancedindividual’sfutureprospectsinruralMozambiqueledtoastrong,statisticallysignificantincreaseinindividual’stimehorizon,providingevidencethatdeeppreferenceparametersthataremutableandendogenoustoindividuals’prospects.Complementingthiswork,Moya(2012)showsthatindividualsexposedtoviolenceinColombiaexhibitamarkedincreasedintheirlevelsofriskaversion,ashiftthatwouldimplyalowerstandardoflivingeveninastandard,singleequilibriumdynamicmodel.SimilartoLaajaj(2012),Moya’sworkblursthelinebetweensingleandmultipleequilibriumpovertytraps.Conditionalonpreferences,theworkofbothauthorssuggestsasingleequilibriummodel.However,unconditionally,theirworksuggeststhatindividualsaresubjecttomultipleequilibria,gravitatingbetweenlowandhighsteadystates,dependingonendowmentsandrealizedshocks.NotealsothatincontrasttotheBanerjeeandMullainathan(2010)andDuffloetal.(2011)work,thisendogenouspreferencedoesnotblamethepoorfortheirownpersistentpoverty(duetotheirintrinsiclackofself‐control),butinsteadidentifieskeystructuralmechanismsthatdistortpreferencesinwaysthatdriveindividualstolowerlong‐runstandardsofliving.Afinalandoft‐citedmechanismthatcangeneratemultipleequilibriapovertytrapsattheindividuallevelstemsfromfixedcoststhatcangeneratelocally‐increasingreturnstoscale.Forexample,farmersmightreceivedifferentfarmgatepricesfortheproductstheysellbasedendogenouslyonthevolumesoldtoatraderwhoincursfixedcostsinproductcollection.Theresultingvolume‐baseddifferenceinpricescreatesdifferentinvestmentincentivesandresultingproductionpatterns,eachcorrespondingtoadistinctlevelofexpectedfarmerwell‐being(Barrett2008).Verysimilarpatternsarisefromchoiceamongtechnologiesthathavesunkcostsofadoption,leadingtonaturalsortingamongadoptersandnon‐adoptersbasedoninitialendowments(Dercon1998,CarterandBarrett2006).Similartothenutritionwageandnaturalresourcedegradationmechanisms,borrowingconstraintsmakeitimpossibleforthetrappedproducertoborrowthefundsneededtoincreaseherscaleofoperationandreapthehigherreturnsthatareavailable.Combinedwithanothermarketfailure,acreditmarketfailureisakeyelementofthismechanism.
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III. TheMultipleFinancialMarketsFailuresPovertyTrapGiventhecentralityoffinancialconstraintstomanyofthemultipleequilibriumpovertytrapmechanismsjustdescribed,thissectiondevelopsingreaterdetailtheempiricalandpolicyimplicationsofwhatwecallthecoremultiplefinancialmarketfailures(MFMF)povertytrapmodel.TheMFMFpovertytrapmodelbringsintostarkreliefthecompellingcharacteristicofunnecessarydeprivationofthoseunluckyenoughtosufferlowinitialendowmentsorwhosufferashockthatknocksthembelowsomecriticalassetthreshold.WefindtheMFMFpovertytrapconceptuallyappealingbecauseitcapturesinarelativelysimpleformatseveralkeyfeaturesthatcharacterizequiteafewsettingsinthelow‐incomeworld,andhasespeciallyinterestingempiricalandpolicyimplications.Italsoillustratesquiteclearlyhowsingleandmultipleequilibriumpovertytrapscanco‐exist.
(a) CoreImplicationsoftheMultipleFinancialMarketsFailurePovertyTrapModel
InCarterandBarrett(2006)wedescribedthegeneralcharacteristicsofaMFMFpovertytrapmodelwithoutgivingitthatname.Tomorethoroughlydeveloptheempiricalandpolicyimplicationsofthismodel,weheresummarizemorerecentanalyses(Barrett,CarterandIkegami2011,andJanzenCarterandIkegami,2012)thatdrawonthefollowingcanonicalpovertytrapmodel.Inthismodel,anindividualihasanimmutableskilllevel,αi,andcanovertimeaccumulateastockofproductiveassets,theamountofwhichatatimetisgivenbyAit.12Theindividualdeploysherassetsandskillundereithera‘high’( )or
‘low’( )technology,eachofwhichismonotonicallyincreasinginbothαiandAit.Thehightechnologyissubjecttofixedcostssuchthatoutputisgreaterunderthelowtechnologyuntilaminimumscaleofproductionisreached.Afterthatscaleisreached,thehightechnologyismoreproductive,asreflectedinsuperiormarginalreturnstoassetsunderthehightechnology.Overtime,theindividualcanchoosetobuildupherassetstock.However,assetsdepreciateatarateτandaresubjecttoaperiodicassetshock, .Thisassetshockisarandomvariablerepresentingweather,theft,accidentoranythingelsethatmightdegradetheassetstock.When ,nothingbadhappensandthe
individual’sassetsarepreserved.When ,afractionoftheindividual’sassetsaredestroyed.
12Notethatbecauseαiisimmutableitwouldnotincludeindividualskillsthatcanvaryovertimeduetoinvestmentsineducation,health,nutrition,learningbydoing,etc.Weconceptualizethoseinvestmentsasaddingtothetimevaryingcapitalstock,Ait.
Fh( i, Ait )
F ( i, Ait )
t
t 1
t 1
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Finally,wemakeMFMFassumptions.Specifically,weassumethattheindividualcannotborrowagainstfutureincomeearningsinordertoeitheraccumulateassetsmorerapidly,ortoinsulateconsumption,ct,againsttheeffectsofshocks.Theseborrowingconstraintsrepresentthefirstfinancialmarketfailure.Inaddition,weassumethatnoinsurance(contingentclaims)marketexists,thereforetheindividualdoesnothaveaccesstoinsurancecontractsthatwouldindemnifyherforassetlosses.Thereisofcourseahostofevidencethatbothofthesefinancialmarketfailuresconstrainthelivesofpoorpeople(Besley1995).Rectifyingthosemultiplefinancialmarketfailuresisakeyareaofpolicyintervention,whichwediscussbelow.Undertheseassumptions,theindividualfacesthefollowinginter‐temporalchoiceproblem:
maxc,A
E0 t
t0
u cit
subject to :xit
(Ait,t ) F(Ait, i ) (1 )t Ait
F(Ait,i)max[Fh(Ait,i),F(Ait,i)]
citxit
Ait1xitcit
whereδ∈ 0,1 isatimepreferenceparameter,andxitisconsumablewealth,definedasthesumofcurrentincomeandthestockofproductiveassets.13TheMFMFassumptionsareembodiedintheconstraintthatsaysthatcurrentconsumptionmustalwaysbelessthanorequaltotheconsumablewealththattheindividualhasonhandastherearenoinsurancepayouts,noriscreditavailabletoaugmentcurrentconsumptionwithborrowingagainstfutureearnings.Inaddition,theassetstockcanbuilduponlythroughautarchicsavings(thedifferencebetweenconsumptionandwealthonhand),againreflectingtheabsenceofloanmarketsforthisindividual.Wealsoassumecostlessswitchingbetweentechnologiesinanyperiod;relaxingthatstrongassumptionwouldmerelyreinforcethemultipleequilibriumcharacterofthemodel.Dynamicprogramminganalysisofthismodelreported(asreportedinBarrett,CarterandIkegami2011)revealsanumberofkeyimplications:1. Endowmentsareexpectedfate
Figure1illustratesthedirectimplicationsofthemodelforindividualsofdifferentabilitylevels(shownonthehorizontalaxis)anddifferentinitial,orinherited,endowmentsoftheproductiveassets.Thesolidlinecuttingacrossthe
13Notethatwemeasureassetsinmonetaryvaluetermsimplicitly,butunrealistically,assumingthattheirpriceisconstantovertime.
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figuredividestheendowmentspacebetweenthoseagentstothenortheastofthelinewho(inprobability)convergetoahigh‐incomeequilibrium,andthosetothesouthwestwhoinexpectationcollapsetoalow‐level,povertytapequilibrium.Foreachabilitylevel,thislinedefineswhatwecallthe“Micawberthreshold”(MT).14Ifanindividualbegins,orduetoanassetshockfallsbelow,theMT,thenshewillfallintoapovertytrap.IfthatsameindividualisaboveherMT,thenshewilltendtothehighequilibrium.Themodelthusexemplifiesamultipleequilibriumpovertytrapmechanism.
Figure1:MultipleandSingleDynamicEquilibriainAbility‐AssetSpace
2. RiskMattersandShocksHavePermanentConsequencesImagineanindividualwhofindsherselfjustabovetheMT.AneventthatdestroysafractionofherassetswillsuddenlypushherbelowtheMTandintoapovertytrap.AsLybbertetal.(forthcoming)expressit,riskmattersmorethan
14ZimmermanandCarter(2001)firstusedthistermtodescribethedynamicassetthresholdforthisclassofmodel.ThelabelitselfisdueLipton(1993)whousedittodistinguishthosewhoarewealthyenoughtoabletoengageinavirtuouscircleofsavingsandaccumulationfromthosewhoarenot.Lipton’slabelisbasedonCharlesDickens’characterWilkinsMicawber(DavidCopperfield)whoextolledthevirtuesofsavingswithhisstatement‘Annualincometwentypounds,annualexpenditurenineteennineteenandsix,resulthappiness.Annualincometwentypounds,annualexpendituretwentypoundsoughtandsix,resultmisery.’TheMicawberthresholddividesthoseabletoengageinavirtuouscircleofsavingsandaccumulationfromthosewhocannot.
Intrinsic Ability, 0
2
4
6
Ass
et S
tock
, Ait
Micawber
Threshold
Single Equilibrium
Poverty Trap
Multiple Equilibrium
Poverty Trap
Single Equilibrium,
Not Chronically Poor
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itotherwisemightbecauseone‐offperturbationscanhavepersistenteffects,i.e.,thesystemcanbeshockedfromonestableequilibriumtoanotherbyasingleevent.AsDerconandChristiaensen(2011)pointout,lackofinsuranceandroutinelycredittrappoorhouseholdsinlowreturn,lowerrisktechnologies,therebyperpetuatingpoverty.
3. CoexistenceofSingleandMultipleEquilibriumPovertyTrapsExaminationofFigure1revealsthattheMTexistsonlyformiddleabilityindividualswhoseskilllevelsliebetween and .Lowabilityindividuals
faceasingle,low‐levelequilibriumandultimatelycollapsetoapovertytrapstandardofliving,evenifinitiallyendowedwithsignificantassets,becausetheirlowintrinsicproductivitylimitstheircapacitytosaveorreplacedepreciatedassets.IntheMFMFmodel,asingleequilibriumpovertytrapmechanismtherebycoexistswithamultipleequilibriumpovertytrap.Notealsothathighabilityindividuals( )faceasingle,high‐levelequilibrium.Theymightbepersistentlypoorinashortpanelastheaccumulatewealthfromalowinitialassetstock,buttheiruniquelong‐runequilibriumisnon‐poor.Aswediscussbelow,thecoexistenceofthesedistinctofpovertytrapsandassetdynamicscreateproblemsforempiricalanalysisbecausequitedifferentformsofpersistentpovertycanreadilyco‐existinasinglepopulation.
4. SystemicChangeMattersFigure1,anditsimplicationsaboutthenatureandlocationofpovertytraps,iscontingentonanumberofassumptionsabouttheproductivityoftheavailabletechnologiesaswellasthedistributionofshocks(i.e.,thenatureofnature).Intherealworld,bothoftheseevolveovertime.Technologychangesduetohumanagencyandpolicyinterventions.Natureevolveswithchangesinclimate,diseaseepidemiology,etc.ChangesineithertechnologyornatureshiftthelocationoftheMicawberthresholdaswellasthecriticalvalues and .Theseobservationsagainimplyfurthercomplexityforempiricaltestingandposesignificanttargetingchallengesforpolicymakers.
AswediscussingreaterdetailinSectionIV,mostempiricalworkonpovertytraps(includingourown)focusesonimplications1and2bystudyingassetdynamics(orthedynamicsofotherwell‐beingmeasures).However,implications3and4substantiallycomplicatetheidentificationofmultipleequilibriumpovertytraps,asdotheintrinsicdifficultiesofestimatingassetdynamicsinamultipleequilibriumsystem.TheMFMFmodeldoes,however,alsohaveimportantbehavioralimplications,someofwhichmaybeamendabletoempiricaltestinginadditiontoorinplaceofthedirectexaminationofassetdynamics.
1 2
i 2
1 2
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(b) BehavioralResponsestoShocksandInterventions
Beyondthecoreinsightsjustdescribed,theMFMFpovertytrapmodelhasatleastfourimportantimplicationsaboutbehavioralresponsestoshocksandinterventions.1. AssetSmoothinginResponsetoShocks
ZimmermanandCarter(2003)notedthatintheMFMFmodel,individualsinthevicinityofatippingpointwouldtendtopreserveorsmooththeirassetstocksinthefaceofshocksratherthansellassetsinordertostabilizeorsmoothconsumption,asispredictedbystandardmodelsofinter‐temporalchoice(e.g.,Deaton1990).Followinguponthisinsighttheoreticallyandempirically,CarterandLybbert(2012,p.4)notetheincremental(shadow)valueofassetsinthevicinityofthethresholdis“notjusttheadditionalimmediateincomethatcanbegeneratedwiththeassets,butalsothestrategicvaluethatattachestothecapacitytomoveforwardovertimetoahigherstandardofliving.Wewouldexpectthatindividualsinthisareawouldbewillingtomakesubstantialsacrificesofconsumptiontoincreaseassets,andtopayasubstantialpenaltyintermsofunsmoothconsumptiontoprotectassetsandavoidfallingbelowthecriticalassetthreshold.”
2. Risk‐TakinginResponsetoaPovertyTrapAsecondandcloselyrelatedimplicationoftheMFMFmodelisdevelopedbyLybbertandBarrett(2011)whoobservethatwhenagentsfaceamultipleequilibriumpovertytrap,observedrisk‐takingbehaviorsreflectnotjuststaticriskpreferencesbutalsoforward‐lookingriskmanagementgiventheexpectedimpactofshocksonfutureassetholdings.Asaresult,thosejustbelowtheMicawberThresholdmayconsciouslychoosetogambleinthehopethatafavorablestochasticrealizationwillcatapultthembeyondtheMTandontoamorefavorablegrowthpath.Conversely,betterendowedindividualsquiteneartheMTmaygotogreatlengthstoavoidriskexposurethatmightcastthembeneaththecriticalassetthresholdandontoanundesirablepathtoapoorstablestate.AsLybbertetal.(forthcoming)explain,theresultingdiscontinuitiesindynamicrisk‐takingbehaviorsposeseriouscomplicationsforcommonapproachestoestimatingriskpreferences.Butitopensupas‐yet‐unexploredopportunitiestostudywealth‐conditionalrisk‐takingbehaviorsthatwouldbethenaturalresultofanMFMFtypestructuretotheeconomy.
3. MultiplierEffectsofSmallAssetTransfersAthirdimplicationoftheMFMFmodelcanbeinferredfromFigure1.AmodestassettransferthatjustsufficestoliftanindividualovertheMicawberthresholdwillcrowd‐inadditionalsavingandinvestmentasthetransferbeneficiarysuddenlyfindsitfeasibletostrivetoreachthehigh‐levelsteadystatecapitalstock.Notethatthisadditionalinvestmentwouldnotoccurabsentthemodestinitialassettransfer.Intheirsimulationanalysis,BCIshowthatarelativelylowcostprogramofassettransferscanstronglycontributetotheeliminationofthe
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unnecessarydeprivationofmultipleequilibriumpovertytraps.Furthermore,asChantaratandBarrett(2012)show,ifassettransfersaffectsocialconnectionsthatmattertoindividualbehavior,thebenefitsofwell‐targetedsmalltransferscanspillovertogeneratesignificantinvestmentandtechnologyadoptioneffectsamongmembersbeneficiaries’networkswhodonotthemselvesreceivetransfers.Empirically,theseanalysissuggestthatinthepresenceofMFMFpovertytraps,well‐designedassettransfersshouldovertimeleadtolargeincreasesinthewell‐beingofbeneficiariesrelativetoanotherwisesimilarcontrolgrouppopulationandthattherecouldlikewisebeimportantspillovergainswithinthenetworksofbeneficiariesascomparedagainstthenetworksofacontrolgroup.Theselargeincreaseswouldinturnimplyveryhighratesofreturnonthe(modest)publicdollarsinvestedintheassettransfer.Thisassumes,ofcourse,thatcarefultargetingkeepsthegeneralequilibriumeffectsofsuchtransfersmodestenoughsothatthepartialequilibriumeffectsdominate,apointtowhichwereturnbelow.
4. Crowding‐inEffectsofRiskReductionMechanismsAfourthbehavioralresponseimplicationoftheMFMFmodelisthatasocialprotectionschemethatfunctionsas,orthrough,anassetinsurancecontractcouldalsocrowd‐inadditionalprivateinvestment.TheBCIpaperdevelopsthisintuitionbyanalyzingtheimpactofaperfectly‐targetedsocialprotectionschemethatindemnifiesindividualsforanyexogenousassetlossesthatwouldpushthehouseholdbelowtheMicawberthreshold.Intheiranalysis,thissortofsocialprotection(incombinationwiththeassettransfersdescribedabove)shiftsthelocationoftheMTandhasmarkedeffectsonthereductionofboththeextentanddepthofpoverty.Whilesuchaschemeisclearlynotimplementableintherealworld,Janzenetal.(2012)askifmarket‐basedindexinsurancecontractscouldfulfillthesamefunction.Theyshowthatforanindividualofintermediateability(α1<αi<α2),assetholdingsbelowtheMicawberThresholdimplyahighprobabilityofcollapsetothepoorsteadystate,whileabovetheMTshewilllikelymakeittothehigh,non‐poorequilibrium.Janzenetal.(2012)thengoontostudywhathappensiftheindividualisofferedanindexinsurancecontract,realisticallypricedsomewhatabovetheactuariallyfairlevel,thatpaysoffiftheshocktotheassetstock, ,islow.TheintroductionofinsuranceshiftstheMicawberThresholdbackbymakinginvestmentinnow‐saferassetsmoreattractive.Thisfundamentallychangesthelifeprospectsofthosewhobeginlifewithanassetendowmentbetweenthepre‐andpost‐insuranceMTs,sparingthemunnecessarydeprivation.Inadditiontothis‘shiftingthresholdeffect,’theinsuranceopportunityalsoincreasesboththelowandhighsteadystateassetlevels,asthecertaintyvalueofinvestmentincreaseswiththeavailabilityofinsurance(a‘shiftingequilibriumeffect’).Finally,thefactthatwithinsurance,fewerindividualsareknockedbelowthethresholdimpliesahigherproductivityeconomywithgreaterlevelsofinvestment(a‘vulnerabilityreductioneffect’).
t
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Insummary,whileMFMFpovertytrapmodelsaremostfrequentlyconsideredintermsoftheirimplicationsaboutbifurcatingassetandincomedynamics,theyhaveanumberofother,testablebehavioralimplicationsthatstandinstrongcontrasttothepredictionsofstandardeconomicmodels.
(c) PolicyTargetingandDesigninthePresenceofMultipleEquilibriumPovertyTraps
Whilepovertytraptheoryisoftendiscussedfromtheperspectiveofhowshocksandinitialdisadvantagecancreateunnecessarydeprivation,thetheoryalsohasthehappierimplicationthatmodestinvestmentinwhatCarterandBarrett(2006)term“safetynets”(i.e.,policiestoprotecthouseholdsagainstassetloss)and“cargonets”(i.e.,interventionstoincreasehouseholdassetholdings)canhavestrongmultipliereffectsbyplacingsomeindividualsinapositionwheretheycanprudentlymakeinvestmentsthattheywouldnototherwiseundertake.Theseimplicationsinturnmotivatethequestionabouthowresourcesavailabletocombatpoverty—suchasthroughincometransfers,socialprotectionandassetbuildingandtransfers—canbemosteffectivelyallocatedinthepresenceofmultipleequilibriumpovertytraps.Todate,weareawareoflittleworkthatexplicitlytacklesquestionsregardingthedesignandtargetingofsocialprotectionandotheranti‐povertyprograms.AnexceptionisthetheoreticalandsimulationanalysisreportedinBarrett,CarterandIkegami(2012),whichshowsthatforagivenpublicassistancebudget,theremaybeaninter‐temporaltradeoffinthewell‐beingofthepoor.Apurelyprogressiveallocationoffundstotheworstoff(includingthesingleequilibrium,chronicallypoor)willofcoursehelpthoseindividualsintheshort‐run.However,inthelong‐run,theextentanddepthofpovertymaybehigherunderpurelyprogressivetargetingthantheywouldbeifsocialassistancewastargetedfirstatbrakingthedownslideofthevulnerableintopovertyandpromotingthegraduationofthemiddleability,multipleequilibriumpoortoanassetpositionabovetheMicawberthreshold.Inotherwords,inthismodel,thepoorarebetteroffintheshort‐rununderpurelyprogressivetargeting,butbetteroffinthelong‐runifsomeresourcesaretargetedatthoseatorneartheMicawberthreshold,inducingthoseneartheassetpovertylinetoinvesttheirwayoutoflong‐termpoverty.Barrettetal.(2012)notethatneitherpolicyphilosophicallydominatestheother,butitiscrucialtobecognizantofthistroubling,butimportanttradeoff.GiventhesestrongimplicationsofMFMFsystems,empiricaltestingforpovertytrapscanplayanimportantroleinguidingdevelopmentpolicy.IV. ImplicationsforEmpiricalTestingforPovertyTraps
Astheprecedingtwosectionsemphasized,themanydifferentcandidatemechanismsbehindpersistentpovertyandpovertytrapscanleadtomarkedlydifferentempiricalpatterns.Thisdiversity–alongwiththefactthatpovertytraps
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surelydonotexisteverywhere–likelyhelpsaccountforthequitemixedmicro‐scaleempiricalevidencetodateonthepovertytrapshypothesis.Thevarietyofpovertytrapmechanismspotentiallyinplayandtheinherentendogeneityofcriticalthresholdsandequilibria(the‘shiftingthresholds’and‘shiftingequilibria’effectspreviouslydescribed)posechallengestoresearchersaimingtotestforthepresenceofpovertytrapsindataonpersistentlypoorpopulations.Becausethesechallengeshavereceivedrelativelylittleattentiontodateintheempiricalliteratureonpovertytraps,inthissectionwehighlightsomeoftheseissuesbeforedrawingouttheimportantpolicyimplicationsofdifferentsortsofempiricaltestsfor,andfindingsonpovertytraps.(a) Directtestsforpovertytraps
Thevastmajorityoftheempiricalliteratureonpovertytrapstriestoidentifylow‐levelequilibriadirectlythroughthestudyofwelfaredynamics,typicallyusingassetmeasures.Themostcommonplacetestsforpovertytraps—followingatraditionestablishedbyJalanandRavallion(2004),LokshinandRavallion(2004),Lybbertetal.(2004),Adatoetal.(2006),Barrettetal.(2006),McKenzieandWoodruff(2006),AntmanandMcKenzie(2007),Carteretal.(2007),VanCampenhoutandDercon(2009),etc.—areactuallytestsforaspecificclassofpovertytrapinwhichonelooksformultipledynamicequilibria,atleastoneofwhichfallsbelowthepovertyline,andthethresholdthatseparatesthem.Thepapersinthisspecialissueallfollowinthattradition,althoughseveralpushfurther,lookingforsingleequilibriumpovertytrapsaswell.Thereismuchtobelearnedfromtheseexplorations,tobesure.Buthavingestimatedmanysuchempiricalmodelsofassetdynamicsourselves,wehavegraduallycometoappreciatethemanysignificantshortcomingstothedirectapproachtotestingforpovertytraps.First,empiricalresultsarecommonlymisunderstood.Perhapsbecausethemultipleequilibriumvarietyisthemostinterestingsortofpovertytrapfrombothatheoreticalandpolicyperspective,analystsfrequentlymistakefailuretorejectthenullhypothesisofauniqueequilibriuminfavorofthealternatehypothesisofmultipleequilibriaasfailuretorejectthenullthatapovertytrapexistsatall,eventhoughthisclearlydoesnotconstituterejectionofthehypothesisthataunique,poorstablestateexists.Indeed,findingsofauniquedynamicequilibriaatapoorlevelofwell‐being—apovertytrap,butjustnotofthemultipleequilibriumsort—arefairlycommonplace(Naschold2009,thisissue;BaulchandQuisumbingthisissue,KwakandSmiththisissue).Thefailuretofindmultipleequilibriadoesnotconstituterejectionofthepovertytraphypothesis,merelyrejectionofaparticular,multipleequilibriumclassofpovertytrap.Thissortofinferentialerrormattersforpolicypurposes,aswediscussbelow,buthappensroutinely.Second,itisnoeasytasktodiscriminateempiricallybetweentruestatedependence—i.e.,theexistenceofmultipleequilibria—andheterogeneityinwelfaredynamicsattributabletopersistentdifferencesamongindividualsincharacteristicsthataffectwell‐being(Heckman1981,1991).Permanentornear‐permanenttraits
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(e.g.,cognitiveorphysicaldisability,gender,race,adulteducationalattainment,geneticpredispositiontodisease,inheritedsocialconnections,physicalenvironment)thatmattertoproductivityandwell‐beingcancauseconditionalconvergenceassociatedwithonesortofpovertytrap.Yetbecausesomeofthosetraits(e.g.,educationalattainment,healthstatus)maythemselvesbeendogenoustoinitialwealthinthepresenceofmultiplefinancialmarketfailures(Loury1981,Bondsetal.2010),disentanglingheterogeneityfromstatedependenceempiricallydependsonstrongidentifyingassumptions(Heckman1991).Third,evenwhenmultipleequilibriaexist,theycanbeexceedinglydifficulttopindownempiricallybecausedirecttestingforthresholdsfallspreytoaproblemakintotheLucascritique.Theunderlyingdynamictheoryimpliesthattheparametersthatdescribeobservedwell‐beingdynamics—includingthestableandunstabledynamicequilibriaempiricalresearchersseektoidentify—arenotstructuralbutareinsteadendogenoustothespecificconditionsunderstudy.Anychangeintheunderlyingbiophysicaloreconomicenvironment,includinginterventionsintendedtofacilitateanescapefromahypothesizedpovertytrap,canalsochangetheunderlyingbehavioralparametersandthusthedynamicequilibria.Soanysample‐basedestimateofwealthdynamicsisinherentlyunstableandvulnerabletoahostofunobservedheterogeneityproblemsaswellastogeneralequilibriumeffectsrelatedtochangesinendogenousinvestment,marketparticipationandtechnologyadoptionbehaviors.Putdifferently,theMicawberThresholdmovesovertimewithanyofahostofchangesinmarketandnon‐marketconditionsandvariesacrossindividualsbasedonunobservedattributes.Butvariationinbothcross‐sectionandtimeseriesmakesidentificationofunstableequilibriaextremelychallenging.Anyofahostofcross‐sectionalortimeseriesrepresentationscanariseinthedata,regardlessofwhethertheunderlyingdynamicsaretrulycharacterizedbypovertytraps.Ofcourse,thebetteronecancontrolforvariablesthatmightaffectthoseequilibria,themorelikelyonecanidentifythetruedynamics.Fourth,manysucheffortsfallshort,foranyofahostofeconometricreasons.Forexample,ifmultipleequilibriaexistandthetheoryiscorrect,thenthresholdsshouldbeunstablepointsaroundwhichoneshouldfindfewobservationsinanysample.Asaconsequence,thereisastrongpossibilitythatbifurcatedassetdynamicsmightappearinsteadasheteroskedasticandpositivelyautocorrelatederrors(Barrett2005b).Thisproblemiseasilyaggravatedbythetwincomplicationsthat(i)theindividualswhoidentifytheout‐of‐equilibriumdynamicsareanon‐randomsub‐samplewithunknownselection,and(ii)non‐randomattritioniscommonplaceinpaneldata.Inparametricregressionstheseproblemarecompoundedbythenecessaryinstabilityinestimatingequilibriafarfromthesamplemeans(Barrettetal.2006),whileinnonparametricregressions,onealwaysworriesaboutunobservedheterogeneityproblemsduetotheabsenceofcontrolvariables.Naschold(2009,thisissue)discussesthetradeoffsamongnonparametricandparametricestimatorsinpushingforsemi‐parametricapproachestotestfortheexistenceofmultipleassetdynamicequilibriainpaneldata.Empiricalresearchersemploymultiple,increasinglysophisticatednonparametricandparametric
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estimatorstotrytoovercometheseproblemsthroughrobustnesschecks(BaulchandQuisumbingthisissue,KwakandSmiththisissue,McKayandPergethisissue).Fifth,asthemodeldevelopedintheprevioussectionillustrates(aswellastheworkofSantosandBarrett,2011),withinasinglepopulation,someindividualsmaybesubjecttomultipleequilibria,whereasothersarenot.TheMicawberthreshold,andevenwhetheritexists,maybeconditionalonindividualskill,orevenonwhethertheindividualissubjecttofinancialmarketconstraints.Whilethresholdestimation(asdevelopedbyHansen2000)isonewaytotrytoidentifytheMicawberthreshold(forexample,seeCarteretal.2007),theeconometricsofconditionalthresholdshaveyettobedeveloped.Sixth,samplingstrategiescommonlyaggravatetheeconometricobstaclesthatexist.Forexample,panelstudiesofhouseholdsandindividualscommonlyrelyonclustersamplingwitharelativelysmallnumberofclusters.Notonlycantheresultingwithin‐clustercorrelationbiasthestandarderrorsofparameterestimates,itnaturallyleadstoregression‐toward‐the‐meaneffectsthatdisfavorfindingmultipleequilibriaeveniftheyexist.Uniquepovertytrapequilibriacanariseduetohigh‐levelsofwithin‐groupcorrelation,duetopoliticaleconomy,institutionalorgeographicfactorscommontomanyhouseholds;butwithin‐samplecorrelationduetosamplingdesigncanleadtospuriousfindingsofsucheffects(JalanandRavallion2002,Nascholdthisissue).Seventh,mostrecenttestsforpovertytraps,includingallofthepapersinthisspecialissue,relyonasset‐basedmeasuresforthereasonsdiscussedpreviously.Despitethecompellingconceptual,practicalandstatisticaladvantagesofasset‐basedapproaches,theydocomeataprice.Assetstocksaretypicallyslow‐changing,whichcanmakeitdifficulttodiscernchangeinshortpanels,especiallywithsmallsamples.Perhapsmoreimportantly,thediversityoftypesofassetsposesaggregationchallenges.Theuseofmoneymetricmeasuresiscommonlycomplicatedbyproblemsofaccountingappropriatelyfordepreciation,thinsecondarymarketsandheterogeneousassetquality.Forthatreason,analystscommonlyrelyonanyofahostofdifferentapproachestoconstructingassetindicessoastoreducealargenumberofrelevantassetsdenominatedinradicallydifferentunits–land,livestock,machinery,nonfarmbusinessequipment,vehicles,etc.–intoascalarmeasureamenabletothesortsofteststhathavebecomecommonplaceinthisliterature.Furthermore,manycriticalfinancial,humancapitalandnaturalassetsmaybeunobserved.AsMichelsonetal.(thisissue)demonstrate,empiricaltestsforpovertytrapsprovequitesensitivetoinherentlyarbitrarychoicesamongassetindexconstructionmethods.Finally,evensimpledescriptivetestsformultipleequilibriumpovertytrapsthatcheckformultimodalcross‐sectionalassetdistributions,asdemonstratedbyBarrett(2005b)andKwakandSmith(thisissue),onlyworkforveryspecificsortsofstochasticprocesses.Astochasticsystemtrulycharacterizedbymultipleequilibriacanreadilygenerateaunimodalcross‐sectionaldistributiondepending
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onthenatureofthestochasticerrorterm–additiveormultiplicative,itsvariance,etc.15Findingmultimodalcross‐sectionaldistributionsisneithernecessarytotheexistenceofevenamultipleequilibriumpovertytrap,norisitevensufficient,astwodistinctmodesobservableindatacouldreflectdistinctsingleequilibriafornon‐overlappingsubgroupswhosemembershipisdefinedbyunobservables.Astheliteratureonpovertytrapshasgrown,themanyobstaclestodirectempiricaltestingofthepovertytrapshypothesisthroughthestudyofwell‐beingdynamicshavebecomeincreasinglyapparent.Giventheconsiderablepolicyimportanceofansweringthequestion“aretherepovertytraps?”howmightempiricalresearchersproceed?Onealternativeapproachinvolveselicitingstate‐dependentwealthorwell‐beingdynamicsfromsurveyrespondentsinagameoranexperimentinordertogetrespondentstodirectlyidentifyapparentnon‐linearitiesinwell‐beingdynamicsexplicitlycontrollingforstate‐dependence.SantosandBarrett(2006,2012)dothiswithEthiopianpastoralists,elicitingtheirexpectationsofherdgrowthconditionalonpoor,normalorgoodrainfallstates.Byblendingtheresultingestimatedstate‐conditionalherdgrowthfunctionsaccordingtotheobservedprobabilitiesofeachrainfallstateintheregion,theyalmostexactlyreplicatetheunconditionalherddynamicsobservedinthesameregioninotherdatabyLybbertetal.(2004)andcandisentangletheroleofexogenousclimatevariationfrominitialherdsizeandevenherdingabilityindeterminingassetdynamics.Butthisapproachlikelydependsonthesimplicityofthesystem;livestockareeffectivelytheonlynon‐humanforminwhichhouseholdsholdwealthinthesouthernEthiopianpastoralistsetting,makingsuchanexercisefeasibletherealthoughitmightnotbeinanurbansettingorinamixedcrop‐livestocksystemwithavibrantruralnon‐farmeconomy.Aradicallydifferentapproachabandonsthequestofdirectlytestingforpovertytrapsinassetdynamicsinfavorofwhatmightbetermedanallegoricalorindirectapproachusingbehavioraldata.Behavioralpatternsthatcouldonlyresultfromrationalresponsebyagentsconfrontingapovertytrapserveasasortofallegoryofthepovertytrap,arepresentationofsomethingmoreabstractandcomplexthatofteneludesdirectobservation.Forexample,dothosewithlowassetstocksfailtoinvestinassetsofferingattractivereturns,onaverage,whilethosewithgreaterinitialstocksofthesameassetinvest,therebysignalinglocallyincreasingreturnsconsistentwiththeexistenceofathresholdseparatingmultipledynamicequilibria?Asanalternativeapproachtotestingforpovertytraps,empiricalresearchersmightexplorethetestablebehavioralimplicationsofpovertytrapsmodelsratherthantryingtoidentifylow‐leveldynamicassetequilibriaexplicitly,especiallyinpanelswithrelativelyfewrepeatedobservations.
15WethankDavidRuppertforpointingthisouttous.
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(b) Indirecttestsforpovertytraps’behavioraleffectsAsdiscussedpreviously,oneofthemostpowerfulbehavioralimplicationsofaMicawberThresholdisthatwhilecanonicalconsumptionsmoothingisanequilibriumbehavioroversomewealthranges,assetsmoothing–i.e.,willfuldestabilizationofconsumption–isanequilibriumbehaviorinotherranges(ZimmermanandCarter2003,CarterandLybbertforthcoming).Thisobservationhasledtoseveralindirecttestsforpovertytrapsonthebasisofobservedassetsmoothingbehaviorsamonganappropriatesubpopulation.Hoddinott(2006)findsconsumptionsmoothingbyZimbabweanhouseholdswhopossesssufficientdraughtanimalstoensurethattheycanplowtheirfieldsthenextyear.Butthosewhoownjustasingleteamoftwooxen(orless),destabilizeconsumptioninthefaceofrainfallshockssoastosafeguardtheirproductiveassets.Inastillmoreindirectfashion,LybbertandMcPeak(2011)estimatetheriskandtimepreferenceparametersofnorthernKenyanpastoralistsandfindthatpoorerhouseholdsaresimultaneouslymoreriskaverseandmorewillingtodestabilizeconsumptionthanaretherelativelyrich.Suchpatternsareconsistentwithapovertytrapmodelbasedonherdsizethresholds—ofthesortfoundinthisareabyBarrettetal.(2006)—butinexplicableintheabsenceofsuchthresholds.CarterandLybbert(forthcoming)usethresholdestimationtechniquestoshowthatruralhouseholdsinBurkinaFasoexhibitassetsmoothing,ratherthanconsumptionsmoothing,intheneighborhoodofcriticalherdsizesatwhichoptimalaccumulationbehaviorbifurcates.HouseholdsabovetheestimatedMicawberThresholdalmostcompletelysmoothconsumptionagainstweathershocksusinglivestocksales,whilethosebelowthethresholdassetsmoothinstead.Alongsimilarlines,SantosandBarrett(2011)recognizethatanunstableherdsizethresholdbetweenmultipledynamicassetequilibriashouldnaturallycreateaninverted‐Ushapedpatternofinformallendinginwealthspace,contrarytoconventionalcreditrationingmodels.StudyingsouthernEthiopianpastoralistswhopreviousstudiesfoundfacemultipleherdsizeequilibria(Lybbertetal.2004,SantosandBarrett2006),theyindeedfinda“middleclassbias”ininformallendingfavoringthoseintheneighborhoodofapotentialthresholdatwhichwealthdynamicsbifurcate.Thisleadstocreditrationingpatterns,asthepoorestareexcludedbecauseoftheirproximitytothelowwealthlevelattractorandtherichestmembersarerationedoutduetodiminishingreturnstowealth.Thissortofpeculiarpatternisentirelyconsistentwiththeexistenceofapovertytrapinthissystemandinconsistentwithothermodelsofinformallending.Inasimilarspirit,MarenyaandBarrett(2009a,b)observethatinthepresenceofmultiplemarketfailures,farmers’fertilizerpurchasebehaviorsshoulddependontheexantesoilqualityoftheirfarmlandbecausethemarginalreturnstofertilizerapplicationdependoninitialsoilquality.TheyindeedfindthateventhoughtheaveragereturnstofertilizeruseareconsiderableforwesternKenyanmaizefarmers,fertilizerapplicationdoesnotpayforthepoorestthirdoffarmers,whocultivate
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lowerqualitysoils.IItappearsoptimalforthepoortofailtoinvestinwhatunconditionallyappearsanattractiveinput.Anendogenousswitchingregressionmodeloffertilizerpurchasebehavior(MarenyaandBarrett2009b)indeedfindsapronounceddiscontinuityinfertilizerdemandatthesoilcarbonthresholdMarenyaandBarrett(2009a)identifyasthetippingpointforprofitablefertilizeruse.Stephensetal.(forthcoming)buildonthesefindingstodemonstrateindynamicbioeconomicmodelhowfeedbackbetweenfarmhouseholdeconomicdecision‐makingandlong‐termsoilfertilitydynamicscangenerateassetthresholdsthattrapsomehouseholdsinchronicpovertyandfoodinsecurity.Theallegoricalorindirectapproachtotestingforpovertytrapsalsolendsitselftointervention‐basedteststhatcanexploitsomeofthestatisticalidentificationpowerofnaturalexperimentsandrandomizedcontrolledtrials.Inprinciple,researcherscangenerateexogenousvariationinthevicinityofaprospectiveMicawberThreshold(e.g.,throughrandomizedassignmentofcashtransfers,credit,insuranceorfertilizer),thenlookforbifurcationsinsubsequentbehaviors.Forexample,theorysuggeststhatcashtransfersorcreditprogramstoaddressonefinancialmarketfailureshouldinteractsynergisticallywiththeintroductionofinsurancetoaddressanothermarketfailurebyfacilitatingandincentivizinginvestmentthatcaninducehouseholdstoaccumulatetheirwayoutofpersistentpoverty.WeareinthemidstofsuchanexperimentinnorthernKenya,whereindex‐basedlivestockinsurance(IBLI)16beganacommercialpilotinearly2010linkedtoarandomizedencouragementresearchdesignthatshouldenableustoidentifydifferentialbehavioralresponsesattributabletowhetherornothouseholdswereinsuredconditionalontheirherdsizes.Thatdesignisoverlaidonanewunconditionalcashtransferprogramsothatwecanexplicitlystudytheindividualandjointeffectsofcashtransfersandinsuranceagainstpropercontrolcommunitiesandhouseholds.Verypreliminaryfindingsfromdataonhouseholds’anticipatedcopingstrategies,gatheredjustasinitialindemnitypaymentswereannouncedinthemidstofamajordrought,indeedsuggestthatinsuranceleadstomarkedlydifferentbehaviors(CarterandJanzen2012).Reducinguninsuredriskwasstatisticallysignificantlyassociatedwithlowerexpectationsofharmfulbehaviorssuchasreducedfoodconsumptionorlivestocksales,whilethoseanticipatinglargerinsurancepayoutsanticipatebuyinglivestocktoaccumulateherds.KeswellandCarter(2011)reporttheresultsofasecondintervention‐basedtestofmultipleequilibriumpovertytraptheory.TheirstudyexploitsaSouthAfricanlandreformprogramthatoperatedasanaturalexperiment,withsomeapprovedbeneficiariesreceivinglandtransfers(worthabout$4000)andothersnot,forreasonsbeyondtheircontrolandunrelatedtotheirindividualcharacteristics.Asdiscussedabove,MFMFpovertytraptheorysuggeststhatanassettransferthatliftsafamilyabovetheircriticalMicawberthresholdwillgenerateveryhighobservedratesofreturnonthedollarsinvestedinthetransfer.Usingacontinuoustreatment16SeeChantaratetal.(forthcoming)fordetailsonthedesignoftheIBLIproduct.
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impactestimator,KeswellandCarterfindthatafterafewyears,theestimatedimpactsontheleveloffamilywell‐beingimplyupwardsofa50to75%annualrateofreturnontheinitialpublicinvestmentintheprogram.Returnsofthismagnitudeonlymakesenseiftransfersinducedbeneficiariesincreasetheirowninvestmentsinproductiveassets.Becausetheseinvestmentincreasesarenotseeninanotherwisesimilarcontrolgroup,theseresultsappeartoidentifypreciselythekindofcrowding‐ineffectpredictedbytheMFMFpovertytraptheory.Insummary,theempiricalliteraturetappingthepotentialofindirecttestsofthepovertytrapshypothesisremainsthin.Buttheseinitialforaysshowconsiderablepromiseinhelpingilluminateimportantpolicyquestionsconcerningtheexistenceandnatureofpovertytraps.V. ConclusionsandPolicyImplicationsThemoralandeconomicefficiencyimperativestointerveneinthecaseofapovertytrapmakesthislineoftheoreticalandempiricalworkhighlypolicyrelevantforpolicymakers,donorsandresearcherscommittedtopovertyreduction.Empiricalfindingsofapovertytraplendaddedevidencetoargumentsformoredirectactiontohelpthepoorescapethestructuralcircumstancesthatcastalongshadowovertheirfuture.ButwehastentoreinforceMcKayandPerge’s(thisissue)pointthattheabsenceofempiricalevidenceofapovertytrapdoesnotargueagainstintervention.Inpracticalterms,veryslowaccumulationbythosefarbelowthepovertylineisscarcelydifferentfromnoexpectedaccumulationbythoseabitbelowthepovertyline.Eithertypeofhouseholdmeritsassistance.Thetrickiswhatsortofassistance.Thisiswheremorediscriminatingempiricaltestingofthepovertytrapshypothesisanditsbehavioralimplicationscanhaveconsiderablevalue.Wherewecanidentify–directlythroughthestudyofwelfaredynamicsorindirectlythroughthestudyofbehaviors–povertytrapsoftheMFMFsort,theninterventionsthatremedythosemultiplefinancialmarketfailureforevenalimitedtimecangeneratelarge,lastinggains.Hencethepromiseofcreditandinsuranceinnovationsandassettransferprogramscoupledwithresearchonpovertytraps.Bycontrast,ifpersistentpovertyandpovertytrapsarisemainlyduetoheterogeneityinpersistenttraits–earlychildhoodhealthandnutritionalstatus,educationalattainment,gender,race,etc.–thatleadstoconditionalconvergenceonasingle,low‐leveldynamicequilibrium,thenshort‐livedinterventionstoremedyMFMFareunlikelytohavegreatlastingimpactonintendedbeneficiaries’long‐termstatus.Moreappropriatepolicyresponseswouldthenaddressthelonger‐termsourcesoftheunderlyingheterogeneitythatgivesrisetosubpopulation‐specificpovertytraps.Hencetheimportanceoftestingforpovertytrapsofanysort,notjustofthemultipleequilibriumvarietycentraltotheMFMFmodel.
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Thesequestionsmatterfundamentallytodevelopmentpolicy.Sachs’(2005)well‐knownargumentforamajorexpansionofaidandforlarge‐scaledevelopmentinterventionsrestsfirmlyonafoundationaltheoryofpovertytraps.Incrementalchangesmakelittledifferencewhentheprevailingdynamicequilibriumisapoorone.Thepossibilityofsuchpovertytrapsalsoundercutsargumentsthatfavorexperimentationwithmanysmallrandomizedcontrolledtrial(RCT)interventionsinordertolearnandsubsequentlyscale‐upwhatworksatthemargin(BanerjeeandDuflo2011,KarlanandAppel2011).Intheabsenceofpovertytraps,significantchangesidentifiedinsmall‐scaleRCTscanindeedleadtobigimpactsoncetakentoscale.Butwherepovertytrapsexist,small‐scalechangeseffectedwithinRCTsare,bydesign,intendednottoaltertheunderlyingstructureoftheeconomicsysteminwhichindividualsfindthemselvesandthusshouldrarelybeexpectedtomakeabigdifference.Theabsenceofevidenceofimpactatthemargintellsuslittleaboutlikelyeffectsatlargerscaleorscope(i.e.,acrossmultipleinterventions,sincecomplexmultifactorialdesignsareexceedinglyrareinRCTs).Theexception,ofcourse,iswheresmall,randomizedinterventionsarecarefullytargetedtobumpintendedbeneficiariesjustbeyondapre‐identified(orhypothesized)MicawberThresholdortoshiftthatthreshold.Butsuchoutcomesrequireexanteidentificationofcriticalassetthresholdsthroughnon‐experimentalmethods.17Theburgeoningempiricaldevelopmentmicroeconomicsliteratureonpovertytraps,nicelyexemplifiedbythepapersinthisspecialissue,exhibitsenormouspotentialtoinformpovertyreductionpolicies.Thenextstepswilllikelyneedtocombinemorerigoroustheorizingwithmorecreative,indirectempiricaltestingofthebehavioralimplicationsofpovertytraps.
17InBarrettandCarter(2010,inpress)wemakethecaseforcombiningexperimentalandobservationalempiricalresearchforpreciselythisreason(amongothers).
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