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Did economists fail us over Brexit?

The Economics That Really Matters blog Recaps a NBER conference on asset accumulation and poverty traps with follow up interviews

Can Hillary Clinton’s Faith Help Her Lead a Fractured Nation?

Climate Change is Making it Too Hot To Work

Towards a Psychology of Poverty Traps

One concern that comes with considering depression or aspirational thinking as poverty trap mechanisms is the possibility this opens up for one to blame the poor for the situations in which they find themselves; i.e. it is tempting to shift from considering the poor as trapped by outside constraints (such as market failures) to considering the poor as trapped by their own negative thinking. However, as pointed out by several scholars during the workshop, it is much more productive to think about the sort of physiological interventions suggested by these mechanisms as compliments to, rather than substitutes for, traditional interventions. If project implementers and project evaluators take account of not just the common external constraints (e.g. lack of access to credit) but also the emerging internal constraints as discussed in this session (e.g. aspirations), then we may begin to have a greater impacts and/or gain better understanding of the limitations of our interventions.

That is Kibrom Tafere Hirfrfot and Liz Bageant in a recent Economics That Really Matters blog post recapping the recent NBER Conference on The Economics of Asset Dynamics and Poverty Traps.

I wholeheartedly agree with this sentiment. Simply suggesting that the poor should try harder is the wrong conclusion to draw from the emerging research on the psychology of poverty, hope, and aspirations in developing countries. Other than adding psychological components onto traditional interventions, a rather obvious policy implication of this research seems to be to create an expanded role for clinical psychologists (particularly child psychologists) within development programs.

The two papers presented at the NBER Conference about this topic strike me as important for development economists to consider. Jonathan de Quidt and Johannes Haushofer’s paper on depression develops an illustrative model of why economists should consider how depression impacts human behavior and economic outcomes. Travis Lybbert and Bruce Wydick’s paper on the economics of hope (a paper I’ve mentioned many times already) makes, in my mind, a very important contribution in showcasing the potential power of hope and aspirations. 

Frequent readers of this blog will know that I’ve been thinking a lot about the psychology of poverty over the last year or so. Because of this, it is encouraging that researchers much more established than myself are bringing legitimacy to this line of scientific inquiry. I’ve come to the conclusion that a more complete understanding of the real-life psychological impacts poverty inflicts on people will allow for more effectively designed policies.

Additionally, this research seems to extend beyond narrow application in developing countries and into other important topic areas such as refugee resettlement policies and racial justice policies in developed countries.

Poverty Traps, Real or Imagined?

This past week in my class on Agriculture in Economic Development (taught by Dr. Nicky Mason and Dr. Saweda Liverpool-Tasie) I presented Michelle Adato, Michael Carter, and Julian May’s 2006 paper on poverty traps and social exclusion in South Africa (sorry, it’s gated, but my slides are here) published in The Journal of Development Studies. As part of the discussion following my summary of the article I posed the question to the class, “Are poverty traps in South Africa real or imagined? And does it matter?”

To bring those who are not in the class up to speed, here are some facts and figures (from Adato et al., 2006) about poverty and wealth dynamics in South Africa.

Post-Apartheid South Africa is characterized by extremely high income inequality and extreme social polarization. Importantly, these two realities are (almost perfectly) correlated with each other. As an example of this reality (in 2001, at the time of the study), the HDI (human development index) for black South Africans was roughly that of the HDI of Zimbabwe while the HDI of white South Africans was roughly that of the HDI of Italy. Big difference!

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In this table several points reveal themselves. First, we see from the basic poor/non-poor distinction it seems a greater number of the surveyed population is living in poverty over time (or at least from 1993 to 1998). Digging deeper, we see that 18% of the surveyed population was poor in both 1993 and 1998 while 35% of the surveyed population changed poverty distinctions between 1993 and 1998. Finally, a large share of the “chronically poor” simply don’t have the stocks of assets one would expect is needed to break free from poverty, and those who fell behind over the time period did so because of some sort of lose of productive assets.

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This figure presents the results and implications of the Adato et al., (2006) paper. Here we see the existence of a low-level poverty trap at about 90% of the income (consumption) poverty line. Additionally, there seems to be a Micawber Threshold (named after the Dicken’s character Wilkins Micawber who can never break free from poverty) at about twice the income (consumption) poverty line. What this means is that those who have asset holdings below the “Micawber threshold” can be expected to converge on the poverty trap while those who have asset holdings above the “Micawber threshold” can be expected to converge toward a non-poor equilibrium over time.

What this means in simple terms is that for some people in South Africa, time is on their side. As the days, months, and years go by they will experience an increased and more freeing level of livelihood. For other people in South Africa, time is not on their side. As the days, months, and years go by they will not experience an increased and more freeing level of livelihood.

This analysis seems to be demonstrating that some people in South Africa may be effectively trapped in poverty and that the end of apartheid did not pave the road out of poverty for them. To belabor the point, liberalizing political policies did not bring with it the levels of livelihoods commonly associated with liberal democracies. The question remains, what is causing these people to be trapped in poverty? Why don’t we see time working for them?

In a different paper Michael Carter and Chris Barrett (2006) state that poverty traps can form when there are increasing returns on investments as incomes rise and when credit and insurance markets are out of reach of the poor. Those are certainly very probable causes of the poverty trap in South Africa, but what if returns on investments were not increasing with wealth (what if returns were decreasing!) and what if credit and insurance markets were available and accessible for the poor in South Africa? Could there still be a poverty trap?

A growing number of development economists are saying “yes”.

Consider the case of South Africa a bit more closely. Say I’m a black South African. There are many investment opportunities that I have access to that would most likely improve my future well-being. I still might not actually take up any of these investments. Why? Because the social situation around me has failed to develop and nurture the aspirational hope and human agency necessary for such behavior.

So are poverty traps (in South Africa) real or imagined? Well, it’s been demonstrated how real poverty traps (increasing returns on investments with wealth and limited access to credit and insurance) may significantly determine poverty and wealth dynamics. An emerging literature is forming, however, on how imagined poverty traps may also play an important role.

Poverty Fault Lines: Towards an Understanding Persistent Poverty

Some of the biggest (and perhaps most meaningless) news is in the cycle again. In late September the world leaders signed an ambitious pledge to “eradicate extreme poverty for all people everywhere by 2030”. Next, the World Bank “moved the goalposts” by increasing the global poverty line from $1.25 per day to $1.90 per day. This is big news because it’s important to understand why these sorts of things happen, but it’s potentially meaningless because these ambitious pledges and new definitions don’t effectively change anything for those actually living in poverty around the world.

I don’t want to write about why the World Bank redefined the poverty line (that has already been written about, in depth). I want to write about what poverty lines tell us, what they don’t, and how they can be improved.

Poverty lines allow us to define a population as “poor” and “non-poor” at a single point in time. By establishing a money metric poverty line and collecting data on household consumption or expenditures or income researchers and policymakers are able to calculate the proportion of a given population that is (strictly speaking) poor. Furthermore by using the standard Foster-Greer-Thorbecke measurements we are able to calculate both the extent and depth of poverty within a population. To be clear, these calculations (done well) are very informative and useful. When representative surveys are repeated we are able to understand the evolution of poverty within a society over time.

However, this sort of poverty measurement is unable to disentangle two very different types of “the poor”. Take an example from Carter and Barrett (2006):

Say, a 33 percent poverty headcount ratio could reflect a society in which the same one-third of individuals are persistently poor, period after period. In such a society, poverty would be experienced by only a minority, but intensely and indefinitely for those unlucky few. Alternatively, repeated observations of the same headcount could reflect a reality in which poverty is a purely transitory phenomenon in which individuals routinely swap places on the basis of random outcomes, or perhaps based on age or other demographic process. Over time, all households would be poor one-third of the time, thus all would share the burden of poverty equally and only for a minority of the time.

Clearly these two types of societies are very different. In the first we’d be worried about hopelessness and fatalistic behavior in a relatively large subgroup of the population. In the second, poverty is simply a step on the road to prosperity. A typical poverty line measurement can not distinguish between these two extremes. This is a problem if you’re a policymaker who cares about this distinction and wants to inform policy to prevent the first case from obtaining.

One way of working around this problem is repeatedly surveying the same exact households, but this method is commonly hampered by challenges tracking down households period after period. If the panel is rife with attrition, even the fanciest analysis won’t be able to draw reasonable results. Even if we were able to find the same exact households year after year after year, there would still be issues. Simply observing a transition out of poverty is unsatisfying to policymakers because we fail to understand how the individual transitioned out of poverty. Some may have transitioned due to good or bad luck others because they have accumulated a new set of assets and their private returns are now enhanced. Again, the implication for policy between these two transitions out of poverty are drastically different.

To overcome these issues Carter and Barrett (2006) and Barrett and Carter (2013) suggest including a dynamic asset poverty line. Identifying this so-called Micawber Threshold allows researchers and policymakers to distinguish between who is likely to escape poverty on their own given the correct amount of time and who is effectively trapped in poverty.

While none of this is new, it bares importance in light of all the discussion about the United Nations “Sustainable Development Goals” and the World Bank’s new definition of “extreme poverty”. It is only by empirically identifying this dynamic asset poverty line will we actually be able to understand the moral and economic efficiency imperatives of poverty in our world today and into the future.

References for further reading:

Barrett C.B. and Carter M.R. (2006) “The Economics of Poverty Traps and Persistent Poverty: An Asset-Based Approach” The Journal of Development Studies, 42 (2) pp. 178-199.

Carter M.R. and Barrett C.B. (2013) “The Economics of Poverty Traps and Persistent Poverty: Empirical and Policy Implications” The Journal of Development Studies, 49 (7) pp. 976-990.

Kraay A. and McKenzie D. (2014) “Do Poverty Traps Exist? Assessing the Evidence” Journal of Economic Perspectives, 28 (3) pp. 127-148.