This week I had the opportunity to give a guest lecture in the undergraduate “Microeconomics of International Development” class at the University of Minnesota. The usual professor (my advisor) was out of town and I happily agreed to substitute. It was a fun experience for me as I’ve never taught an undergraduate class before this experience.
A couple weekends ago, my department (Applied Economics at the University of Minnesota) hosted the Midwest International Economic Development Conference (MIEDC). It is a smaller conference with tremendous quality of presentations. Despite this, many are not able to attend the conference or even all of the sessions. As a service to those interested, a few colleagues and I posted a recap of the 2018 MIEDC on the Economics That Really Matters blog.
A lot has been said recently about the reduction in global poverty over the past few decades. Although the positive coverage of these encouraging statistics is certainly justified, important questions still remain. Many of these questions relate to the dynamics of poverty, rather than simply snapshots of static poverty. In short, static poverty measurements (which are used when estimating global poverty at given points in time) cannot distinguish between people who have been in poverty their entire life and people who happen to have had an unfortunate circumstance in the year the poverty data was collected.
Haiti is a country that has been almost “NGO’d” to death. In their new book, From Aid to Trade, Daniel Jean-Louis and Jacqueline Klamer (full disclosure: two former colleagues of mine) highlight this issue in a clear and meaningful way. They make the case that even with this vast abundance of NGOs, Haiti as a nation has not seen very much of an improvement in the last several decades.
The book begins with a vivid story of Laurent Auguste, owner of a local soap manufacturing company in Port-au-Prince, Haiti. After the cholera outbreak in 2010, bars of soap were being donated and distributed for free in Haiti by everyone from the United Nations to small churches across the United States. According to Daniel and Jackie, these donations effectively pushed Laurant and his soap company out of business.
This is just one anecdotal example of perhaps thousands of stories demonstrating the misallocation of good intentions in Haiti. More recently, in early March 2016 The New York Times Magazine ran a story highlighting a group of older Christian missionaries who volunteered their time in the hills above Port-au-Prince by “struggling with heavy shovels to stir a pile of cement and sand.”
They were there to build a school alongside a Methodist church. Muscular Haitian masons stood by watching, perplexed and a bit amused at the sight of men and women who had come all the way from the United States to do a mundane construction job… Imagine how many classrooms might have been built if they had donated that money rather than spending it to fly down themselves. Perhaps those Haitian masons could have found weeks of employment with a decent wage. Instead, at least for several days, they were out of a job.
One of the key lessons of these stories is that poverty alleviation and economic development always requires more than good intentions.
I, myself, learned this lesson while volunteering with a student organization in college. Our group was affiliated with an organization that facilitated trips for business and economics students to travel to Panama (and other countries) in order to perform microenterprise consulting and financial literacy training. I went on two trips, each a week long, in back to back summers. During the first trip, we worked with a microfinance institution (MFI) in a rural village. Through that MFI our group provided funds for the village to build a roadside stand to sell their hand-made crafts and souvenirs. Returning a year later, the materials that had been purchased with these funds were sitting—unused—in a pile on the side of the road.
This is a crucial lesson for anyone who possess the persistent desire to help the less fortunate, the oppressed, the poor, or the marginalized around the world. If you are new to the field of international development then this may be a worthwhile book for you. The stories told by Daniel and Jackie introduce the complexity of our world and exposes this inconvenient reality: that good intentions are necessary but not sufficient in our world.
If, however, you are more experienced in the field of international development, then continue reading because even this complexity is complicated. My remaining thoughts can be separated under two headings: ‘economies not economics’ and ‘
war aid, what is it good for?’.
Economies not Economics
(Some may catch this as one of the key points of Morten Jerven’s book Africa: Why Economists Get it Wrong. It’s important, so I’ll expound on it a bit.)
In From Aid to Trade, Daniel and Jackie develop and present a strategy of economic development, what they call, opportunity-based economic development (OBED). This strategy is defined as the following (pp. 66):
As a comprehensive strategy, OBED means harnessing assets and capital through entrepreneurial opportunities to increase balanced transactions, a key activity to implement OBED, thereby meeting needs profitably and generating resources. It means that needs should be met through market-based opportunities and initiatives, not through projects or programs that do not generate profit.
To me, this sounds a lot like the so-called “Washington Consensus” policies of the late 1970s and 1980s. Here’s a brief summary of the goals of these policies: The term “Washington Consensus” denotes the ambitious agenda that considered developing nations as no different than economics 101 textbook cases of free-market economies. Basically, the agenda reflected an urge to “unshackle” these economies from the “restraints” of government regulation and in return institute “market-based” policies that “stabilized”, “privatized”, and “liberalized.”
Looking back on the outcomes of these policies, it’s not very controversial to state that they “didn’t work” – by that I mean they didn’t deliver the expected outcomes. Why? Well, in short, because policymakers, at the time, were studying economics and not economies. They treated the diversity of the developing world as being characterized by oversimplified stylized facts often found in an economics 101 textbook.
Never mind that the critical assumptions of a free and efficient market as presented in economics 101 (i.e. individuals maximizing self-interest, secure property rights, full information, no monopoly power, access to a complete set of markets) fail to hold in many, if not all, of the local economies of developing nations. Never mind the institutional underpinnings of market-oriented economics. Never mind that the very institutions that allow market-oriented policies to “work” – by that I mean create flourishing societies – in developed countries took decades, or perhaps even centuries, to form and mature. Never mind the intricacies of local contexts, of local history, of local culture that effect how people make decisions and behave. Never mind political interests that may make certain policies more urgent or feasible in a given country.
There is little doubt – or at least I’m not arguing – about the goal of developing countries to become self-sufficient, industrialized, market-oriented countries. I just want to suggest that achieving this goal is tricky. It’s context specific. There is no universal recipe. And the solutions almost certainly lie beyond the realm of economics 101 textbooks. I would have loved more specific details, from Daniel and Jackie, on when and where the OBED strategy works best and a discussion of the limitations of OBED as a strategy for the development of economies.
War Aid, What is it Good For?
The title of the book is catchy, and I’d say a bit jarring. Both words, “aid” and “trade” carry a lot of baggage and are difficult to wrap one’s head around. The idea of moving “from aid to trade” sounds nice on the surface. But what do we actually mean?
As I’ve written about before, painting “aid” as a singular thing uses a brush that is a bit too wide. Aid takes many different forms. There is humanitarian aid. Food aid. Aid for education. Aid for health. Aid for infrastructure. Aid for energy. Aid for the environment. Aid for security. Aid for political stabilization. Aid for economic reform. Aid for data collection. Aid for policy analysis. And on and on and on. Do all of these “not work”? Should all of these be replaced by trade? I’m not sure if that’s even possible, let alone desirable.
Next, lets relax the assumption that aid is altruistic. Instead lets allow ourselves to live in a world where countries give aid for purposes of their own benefit. In this case, countries like the United States give foreign aid primarily for self-interested purposes – i.e. for reasons explained by public choice theory. As much as I dislike this reality, I’d argue this is the world we live in.
If the reality is that the primary reason for countries like the United States giving foreign aid is for self-interested reasons, then it’s no wonder that lots and lots of foreign aid funded programs haven’t delivered growth or development. Additionally, if this characterization of foreign aid spending is true, then the bulk of the effort from those of us who actually do have so-called altruistic intentions should be to figure out how aid can be used most effectively. In a sense, we should move away from the “aid vs. trade” characterization and think more carefully about aid plus trade.
Now, this “aid plus trade” characterization is (I think) actually what Daniel and Jackie’s book is all about. So don’t let the title discourage you, From Aid to Trade is a book that (thankfully) moves us beyond the tired “aid debate” and is more about how aid can facilitate trade. This much is alluded to in the subtitle: “How Aid Organizations, Businesses, and Governments Can Work Together”. But remember, these are lessons learned from Haiti. Be careful when applying them to different economies.
A couple weeks ago I posted my review of the documentary “Poverty, Inc.” I was a bit critical and rambled a bit too long for a decent blog post. Despite it all, the folks over at Shared Justice, wanted to republish my review. So, here is a link to the (slimed down and edited) republished version of my review:
Here are a few updates on the key points of the review:
TOMS Shoes: When Theory Doesn’t Hold in Reality
There is actually more to this story…
There is another research paper, written by the same core group of researchers, which studies the impact of TOMS Shoes more broadly. This study, which is currently in the peer-review process at the World Bank Economic Review, reports on data collected across a wide set of important outcomes, such as: school attendance, health, and psychological well-being. They find no evidence that there are any “life changing” impacts due to receiving a TOMS Shoe donation. Additionally, children who received free shoes were significantly more likely to agree with the statement: “Others should provide for my family’s needs” and less likely to agree with: “My family should provide for its own needs.”
So by no means am I stating that TOMS Shoes is getting it totally “right”. In fact, they are far from it, but at least they are aware of this reality. Here’s one of the lead authors talking about these two studies:
I have always been a greater fan of interventions that attack the root of poverty rather than give things away to the poor. But in light of this study, what has made a great impression on each of us on the research team has been TOMS commitment to alter its program in response to shortcomings that have been manifest through our study as well as a number of other studies that the company has sponsored on its giving program. TOMS is perhaps the most nimble organization any of us has ever worked with, an organization that truly cares about what it is doing, seeks evidence-based results on its program, and is committed to re-orienting the nature of its intervention in order to maximize results. In response to children saying that the canvas loafer isn’t their first choice, they now often give away sports shoes. In response to the appropriateness of their shoes in different contexts, in Mongolia they now give away these cute little kids’ snow boots. In response to the dependency issue, they now want to pursue giving the shoes to kids as rewards for school attendance and performance. Moreover, we are impressed with TOMS commitment to transparency. Never once as researchers did we feel pressure to hide results that could shed an unfavorable light on the company. By our agreement, they could have chosen to remain anonymous on the study; they didn’t.
Foreign Aid: A Simple Cost-Benefit Analysis
Since posting this piece, some readers have made comments that have called into question the idea of putting a dollar value on a human life. For those who remain uncomfortable with this practice, I’d just like to encourage you to read this recent article published in the Wall Street Journal: Why the Government Puts a Dollar Value on Life: To analyze the benefits of high-cost regulations, pricing the priceless is a necessary calculation.
Innovation in the Aid Industry: Cash Transfers
Here are a couple working papers on cash transfers recently presented at Oxford University’s Center for the Study of African Economies annual conference. More evidence that the development industry is continuing to learn. (Summaries provided by Dave Evens.)
- “We find strong evidence that cash transfer programmes has a mitigating role against the negative effects of weather shocks.” (Asfaw et al.)
- Cash grants for female entrepreneurs are more effective when women are willing to hide money from their husbands. (Fiala)
- Conditional cash transfers may lower political participation by pleasing voters and reducing interest in opposition activities. (Dodlova)
- If your neighbor gets a cash transfer and you don’t, it leads to “strongly decrease life satisfaction and moderately decrease consumption and asset holdings.” But the effects attenuate over time. (Haushofer et al.)
- A poverty graduation program with business skills training, business mentoring, savings training, and cash transfers to women improved income, savings, and food security. #Kenya #RCT (Gobin & Santos)
For more on this ‘more evidence, less poverty’ topic. Check out this old but still worthwhile Freakonomics podcast.
Poverty, Inc. is a new documentary* that draws attention to the flaws in the modern global aid and development industry. The film itself is quite well-made and is high in production value. For a documentary about failed attempts to aid the poor and the development of societies it is actually a remarkably engaging film.
The documentary begins by calling for reform in the US global food aid system. The film demonstrates how food aid is distributed around the world in a way that largely contains the benefits within the United States. We package up our surplus (and subsidized) agricultural products, ship them across the world on US ships, and giving them out for free in countries that are primarily agricultural based economies. As I’ve blogged before, the evidence is clear: the most effective way to help hungry people around the world is by providing cash, electronic transfers, or by purchasing food locally.
The film then moves on to the most common critique of foreign aid: pointing out that aid that goes directly to corrupt governments does very little in the lives of the poor and (perhaps) makes the whole situation worse. By providing governments with revenue, the need for the government to be accountable to its electorate is diminished – causing a weakening of “the social contract” between governments and their people. This may be called the Angus Deaton critique of aid.
Next, the film tells the story of the perverse incentives orphanages create for poor families in poor countries. Orphanages are numerous in countries like Haiti and they may be actually pulling families apart. By offering to care for children in poor areas, it may be in the best interest of a poor family to give their child up to the orphanage. This effectively exacerbates the problem those who run orphanages are explicitly trying to help solve. Although this reality is well documented, orphanages continue to be popular among rich “do-gooders”.
Finally, the film stresses that real and meaningful change occurs with the change of existing institutions (i.e. change in the “rules of the game” as Doug North would say). Most who work in development, when they are being most honest, would agree that the primary reason why some countries are rich and others are poor is due to political institutions: i.e. rule of law, authoritarianism vs. democracy, judicial systems, ect.
By raising awareness of these flaws in the global aid system, I greatly appreciate this documentary, as these issues are presented in a clear and meaningful fashion. I do, however, have two key critiques: First, none of these flaws are all that novel to those who are actually working in the aid and development industry, and they actually fail to mention the flaw that (perhaps) underscores everything that is mentioned above. Second, the film focused only on the flaws of the current system and fails to mention what the aid and development industry (perhaps miraculously) has gotten right over the years.
TOMS Shoes: When Theory Doesn’t Hold in Reality
The film makes the case that aid doesn’t work, and may be hurting those it should be helping. This is a real concern, but the film doesn’t share much in terms of real evidence or rigorous analysis. This lack of empirical evidence allows for mistakes to slip into the film.
For example, the film takes quite a bit of time explaining why TOMS Shoes, while well-intended, actually damages the local economies where the shoes are donated. This explanation uses solid and well-developed theoretical economic logic: local shoe businesses can’t compete with free, so when TOMS Shoes gives away free shoes the local shoe market suffers. Although this theory is solid, it is worth actually performing a study in order to understand if this theory holds up in reality.
Three economists from the University of San Francisco performed such a study and recently published it in the peer-reviewed Journal of Development Effectiveness. The findings of the study are surprising, given the sound logic in the paragraph above. They find no statistically significant effects on the local labor market, in rural El Salvador, due to the donations of TOMS Shoes. There is a small effect, about one fewer pair of shoes demanded and sold locally due to 20 pairs of TOMS Shoes donated, but this effect is so small (and not statistically significant) that it hardly warrants the mass prevention of shoe donations.
The key take-away from this is that shoe donations, specifically, and aid, in general, ought to be targeted to those who actually need it. In the case of shoes, those who donate shoes should be careful not to give shoes to people who would otherwise pay the going market price for shoes. In many communities, however, there are lots of people who both need shoes and can’t pay the market price for shoes that would benefit greatly from the donation of good quality shoe donations.
Foreign Aid: A Simple Cost-Benefits Analysis
Although it may be easy to point out aid and development spending that may have not generated genuine economic growth and poverty reduction, the benefits from aid and development can be so huge, when it is spent well, that the benefits may still outweigh the costs using typical cost-benefit practices.
For example, the eradication of smallpox around the world. (An example brought to my attention by William MacAskill on a recent EconTalk podcast.) Suppose, just for the time being, that all forms of aid had no benefits except for aiding in the eradication of smallpox. Before smallpox was eradicated it killed a recorded 300 million people globally. Since its eradication, in 1973, roughly 100 million lives have been saved. To put that number in perspective, that’s more lives saved than would have been saved if we achieved world peace in 1973. Now, if you crunch the numbers, counting how many lives were saved in terms of how much money has been spent on foreign aid (remember, we are assuming there have been no other benefits of aid since 1973), you’d concluded that it cost roughly $70,000 per life saved. To put this calculation in perspective: standard cost-benefit analysis within the United States government rests on the assumption that a life is “worth” saving if it can be done with a price tag of $7 million or less.
The key take-away from this is there are huge benefits to foreign aid, particularly in the sphere of global health. To make the case against spending foreign aid, it is not a sufficient argument to simply point to projects or policies that seem to have not produced benefits. Like most topics in public policy or business administration, the benefits must be weighed against the costs. In the case of human development and poverty alleviation the potential benefits are so large that the seemingly high costs are often justified.
Innovation in the Aid Industry: Cash Transfers
When the film presents the current reality of the global aid and development industry (pictured below), the newest, and perhaps, most exciting innovation in the last decade is omitted: direct cash transfers.
Inserted into the figure above, direct cash transfers create a line of little green arrows from the yellow group of people (presumably rich people) directly to the red and orange people (the “people in poverty”). No taxes, no donor nation governments, no developing nation governments, no egotistical NGO development project. Through organizations like Give Directly you can send money from your bank account directly to the mobile money (i.e. MPESA) account of the extreme poor all around the world.
When thinking about the power of direct cash transfers consider the idea of diminishing returns. It seems wellbeing and income are related to each other, approximately, by the logarithmic function. Whereas no matter how much money you have, doubling your income will provide the same amount of gain in welfare. This means that for someone who makes $2 per day, giving this person an extra $2 per day will do approximately as much in terms of wellbeing as giving someone who makes $200 per day an extra $200 every day.
The most remarkable detail about this omission is that (at least) the director of the film seemed unfamiliar with direct cash transfers when asked about them by Russ Roberts while a guest on the Econ Talk podcast. While this critique borders on ad hominem, this is not my intention. It is rather stunning and relatively disappointing that the director of a documentary about the modern aid and development industry, “hasn’t spent a lot of time thinking [about cash transfers]”. Particularly because talk about cash transfers has been so common in recent years. A couple years ago a large study was done on unconditional cash transfers in Western Kenya – paper here, media coverage here, here, here, here, and here. Additionally, the most famous cash transfer program is Mexico’s school attendance conditional cash transfer program, Progresa/Oportunidades – one of the many papers here, more information here, here, here, here, and here.
The key take-away is that the aid and development industry is still evolving and improving. In fact, the increased use of direct cash transfers could help improve the flaws in the global food aid system, mentioned above. Some have suggested that direct cash transfers should serve as “index funds” of sorts for the aid and development industry. If your program is not doing as good or better than just giving all the money needed to run the program to the poor then, maybe, it’s time to make some changes to the program.
Conclusion: The Root of the Problem with Aid
To conclude this review, I’d like to highlight what may be the largest and most fundamental flaw in the aid and development industry as it was largely left out of the film: the extreme lack of evidence and rigorous feedback in decision making, program design, and management of NGOs.
The world is a complicated place. As is demonstrated above through the case of TOMS Shoes, well-developed theory and sound logic can only provide so much clarity about what will work and what won’t in various contexts. In order for aid to actually be effective data need to be collected, feedback needs to be heard, and impacts need to be measured. The problem with most NGOs, and the key reason why Haiti remains poor despite the overwhelming number of NGOs, is because these organizations often don’t do anything as far as collecting data, gathering feedback, or rigorously measuring impact.
I understand why very few NGOs spend time and money measuring impacts and collecting evidence. Doing so in any sort of rigorous and honest manor requires a lot of humility and courage. It is perhaps natural for us to want to live a (fictional) world where we know we know how things work. Admitting our own faults is often one of the most difficult challenges we face, but learning from failure and iterating through trial and error is simply the most effective problem solving strategy at our disposal.
The Poverty, Inc. documentary tried to make the case for so-called market-based or business solutions to poverty around the world. This recommendation glosses over the primary reasoning behind the preference for the private sector over the public sector. The main reason why the private sector drives innovation and progress is because it is constantly receiving feedback vis-a-vis the market. The public sector, on the other hand, has a very slow (and sometimes nonexistent) mechanism for feedback and therefore lacks innovation and progress. Aid in and of itself is not bad or ineffective, it’s the lack of feedback caused by the lack of commitment to evidenced based management that makes much of global aid to be bad and ineffective. The challenge of poverty is that it often rests outside the scope of markets and private sector businesses. The poor can’t “entrepreneur” themselves around bad leadership or bad policies, rather it’s good leadership and politics that needs to create an environment for entrepreneurship to flourish.
In recent years, the idea that aid given to foreign countries is “bad” always seems to gain a lot of traction. I’ve never quite figured out why so many people are set on painting with such broad strokes when it comes to solving one of the world’s most persistent puzzles. The aid and development industry needs more evidence not less financial support. The last thing that is needed would be for public support of foreign aid to wane in years to come. In light of the flaws highlighted by Poverty, Inc. and the key points of this review, perhaps the most concrete task to be done would be to call your member of congress to voice support for the Foreign Aid Transparency and Accountability Act.
* A disclaimer: I personally know many of the people who were interviewed in and who were involved in making this film. While in college and for a year after, my work was affiliated with Partners Worldwide, who assisted film-makers for this project. During this time, I assisted with some preliminary research for a book about Haiti with two administrators, worked for a few months with several of the folks in Ghana (I’ve actually been to the pineapple plant shown in the film), and spent a year in Kenya working with the organization full time. Although I remain friendly with many of my former colleagues, I’ve tried to keep this review as objective as possible.
I had a blog post all written about this new working paper by Michael Clemens and Lant Pritchett “The New Economic Case for Migration Restriction“, then Chris Blattman posted about this comedy show that summarizes the research much better than I ever could.
I strongly recommend taking the time to watch this. It will make you laugh, cry, weep, and think. (Pardon the occasional language.)
For the nerdier readers. I find this paragraph from the paper to be tremendously insightful and painfully relevant:
Permitting people to move from low-productivity places to high-productivity places appears to be by far the most efficient generalized policy tool, at the margin, for poverty reduction. Almost all policies intended to raise the incomes of people in poor places do so either modestly or not at all. A successful in situ anti-poverty program might raise the per-capita consumption of the world’s poorest households by US$54 per year (Banerjee et al. 2015). A two-year, six-component in situ intervention—guided by some of the top minds in development economics and backed by formidable financial and organizational resources—produced the equivalent annual consumption gain of the wage differentials of working in a rich versus poor country for one day. The harm to the poor from policies that produce such large losses for the poor cannot be systematically offset by the gains to any known in situ development intervention.
HT: David MacKenzie and Chris Blattman
Davos Dreaming: Development without Development: “The calculation works not because 62 people own the vast majority of everything (they don’t), but because 3.5 billion people own barely anything. Both groups own less than 1% of the world’s wealth.”
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!
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.
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.