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Well-being dynamics and poverty traps

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C. Barrett
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A sound understanding of poverty traps—defined as poverty that is self-reinforcing due to the poor’s equilibrium behaviors—and their underlying mechanisms is fundamentally important to the development of policies and interventions targeted to assist the poor and/or eradicate poverty.

The authors review the theoretical and empirical evidence on single and multiple equilibria poverty traps at the macro, meso, and, especially, micro levels. In addition they review the literature exploring the various mechanisms that have been posited to perpetuate poverty.

The authors find sufficient evidence to support the poverty traps hypothesis, suggesting that policies designed to interrupt those self-perpetuating mechanisms merit serious attention.

While most evidence for multiple equilibria poverty traps are from meso and micro level studies, multiple equilibria welfare dynamics have been observed at the macro level as well. Bloom et al. (2003) find multiple equilibria in a cross-country analysis of 152 countries.

Among low-level equilibrium countries, they find that geography and climate are significant determinants of GDP per capita. That is, there is a range of better and worse off countries within the poverty trap; the worse off countries are hot, landlocked, and have low seasonal rainfall.

While they find that geography plays a role in the growth of the low-income countries, Bloom et al. (2003) reject an argument of simple geographic determinism. A more complex suite of factors appears to give rise to the multiple equilibria they identify.

[adapted from author abstract]