What Is a Poverty Trap?
A poverty trap is a mechanism that makes it very difficult for people to escape poverty. A poverty trap is created when an economic system requires a significant amount of capital to escape poverty. When individuals lack this capital, they may also find it difficult to acquire it, creating a self-reinforcing cycle of poverty.
Key Takeaways
- A poverty trap refers to an economic system in which it is difficult to escape poverty.
- A poverty trap is not merely the absence of economic means. It is created due to a mix of factors, such as access to education and healthcare, working together to keep an individual or family in poverty.
- Noted economist Jeffrey Sachs has made the case that public and private investments need to work in concert to eradicate the poverty trap.
Understanding Poverty Traps
Many factorscontribute to creating apoverty trap, including limited access tocreditandcapital markets, extremeenvironmental degradation(which depletes agricultural production potential), corrupt governance,capital flight, poor education systems, disease ecology, lack ofpublic healthcare, war, and poorinfrastructure.
In order to escape the poverty trap, it is argued that individuals in poverty must be given sufficient aid so that they can acquire the critical mass of capital necessary to raise themselves out of poverty. This theory helps to explain why certain aid programs that do not provide a high-enough level of support may be ineffective at raising individuals from poverty. If those in poverty do not acquire the critical mass of capital, they will simply remain dependent on aid indefinitely and regress if aid is ended.
Recent research has increasingly focused on the role of other factors, such as healthcare, in sustaining the poverty trap for a society. Researchers at the National Bureau of Economic Research (NBER) found that countries with poorer health conditions tend to be mired in a cycle of poverty as compared to others with similar educational attainments.
Researchers at the University of Florida in Gainesville collected economic and disease data from 83 of the world's least and most developed countries. They found that people living in areas with limited human, animal, and crop disease were able to lift themselves out of the poverty trap as compared to people who lived in areas with rampant disease.
Types of Poverty Traps
Poverty traps can vary in their underlying causes and characteristics, but they all share the common feature of perpetuating poverty or making it difficult for individuals or communities to escape poverty. Here is an overview of the various types of poverty traps.
Economic Poverty Traps
Economic poverty traps are characterized by low income and limited economic opportunities. People in these traps may face challenges such as unemployment or underemployment, low wages, and lack of access to credit or financial services. This makes it difficult for them to save, invest, or escape poverty because they are often living hand-to-mouth, struggling to meet their basic needs.
Geographic Poverty Traps
Geographic poverty traps occur in areas that are geographically isolated or marginalized. These regions may lack essential infrastructure like roads, electricity, and clean water, making it hard for residents to access education, healthcare, and job opportunities. Limited connectivity to markets and resources can further perpetuate poverty in these areas.
Health Poverty Traps
Health-related poverty traps are linked to poor health and inadequate healthcare access. Individuals in these traps often face chronic illnesses, lack of preventive care, or insufficient treatment options. Medical expenses can drain their limited resources, and ill health can limit their ability to work and earn a stable income.
Educational Poverty Traps
Educational poverty traps stem from inadequate access to quality education. High dropout rates, lack of schools, and limited educational opportunities hinder individuals' ability to acquire skills and knowledge necessary for better employment prospects. Without education, they may remain trapped in low-paying, low-skilled jobs.
Social Poverty Traps
Social factors such as discrimination, social exclusion, or limited social support networks can create social poverty traps. These factors may restrict individuals' access to resources, opportunities, and social mobility. Discrimination based on factors like race, gender, or ethnicity can perpetuate inequality and poverty, and social factors can perpetuate other types of poverty traps listed within this section.
Generational Poverty Traps
Generational poverty traps occur when poverty is passed down from one generation to the next within families. Children born into impoverished households may face limited access to quality education, healthcare, and proper nutrition. These individuals may also face barriers or limitations based on debts or financial limitations passed down from generation to generation.
Institutional Poverty Traps
Institutional poverty traps are related to weak governance, corruption, and ineffective institutions. Inadequate rule of law, lack of property rights protection, and rampant corruption can stifle economic growth, discourage entrepreneurship, and hinder access to essential services like healthcare and education. These institutional weaknesses can keep individuals and communities in poverty.
Poverty traps are often the subject of political debate; some believe the government has a responsibility to alleviate poverty traps, while others believe markets should evolve on their own.
The Public and Private Role in Addressing the Poverty Trap
In his bookThe End of Poverty: Economic Possibilities for Our Time, Jeffrey Sachs recommends that, as a way of combating the poverty trap,aid agenciesshould functionasventure capitaliststhat fundstartup companies.
Sachs proposes that,just like any other startup, developing nations shouldreceive the full amount of aid necessaryfor them to begin to reverse the poverty trap.He points out that the extremely poor lack six major kinds ofcapital: human capital, business capital, infrastructure,natural capital, public institutional capital, and knowledge capital.
Sachs added in his book:
"The poor start with a very low level of capital per person, and then find themselves trapped in poverty because theratioof capital per person actually falls from generation to generation. The amount of capital per person declines when the population is growing faster than capital is being accumulated... The question for growth in per capita income is whether the net capital accumulation is large enough to keep up withpopulation growth."
Sachs postulates thatthepublic sectorshould concentrate its effortson investing in:
- Human capital—health, education, nutrition
- Infrastructure—roads, power, water and sanitation, environmental conservation
- Natural capital—conservation of biodiversity and ecosystems
- Public institutional capital—a well-run public administration, judicial system, police force
- Parts of knowledge capital—scientific research for health, energy, agriculture, climate, ecology
Business capital investments, Sachs says, should be the domainofthe private sector, which he claims would more efficiently use the funding to develop the profitable enterprises necessary to sustain growth enough to lift an entire population and culture out of poverty.
Solutions to Overcome Poverty Traps
With Sachs context in mind, let's dig deeper into potential solutions that could overtake poverty traps. Bear in mind that this list is not meant to be exhaustive; in addition, this list is meant to be a high-level overview of potential strategies whose success may ebb and flow over time.
Invest in Education
Investing in education is often cited as being crucial for breaking the poverty cycle. Quality education, with well-trained teachers, updated curriculum, and modern facilities, ensures that children have the skills and knowledge needed for better job opportunities. Equitable distribution of educational opportunities, particularly for marginalized groups, is vital for addressing inequality. Additionally, vocational and technical training programs prepare individuals for skilled employment, which can be a pathway out of poverty via better job opportunities.
Improve Healthcare Access
Access to affordable healthcare services is an essential poverty reduction strategy. Establishing and maintaining healthcare facilities, especially in underserved areas, guarantees access to medical services. Preventive care measures such as immunizations and health education reduce the prevalence of diseases and lower healthcare costs in the long run. Expanding health insurance coverage is crucial to protect low-income individuals and families from the financial burden of healthcare expenses.
Develop Infrastructure
Investing in basic infrastructure like roads, electricity, and water supply improves living conditions and stimulates economic activity. This is especially true in remote or marginalized areas that may have a lack of physical accessibility for resources and access. This development facilitates growth to markets, education, healthcare, and professional opportunities.
Promote Credit Accessibility
Poverty traps may be alleviated by increasing financing and credit accessibility. Microfinance institutions can provide small loans to aspiring entrepreneurs and small business owners who lack access to traditional banking services. These loans enable individuals to invest in income-generating activities and improve their economic prospects. In addition, expanding access to formal banking services, savings accounts, and insurance products for marginalized populations promotes financial inclusion.
Promote Social Inclusion
Promoting gender equality and women's empowerment is not only a human rights issue but also a key driver of poverty reduction. When women have equal access to education, economic opportunities, and leadership roles, entire communities can benefit. Effective anti-discrimination laws and policies can also protect the rights of minority groups and promote social inclusion.
Improve Governance and Anti-Corruption
Transparent governance, the rule of law, and accountability are crucial for reducing corruption and ensuring equitable resource allocation. Independent anti-corruption agencies can investigate and prosecute corruption cases, discouraging corrupt practices. In addition, advocacy efforts push for policy changes and reforms at various levels to address the root causes of poverty and promote equity and inclusion.
According to World Bank Group, the number of individuals in extreme poverty rose to over 700 million people during the pandemic and may be around 685 million at the end of 2022. During the pandemic, the global extreme poverty rate reached 9.3%.
Examples of a Poverty Trap
One of the most important considerations in studying the poverty trap is the amount of government aid necessary to lift a family out of their present conditions.
Consider the case of a family of four, made up of parents and two children who are below legal working age. The family has an annual income of $24,000, with the parents working in jobs that pay $10 per hour. According to the latest federal poverty guidelines, a family of four is considered to be poor if its income is less than $30,000.
In a simple case, let us assume that the government begins handing out aid amounting to $1,000 per month. This raises the family's annual income to $36,000. While it is capped at $1,000, the government aid decreases in proportion to increases in the family's income. For example, if the family's earnings increase by $500 to $2500 per month, government aid reduces by $500. The parents would have to work an extra 50 hours in order to make up for the shortfall.
The increase in working hours comes at an opportunity and leisure cost to the parents. For example, they might end up spending less time with their children or may have to hire babysitters for the time that they are out of the home. The extra hours also mean that the parents will not have the leisure to upgrade their skill-sets for a better paying job.
The aid amount also does not take into account living conditions for the family. Because they are poor, the family lives in one of the most dangerous neighborhoods in the city and does not have access to proper healthcare facilities. In turn, crime or susceptibility to disease could drive up their average monthly spending, making an increase in the family's income effectively useless.
Real-World Example
In the real world, the case of Rwanda, a country wracked by genocide and civil war until recently, is often held up as an example of a nation that tackled the poverty trap by identifying factors beyond income. The African country focused on healthcare and insurance to increase the average daily calorie intake.
However, certain researchers charge the country's government with reducing the measurement threshold in order to make Rwanda rate better on poverty statistics.
What Causes Poverty Traps?
There are several factors that make it difficult for people to escape poverty. A lack of access to capital is a major contributor to poverty traps as is poor education, infrastructure, and healthcare.
Why Is It So Hard to Get Out of Poverty?
Many of the things that can help pull people out of poverty require the one thing poor people don't have: money. For example, without money, it’s difficult to get a decent education and acquire new skills to boost job prospects and earnings potential. Spare time to address issues and boost wellbeing is also in short supply, as every hour spent not sleeping is dedicated to earning money and surviving.
How Many People in the U.S. Live in Poverty?
According to the United States Census Bureau, 37.9 million people in the U.S. lived in poverty in 2022, which represents 11.5% of the population.
The Bottom Line
Poverty traps are self-perpetuating cycles of poverty, where individuals or communities struggle to escape. The reasons for poverty cycles may include low income, limited access to education, healthcare, and limited economic opportunities. These factors reinforce one another, trapping people in a cycle of deprivation and hindering their ability to break free from poverty without external interventions and support. However, there are numerous ways to break poverty traps and solutions to promote economic and financial equity for all.
