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!

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.