Poverty Traps¶

Does being poor keep you poor?

The S-curve¶

This clearly shows that where you start affects where you end.

\[ \text{Economic Status}_\text{present} = \beta_0 + \beta_1 \text{Economic Status}_\text{past} \]

So, the poorest of the poorest need enough direct income transfers to push them up, else they will go back to their past state.

The mistake in some models is that they assume upward concave curve rather than the S-curve, thereby missing the existence of the Poverty Trap.

Capacity Curve¶

Relationship between work capacity and income.

Piece-rate, or piecemeal pay, means that employees are paid by the unit when completing a particular task, for instance, bushels harvested, trees pruned, or acres mowed. In this case, a worker is compensated by individual output and not by an hourly rate

Higher the income, more food calories. The first few calories are required as a minimum to function actively; however, after a certain point, there is decreased return.

\(v^*\) represents the smallest possible wage at which people meaningful work. It is not an economy-wide parameter, but an individual parameter depending on the amount of non-labor income (I suppose passive income?)

Aggregate Labor Supply¶

Involuntary unemployment occurs when the economics forces maintain equilibrium due to balancing labor demand and labor supply.

The capacity curve changes whether or not the person had food the previous day. So, we can conclude that being today’s employment helps in continued employment tomorrow.

Distribution of Land¶

Effective Reservation Wage¶

The thick curve is the effective reservation wage, as you need to be

willing to work
able to work

Equilibria¶

When the wage is very low, very few people can work

Policies¶


Land reform	- May improve production and employment - Can improve production without reducing involuntary unemployment
Loans to poor	This does not happen, as the poor will first focus on getting basic needs rather than investing in increasing their wealth sufficient to repay, and hence will default on their loans
Minimum wage
Direct income transfer	- The poorest people get empowered by getting cash - Others would get lazy
Investment in the poor	As nutrition plays a big role in working productivity, employers of long-term contracts tend to invest in their workers. But this does not happen for short-term contracts. Due to this reasoning, slaves were better fed than poor workers.

An economy is Pareto efficient. Hence, it is not possible to improve the welfare of someone without decreasing the welfare of someone else.

Intra-Family Resource Allocation¶

In a poor family, the most efficient way is to invest more resources into the person who is employed so that they can thereby bring in more income, rather than equally. Unfortunately, this may lead to malnourishment of the other person. Sometimes, this may be the only way possible for poor families.

In most cases, this is how it goes

flowchart TB

Father -->
|Remaining resources| Children -->
|Remaining resources| Mother -->
|Remaining resources| Elderly

Poverty Traps Characteristics¶

Strong relationships

\[ \begin{aligned} \text{Income}_{t+1} &\propto \text{Nutrition}_t \\ \text{Productivity}_{t+1} &\propto \text{Nutrition}_t \end{aligned} \]

\[ y_{t+1} = (f \circ g)(y_t) \]

where

\(f =\) Capacity Curve
\(g =\) Decision to consume curve

Multiple equilibrium points exist when the curve intersects the 45deg line at multiple points

Intersection happens where slope = slope of 45deg line = \(\tan 45\) = 1

When \(y_{t+1} = y_t\), the convolution \((f \circ g)\) has a slope > 1. This happens when the product of the elasticity of \(f\) and \(g\) curve > 1

In some cases, food is affordable, so \(g\) won’t be steep.

Nutrition-based Poverty Trap¶

Not much basis for Nutrition-based Poverty Trap, as food is relatively cheap
When people become richer, they tend to spend more on food
Half of the increase into better food
Half of the increase into more calories
Clear relationship between per capita expenditure vs calorie consumption
Relationship does not appear to be non-linear, at least in this range, despite the fact it is probably an over-estimate due to reverse-causality
Strong log-linear relationship between price of calories and expenditures, indicating a lot of substitution towards more expensive calories
Duration of study affects people behavior
When subsidies are provided for short-period, people focus on eating “better” food than to improve nutritional status
if this was a long-term, then the behavior may have been different

India¶

Local Regression at different points of log(calories) vs log(per capita expenditure)

As you can see, as people get richer, they eat more expensive calories. This means that they don’t feel the pain of poverty trap, as they would rather than get more calories rather than expensive calories, with the same budget.

Elasticity of per capita calories to per capita expenditure

Log(price per calorie) vs log(per capita expenditure)

Even though the number of extremely poor people has gone down in India, the per capita consumption has not increased, as the Calorie Engel curve has moved rightward.

China¶

Subsidize staple food in 2 regions fro randomly selected household

In both regions, substitution towards more expensive calories

Elasticity of calorie consumption with income is low

Graduation Programs¶

Last Updated: 2024-05-12 ; Contributors: AhmedThahir