Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Poverty Trap
Hosny Zoabi
Poverty Trap
Poverty Trap
Poverty Trap
Trap arise both from market failure and also from institution
failure. That is, from traps within the set of institutions that
govern economic interaction.
Some countries record per capita income even lower than Tanzania.
1997 average income in Zaire is measured at $276.
Hosny Zoabi (New Economic School) Poverty Trap 7/1
Poverty Trap Some Facts
Left: Average of 5
richest and poorest
countries. right 10
countries.
Income disparity has
widened dramatically in
the postwar era, and the
rate of divergence is, if
anything, increasing.
Figure 1.
Economic Development
How did the massive disparities arise?
Although the beginnings of agriculture some ten thousand years
ago marked the start of rapid human progress, for most of the
subsequent millennia all but a tiny fraction of humanity was
poor.
Poverty: Suffering regularly from hunger and highly vulnerable
to adverse shocks.
Early improvements in economic welfare came with the rise of
premodern city-states.
Collective organization of irrigation, trade and communications.
Handicraft manufacture became more specialized over time, and
agriculture more commercial.
Hosny Zoabi (New Economic School) Poverty Trap 10 / 1
Poverty Trap History
Economic Development
While such city-states and eventually large empires rose and fell
over time, and the wealth of their citizens with them, until the
last few hundred years no state successfully managed the
transition to what we now call modern, self-sustaining growth.
Throughout the history, increased wealth was followed by a rise
in population. Malthusian pressure led to famine and disease.
The overriding reason for lack of sustained growth was that in
the premodern world production technology improved only
slowly.
While the scientific achievements of the ancient Mediterranean
civilizations and China were remarkable, in general there was
little attempt to apply science to the economic problems of the
peasants.
Scientists and practical people
Hosny Zoabi (New Economic School) had only limited interaction.
Poverty Trap 11 / 1
Poverty Trap History
Economic Development
Economic Development
These technological innovations led to changes in institutions.
The weakening of local fiefdoms was followed in many countries
by a consolidation of central authority, which increased the scale
of markets and the scope for specialization
Growing trade with the East and across the Atlantic produced a
rich and powerful merchant class, who subsequently leveraged
their political muscle to gain strengthened property and
commercial rights.
Increases in market size, institutional reforms and progress in
technology at first lead to steady but unspectacular growth in
incomes.
In 1820 the richest countries in Europe had average per capita
incomes of around $1,000 to $1,500 some two or three times
that
Hosny Zoabi (Newof the School)
Economic poorest countries today.
Poverty Trap 13 / 1
Poverty Trap History
Economic Development
Richness in our sense begins with the Industrial Revolution in Britain
(although the rise in incomes was not immediate) and, subsequently,
the rest of Western Europe.
Economic Development
The structure of the British economy was massively transformed in a
way that had never occurred before.
Economic Development
Looking forward from the start of the last century, it might have
seemed likely that these riches would soon spread around the world.
Such a forecast would have been far too optimistic. Relatively few
countries besides Western Europe and its off-shoots have made the
transition to modern growth.
Some Notes
Poverty trap is often interpreted as an explanation for the
cross-country income difference. As such, it is frequently viewed
as an alternative to the models that attribute cross-country
income difference to the cross-country difference in, say, TFP
and/or the investment distortions.
This is a misinterpretation. First, the message of poverty trap
models is the self-perpetuating nature of poverty. It suggests
that the long run performance of an economy could be much
better if its initial condition were better.
It does not mean that the cross-country difference in the long
run performance is due mostly to the difference in their initial
conditions.
Second, the notion of poverty trap does not contradict the
Hosny Zoabi (New Economic School) Poverty Trap 27 / 1
Poverty Trap The Mechanics of Poverty Trap
Some Notes
Many calls for foreign assistance for underdeveloped countries
can be understood using the notion of poverty trap. See, e.g.,
Sachs et. al. (2004).
Thus, poverty trap is often viewed as a powerful case for policy
activism.
It is important to keep in mind that each model of poverty trap
is designed to highlight one particular feedback mechanism
behind the vicious cycle. Thus, other sources of poverty trap are
deliberately assumed away.
In reality, of course, many sources of poverty trap are likely to
co-exist and any policy intervention in an attempt to pull the
economy out of one trap may end up pushing it into another.
Hosny Zoabi (New Economic School) Poverty Trap 28 / 1
Poverty Trap Inequality and Economic Growth
Overlapping-Generations economy
t = 0, 1, 2, 3, ...
One good
3 factors:
K Physical capital
Ls Skilled Labor
Lu Unskilled Labor
Production
Ytu = aLut
Capital:
rt = f (kt ) r(kt )
Skilled labor:
Unskilled labor:
wtu = a w u
Factor Prices
Individuals
Differ in:
Parental income Investment in HC
Time endowment:
1 units of time in each period
Capital endowment:
bt capital inherited in 1st period
Preferences:
ct+1 consumption
bt+1 transfers to offspring
xt+1 income in period t + 1
bt+1 = (1 )xt+1
ct+1 = xt+1
=
= [ ln + (1 ) ln(1 )] + ln xt+1
Assumptions
r<i (A1)
h>0 (A2)
xut+1 = (w u + bt )(1 + r) + w u
= w u (2 + r) + (1 + r)bt
s
w (h bt )(1 + i) if bt h
xst+1 =
w s + (bt h)(1 + r) if bt h
=
s
w (1 + i)h + (1 + i)bt if bt h
xst+1 =
w s (1 + r)h + (1 + r)bt if bt h
Assumptions
xtu+1
wu ( 2 + r ) (1 + r )
bt
(1 + r ) xtu+1
ws
wu ( 2 + r ) (1 + r )
(1 + i )
w s (1 + i )h
h bt
Oded Galor Inequality and the Process of Development
Hosny Zoabi (New Economic School) Poverty Trap 44 / 1
Poverty Trap Inequality and Economic Growth
xts+1
xtu+1
f h bt
< f xut+1 > xst+1 (individual t becomes unskilled)
bt
> f xut+1 < xst+1 (individual t becomes skilled)
where
w u (2 + r) [w s (1 + i)h]
f=
ir
Bequest Dynamics
bt+1 = (1 )xt+1
w u (2 + r) + (1 + r)bt bt [0, f ]
bt+1 = (1 ) w s (1 + i)h + (1 + i)bt bt [f, h]
w s (1 + r)h + (1 + r)bt bt [h, )
(1 )(1 + r) < 1
(A5)
(1 )(1 + i) > 1
(f ) < f
(A6)
(h) > h
Bequest Dynamics
bt +1
(bt )
(1 ) ws (1 )(1 + r )
(1 )(1 + i )
(1 ) wu (2 + r ) (1 )(1 + r )
f h
bt
Hosny Zoabi (New Economic School) Oded Galor
Poverty TrapInequality and the Process of Development 49 / 1
Poverty Trap Inequality and Economic Growth
Bequest Dynamics
bt +1
(bt )
bu g bs
bt
Hosny Zoabi (New Economic School) Poverty Trap 50 / 1
Poverty Trap Inequality and Economic Growth
bt +1
(bt )
bu bs
bt
s
l
lu (b0 )
bb
t
g t
xP,u u
t+1 = (w + bt )(1 + r) + w
u
= w u (2 + r) + (1 + r)bt
xP,s s
t+1 = w + (1 + r)bt
= (1 + r)h
Hence,
xP,s s
t+1 = w (1 + r)h + (1 + r)bt
Occupational Choices
xP,s P,u
t+1 > xt+1
w s (1 + r)h > w u (2 + r)
But this is A(4)! So everyone becomes skilled worker
All individuals whose bequests bt < h are strictly better off under
the policy
Properties of P (bt )