SAGA Proposal: Poverty Traps

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SAGA Research Proposal:

1.2.3.2 Poverty Traps

Vulnerability is linked to poverty dynamics through the idea of poverty traps. A poverty trap exists when one is not expected to climb out of poverty naturally through asset accumulation over time. Rather, one is caught in a recurring cycle of crisis and partial recovery (Barrett and Carter 2001). The possibility that a negative shock to one’s welfare could be so severe as to make it impossible to recover makes the consequences of such downside risks overwhelmingly important, and helps to explain the importance that Africa's poor place on vulnerability. The existence of poverty traps is most commonly explained as arising due to capital market failures and insufficient investment in human capital through education, health and nutrition. Evidence of such poverty traps has been uncovered in Côte d'Ivoire, Ethiopia, Kenya, South Africa, Tanzania, and Madagascar (Carter and May 1999; McPeak and Barrett 2001; Dercon and Krishnan 1998; Barrett, Bezuneh and Aboud 2001; Razafindravonona, Stifel, and Paternostro 2001).

While poverty traps are usually defined in terms of assets or incomes, it is equally valid to consider poverty traps in other welfare dimensions such as health — one becomes so sick that recovery is impossible — or nutrition — children who are chronically undernourished suffer stunting from which they can never recover. In addition, there are obvious interactions between various dimensions of welfare. Adverse circumstances that lead to poor health or low education could cause unrecoverable income poverty, and vice-versa. Identifying and understanding the many dimensions poverty traps is an important area for research on vulnerability in Africa.

Because vulnerability is so important, societies have developed a variety of strategies to deal with the risks that poor people face. As Collier and Gunning (1999) point out, the best solutions to vulnerability allow people to smooth their consumption even as their income varies. Insurance markets achieve this, as do well-functioning capital markets in which people can borrow and save to smooth consumption. Unfortunately, Africa’s poor rarely have access to such markets, especially in rural areas where most of the poor live. In the absence of these markets, Africans can try to accumulate physical assets on their own, but the possibilities for this are limited by the menu of physical assets available for accumulation and by the risk of theft in environments with little security (Greif and Bates 1995). Of course, this lack of security does more than prevent the rural poor in Africa from using assets to self-insure: it directly reduces their incentives to accumulate wealth and hence, to grow out of poverty. In many arid and semi-arid areas, Africans commonly accumulate wealth in the form of livestock. But as herd sizes increase, overgrazing can set in and supervision of individual animals declines, leading to increased livestock mortality and enormous, cyclical losses of wealth (Fafchamps 1998; Lybbert, Barrett, Desta, and Coppock 2001; McPeak and Barrett 2001).

In the absence of insurance or asset-based solutions to income risk that work by smoothing consumption, Africans must deal with vulnerability by trying to stabilize their incomes directly, a strategy known as risk avoidance. In an uncertain environment, this is difficult to achieve, and it can lead to a type of poverty trap that is particularly relevant for research under this Cooperative Agreement: poverty that is caused by vulnerability. People who are vulnerable are understandably averse to risk. Yet a variety of studies show that risky activities are also high return activities in Africa, so that a strategy that is perfectly sensible from the point of view of risk avoidance condemns one to low return activities and perpetual poverty (Binswanger and Rosenzweig 1993; Dercon and Krishnan 1998). In such an environment, finding ways to reduce Africans’ vulnerability could unleash substantial economic growth potential by allowing people to invest in riskier high return activities.

Vulnerability and poverty dynamics are often closely linked with our other research topics of health and education. Faced with an income shock, poor families may find themselves forced to pull children out of school (Davies 1996; Jacoby and Skoufias 1997; Basu 1999). Hence, child labor acts as a coping mechanism against vulnerability, albeit one that imposes severe costs by reducing future productivity and insuring that poverty is transmitted across generations. Education policies that do not consider how poor households respond to risk may therefore fail to encourage greater school participation. On the other hand, policies that reduce agricultural risks, such as developing rural credit markets, may have large indirect benefits for children’s schooling. For health, we have already noted the cumulative poverty impacts of health shocks that may arise when households sell productive assets as a coping strategy for illness

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