Trapped in $1.9 a day
What exactly is poverty? Poverty, in simple words, is not having enough material possessions or income for a person’s basic needs. But what are basic needs and when do we know that a certain individual’s needs aren’t being met? The World Bank has devised an international poverty line that helps us understand who is living under extreme poverty. Any individual living under $1.90 USD per day is considered to be living in poverty. According to the latest estimates, 9.2% of the global population or 689 million people lived in extreme poverty in 2017.
Poverty has been around for several thousand years. Why? Do the poor not learn how to improve their living standards over time? They do, but one of the main obstacles they face is the lack of amenities. This often leaves them trapped in the cycle of poverty.
A Poverty Trap is a self-reinforcing mechanism that makes it difficult for people or an economy to come out of poverty. It is usually created when an economic system experiences any of the following- limited access to credit and capital markets, corrupt governance, environmental degradation, poor education system, lack of health care, war, epidemics or poor infrastructure.
In such situations, individuals or economies trapped in poverty require additional capital to overcome these problems and begin their trajectory towards economic growth.
However, the unavailability of these funds makes them dependent on foreign/external aid to be lifted out of poverty.
In their book Poor Economics, economists Abhijit V. Banerjee and Esther Duflo use the adjacent diagram to explain an ‘income-based poverty trap’. In a way, this diagram is a depiction of the phrase often used to describe a capitalistic or free-market economy-’The rich become richer and the poor become poorer.’
In a world with poverty traps, your income today will determine your income in the future (could be tomorrow, next month or next decade). This means that what you do with your income today decides your disposable income and expenditure patterns in the near future.
(The diagonal line NQ represents income today is equal to income tomorrow)
For example, a farmer’s income is as low as A1(see figure). In the absence of irrigation facilities, poor rainfall will ruin his crop, such that his income from the subsequent produce will fall to A2. Perhaps, it wasn’t poor rainfall but a lack of inexpensive and accessible healthcare at a time when a family member was ill, that drove his income down. Such reasons will deprive the farmer of capital that he could’ve invested in fertilizers or high yield seeds and set him into a cycle of poverty. Hence, the arrows from A1 and A2 move leftward, wherein future income decreases and the light grey area illustrates a poverty trap.
Now imagine if the farmer’s income was such that he started at a point beyond P, outside the poverty trap zone. Notice that the graph outside the poverty trap zone slopes upward, indicating that an increase in his current income, would grow his future income. Essentially, if the farmer has enough money to buy fertilizer, irrigation facilities or has affordable healthcare, he would be able to raise his yield and consequently, his income.
Therefore, in order to escape poverty, the farmer would require some form of aid to help him overcome his initial obstacles and enter the zone of self-sustenance.
American economist, Jeffrey D. Sachs, believes that most of tropical Africa is also stuck in a poverty trap because of geographical reasons which lead to food shortages, deforestation, epidemics, limited access to trade routes, lawlessness arising from poverty, water shortages and much more. However, he is of the view that targetted investments from outside sources can cost-efficiently battle poverty provided that they are focused on issues posing the biggest threat: food security, agriculture technology, infrastructure etc.
After the genocide of 1994 wherein over 800 thousand lives were lost, Rwanda received millions of dollars in foreign aid. The country was able to recover and now enjoys an average growth rate of 6% per annum, with significantly reduced inequality and poverty.
Similarly, a study shows that Overseas Development Assistance has significantly reduced poverty in Kenya and has benefited the extremely poor more than the people just below the poverty line.
Many a time government policies and poverty alleviation programmes fail, either because the aid they provide is insufficient to bring the poor to a point where they can self sustain and escape destitution or they do not cater to the exact needs of the targetted impoverished population which deems the entire plan unsuccessful.
Poverty traps are widespread and are often difficult to escape, however, small steps in the right direction can furnish millions of impoverished individuals with enough to exit the cycles of poverty and lead prosperous lives.
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