Do poverty traps exist?
There are (at least) three competing views of why poverty can be so persistent.
- the first - the “American Dream effect”, is that anybody can make it through hard work and thrift. This implies that households and countries should be able to gradually work their way out of poverty, and failure to do so represents lack of effort
- the second view is that poverty is the result of poor fundamentals – poor institutions and endowments at the country level, or low skills and abilities at the individual level
- the third view is that poverty begets poverty, so that current poverty is itself a direct cause of poverty in the future
This paper reviews the empirical evidence on the existence of poverty traps, understood as self-reinforcing mechanisms through which poor individuals or countries remain poor. Poverty traps have captured the interest of many development policy makers, because poverty traps provide a theoretically coherent explanation for persistent poverty. They also suggest that temporary policy interventions may have long-term effects on poverty.
However, a review of the reduced-form empirical evidence suggests that truly stagnant incomes of the sort predicted by standard models of poverty traps are in fact quite rare. Moreover, the empirical evidence regarding several canonical mechanisms underlying models of poverty traps is mixed.