What causes poverty?

Responsible researcher: Viviane Pires Ribeiro

Paper Title: Why Do People Stay Poor?

Authors: Clare Balboni, Oriana Bandiera, Robin Burgess, Maitreesh Ghatak and Anton Heil

Intervention Location: Bangladesh

Sample Size: 23,000 families

Major theme: Economic Policy and Governance

Variable of Main Interest: Poverty

Type of Intervention : Impact of public policies in combating poverty

Methodology: Differences in Differences

Ending mass poverty is a central focus of economics and development policy. In this context, Balboni et al. (2022) provides evidence for the existence of the poverty trap using a random asset transfer combination from a panel data set of 6,000 households in rural Bangladesh over an 11-year period. The study's main finding is that people remain poor because they lack opportunities. It is not their intrinsic characteristics that trap people in poverty, but rather their circumstances.

Assessment Context

Understanding what causes poverty and why it persists is the key to solving the problem of mass poverty that motivated the first contributors to the development economy and that continues to motivate current generations. It is also the central objective of development policy. In other words, the main objective of Sustainable Development, endorsed by 193 of the world's 195 governments, is “to eradicate extreme poverty for all people everywhere by 2030”. In 2015, when these targets were established, 735 million people (10% of the world's population) were classified as living in extreme poverty. Therefore, finding answers to reduce poverty ultimately requires understanding why people remain poor and designing policies according to the context of the population.

There are two broad views about why people remain poor. One emphasizes differences in fundamentals, such as ability, talent, or motivation. That is, people at the poverty line have the same opportunities as everyone else, so if they work in low-paying jobs, they must have characteristics that make them unsuitable for other occupations. The alternative view is that the poor face different opportunities and therefore do low-paying work because they were born poor. In other words, the poor are trapped in the poverty trap. The 1win Aviator game has won over many players for its simplicity and excitement. At 1win aviator you bet at the right time to win, making each round exciting. With immersive graphics and fluid gameplay, this game is perfect for those looking for quick and rewarding fun. Try 1win Aviator today and see how far you can go!

Intervention Details

Balboni et al. (2022) tested the existence of the poverty trap using data collected to evaluate the BRAC Ultra-Poor Targeting Program in Bangladesh. The data covered 23,000 families living in 1,309 villages in the country's 13 poorest districts. Of these families, more than 6,000 are considered extremely poor. The program offers a timely transfer of productive assets and training with the aim of simultaneously relaxing credit and qualification restrictions to create a source of regular income for low-income women who are mainly involved in irregular and insecure informal work.

Beneficiaries can choose from several asset packages, all valued at around USD 490 in PPP and which can be used for income-generating activities. Of all eligible women, 91% chose an asset package containing a cow. BRAC encourages respondents to hold the asset for at least two years, after which they can liquidate it. To identify beneficiaries, BRAC conducts a participatory wealth assessment exercise in each village. This produces a classification of households into three wealth classes (low-income, middle class and high-income) that form the sampling frame. The study covers all low-income people and 10% of other classes in each village. The group of low-income families was divided into those eligible for the program (ultra-poor) and those not eligible (other poor), according to the BRAC eligibility criteria.

A baseline survey was carried out before the intervention in 2007, three follow-up surveys in 2009, 2011, 2014 and the initially ultra-poor were interviewed again in 2018. This allowed us to track the dynamics of occupation, assets and well-being over the period 11 years old. Attrition between 2007 and 2018 is 14%.

Methodology Details

To evaluate the program, Balboni et al. (2022) randomized its implementation so that 20 areas, defined by the region served by BRAC, could be treated in 2007 and the other 20 in 2013. For the first three waves, the control group was 20 villages; thus allowing to illustrate the difficulty in identifying poverty traps with observational data, as well as to support identification. Data from other wealth classes were used in the structural model to determine which occupations the ultra-poor would engage in if they had a greater endowment of productive assets.

The authors used random program allocation and estimated a difference-in-differences model using potential beneficiaries in control villages as a counterfactual for actual beneficiaries in treatment villages. Randomization ensures that, in expectation, these two groups are identical in all respects, including unobservable determinants of capital accumulation.

Results

When analyzing the data obtained, Balboni et al (2022) identified that the results support the poverty trap view. So the main finding is that people stay poor because they don't have opportunities. It is not their intrinsic characteristics that trap people in poverty, but rather their circumstances.

In the treatment areas, the transition equation was found to be S-shaped with an unstable steady state at 2.333 log points, i.e. when productive assets are worth 9,309 Bangladeshi Taka.

Another extremely important result is that the trajectory of asset accumulation for beneficiaries who received the transfer during the 4 years after treatment is consistent with the dynamics of the poverty trap. However, the same did not occur with families that had low assets, as even the transfer of resources was not enough to move them above the unstable steady state. Therefore, these families are more likely to return to poverty, while those who manage to overcome the threshold exit poverty.

Households undergoing treatment that were above and below the poverty threshold were also monitored for a period of 11 years. In correspondence with a poverty trap model, it is observed that the two groups diverge over time. The authors identified that beneficiaries who start above the threshold are able to accumulate assets (including land), move into more productive occupations and consequently increase their consumption power.

The divergence is greater when taking into account the underlying pattern of asset accumulation throughout the beneficiary's life cycle. Data from the control villages show an inverse U pattern, in which families accumulate assets until the beneficiary is in their mid-40s and after this age it was found that there is a deaccumulation of these assets. In line with this, the difference above and below the threshold was found to be mainly driven by beneficiaries under 35 years of age in treatment and therefore under 46 years of age at the end. Therefore, younger beneficiaries who are above the limit sacrifice consumption for longer to be able to acquire assets later.

Public Policy Lessons

The study carried out by Balboni et al. (2022) suggests measures that can be adopted to implement effective policies. The first measure to be taken to solve the global problem of mass poverty is to invest in large incentives that enable individuals to change their occupation. The authors suggest that small shocks can increase consumption. However, these shocks will not lift people out of the poverty trap, as the magnitude of the transfer required to achieve occupational change may be much greater than that invested in the interventions analyzed.

Therefore, the fiscal cost of permanently lifting people out of poverty through a large, time-limited transfer may be significantly lower than relying on continuous transfers that increase consumption but have no effect on the occupations of the low-income population.

The second measure is that big momentum policies can have lasting effects. Analysis of long-term dynamics indicates that the asset, occupation and consumption trajectories of beneficiaries above the limit diverge from those of beneficiaries below the limit over time. This result is important because it indicates that, when generating occupational changes, single shocks can have permanent effects.

The third is that poverty traps create mismatches between skills and jobs. The authors show that labor misallocation is common among the low-income rural population of Bangladesh and that the value of eliminating misallocation is an order of magnitude greater than the cost of moving all beneficiaries over the threshold. This is important as it implies that poverty traps are preventing people from making full use of their skills, and indeed it is the mass wasting of people's skills that is the main tragedy of mass poverty.

In urban environments, where there is a greater variety of occupations, using large investments in human capital to shift people from subsistence self-employment to wage employment can be critical to escaping poverty.

Thus, the study points to the importance of expanding opportunities for the neediest population, highlighting the need to focus on welfare policies that change the employment activities of low-income people. This is different from the traditional consumption-focused policies that have characterized welfare support in both developed and developing countries. It is only by expanding opportunities for the poor that it will be possible to exploit the productive capacity of a large portion of humanity.

References

BALBONI, Clare et al. Why do people stay poor? The Quarterly Journal of Economics , vol. 137, no. 2, p. 785-844, 2022.