By Anwesha Bhattacharya
Edited by Madhavi Roy, Senior Editor, The Indian Economist

“A Poverty trap is a spiraling mechanism which forces people to remain poor. It is so binding in itself that it doesn’t allow the poor people to escape it.” – The Economist Times.

A Poverty trap is, hence, a vicious cycle where poverty persists in its most inimical form. This vicious cycle cannot be broken unless specific measures are taken. Most development economists like Debraj Ray and Harvey Levenstein attribute poverty traps to nutrition and productivity. Monetary aid is a direct measure that most governments and policy makers suggest to break the poverty trap.

Jeffrey Sachs, author of ‘The End of Poverty’, talks about aid, particularly in Africa. He writes that developed nations are analogous to venture capitalists and developing nations are start-ups. Like a venture capitalist, developed nations have to give the entire amount needed by the poor country; like every start-up, developing countries also need time to become profitable. Sachs says. “The poor start with a very low level of capital per person, and then find themselves trapped in poverty because the ratio of capital per person actually falls from generation to generation”. This forms a vicious cycle which entraps generation after generation, as seen in some countries of Africa and Asia.

A poignant example of the poverty trap would be that of Pak Sohlin of Indonesia, as discussed by Abhijit Banerjee and Esther Duflo in their book ‘Poor Economics’. Pak or Mr. Sohlin was a farm labourer. When the price of oil increased, the price of fertilizers went up, which made farming a costly business. The increasing prices left the employer with two choices: to reduce the wages of his employees or reduce the number of employees. The employer decided to reduce the number of workers on his field due to which Pak Sohlin lost his job.

The rationale behind not lowering wages is what leads to a vicious poverty trap. Low wages, coupled with rising food prices, would make food more expensive for Pak Sohlin, due to which he would have to sustain himself on lower quantities of food. The amount of food he could have bought with his daily wage was less than what his body needed to sustain him. Suppose Pak Sohlin earned 2000 rupiah after the wage cut and bought food worth 1800 rupiah (after making other certain fixed costs). The optimal amount of food that would give him energy for a whole day’s work in the field might cost him 2200 rupiah. But since he could not feed himself to sustain his strength, due to a shortage of 400 rupiah, he could give his optimal in the field and thus the employer did not feel the need to employ him. Thus, Pak Sohlin lost his job, lost his minimum wage and, as a result, lost his ability to buy food and sustain himself. This threw him into a poverty trap: one where he was unable to buy food to sustain himself due to which he did not have the strength to work and without work, he was unable to earn wages and, thus, he could buy food.

Pak Sohlin’s case is a prime example of nutrition-based poverty traps where nutrition is directly linked to productivity. Poverty traps can arise due to a large number of factors such as violent domestic conflict in the case of Nigeria, politically oppressive neighbours as it has happened with Ukraine, natural calamities as faced by Japan and prevalence of unskilled workers in a highly mechanized economy, which most developing countries suffer from. Since poverty traps are cyclical in nature, they can only be broken with the help of outside influence. Jeffrey Sachs is right in theorizing that developed countries need to provide aid to the developing countries in order to free them from such traps.

Anwesha is a first year Economics student at Lady Shri Ram College for Women. She has a passion for writing and traveling; it is her lifelong dream to go on a backpacking tour across Europe and start a travel blog simultaneously. She considers herself to be a foodie and loves German and Japanese cuisine. Her favourite pastime is escaping into the magical world of fiction. She is always ready to make new friends and explore new horizons.

Posted by The Indian Economist | For the Curious Mind