The poverty trap
IN a seminal submission, Mahabub Hossain and Nigar Nargis have extensively dwelt on poverty dynamics in Bangladesh during the two decades. Based on panel data of sample households, they observe that 25%-30% of the rural households had always been poor, i.e. they were unable to rise above the poverty line.
As we reckon, neither growth nor globalisation that seemingly "swept" through Bangladesh during this period could push them up. In the on-going poverty discourse, this group is identified as "chronic poor." Note that chronic and extreme poor are separate concepts, although confusedly considered as concomitant in the discussions.
Even the moderately poor may appear as chronic poor. Again, when we speak of chronic poor, we indicate the duration of poverty; extremeness indicates the intensity of poverty. However, and more often than not, chronic poverty is related to a kind of "poverty trap" into which the chronic poor have fallen.
One of my most favourite economists, S.R. Osmani, now a professor of Development Economics at the University of Ulster, argues that chronic poverty may not necessarily be related to poverty trap. Conventional wisdom suggests that the paucity of initial wealth or endowments creates a trap from which a poor person finds hard to break out of without outside help.
But even un-trapped poor persons may fail to escape poverty given that they have a finite lifespan and an even shorter working life. The concept of chronic poverty must then incorporate the idea of lifespan -- strictly speaking the span of working life.
Mahabub Hossain and Nigar Nargis, for example, assumed two decades as a lifespan. Binayek Sen and D.Hulme considered 10-15 years. But taking into consideration a whole lifespan, a person may witness a turnaround in poverty over his whole lifecycle.
The crucial insight offered by Osmani's new perspective is that chronic poverty can arise not just from a low level of endowments but also from a mismatch between the structure of endowments possessed by the poor and the structure of opportunities open to them.
Suppose a poor person is provided with a boat and nets to earn a livelihood by catching fish. If water bodies dry up, it may take away his livelihood. Likewise, a poor person may have some fruit trees but no storage or marketing facilitates, or the owner of a cow may find it difficult to market the milk.
In these cases, ownership or transfer of assets to the poor is a necessary but not sufficient condition to raise them from the shackles of chronic poverty.
Many social scientists are sceptical about the potency of economic growth in helping the chronic poor in a meaningful manner. In fact, as Osmani opines, the whole research on chronic poverty weakens, if not nullifies, the potency of growth as a remedy.
This school of thought could possibly be right under the assumption that there is a link between the trap and the turnaround. The author feels that growth is not necessarily impotent in reducing such type of poverty. The impact of growth on chronic poverty would depend on binding constraints -- macro or structural.
The macro constraints implies that the opportunities available in the economic system are simply too crushing to allow a reasonable rate of return from whatever assets they have. For wage earners, it is less employment and low levels of wages; for the self-employed people it would mean low rates of return in their respective lines of production.
In such a case, a few may break out of poverty with a bit of luck, but not all. Of course, individual effort could make the size of the cake bigger, but coordination failure could keep the overall size small. This is a case of poverty trap at macro level.
There are also institutional failures of various kinds. Higher level of poverty traps could cause chronic poverty at individual levels, whether or not individual poverty takes the form of a trap. Thus, in order to explain chronic poverty it is not essential to invoke the notion of poverty trap at individual level, but poverty traps at higher levels may play a very big role in doing so.
In such cases, the best solution is stimulation of overall growth. As faster growth helps expand the market and push up the envelope of opportunities, those suffering from chronic poverty would find it easier to earn a higher rate of return on their endowments --pushing up the trajectory of expected income rapidly enough to take them beyond the poverty line during their lifetime.
The other side is structural constraints. Growth matters, but structural mismatch binding might weaken its effectiveness in reducing poverty. Here the pattern of growth -- such as sectoral pattern, geographical distribution of growth, factor bias in the choice of technology -- assumes more importance than the rate of growth itself.
These elements decide how the expanded opportunities offered by growth affect different individuals and social groups. Thus, growth from say rice cultivation could benefit the poor more as they are mostly engaged in agriculture. The expansion of non-farm activities, especially services, business and trade or fish cultivation, could less benefit the poor in the absence of required capital and education.
What matters more in this case is distribution of opportunities rather than the expansion of opportunities. The bottom line is that the structure of endowments must match the structure of opportunities for the chronic poor.
Admittedly, the problem of structural mismatch is more difficult to address than the macro-level market constraints. More importantly, it requires a policy regime that is designed to guide the growth process in a way that aligns the structure of opportunities more in conformity with the structure of endowments of the chronically poor.
This is no simple task, but if pro-poor growth is to mean anything, this is what it must mean. From the end of endowment scale, the more cost-effective and durable device for attacking chronic poverty is redistribution of assets, special programs for enhancing education of specific groups of people, and removing the entry barriers for certain segments to markets.
In general, the removal of structural mismatch would call for a two-pronged strategy of engendering an appropriate pattern of growth on the one hand and adopting the right kind of targeted interventions on the other.
Thus, a condition of chronic poverty could exist with or without a trap. The search for the causes of chronic poverty should be broadened from the magnitude of endowments to the structure or composition of endowments. In the latter case, macro constraints or limitation of market size may keep people chronically poor by forcing down the rates of return on their endowments.
Structural mismatch also forces down rates of return. The relative importance depends on specific circumstances. When macro constraint is binding, rapid growth may be panacea for poverty reduction. For the second, targeted interventions are required.