Economics of poverty traps and persistent poverty an asset based approach
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Economics of Poverty Traps and Persistent Poverty: An Asset-based Approach. January 2005 American Economic Association annual meetings Philadelphia. Why We Need An Asset-Based Approach to Poverty Analysis.

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Economics of poverty traps and persistent poverty an asset based approach

Economics of Poverty Traps and Persistent Poverty: An Asset-based Approach

January 2005

American Economic Association annual meetings

Philadelphia


Why we need an asset based approach to poverty analysis

Why We Need An Asset-Based Approach to Poverty Analysis

  • The ‘Washington Consensus’ reforms constitute an implicit theory of structural poverty transitions:

    • Getting Prices Right should raise returns on unskilled labor, poor households’ primary asset;

    • Getting Institutions Right by securing property rights should enhance asset accumulation by poor households;

    • Deregulation should enhance financial access of poor households, further boosting accumulation

  • But, has it worked?

  • Very hard to gauge using conventional, flow-based approaches to poverty analysis that look only at (potentially transitory) outcomes.


Evolving views of poverty

Evolving Views of Poverty

Successive generations of poverty analysis

1st: static income/expenditure analysis

(headcount, poverty gap, FGT measures)

2nd: dynamic income/expenditure analysis

(chronic/transitory poverty distinction)

3rd: static asset poverty analysis

(structural/stochastic poverty distinction)

4th : dynamic asset poverty analysis


Asset based view of poverty

Asset-Based View of Poverty

Transitions Stochastic churning (B to u(A’’))

from Poverty: Structural via accumulation (A’ to A”)

Structural via higher returns (u(A’) to C)


Poverty traps and the dynamic asset poverty threshold

Poverty Traps and the Dynamic Asset Poverty Threshold

  • Will structurally poor move ahead over time?

  • Lessons from empirical macroeconomics – “twin peaks”, “divergence big time” or “convergence”?

  • Key question: do returns to productive assets (land, labor, etc.) increase in wealth?

  • Such a relationship could exist due to:

    • Increasing returns to scale in income generating process

    • Minimum investment levels/indivisibilities

    • Uninsured risk


Locally increasing returns and multiple livelihood equilibria

Utility

L2

U*H

Asset Poverty Line

Income Poverty Line

L1

Marginal return on assets

U*L

Assets

A*1

AS

A

A*2

Locally Increasing Returns and Multiple Livelihood Equilibria

No problem if perfect financial markets exist. But if not, what savings strategies are feasible below AS?


A 4th generation view

A 4th Generation View

Figure 3: The Dynamic Asset Poverty Line

Utility

L2

U*H

Dynamic Asset Poverty Line

Income Poverty Line

L1

U*L

Static Asset Poverty Line

Initial Assets

A*1

A*

AS

A

A*2

Poverty Trap

Dynamic Asset Poverty Line (Micawber Threshold)

At=A0 (dynamic equilibrium)

Next Period’s Assets


Empirical strategies to identify dynamic asset poverty thresholds

Empirical Strategies to Identify Dynamic Asset Poverty Thresholds

Need to find threshold in asset space where dynamics bifurcate.

Challenges:

- highly nonlinear dynamics

- sparse data around unstable eql’n

- multidimensional asset space

Efforts to date:

- Lybbert et al. 2004 EJ, Barrett et al. 2004, Adato et al. 2005 all use nonparametric methods based on single asset or asset index.

Need to improve on these methods


Dynamic poverty measures

Dynamic Poverty Measures

Two natural extensions of FGT class:

Predicted flow dynamics version:

Asset gap version:


Implications for persistent poverty reduction strategies

Implications for Persistent Poverty Reduction Strategies

An asset-based approach permits

- identification of minimum asset bundles necessary for hhs to engineer own growth

- natural integration of safety net strategies with poverty reduction strategies

- prioritization of efforts to rectify mechanisms of financial and social exclusion


Economics of poverty traps and persistent poverty an asset based approach

Thank you!


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