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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American Economic Association annual meetings
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
Transitions Stochastic churning (B to u(A’’))
from Poverty: Structural via accumulation (A’ to A”)
Structural via higher returns (u(A’) to C)
Asset Poverty Line
Income Poverty Line
Marginal return on assets
No problem if perfect financial markets exist. But if not, what savings strategies are feasible below AS?
Figure 3: The Dynamic Asset Poverty Line
Dynamic Asset Poverty Line
Income Poverty Line
Static Asset Poverty Line
Dynamic Asset Poverty Line (Micawber Threshold)
At=A0 (dynamic equilibrium)
Next Period’s Assets
Need to find threshold in asset space where dynamics bifurcate.
- 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
Two natural extensions of FGT class:
Predicted flow dynamics version:
Asset gap version:
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