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OP-ED: Is poverty a trap?

  • Published at 02:21 pm July 30th, 2020
The covid-19 pandemic may have driven as many as 100 million people back into extreme poverty,said World Bank President on August 20,2020 Bigstock

How the poor can get richer

Bangladesh has just been used to prove one of the great contentions in economics. That poverty is a trap that people need aid to escape from. The alternative view is that it’s effort, or application, or possibly even blind chance, that enables some poor to become not poor. 

The importance is that if it’s a trap, which needs aid in escaping from, then if we provide the aid then people will escape. Given that we’d like the poor to become richer, this is indeed an important question.

The research looks at the effects of the “Targeting the Ultrapoor” program, which, stripped to its basics, gives landless women out in the villages a cow or perhaps some other productive asset. That people are richer when they have such an asset than when they don’t is obvious. But the finding from the research is more subtle.

If the women are given an asset of about so much -- the “so much” being perhaps Tk9,000 worth, not a lot I think we’ll agree -- or more, then they both remain richer over time and also become richer as time goes on. If they receive assets worth less than this amount -- no, not a fraction of a cow but perhaps goats, or chickens, to a lesser value -- then the effect gradually disappears over time. 

That is, there’s a certain lump that has to be passed over for people to become permanently better off. Less than that amount and they revert to being, over the years, just as poor as they were when this all started. One more detail – it’s not the transfer of Tk9,000 in assets, it’s if the transfer brings their total assets over Tk9,000 (actually Tk9,300) that matters. You need to have a certain amount of assets to become permanently not the poorest of the poor.

And so the conclusion is that there is this trap. How is anyone going to go from no assets to that magic Tk9,000 figure without outside aid? Or, given that billions upon billions around the world have done, perhaps it’s just very difficult and we can make it easier? So, make some more asset transfers and see the poor get rich over time. How excellent, and let’s go and do it.

Except there’s still a hole in this argument. As the World Bank likes to point out, over the past 30 years the poverty rate in Bangladesh has gone from 44% of everyone to 14%. Or, if we prefer, we can consider that 8 million Bangladeshis escaped poverty between 2010 and 2016 alone. They didn’t all do that by getting cows. Indeed, they didn’t all do that by staying on the farm or in the villages.

Just to note yes, we are using the same definition of poverty here, that $1.90 a day, adjusted for local prices, which is the World Bank definition of absolute poverty.

So what did actually happen? The answer is that people stopped being landless peasants instead of just becoming slightly richer landless peasants. The answer is those factories, the RMG industry, the Industrial Revolution in fact. That’s what has made tens of millions of people richer, stopped them being absolutely poor.

At the deeper level, the problem is that this research paper looks at what happens with poverty in a technologically stable society. Yes, OK, if all there is to do in life is to be in a village and farming then it may well be true that poverty is a trap. That a certain minimum level of assets is necessary to be able to get ahead of the game, to be able to become progressively better off. 

But we’re not in a technologically stable society. Us all wandering around with mobile phones that would have astonished our grandparents -- heck astonished us when they turned up with mobile internet and all only a decade ago -- is proof enough of that. 

Most obviously we’ve had that technological change in Bangladesh in these recent decades. Vast numbers of people have moved off the land and into the factories. Where life is not perfect, not by any means, but is better than out in the villages wondering if someone’s about to give you a cow. 

We can say, as a result of this research, that poverty is a trap we need aid in getting out of -- but only if we’re thinking of a static society. The moment we add in change then the point rather goes away. Further, given that there is, in any modern society, always change, then even though the result is true it’s irrelevant. 

Which is something that happens in economics more often than we might think. Finally, we work out the truth of something but by then it doesn’t matter because the world around us has changed so much.

Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.

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