Lecture Notes: Poverty Traps and Development

Introduction

• Presented by Professor Esther Duflo
• Overview of class requirements
  • Up to 10 essays with a choice of topics
  • Only the best 5 essays will be graded
  • Importance of early submission to avoid end-semester panic
  • Readings and class participation are crucial
  • Pop quizzes on readings at random times

Class Structure

• This course focuses on readings, discussions, and lectures
• Two development classes: 14.73 (this class) and 14.74
  • 14.73: More discussion and readings
  • 14.74: More technical and empirical focus
• Recommendations against taking both simultaneously due to overlap

Recordings and Participation

• Class is recorded for MIT OpenCourseWare
• Students should introduce themselves when speaking

Poverty Traps Overview

Key Example: Pak Solhin

• Encountered in Indonesia, summer of 2008
• Discussed the impacts of rising food prices and economic conditions
• Illustrates the concept of poverty traps:
  • Low yields due to lack of resources (e.g., fertilizer)
  • Cycle of poverty: low income -> less capacity to invest in productivity

Factors Contributing to Poverty Traps

• Biological aspects of physical work capacity
• Examples of poverty traps in education and employment
  • Children dropping out of school due to family economic pressures

Mechanisms of Poverty Traps

• Importance of initial investments (e.g., fertilizers, education)
• The capacity curve: Illustrates the relationship between income, food consumption, and work capacity
  • Initial calories for survival, followed by capacity to work
  • Shifts in the curve due to economic changes can trap individuals in poverty

Biological Poverty Trap Theory

• A capacity curve shows:
  • Relationship between income today and work capacity
  • Income affects future income potential
• Importance of caloric intake for productivity
• Factors affecting this relationship include:
  • Food prices
  • Employment wages

Graphical Analysis

• Visual representation of income dynamics over time
  • Steady states: stable vs unstable equilibria
  • Poverty traps emerge from unstable equilibria
• Understanding shifts in the curve helps analyze poverty traps

Discussion Points

• Questions raised about the empirical validity of the poverty trap theory
• Potential for inter-generational poverty traps due to educational barriers
• Importance of understanding local contexts and variations in poverty traps

Conclusion

• The class will further investigate the empirical evidence around poverty traps
• Future discussions will cover experiments related to poverty alleviation strategies

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Key Terms:

• Poverty Trap
• Capacity Curve
• Income Dynamics
• Steady State
• Inter-generational Poverty

Next Steps:

• Prepare for discussions on experimental evidence regarding poverty traps on Tuesday.