Lecture Notes on Poverty Trap

Definition of Poverty Trap

• A set of circumstances that keeps individuals in poverty unless an external force intervenes.
• Example: Winning the lottery.

Personalizing the Concept

• College Student Illustration:
  • Owns a computer for assignments.
  • Completing assignments leads to course completion.
  • Graduating college potentially leads to a well-paying job.
  • Current investments in education positively impact future income.
  • Future income can exponentially increase with current actions.
  • Ability to handle financial setbacks, like fixing a broken computer, through borrowing or selling.
• Contrast with Extreme Poverty:
  • Current investments may not have a positive effect on future income.
  • Money made today doesn’t immediately help future income until a certain threshold is reached.

Case Study: Grace in Tanzania

• Grace’s Situation:
  • A poor farmer raising chickens.
  • Income from selling chickens used for family needs and school fees.
  • Remaining money reinvested in her chicken business.
  • Possibility of raising her family out of poverty.
• Challenges Faced:
  • Unstable conditions: maintenance, healthcare, increased costs.
  • Lack of insurance or welfare systems.
  • Financial setbacks force selling assets or withdrawing children from school.
  • Cyclical return to poverty or worse situations.

Characteristics of the Poverty Trap

• Present income and education may not aid future earning potential.
• Lack of safety nets for financial setbacks.
• Interventions needed to escape the trap and facilitate economic growth.

Global Implications

• Affects billions and hampers the global economy.
• Diverse opinions on what effective interventions should be.

Conclusion

• The poverty trap is a significant barrier to economic advancement for many in the developing world.