POVERTY TRAPS

A poverty trap is a spiraling mechanism that binds the poorer sections of society within itself, making it very hard to escape. Poverty is said to be a cycle very interlinked with adequate nutrition. Nutrition-based poverty traps are an ancient economic idea that dates back to the 1950s.

An example of the poverty trap would be that of Pak Sohlin of Indonesia, as discussed by Abhijit Banerjee and Esther Duflo in their book ‘Poor Economics’.

Pak was a farm labourer. When the price of oil increased, the price of fertilizers went up, which made farming a costly business. The increasing prices left the employer with two choices: to reduce the wages of his employees or reduce the number of employees. The employer decided to reduce the number of workers on his field due to which Pak Sohlin lost his job.

The rationale behind not lowering wages is what leads to a vicious poverty trap. Low wages, coupled with rising food prices, would make food more expensive for Pak Sohlin, due to which he would have to sustain himself on lower quantities of food. The amount of food he could have bought with his daily wage was less than what his body needed to sustain him. Suppose Pak Sohlin earned 2000 rupees after the wage cut and bought food worth 1800 rupees (after making other certain fixed costs). The optimal amount of food that would give him energy for a whole day’s work in the field might cost him 2200 rupees. But since he could not feed himself to sustain his strength, due to a shortage of 400 rupees, he could not give his optimal in the field and thus the employer did not feel the need to employ him. Thus, Pak Sohlin lost his job, lost his minimum wage and, as a result, lost his ability to buy food and sustain himself. This threw him into a poverty trap: one where he was unable to buy food to sustain himself due to which he did not have the strength to work and without work, he was unable to earn wages and, thus, he could not buy food.

To further understand Poverty traps, we use the graph given which is split into two parts, let’s assume that on the left side of the graph, there is a minimum wage earner, Mr. X is who doesn’t have lots of money but has just enough to sustain himself.

As he doesn’t have enough,

his investments and savings are insufficient. And if Mr. X experiences some kind of unforeseen financial emergency, say hospital bills, he will travel furthermore to the left of the graph where he will be forced to borrow money which would make him have to work even harder to pay the amount back this will in turn, affect his health. It would obviously be very hard for him to come back up. This is an endless cycle and is therefore known as a poverty trap. On the right side however, there is Mr. Y who has more money than he needs to sustain himself, and if he faces any unforeseen financial emergency, he would lose some money but would be able to come back up much faster and in an easier manner than Mr. X because he already has more than he needs, thereby staying outside the dreaded poverty trap.

Your current investments are directly proportional to your future income. For example, today if your parents invest in quality education, there’s a likely chance you’ll end up with a good job and a decent standard of living.

But let’s assume your parents are villagers and earn a minimum wage, you will likely be doing the same because of the lack of opportunities available.

Pak Sohlin’s case is a prime example of nutrition-based poverty traps where nutrition is directly linked to productivity. Poverty traps can arise due to a large number of factors such as violent domestic conflict in the case of Nigeria, politically oppressive neighbours as it has happened with Ukraine, natural calamities as faced by Japan and the prevalence of unskilled workers in a highly mechanised economy, which most developing countries suffer from. Since poverty traps are cyclical in nature, they can only be broken with the help of outside influence. And one of the only ways to get out of them is with the help of developed countries, who need to provide aid to the developing countries in order to free them from such traps.

However, no amount of aid from developed countries or even the government would be of any help unless poor people know how to use it. We’ve all seen that even though people have incomes so low they cannot afford groceries, buy luxuries like televisions or smartphones, it is noticed that, when given additional money, people stuck in these poverty traps tend to spend more on articles of snob appeal than necessities and assets, to make up for a void that existed because of their lack of financial resources. It is therefore important for the government to not only provide funds for these people but to also financially educate them, invest in the heavily available human capital, provide the children with equal opportunities, help increase employment, provide families with security, and most importantly, proactively take part in helping people break and reverse the poverty trap.