What is a poverty trap?

I have first come across the term 'poverty trap' when I took The Age of Sustainable Development online course led by an amazing and inspirational economist Professor Jeffrey D. Sachs. I later purchased the hard copy of his book 'The End of Poverty' which I am still studying, making notes and gathering in-depth knowledge on the topics you can find on this blog. In his book he takes a deeper dive into the question of modern poverty, analyzing its grounds and providing rationale for why it can end in our lifetime. As you may expect, a solution to that is not straight-forward but it IS actually viable. In this section I will present arguments that explain, step by step, the concept of modern poverty and factors that contribute to its elimination.  

Broadly speaking, rapid economic growth is the number one determinant of the nation's prosperity and general well-being. We have seen how industrial revolution and economic development spread across the world, starting from England and soon reaching other corners of the world. However, not all of the countries succeeded in getting on the path of fast economic growth and continue to remain trapped in poverty to this day. Why is it so, that some countries move forward and others are stuck in underdevelopment and instability? There are lots of good, but not universal, explanations, like government policies, conditions of the natural environment etc. but in fact, all of them cannot be applied to all places. According to Dr. Sachs 'The real art of economic development is to make good judgement what's happening in this particular place'. In other words, we need to make sense of the situation or problem we are facing before we make an ultimate diagnosis. 

One of the causes for the country to be stuck in poverty and without economic growth is so called poverty trap. It applies strictly to the poorest places and not to other parts of the world. It is a spiraling mechanism that does not allow people to rise above the basic level needed to achieve the economic development. In real life it simply means there is not enough money to provide the basics like water, electricity, roads, ports of trades or access to health care. Without these basics, people simply struggle to survive or to sustain themselves. They cannot save the capital for future investments. Most of the countries in 21st century can afford this but the poorest of the poor cannot. So some of the governments may know what kind of actions are needed to break the poverty cycle and slowly start climbing the economic ladder but they do not have money to make these crucial investments. 

A solution to this could be a short term financial boost also known as aid or official development assistance. This method is already in place and special organizations are set up like the Global Fund to fight AIDS, TB, and Malaria which help countries fight extreme poverty. The idea of foreign aid is premised on the notion that the development can be achieved by adopting the right set of instructions and helping with the initial implementation cost. This should also guarantee sustainability once the funding stops. You may think, the governments can also take a credit which will boost the economic growth but the harsh reality is that our capital market works in that way to avoid the credit risk as much as possible. So private and public lenders are reluctant to give loans to poor countries even if they know that it will help them place its foot on the first rung of the ladder of development. 

The greatest tragedy however is that one sixth of the population is not even on this ladder. Suffering the consequences of geographical location which conditions economic development; limited access to credit; climate stress and connected to this disease burden like malaria; environmental degradation due to natural capital being depleted and the poverty itself, they are unable to escape this vicious cycle on their own. And that is where the humanity begins. Where responsibility and solidarity go hand in hand. Because diagnosing country just for the facts and figures is not enough. If we took the effort to get to the core of the problem, we should also play a part in solving it. There is a difference between recognizing a problem and acknowledging it. If we truly accept it, than whether or not we decide to help is no longer a question. It becomes an obligation for the world's leaders and a moral mission for all of us.