What are strategies for dealing with poverty traps?

Slowly weaning people off of unemployment benefits instead of completely cutting them off, and delaying paying taxes for a period of time to let them get back on their feet.

What are the causes of poverty traps?

Insufficient job opportunities No health insurance to cover costs of medical expenses Expensive goods/services Conflict within the country Being unable to afford education

What are examples of poverty traps?

Some examples of poverty traps include living in a country with poor governance and being in an underdeveloped or slow-growing society.

What are the four poverty traps?

Conflict Natural resource Landlocked with bad neighbors Poor governance of a small country

How do poverty traps cause deterioration of education?

Because education is too expensive for impoverished neighborhoods, not even the teens are able to finish their education.

Poverty Trap: Definition, Diagram & Causes

Q: What's a poverty trap?

A poverty trap is a means by which those who are impoverished are unable to escape poverty.

Poverty Trap

If you were to imagine a family in poverty, what would you imagine? You'd probably think of a low-income family or a family that in general is struggling financially. Although low wages and lack of money are definitely part of the issue, it's not the entire story. Those who are in poverty tend to get stuck in what is called a poverty trap. Unless something is done to help the family in need, they will continue to be stuck in that trap perhaps for generations. We'll be discussing the causes and effects of poverty traps, the types of poverty traps, and go over some examples. Ready to find out more? Then let's go!

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Poverty trap definition

A poverty trap is a means by which those who are impoverished are unable to escape poverty. Poverty traps occur when the economic system demands a considerable amount of money to pull those who are impoverished out of poverty. Those without a lot of money might find it hard to get that amount of money, which creates a vicious cycle and effectively "traps" them.

A poverty trap is a means by which those who are impoverished are unable to escape poverty.

Those who are above the poverty line (and especially those who are well above the poverty line) are there due to a variety of reasons. It could be that their parents were well off and so were able to provide them with decent housing, food and water that is constantly available, access to medical care, opportunities to be educated at good schools, etc. Maybe they were even left with a decent inheritance. The better opportunities than they had growing up, the more likely it is that their kids will succeed and not be at risk of falling into poverty.

The poverty line is the minimum amount that is thought to be sufficient for survival in a particular country.

Unfortunately, those who are caught in poverty traps are not able to provide all of the above-mentioned for their own children. Those things could be considered luxuries and therefore the future of those kids is also not too far removed from the situation they are already in. Meaning, that because their parents couldn't afford to send them to good schools, get them access to medical care when they need it, etc. the children don't have the opportunity to excel, get degrees, and get good jobs in the future. These kids are already starting from a very disadvantaged point compared to other kids their age.

Poverty is the state of not having the financial resources available to afford basic expenses such as food, housing, and clothing.

Poverty trap diagram

Once someone is caught in a poverty trap it becomes extremely difficult to get past the poverty threshold. Unexpected expenses come up, people lose their jobs, people get sick, and all of these can create an even worse situation for those in the poverty zone. Figure 1 below will help you visualize a poverty trap.

Poverty trap StudySmarter Originals Fig. 1 - Poverty trap. Source: Poor Economics¹

Figure 1 above shows the blue 45-degree line which represents the equality between future income and current income. The red area is the 'poverty trap zone', whilst the green area is the 'outside poverty trap zone'.

For those people who are initially in the poverty zone future income is lower than the current income.¹ This is shown by the green S-shaped curve being below the 45-degree blue line. Over time, they are trapped in poverty as they become poorer and poorer each day.

For those people who are outside the poverty trap zone, future income is higher than current income.¹ This is shown by the green S-shaped curve being above the 45-degree blue line. Over time, their income becomes higher and higher so they become better and better off.

Those who are in the green section of the diagram are considered to be in the poverty zone. Usually, some sort of outside assistance or aid is needed to get people out of the trap. However, due to things such as tax structures, those who have recently left the poverty zone tend to get sucked back in. But how?

Let's go through an example to see how this plays out:

Imagine you're jobless and the poverty threshold where you live is $19,000 a year for a single person. You're on government assistance receiving housing benefits and foods stamps. You end up getting a job working full-time and making $20,000 a year. Since you're over the threshold, the government takes away your benefits and you're left to pay for housing and food by yourself, as well as all other expenses.

Now, you have more expenses though. Now you have to pay for transportation to get to work, you have to buy work clothes, etc. You also have to pay taxes, whereas before you didn't. Even though you're technically over the poverty threshold, now you seem to be worse off than you were when you were jobless and on government assistance. You've been sucked back into the poverty trap.

Causes of poverty traps and poverty trap examples

Numerous situations can cause a person or a family to drop below the poverty line and stay there.

A few examples would be:

Insufficient job opportunities
No health insurance to cover costs of medical expenses
Expensive goods/services
Conflict within the country
Being unable to afford education

The four poverty traps

There is a conflict poverty trap, a natural resource poverty trap, a landlocked with bad neighbors poverty trap, and poor governance of a small country poverty trap. Each of these traps makes it close to impossible for people to escape poverty.

Poverty Trap: Conflict

Every society faces conflicts, but persistent and recurrent conflicts can cause countries to be stuck in poverty. Underdeveloped and slow-growing countries are more likely to experience conflict, especially in the form of civil war. Once a war begins, it tends to last further into the future the poorer a country is. Wars create refugees and even more poverty than before, so the country would be stuck in a loop and effectively locked into poverty.

Poverty Trap: Natural Resource

The natural resource trap is when a country and their economy become overly dependent on the natural resources that they have and sell. They might think they have hit gold when they find they have that resource. At the beginning of selling that resource, they are profiting. However, the more they profit, the more their money is worth. This seems like a good thing but let's do an example to show why it actually is harmful to the economy in the long run.

Imagine you're a farmer in Country A selling your crops to make an income. You need about $3 to grow a bushel of corn and you sell it for $5 to make a profit. Because of the natural resources making your country richer, what is considered to be $5 in your country is worth $8 on the international market. So, even though that same bushel is being sold for $5 in your country's money, to others outside of your country that same bushel is $8. It's gotten more expensive for them.

Instead of buying your bushel, those same people are going to go elsewhere to buy it for cheaper. Your bushel is no longer competitive so you're losing money.

Let's look at the diagram below for a visual representation of the above example:

Fig. 2 - Natural resource poverty trap

As you can see in Figure 2 above - as the health of the economy improves so does the domestic currency. The currency becomes stronger or appreciated. This is represented by the movement from the lower-left corner to the upper right corner in Figure 2. This positively correlates with expected profit, represented by the blue line. As the economy gets stronger and the currency appreciates, we would expect local producers' profits to increase. However, with the natural resource poverty trap, actual profit, represented by the green line, dips below the expected profit after a certain point.

And that's just the beginning. Since their money is worth more outside of their country, residents are going to buy more products from abroad rather than supporting their fellow residents by buying domestically produced goods. Those sections of the labor market that produce domestic goods then end up losing out financially, and that part of the economy is going to deteriorate. This makes the country even more dependent on natural resource. Jobs are lost, not many new jobs are created, and this continues in a downward spiral.

Poverty Trap: Landlocked with bad neighbors

A landlocked country is a country that is surrounded by land, and that does not have access to water (for trade). Countries that are landlocked have difficulty trading resources because they don't have ports, so they usually either trade resources via air or by striking a deal with a neighboring country so they can use the neighboring country's ports.

The issue comes when the neighboring countries are "bad" neighbors. This means that they will not assist the landlocked country either because they have no desire to help (due to the two countries not getting along) or are unable to help. Either way, the landlocked country cannot sell its resources and that is limiting its growth. Limited growth makes it easy to fall into poverty.

Poverty Trap: Poor governance of a small country

Governments of small countries typically have a more vital part in the development of the country's economy. The problem is when those governments whose job it is to better the economy instead have horrible policies or are corrupt. This damages the economy and development cannot take place. This happens for a few reasons, but mainly due to the greed of those in power.

Poor governance and Brain Drain

Poor governance can create something called Brain Drain. This is when highly educated people and professionals move to another country so they can get a better income and better living conditions. They know if they stay in their home country even though they have a good profession, they're still going to be making significantly less than if they left to go to a country with better governance. Since all the "smart" residents are leaving the country, this creates a lack of professionals back home. Therefore, this is known as the Brain Drain.

Effects of poverty traps

Poverty traps cause a slew of problems but mainly the following:

Depleted resources - since the area being lived in is an impoverished one, there are limited resources to begin with, and (depending on the number of people living in the same area) there can easily be a lack of necessary resources such as food and water to be found in that neighborhood.
Deterioration of education - due to the fact that education would be too expensive for impoverished neighborhoods, not even the teens would be able to finish their education. They would have to find jobs instead.
Increase in violence - crime and violence are more prevalent in poor neighborhoods. This can be not only a threat to the residents, but it can also have a negative effect on the spending of public funds.

Ways to help those in poverty traps

Those who are trapped in poverty traps usually need some form of outside assistance in order to pull themselves out. A few of the things that can be done are: slowly reducing benefits and delaying the payment of taxes for those who are trying to get out of the trap.

Poverty Trap: Weaning people off of unemployment benefits

Instead of "punishing" those who have just recently gotten a job, why not continue to give them aid for a period of time so they can get back on their feet first? If someone who is below the poverty line all of a sudden becomes employed and is making an income above the threshold, this should be encouraged. Arguably, unemployment benefits should continue for at least six months to a year in order to allow them to get their finances in order.

Poverty Trap: Delaying payment of taxes

Those who receive government assistance usually do not have to pay any federal taxes. However, if someone just went above the poverty line, they will be expected to pay taxes like every other working citizen. Since the person just crossed the poverty line, there should be a delay where the person will have the time necessary to take care of their basic needs and get used to being a worker. Arguably, the first year of taxes should be waived for someone who has managed to pull themselves out of the poverty trap.

Poverty Trap - Key takeaways

A poverty trap is a means by which those who are impoverished are unable to escape poverty.
The poverty line is the minimum amount that is thought to be sufficient for survival in a particular country.
Poverty is the state of not having the financial resources available to afford basic expenses such as food, housing, and clothing.
There are four main poverty traps: conflict, natural resources, landlocked with bad neighbors, and poor governance of a small country.
Once in the poverty trap, it is difficult to get out.
The more well-off someone is when they're younger, the less likely it is that they will fall into poverty or poverty traps.
Poverty traps cause resource issues, lack of education, and increases in crime.
Ways to help those in poverty traps include: slowly reducing benefits and delaying the payment of taxes for those who are trying to get out of the trap.

Sources:

1. Abhijit Banerjee and Esther Duflo - Poor Economics, 2011 (book).

Poverty Trap

StudySmarter Editorial Team

Poverty trap definition

Poverty trap diagram