Why do people stay poor?

Dynamics of inequality

Posted

October 2024

| By

Claire Balboni

Oriana Bandiera

Robin Burgess

Maitreesh Ghatak

Anton Heil

Research summaries

Research Paper

What is this research about and why did you do it?

Why do people stay poor? Is it a matter of ability or motivation pushing people into low-productivity jobs (equal opportunity view),or do barriers stemming from unequal access to resources trap them in low-wage occupations (poverty trap view)? This question is crucial for designing effective policies. In the presence of poverty traps, policy can be more effective by focusing on pushing individuals above the threshold required to access more productive occupations and build lasting wealth, rather than long-term consumption and income support. Understanding the root causes helps to enable targeted solutions to break the cycle of poverty and promote economic mobility.

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How did you answer this question?

We analyse data from a large-scale asset transfer programme, BRAC's Targeting the Ultra-Poor programme, in northern Bangladesh, a region afflicted by extreme poverty and limited job opportunities. We exploit the randomized transfer of valuable assets, typically cows, and an 11-year panel of 6,000 extremely poor households. By examining changes in assets, occupations, and consumption, we assess whether long-run dynamics in these outcomes are consistent with the central prediction of poverty trap models that a one-time policy can have permanent effects by lifting people out of the trap.

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What did you find?

Our findings suggest that the dynamics of asset accumulation follow a pattern characteristic of a poverty trap. Figure 1 shows a threshold level of initial productive assets, above which households continue to accumulate wealth, while those below slide back into poverty. Structural estimation of an occupational choice model reveals that almost all programme beneficiaries are initially misallocated in low-productivity occupations, and that correcting this misallocation would generate benefits that substantially outweigh the program’s costs. These findings underscore the potential for large-scale targeted asset transfer interventions to help break the cycle of poverty.

Local polynomial regression estimate of the transition equation of productive assets in 2011 vs. past transfer assets in 2007. The dashed 45 degree line represents where assets remain constant. The S-shaped curve illustrates how households above the asset threshold continue to accumulate assets over 4 years, while those below lose assets, providing evidence of a poverty trap

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What implications does this have for the study (research and teaching) of wealth concentration or economic inequality?

The existence of poverty traps has important implications for poverty alleviation policies. Our findings suggest that big-push but time-limited approaches might be more effective in improving the welfare of the world’s extreme poor than ongoing consumption- or income-support programmes which are widespread around the world. This highlights the importance of reconsidering our approach to addressing global poverty, emphasising policies that transform employment opportunities for the poor.

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What are the next steps in your agenda?

The findings of this research raise several questions about the generalizability of the results to other context and interventions, including work that varies the design of the programme or considers related interventions in urban settings.

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Citation and related resources

Balboni, C., Bandiera, O., Burgess, R., Ghatak, M., and Heil, A. Why Do People Stay Poor?, The Quarterly Journal of Economics, Volume 137, Issue 2, May 2022, Pages 785–844

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