Principal investigator: Viviane Pires Ribeiro
Paper Title: Why Do People Stay Poor?
Authors: Clare Balboni, Oriana Bandiera, Robin Burgess, Maitreesh Ghatak and Anton Heil
Location of the Intervention: Bangladesh
Sample Size: 23.000 Families
Main theme: Economic Policy and Governance
Main Variable of Interest: Poverty
Type of InterventionImpact of public policies on combating poverty.
Methodology: Differences in Differences
Ending mass poverty is the central focus of economics and development policy. In this context, Balboni et al. (2022) provides evidence of the existence of the poverty trap using a combination of random asset transfers from a panel data set of 6.000 households in rural Bangladesh over an 11-year period. The study's main finding is that people remain poor because they lack opportunities. It is not their intrinsic characteristics that trap people in poverty, but rather their circumstances.
Evaluation Context
Understanding the causes of poverty and the reason for its persistence is key to solving the problem of mass poverty that motivated early contributors to the development economy and continues to motivate current generations. It is also the central objective of development policy. That is, the main goal of Sustainable Development, endorsed by 193 of the world's 195 governments, is to "eradicate extreme poverty for all people everywhere by 2030". In 2015, when these goals were established, 735 million people (10% of the world's population) were classified as living in extreme poverty. Therefore, finding answers to reduce poverty ultimately requires understanding why people remain poor and designing policies according to the context of the population.
There are two broad views on why people remain poor. One emphasizes differences in fundamentals, such as ability, talent, or motivation. That is, people on the poverty line have the same opportunities as everyone else, therefore, if they work in low-paying jobs, they must have characteristics that make them unsuitable for other occupations. The alternative view is that the poor face different opportunities and therefore do low-paying jobs because they were born poor. In other words, the poor are trapped in the poverty trap. The 1win Aviator game has captivated many players with its simplicity and excitement. 1win In 1win Aviator, you bet at the right moment to win, making each round exciting. With engaging graphics and fluid gameplay, this game is perfect for those seeking quick and rewarding fun. Try 1win Aviator today and see how far you can go!
Intervention Details
Balboni et al. (2022) tested for the existence of the poverty trap using data collected to evaluate the BRAC Ultra-Poor Targeting Program in Bangladesh. The data covered 23.000 households living in 1.309 villages across the country's 13 poorest districts. Of these households, over 6.000 are considered extremely poor. The program offers a one-off transfer of productive assets and training aimed at simultaneously easing credit and skills constraints to create a regular income source for low-income women who are primarily engaged in irregular and insecure informal work.
Beneficiaries can choose from several asset packages, all valued at approximately USD 490 in PPP, which can be used for income-generating activities. Of all eligible women, 91% chose an asset package containing a cow. BRAC encourages respondents to retain the asset for at least two years, after which they can liquidate it. To identify beneficiaries, BRAC conducts a participatory wealth assessment exercise in each village. This produces a classification of households into three wealth classes (low-income, middle-income, and high-income) that form the sampling base. The study covers all low-income individuals and 10% of the other classes in each village. The group of low-income families was divided into those eligible for the program (ultra-poor) and those ineligible (other poor), according to BRAC's eligibility criteria.
A baseline survey was conducted prior to the intervention in 2007, three follow-up surveys in 2009, 2011, and 2014, and the initially ultra-poor were interviewed again in 2018. This allowed tracking the dynamics of employment, assets, and well-being over the 11-year period. The attrition between 2007 and 2018 is 14%.
Methodology Details
To evaluate the program, Balboni et al. (2022) randomized its implementation so that 20 areas, defined by the region served by BRAC, could be treated in 2007 and the other 20 in 2013. For the first three waves, the control group consisted of 20 villages; thus illustrating the difficulty in identifying poverty traps with observational data, as well as supporting identification. Data from other wealth classes were used in the structural model to determine in which occupations the ultra-poor would engage if they had a greater endowment of productive assets.
The authors used the program's random allocation and estimated a difference-in-differences model using potential beneficiaries in control villages as a counterfactual to actual beneficiaries in treatment villages. Randomization ensures that, in expectation, these two groups are identical in all respects, including unobservable determinants of capital accumulation.
Results
Analyzing the data obtained, Balboni et al (2022) identified that the results support the poverty trap view. Thus, the main finding is that people remain poor because they lack opportunities. It is not their intrinsic characteristics that trap people in poverty, but rather their circumstances.
In the treatment areas, the transition equation was found to be S-shaped with an unstable steady state at 2,333 log points, i.e., when the productive assets are worth 9.309 Bangladeshi Taka.
Another crucial finding is that the asset accumulation trajectory for beneficiaries who received the transfer during the 4 years following treatment is consistent with the dynamics of the poverty trap. However, the same did not occur with families who had low assets, as even the transfer of resources was not enough to move them above the unstable steady state. Therefore, these families are more likely to fall back into poverty, while those who manage to overcome the threshold escape poverty.
Households undergoing treatment that were both above and below the poverty line were also monitored over an 11-year period. Consistent with a poverty trap model, the two groups diverge over time. The authors identified that beneficiaries who start above the poverty line are able to accumulate assets (including land), move into more productive occupations, and consequently increase their purchasing power.
The divergence is greater when considering the underlying pattern of asset accumulation throughout the beneficiary's life cycle. Data from the control villages show an inverse U-shaped pattern, where families accumulate assets until the beneficiary is in their early 40s, after which there is a de-accumulation of these assets. Consistent with this, the difference above and below the threshold was found to be primarily driven by beneficiaries under 35 years old at treatment and therefore under 46 years old at the end. Thus, younger beneficiaries who are above the threshold sacrifice consumption for a longer period in order to acquire assets later.
Lessons in Public Policy
The study conducted by Balboni et al. (2022) suggests measures that can be adopted for the implementation of effective policies. The first measure to be taken to solve the global problem of mass poverty is to invest in large incentives that enable occupational change for individuals; the authors suggest that small shocks can increase consumption. However, these shocks will not lift people out of the poverty trap, as the magnitude of the transfer needed to achieve occupational change may be much greater than that invested in the interventions analyzed.
Therefore, the fiscal cost of permanently lifting people out of poverty through a large, time-limited transfer may be significantly lower than relying on ongoing transfers that increase consumption but have no effect on the employment of the low-income population.
The second measure is that large stimulus policies can have lasting effects. Analysis of long-term dynamics indicates that the asset, employment, and consumption trajectories of beneficiaries above the threshold diverge from those of beneficiaries below the threshold over time. This result is important because it indicates that, by generating occupational changes, one-off shocks can have permanent effects.
The third is that poverty traps create mismatches between skills and jobs. The authors show that labor misallocation is common among the low-income rural population of Bangladesh and that the value of eliminating misallocation is an order of magnitude greater than the cost of moving all beneficiaries beyond the threshold. This is important because it implies that poverty traps are preventing people from making full use of their skills, and indeed, it is the mass waste of people's skills that is the main tragedy of mass poverty.
In urban environments, where there is a greater variety of occupations, the use of large investments in human capital to transfer people from subsistence self-employment to salaried employment can be fundamental to escaping poverty.
Thus, the study points to the importance of expanding opportunities for the most disadvantaged population, highlighting the need to focus on welfare policies that change the employment activities of low-income people. This differs from traditional consumption-focused policies that have characterized welfare support in both developed and developing countries. Only by expanding opportunities for the poor will it be possible to explore the productive capacity of a large segment of humanity.
References
BALBONI, Clare et al. Why do people stay poor? The Quarterly Journal of Economics, v. 137, no. 2, p. 785-844, 2022.
