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Poverty traps

2014-09-22 06:14:48

Do poor countries really get richer?

Sep 19th 2014, 12:14 by C.W. | LONDON

DO POVERTY traps exist? Academics seem to think so. According to Google Scholar, so far this year academics have used the phrase poverty trap 1,210 times. (Paul Samuelson, possibly the greatest economist of the 20th century, was mentioned a mere 766 times). Some of the most innovative work in development economics focuses on how individuals' lowly economic position may be perpetuated (geographical and psychological factors may be important).

But, says a new paper by two World Bank economists, the idea of poverty traps may be overblown. They focus on national economies and present some striking statistics. In the graph below, a country that manages to get to the left side of the line has seen real per-capita income improvement from 1960 to 2010. The vast majority are on the left:

What is more, the bottom 20% of countries in 1960, over the subsequent fifty years, saw an average annual growth rate in real per-capita GDP of 2.2%. (The richest 20% only mustered 2.1%.) In fact, over the last 50 years the poorest 10% of countries have grown at the same rate that America did in the past 200. That fact, argue the economists, is difficult to square with models of poverty traps.

But I'm not so sure. For instance: let s compare the bottom quintile of countries in 1960 (of which there were 22) with the bottom 22 in 2010. The average annual per-capita GDP growth rate falls from 2.2% to 0.67%. The very bottom, whichever countries they might be, have not done too well over the past fifty years.

Now let s look at what happens in individual decades, rather than looking at 1960-2010 as a single period. Most people would agree, I think, that if a poor country goes ten years without economic growth, some kind of poverty trap is in operation. So let's look at all countries with per-capita incomes below $10,000 (in real terms) and see how many times a decade went past with negative economic growth in that country.

The results are not heartening. In the 1980s, for example, 40% of countries with a per-capita income below $10,000 saw negative income growth. In the 1990s 35% did. (The best period was the 1950s, when only 5% did.) Poor countries did worse than rich: in every decade from the 1950s to the 2000s, proportionally more poor countries than rich ones saw falling living standards.

Finally, let's look at the average income growth for different income quintiles for each decade. This time, I update the composition of each income quintile for every decade, to reflect countries that have got richer or poorer. The first quintile comprises the richest fifth of countries; the fifth comprises the poorest.

Once again the results are depressing (see chart). Apart from in the 2000s (as we discuss here) the poorest countries had consistently lower per-capita income growth over a given decade than did rich countries. In the 1970s the spread between richest and poorest was 24% points. Over all decades the poorest quintile s average growth rate was 0.5%. The equivalent figure for the second-poorest quintile was 1.37%. (Even those puny growth rates may not have fed into higher living standards for the poorest people within those countries: income inequality in developing countries has risen precipitously over the past few decades.)

All this is not to say that poor countries are destined to stay in poverty. Stagnant incomes over 50 years suffered by countries like Burundi, Haiti and Nicaragua are rare. But short-term poverty traps are pervasive. Low or negative growth for a decade is enough to blight a whole generation.