Updated: Sep 25, 2020
Why do the poor stay poor? How do people break the poverty cycle?
The poverty trap represents the set of events by which poverty for an individual is likely to continue unless there is some external force helping that person to get out of this trap. So why is this? Let’s make this personal.
Think about yourself as a college student. You may be fortunate enough to own a desktop or laptop computer to help you complete your college assignments. Being able to complete your assignments allows you to complete the course. Completing your courses allows you to graduate from college and then get a better paying job. This means that your current investments in things like education or current income will have a positive effect on your future income. In fact, as a poor student because your income is so low right now, once you graduate your future income might jump the highest it will ever jump in your life.
However, what would happen if your computer broke and you had to get it fixed? Even as a poor student, you would probably be able to find a way to pay to get your computer fixed. You might have to borrow money or even donate plasma. Regardless, as a college student you have many more opportunities to handle financial shocks than someone who lives in poverty in a less-developed country. This means that even though you may now be a poor student, your poverty is not as bad as someone in a situation with few opportunities to hand financial shocks. For people in this extreme poverty situations, current investments in things like education at first will not have a positive effect on future income. Let me explain.
Let’s consider the situation of Grace. Grace is a poor chicken farmer in Tanzania. To make a living, Grace raises chickens and then sells them to other people in the village. She uses the money from selling chickens to buy food and clothes for her children and her husband who has been sick and unable to work for the past year. This money is also used to pay for her husband’s healthcare costs and her children’s school fees. What little amount she has left over is then put into feeding and caring for the chickens, paying for medicine to keep the chickens healthy, and maybe even buying more baby chicks if there is any money left over.
In this current state, Grace will be able to continue to survive and may even be able to grow her business. If things stay stable, then Grace could eventually raise her family out of poverty.
Unfortunately, however, life happens and things don’t stay stable. Eventually the chicken coop will need maintenance. Eventually a child will become sick and need to go to the doctor. Eventually school fees will increase or the cost of food will go up. Eventually the house will need repairs. In any of these situations, because Grace has very little saved money and few options to borrow it, she might have to sell off all of her chickens or take her children out of school to help pay for these new costs. This puts her back in a similar or worse situation to the one she was in before the shock.
This is the poverty trap. It means that if you are very poor, then the money you make in the present or education you receive in the present doesn’t necessarily help you make more money in the future.