Poverty traps. A ‘poverty trap’ is an important concept in the study of poverty and underdevelopment. It refers, broadly, to the idea that the economic choices that would, in general, enable individuals and households to prosper are unavailable to those l

A ‘poverty trap’ is an important concept in the study of poverty and underdevelopment.
It refers, broadly, to the idea that the economic choices that would, in general, enable individuals and households to prosper are unavailable to those living in poverty because of their situation of poverty (and factors connected with it).

1. ECON8440 DEVELOPMENT ECONOMICS Lecture 3: Poverty Traps

2. Motivation A ‘ poverty trap ’ is an important concept in the study of poverty and underdevelopment. It refers, broadly, to the idea that the economic choices that would, in general, enable individuals and households to prosper are unavailable to those living in poverty because of their situation of poverty (and factors connected with it). A ‘poverty trap’ is not straightforward to verify empirically. But there are observable phenomena in developing countries that may be indicative of poverty traps: e.g. persistent poverty, malnutrition , inability to work due to poor health, etc.

3. A Theory of Malnutrition and Unemployment Dasgupta and Ray (1986) develop a theoretical model to show how malnutrition and unemployment may arise in a competitive market economy. The setting is similar to that in the ‘Agricultural Household Model’: Production involves the use of land and labour There is a competitive labour market Consumers value income and leisure The point of departure from the theories we saw last week: Labour productivity depends on the level of consumption (i.e. malnourished workers are less effective )

4. Malnutrition Dasgupta and Ray (1986)

5. Malnutrition (cont’d.) Dasgupta and Ray (1986)

6. The Model - Labour

7. Labour Power vs Income

8. Production

9. Land

10. Land Distribution

11. Rental Income and Reservation Wage

12. Reservation Wage by Land Ownership

13. Efficiency Wage for the Landless Consider a landless farmer. His consumption will equal his wage w . Therefore, his labour power is given by λ (w) The net profit from hiring him equals λ (w) − w The optimal wage is given by argmax w λ (w) − w The solution to this optimisation problem is given by λ ’(w) = 1 The solution (call it I-hat ), is also the efficiency wage of a landless person. Crucial Assumption: The reservation wage of a landless person is less than I-hat

14. The Efficiency-Piece Rate

15. The Piece-Rate versus Land Ownership

16. The Piece-Rate vs Landholding, cont’d.

17. Involuntary Unemployment

18. Full Employment

19. Partial Land Reforms

20. Effects of Partial Land Reforms

21. Full Land Reform

22. Effects of Full Land Reform

23. Dasgupta and Ray – Conclusions Thus, we have involuntary unemployment and malnutrition even when markets are competitive, i.e. no missing markets.