Poverty Traps: Multiple Equilibria

A poverty trap occurs when poverty itself causes conditions that perpetuate poverty. This creates multiple equilibria: a "good" equilibrium (prosperity) and a "bad" equilibrium (poverty), with no natural tendency to move from bad to good.

Key Poverty Trap Mechanisms:

1. Nutrition-Based Trap (Dasgupta & Ray) - Poor nutrition → Low productivity → Low income → Poor nutrition - Explains why even small income increases don't always help

2. Credit Constraints - Poor can't borrow → Can't invest in education/business → Remain poor - Explains microfinance's appeal (and limitations)

3. Savings Trap - Below subsistence, ALL income goes to survival - No savings → No investment → No growth

4. Human Capital Trap - Poor families can't afford schooling → Low skills → Low income - Intergenerational persistence of poverty

5. Geographic Trap (Sachs) - Disease burden → Low productivity → Can't fund healthcare - Particularly relevant for malaria-endemic regions

Policy Implication: The "Big Push"

If poverty traps exist, small interventions won't work—you need a coordinated "big push" across multiple dimensions to escape the trap. This was Sachs' argument for massive aid increases.

Critique: Easterly's Response

William Easterly argues poverty traps are theoretically elegant but empirically weak. Most poor countries HAVE grown over time—they're not trapped. The problem is weak institutions, not traps.