1. Economics of Poverty Traps and Persistent Poverty: An Asset-based Approach
Michael R. Carter
University of Wisconsin
Christopher B. Barrett
Cornell University
January 2005
American Economic Association annual meetings
Philadelphia

2. Why We Need An Asset-Based Approach to Poverty Analysis
The ‘Washington Consensus’ reforms constitute an implicit theory of structural poverty transitions:
Getting Prices Right should raise returns on unskilled labor, poor households’ primary asset;
Getting Institutions Right by securing property rights should enhance asset accumulation by poor households;
Deregulation should enhance financial access of poor households, further boosting accumulation
But, has it worked?
Very hard to gauge using conventional, flow-based approaches to poverty analysis that look only at (potentially transitory) outcomes.

3. Evolving Views of Poverty
Successive generations of poverty analysis
1st: static income/expenditure analysis
(headcount, poverty gap, FGT measures)
2nd: dynamic income/expenditure analysis
(chronic/transitory poverty distinction)
3rd: static asset poverty analysis
(structural/stochastic poverty distinction)
4th : dynamic asset poverty analysis

4. Asset-Based View of Poverty
Transitions Stochastic churning (B to u(A’’))
from Poverty: Structural via accumulation (A’ to A”)
Structural via higher returns (u(A’) to C)

5. Poverty Traps and the Dynamic Asset Poverty Threshold
Will structurally poor move ahead over time?
Lessons from empirical macroeconomics – “twin peaks”, “divergence big time” or “convergence”?
Key question: do returns to productive assets (land, labor, etc.) increase in wealth?
Such a relationship could exist due to:
Increasing returns to scale in income generating process
Minimum investment levels/indivisibilities
Uninsured risk

6. Locally Increasing Returns and Multiple Livelihood Equilibria
Marginal return on assets
A*2
A*1
Utility AS A
Asset Poverty Line
Income Poverty Line
Assets L1 L2
U*H
U*L
No problem if perfect financial markets exist. But if not, what savings strategies are feasible below AS?

7. A 4th Generation View Poverty Trap
Figure 3: The Dynamic Asset Poverty Line
Utility L2
U*H
Income Poverty Line
Dynamic Asset Poverty Line L1
U*L
Static Asset Poverty Line
Initial Assets
A*1 A* AS A
A*2
Poverty Trap
Dynamic Asset Poverty Line (Micawber Threshold)
At=A0 (dynamic equilibrium)
Next Period’s Assets

8. Empirical Strategies to Identify Dynamic Asset Poverty Thresholds
Need to find threshold in asset space where dynamics bifurcate.
Challenges:
- highly nonlinear dynamics
- sparse data around unstable eql’n
- multidimensional asset space
Efforts to date:
- Lybbert et al EJ, Barrett et al. 2004, Adato et al all use nonparametric methods based on single asset or asset index.
Need to improve on these methods

9. Dynamic Poverty Measures
Two natural extensions of FGT class:
Predicted flow dynamics version:
Asset gap version:

10. Implications for Persistent Poverty Reduction Strategies
An asset-based approach permits
- identification of minimum asset bundles necessary for hhs to engineer own growth
- natural integration of safety net strategies with poverty reduction strategies
- prioritization of efforts to rectify mechanisms of financial and social exclusion

11. Thank you!