Poverty Trap

A poverty trap is any mechanism through which poverty perpetuates itself. People or places caught in one cannot escape through small, gradual improvements, because their low income or assets keep them from making the investments that would raise future income. The defining feature is a threshold: below it, households tend to drift back towards poverty; above it, they tend to keep improving. A large enough push, such as a grant of assets, a road, a cure or a job, can move them over the threshold for good.

The term is used at two levels. Development economists apply it to households and to whole economies, often in developing countries. In rich countries it is also used for the "benefit trap" or "welfare trap", in which the way welfare payments are withdrawn leaves people little better off from earning more. It is distinct from the middle-income trap, which concerns countries that stall at middle incomes rather than at the bottom.

Picture someone who walks two hours each way to work because they cannot afford a bicycle. The walk leaves them too tired for extra shifts, so they never save enough to buy the bicycle that would let them earn more. Being without the bicycle is what keeps them without it.

A poverty trap is any loop like that. If a one-off push, such as a loan or a gift of the bicycle, lets the person earn enough to keep going, a trap was holding them back. If they would have ended up in the same place anyway, it was not really a trap, just a slow climb.

• Nutrition and health. Workers who cannot afford enough food or medicine may be too weak to earn much, keeping them unable to afford better food. Diseases such as malaria can have similar effects at the level of a region.
• Credit and collateral. Without savings or land to pledge, poor households cannot borrow to start a business or buy livestock, even when the return would be high, a gap financial inclusion and microcredit aim to close.
• Education and human capital. Children taken out of school to work earn more today but less as adults.
• Low saving and investment. At the national level, low incomes mean low saving and little investment, so the capital stock and productivity stay low. Jeffrey Sachs argued in The End of Poverty (2005) that a "big push" of aid could break such traps.
• Geography and infrastructure. Remote, landlocked areas without roads or power face high costs of reaching markets.
• Psychology and stress. Some research suggests that the mental burden of scarcity narrows attention and shortens planning horizons, a topic in behavioral economics.

In welfare systems, a poverty trap arises when benefits fall sharply as earnings rise. If a household loses 80 cents of support for every extra dollar earned, and also pays income and payroll tax, its effective marginal tax rate can approach or exceed 100%. Work then barely raises total income. Reforms try to lower these rates by withdrawing support gradually: the UK's Universal Credit reduces payments by 55 pence for each extra pound of net earnings above any work allowance, and the US Earned Income Tax Credit rises with earnings before phasing out. A negative income tax or universal basic income are more radical ways of avoiding the problem, while welfare-to-work programmes try to raise earnings directly.

Whether poverty traps exist widely is debated. In a 2014 review, Aart Kraay and David McKenzie of the World Bank found limited evidence for traps at the level of whole countries, noting that many poor countries have grown steadily. Economists such as William Easterly argue that large aid pushes have often failed and that institutions and markets matter more. Others, including Abhijit Banerjee and Esther Duflo in Poor Economics (2011), argue that traps exist in some areas and not others, and that each must be tested.

Some of the strongest household evidence comes from Bangladesh. A 2022 study by Clare Balboni, Oriana Bandiera, Robin Burgess, Maitreesh Ghatak and Anton Heil tracked women who received livestock and training under the BRAC "graduation" programme. They found a threshold level of assets: those who started above it kept accumulating and escaped poverty, while those below it slid back. Randomized trials of similar graduation programmes in several countries have found lasting gains in income and consumption years later.

If traps exist, temporary but large help can have permanent effects, which supports one-off asset transfers, cash transfers, school feeding, health campaigns and investment in roads and power. If they do not, steady improvements in markets, property rights and governance may do more. Critics also warn that labelling people as "trapped" can understate their own strategies and the role of discrimination, conflict or bad policy. Studies of the issue overlap with research on poverty and inequality, on unemployment, and with the work of the World Bank.

• American Economic Association: Kraay and McKenzie, "Do Poverty Traps Exist?" (2014)
• Quarterly Journal of Economics: Balboni et al., "Why Do People Stay Poor?" (2022)