Poverty traps, as defined in the context of the neoclassical model, are development crises. Poor countries in Africa, in particular, are unable to develop economically, and there is increasingly negative growth in income per capita. Some of the African countries are the poorest in the world; the health conditions are the worst; the population experiences ecological stress; the government has to deal with the heavy debt burden.
However, there is increasing evidence that well-governed poor nations are not caught in poverty traps. According to the simple regressions that control for initial income and quality of government, poor African countries can overcome their poverty without foreign aid. Empirical evidence that Sub-Saharan Africa is caught in a poverty trap is weak. However, there is strong evidence that foreign aid hurts the economic development of Africa.
As Jeffrey Sachs noted, “Poorest countries have systematically poorer governance measures than richer countries, since good governance itself requires real resources” (p. 120). Empirical evidence supports this belief. African government lacks vital financial resources to foster economic development. There are well-governed and poorly-governed parts in tropical Africa, however, the whole region is believed to be too poor to achieve high levels of economic growth. Nevertheless, it does not mean that more policy and governance reforms are insufficient to overcome the poverty trap. Undoubtedly, poverty leads to low national savings rates and negative economic growth rates. But the low domestic savings are not offset by large inflows of foreign aid and foreign direct investment.
Extreme poverty in Africa is caused by poor infrastructure and weak human capital (Sachs, p. 121). Theorists assume that low domestic savings and low rates of market-based foreign capital inflows do not promote an escape from poverty. Nevertheless, the amount of foreign aid to Africa tends to increase and allows the poorest African countries to escape the poverty trap. Sachs noted Africa needs a “big push” in public investments to produce an increase in productivity (p. 122).
The current level of foreign donors’ intervention is sufficient to lead the African countries to improved economic indicators. From this perspective, empirical evidence on the poverty trap in Africa is weakly supported with reliable statistics.
There are three factors vital for research on the African poverty trap: capital thresholds, savings traps, and demographic traps. Sachs agreed that none of these would be sufficient by itself to cause a poverty trap (p. 130). Africa suffers slow growth in total factor productivity. In addition, there are five reasons why Africa is vulnerable to the persistent poverty trap (Sachs, p 131): high transportation costs and small market size, low-productivity agriculture, high disease burden, adverse geopolitics, and slow diffusion of technology from abroad. Nevertheless, Sachs has failed to provide strong empirical evidence on how these factors have contributed to or created poverty in Africa. There is a note that these factors in combination lead to extreme poverty in the region, however, there is no evidence supporting such a conclusion.
Moreover, Sachs noted that Africans face high transport costs in shipping goods between coastal ports and places where they live and work. Nevertheless, Sachs does not provide any statistical information on transportation costs. Thus, this assumption is not supported by reliable empirical evidence. In particular, Sachs noted that “small developing countries with little access to global trade tend to grow more slowly than countries with large internal markets, or than countries that have easy access to trade” (p. 132). The above note is not supported by any studies, research, or statistics. This statement is an assumption, not evidence.
Even though William Easterly relied on the findings of Sachs, the evidence he provided is empirically stronger. In particular, he noted that “2006 shows no sign of a slowdown in the enthusiasm for the Big Push” (Easterly, p 291). It indicates that the current level of foreign aid is sufficient for African poorest countries to overcome the poverty trap. While Sachs’s article is filled with common-knowledge comments, such as “Africa gets no break on food productivity” (p. 132) and “high transport costs mean that African farmers can afford little fertilizer” (p. 133), Easterly provides reliable statistics indicating that African poverty trap is overemphasized.
In addition, Easterly provides strong arguments on the absence of the poverty trap in Africa. He cites the findings of Kraay and Raddatz who have tested whether the savings and increasing return mechanism generate a poverty trap. They failed to find evidence of the technological non-convexities being necessary to create the poverty trap (Easterly, p. 297). There is little evidence for a poverty trap based on the mechanisms discussed by Sachs. Undoubtedly, Africa is home to endemic tropical diseases, malaria, and AIDS. However, observers mistakenly assume that Africa’s ongoing malaria crisis is a symptom of its poverty and weak institutions (Sachs, p. 133). In particular, the spread of malaria is attributed to the combination of climatic and biological reasons, not to economic underdevelopment.
The underlying problem with all theories that stress low-physical and human capital as the source of the poverty trap is that they simply imply high returns to capital in the poor countries (Easterly, p. 297). Moreover, the research on aid and growth has failed to generate evidence on whether aid has the growth effect predicted by the poverty trap model. If to take this assumption as valid, the majority of articles on the poverty trap in Africa rest on extremely weak empirical evidence. From this perspective, the ideas of Sachs are not supported with facts and statistics but are rather a result of Sachs’ interpretation of the poverty issue in Africa.
Notably, Easterly notes that the growth in aid-intensive countries is lower than in similar developing countries that get little aid. Moreover, the aid has risen over time as a percent of income in Africa, but Africa’s growth rate has fallen (p. 298). Thus, the poverty trap in Africa cannot be analyzed based on the intensity of foreign aid in the region. On the contrary, strong empirical evidence should be derived from internal data.
Sachs tried to provide an insight into Africa’s economic problems. In particular, he noted that Africa has been cutting down its rainforests to make room for new farmland and to provide fuelwood and timber, but the deforestation was not counted as a loss of natural capital (p. 142). However, no numbers are provided to support this claim as well as there is no empirical evidence to correlate deforestation and poverty in the region.
In conclusion, there is no strong empirical evidence supporting the poverty trap in Africa. Data available on foreign aid in Africa and national economic indicators point out that the effect of foreign aid on Africa’s economic development is negative. Sachs has provided a good analysis of poverty in Africa; however, he has failed to relate it to specific causes and foreign aid. While Easterly has relied on the findings of Sachs, he has provided strong empirical evidence indicating that the poverty trap in Africa has not been related to foreign aid and the causes of poverty have not been researched yet. Taking into account the lack of valid empirical evidence, the results of given studies should not be treated as reliable.
References
Easterly, W 2006, ‘Reliving the 1950s: the big push, poverty traps, and takeoffs in economic development’, J Econ Growth, 11, pp. 289-318.
Sachs, J 2004, ‘Ending Africa’s Poverty Trap’, Columbia University and UN Millennium Project, Brookings Papers on Economic Activity, 1, pp. 117-147.