Introduction
Developmental macroeconomics has historically believed in the presence of a debt trap that contributes to the persistent impoverishment of countries. Kraay and McKenzie review the existing theories and assess them vis-à-vis modern evidence to gauge the plausibility of the existence of poverty traps. They do so by taking empirical evidence of stagnant income from countries like Burundi, Nicaragua, and Haiti (128). This paper reviews the article by Kraay and McKenzie to understand the implication of their study to the development process by identifying some of the main points raised in the article. In addition, paper aims to describe how these points affect understanding of the development process in general and offer some thoughts on how policy-makers could address some of the issues raised.
Analysis
Kraay and McKenzie studied the empirical models that have empirically proven the presence of poverty traps as the reason behind persistent poverty in some countries. The paper restricts its studies to the economic condition after World War II (128). The authors point out that the previous models of poverty trap suggest that when less developed countries (LDC) have low savings and no resource to invest the best way is to utilize foreign aid for investment purposes until they reach a point when savings rate increases. The findings imply that some fundamentals, such as the savings rate affect poverty in LDCs.
However, the authors argue that they meet only the necessary conditions (Kraay and McKenzie 131). They believe unless there is a proper policy in place that can change the fundamentals of the economy, (e.g. technology change) simple investment with the assistance of foreign aid will not help the country to come out of the poverty trap (131).
Further, they reviewed poverty trap models that studied countries stuck in a poverty trap due to stagnation of income levels. Their study shows that in post-World War II LDC’s stagnant income is a rare phenomenon and is not associated with the initial phases of development. Thus, they point out that even the poorest countries manage to cross the threshold of the poverty trap that allows them to grow at a modest rate (134).
The savings based poverty trap models suggest that LDCs are unable to save, which constraints their ability to grow higher than the total factor productivity of growth (135). The authors point out their skepticism about the big push theory of poverty that supports the existence of a poverty trap and believes a one-time subsidy can induce agents to push for further investments that would push the country out of the trap (137).
Further, the authors criticize the nutritional poverty trap models by stating that if in LDCs, calories are cheap and hence meeting the nutritional requirements is not a problem. They also point out that malnutrition may affect productivity as the model suggests but they do not suggest a proper policy to remove malnutrition. Some models of a poverty trap, discussed by Kraay and McKenzie point out that small investments are not enough to push the economy out of a poverty trap, which can be achieved only with the aid of large investments due to the capital market imperfections (138).
However, the authors believe that it does not require a lot of money to start a business. Moreover, the availability of a large number of technologies makes it easier for smaller businesses to start a new venture (140). Therefore, Kraay and McKenzie argue that if there is a number of available technologies then the “multi-equilibria-based poverty trap” should not exist (141). Further, this model, the authors point out, does not help microfinance and doubt the capability of small businesses to post high returns. The geographic poverty trap model argues that due to the remote location of certain regions they lack access to the available production technologies (143). The policy solution provided by this model is the migration of the population that is expected to lift poverty (144).
Clearly, Kraay and McKenzie pointed out various shortcomings of the prevailing models of poverty trap discussed in the previous paragraph. This paragraph discusses the policy implications suggested by the authors of the article. The authors conclude that the previous studies of the poverty trap have presented their studies in isolation of other factors and therefore have failed to provide a holistic model of poverty alleviation.
They argue that the real world scenario does not support the claims presented by any of the models. Moreover, Kraay and McKenzie believe that the poverty trap is not the only factor that can explain the incidence of continuous poverty as there are other traps that could have contributed to it (144). Further, they believe that the empirical data collection methodology has been more successful in explaining the incidence of poverty than theoretical modeling. They also believe that the interaction of the poverty trap models and the basic economic development models necessary for explaining the economic dilemma.
Conclusion
The policy implication suggested by the authors, essential for the poverty alleviation program, aims to lower the barriers that curtail internal and international mobilization. They also believe that large-scale aid is necessary to help remove poverty and propel growth.
Works Cited
Kraay, Aart and David McKenzie. “Do Poverty Traps Exist? Assessing the Evidence.” Journal of Economic Perspectives 23.8 (2014): 127-48. Print.