mit14 73s11 lec2 slides
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14.73 Challenges of World
Poverty
Lecture 2
Abhijit V. BanerjeeEsther Duflo
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Putting a face on poverty: Pak Solhin
We met Pak Solhin in a small village inIndonesia, in the summer of 2008
When we met him, he was all alone at home
The older of his three children, a 13 year old,
was working as a construction worker in thenearby city
His wife was also in the city, as a live-in maid
The other two children were staying with their
grand-parentsHis house does not have a single item of
furniture, no water, no electricity
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Pak Solhin
Until that summer, Pak Solhin was a farm laborer He does not have any land, because his parents had 13 children,
and they had to cut the land in many small pieces to build homes
on them.
But that summer, because of the increase in fertilizer and oil prices,farmers stopped hiring workers to save money, and started to work
the farm themselves.
Pak Solhin could not accept a lower wage instead of losing his job,
because the food prices had increased to: at a lower wage, he
would not even have enough strength to work a whole day. He cannot work as a construction worker, because he is too weak
for the basic job, too unskilled for the better jobs, and too old to be
an apprentice.
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Pak Solhin He had no money to feed himself or the kids, so his wife
and older kid went to the city. Even with their salary, hecannot pay for the food for the younger ones andhimself.
Nobody can lend him money; but the grand parent
agreed to take the two young children with them. The older child dropped out of school and became a
construction laborer
He eats about once a day, when he gets subsidized rice,or he catches a fish on the bank of the river: he cannotswim, so he cannot properly fish.
He is very depressed, and negative about the future. Healmost cries during the interview.
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What are the striking/puzzling aspects
of this story?
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Anecdote or illustration?
What is unique in the case of Pak Solhin, and
on the contrary, what seems to you to be
representative of the lives of many of the
poor?
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A nutrition based story for a poverty
trap: the capacity curve
The first few calories are used by your body
just to survive: they dont make you strong
When you start eating enough to survive, the
next calories start giving you strength
Someone who is very poor like Pak Solhin may
not have enough to eat to be very productive,
but he could eat more, he would.
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Figure 1: The Capacity Curve : the Shape
Work
Capacity
Income
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The dynamic of income leads to the
possibility of poverty trap
Start at y0, go to y1,
Find y1 on the 45 degree line: find the new y1, go
to y2
And it goes on like this.
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Figure 2: The Dynamic of income and the poverty trap
Income
from
Work
Inherited
Income0
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Figure 2: The Dynamic of income and the poverty trap
Income
from
Work
Inherited
Income0
1
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Figure 2: The Dynamic of income and the poverty trap
Income
from
Work
Inherited
Income0
1
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Figure 2: The Dynamic of income and the poverty trap
Income
from
Work
Inherited
Income0
1
2
3
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Figure 2: The Dynamic of income and the poverty trap
Income
from
Work
Inherited
Income0
y0 1
2
1
2
3
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A1 A2 A3
Q
Income today
Income
tomorrow
With a concave relationship between income today
and income tomorrow there is no poverty trap!
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Figure 2: If the capacity curve is about the 45 degree line, there is no poverty trap either!
Income
from
Work
Inherited
Income
y0 y1 y2 y3
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Figure 4: everybody ends up poor
Income
from
Work
Inherited
Income
y0y1y2y4 y5 y3
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When does a poverty trap emerge?
When we compare the different curve, there is something specificabout figure 1:
The S-Shaped curve intersects the 45 degree line from below: For poor people, income grow slowly, so slowly that income tomorrow
is below income today: the poor become poorer (up to a point)
At some point, the rate of growth of income start increasing: incomeyesterday becomes larger than income today: the middle class and thesomewhat rich continue to be rich.
This will be the key thing to look for in the class.
Note that a double feedback loop (e.g. poor nutrition lower yourincome, and low incomes means you cannot buy a lot of food) does
not always need there is a poverty trap: the relationship has to besufficiently strong: this is an error many policy makers make!
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The importance of poverty trap
The Jeff Sachs/Angelina Jolie video pointed out toseveral possible poverty traps.
The farmer Kennedy and his fertilizer: what could behis problem?
The mother of a large family and the nutrition of herchildren
Other?
In each of these cases, what do we need to knowto decide whether there is a poverty trap or not?
Where else could we find poverty trap?
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The policy implications of a
poverty trap
It is important to know whether there is apoverty trap or not, because a poverty trap opensthe possibility of a big push: a small actioncould have big benefits: so it may be the socially
optimal thing to do. Health (e.g.: free bednets)
Agriculture (e.g. free fertilizer one season)
On the other hand, if we are in the case without
poverty trap, helping the poor in this way willsimply be a form of redistribution, but it wontproduce efficiency gains.
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MIT OpenCourseWarehttp://ocw.mit.edu
14.73The Challenge of World Poverty
Spring 2011
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