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Inequality is the main reason for the persistence of poverty - Discuss.

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Introduction

Rezaah Ahmad Part II Development Supervision 2 Poverty Traps Inequality is the main reason for the persistence of poverty. Discuss. Poverty is arguably the most visible characteristic of economic underdevelopment and as such the reduction of poverty is perhaps the main goal of development economics. There is little empirical evidence to suggest that growth has a significant effect on poverty. Poverty is persistent. It is argued that the persistence of poverty has been due to rising levels of inequality both between and within countries. Inequality is both the cause and the effect of poverty traps. Poverty traps imply that once an individual becomes poor they are in an equilibrium state and it is therefore difficult to break out of the vicious cycle and move to equilibrium with better outcomes. Poverty is path dependent and governed by past experiences. Coordination failures and other negative exogenous shocks mean that whilst some suffer from accidents in history and fall into poverty others do not. The level of inequality in an economy interacts with the way in which it works. Kuznets argued that the relationship between development of inequality was inverted-u shaped. That is an economy starts with a low level of inequality then as the process of development continued the inequality in an economy rises as the initial benefits accrue to a few. As development progresses the benefits 'trickle down' and everyone becomes better off. ...read more.

Middle

Thus there is a poverty trap in that the undernourished cannot accumulate and consequently can never become better nourished. This situation could also be Pareto optimum equilibrium, that is, there is no way of making people better off without making someone else worse off. If income and assets could be redistributed and inequality of initial endowments reduced then there would be more 'small' landowners who have a low efficiency wage. Thus at any given offered wage there would be more people working and fewer people malnourished. If poor workers were able to borrow for consumption purposes then this would have the same effect making people better off. Unfortunately however credit markets usually require some collateral other than in the form of labour and thus do not lend to poor workers who do not have assets. If it was possible a long term contract could help to solve the problem because work capacity affects future output. These contracts are however usually not feasible. This is because unless an employer can guarantee that an employee will work for him forever there will be little incentive to take part in a long term contract. A person in good health will also be wanted by other employers thus bidding up his wage rate. The Dasgupta- Ray model has been criticised for having little relevance in practice. ...read more.

Conclusion

There are other characteristics of the poor that lead to poverty traps such as low physical and human capital, poor infrastructures, poor information flows and high risk that mean that it is very difficult fro them to break out of their unfortunate situations. These can all have very similar mechanisms as the models described previously. 'Both history and economic policy matters much more in an environment with a poverty trap Purely random acts like war, disease, natural disasters or an irresponsible policy measure of short duration, may change forever the course of economic development' (Azariadas) on a macroeconomic scale. Government intervention may be worthwhile and indeed may have very high returns if it can protect people from such devastating transient shocks and prevent individuals from falling into the poverty trap in the first place. The policy implications from the existence of poverty traps are that whilst bad shocks can push people into destitution where they stay trapped, good shocks can push individuals onto equilibrium where there are better outcomes. Azariadis suggests that 'public subsidies to health and education, at a rate sufficient to overcome a poverty trap, are productive at middle levels of development, but may be beyond the resource constraints of the poorest developing nations'. In conclusion then inequality in income, assets, opportunities and access to markets among other things mean that the very poor can be pushed into a low outcome equilibrium. Once they are at this equilibrium point it is very difficult for such people to escape and thus poverty is very persistent. ...read more.

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