Poverty Trap Theoretical Analysis

In this paper, Kraay and McKenzie analyze the poverty trap theory and its possible evidences in the contemporary world. Using previous researches, they argue that poverty traps are extremely rare and that the traditional policies promoted by this theory are often inefficient. Therefore, they claim the necessity of different and less-conventional approaches.

First of all, the two economists explain the idea of poverty trap, both on a microeconomic and macroeconomic level. This distinction is extremely important, because it leads to different policies. On an individual perspective microfinance loans are the most common instrument to lead households outside of the poverty level. On an aggregate level instead, foreign aids, based on the ‘big push’

In the 1950s several authors argued that poverty traps were the main cause of economic stagnation in many states. However, a number of researches, made between 1950 and the 2000, could not find empirical evidences of poverty traps’ existence, or only limited ones. An example is the 2007 analysis carried out by Kraay himself and Claudio Raddatz in African countries; they investigate the relations between low development rates and two central mechanism of poverty traps theory, low savings and low productivity. Their analysis led to the conclusion that ¨while saving rates and productivity do clearly increase with income levels [...] they do not increase in the right nonlinear way required to generate stable low-level equilibria that can plausibly account for very persistent income differences across countries¨. NOTA1

According to the poverty traps theory, foreign aids are a fundamental instrument to lead developing countries to a ‘take off’, as explained by Rostow 's States Growth Model NOTA2. Even this notion has been criticized by several economists, such as Raghuram G. Rajan and Arvind Subramanian. In an analysis of 2005, they evidence the impossibility of finding a significant relationship between foreign aid and an a sharp economic growth in the receiving country.

Indeed, the great European emigration, began in 17th century, has had an important role in the economic development of the continent. In addition, J. Edward Taylor, representative of the United Nations Population Division, in a 2006 report, explains the positive connection between international migration and income growth in the sending countries. Collected data show that ¨income growth in migrant-sending areas often is associated with more international migration, not less¨. NOTA5. A number of young people emigrate from less developed countries to gain skills and experiences; often they decide to return creating the ‘brain gain’ phenomenon. In addition, remittances have a fundamental role in raising the income of less developed states; therefore governments should reduce the their transaction costs and adopt policies which favour international