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The Inclusive Economy
Poverty Traps
By Bill Schweke on 10/28/2011 @ 12:15 PM
Many Americans believe that the poor could escape from poverty if they truly tried. Let’s call this argument the Horatio Alger narrative (the individual ascension story), or, the premises underlying Herman Cain’s 9-9-9 plan. These comparisons say much for this argument. After all, economic opportunity is not something that can be given to you or bought off the shelf at Target. Of course, your ability to choose economic opportunity is much improved if you are born as a member of the super-rich.
But there is another better, more complimentary view – the Poverty Trap perspective. Proponents argue that cumbersome institutions, crazy incentives, and mega-trends (e.g., globalization, increased skills) can make the playing field much less even. Plus, there are otherwise benign community and kinship values and attitudes that can hold the poor back from achieving economic growth, such as inheritance norms, Potlatch rituals, etc.
Poverty Traps (2006), edited by Samuel Bowles, Karla Huff and Steven Durlauf, is a good introduction to this literature and these arguments.
The book reflects the multi-disciplinary research, model building, and historical and anthropological investigations underway. The authors see markets as embedded institutions which can operate productively and equitably, or not.
Public policy and even economics are not physics. History matters and place does as well. In some countries, such as Somalia (to take an extreme example), area “entrepreneurs” are pirates and warlords, which is a hell of a situation if you want to strengthen property rights, trust, deal making, modern and sufficient public goods, trade, and other preconditions of a healthy climate for development. Weakening poverty traps may entail reaching certain thresholds in quality, composition and distribution of human capital in a given area.
Opportunities for gain, exchange and entrepreneurship will need to exist at certain scale if a good product idea and education are not to go to waste. In a market economy one can choose to buy a good or service or to pursue an occupation, but you are hard-pressed to purchase a different culture or a different colonial history. Indeed, the past can hinder the options for today. The “resource curse” (e.g., diamonds in Africa) can perpetuate crime and corruption.
The concentration of the poor in a specific neighborhood can intensify the possibilities for inappropriate role models, as well as the strength of the vicious circles that characterize poverty traps.
A former CFED staffer, Alan Okagaki, captured these points wonderfully in a CFED study, “Windows on the World,” way back in 1988. Consider the following quotes; they are all about poverty traps:
“Poor communities are islands isolated from the mainstream. The isolation is geographic, social and economic.” These disadvantaged communities can become “engines of doom,” with no hope, no future, perpetuating their poverty and under-development.
Yet, “economic achievement is not a commodity. It cannot be given to people. Economic advancement is fundamentally about initiative and confidence.” We need to “integrate poor places into the economic mainstream or rebuild its indigenous capacity.
“Middle class parents are the best job developers. They can make the connections and vouch for their children…”
“In order to remain out of poverty in our economic culture, people must pursue opportunities . . . “
At the risk of sounding ‘too cute,’ there are six key prerequisite elements for expanding the opportunity to produce:
1. Confidence
2. Competence
3. Credentials
4. Connections
5. Capital
6. Conversation (between low-income communities
and the mainstream economy)
Poverty Traps and CFED’s own study underscore how isolated poor places are and how limited their vision. They offer a window into the world of economic disadvantage and persisting poverty.
Yet, to succeed, as CFED Founder Bob Friedman once put the matter, we need to “create windows out to the outside world.”
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