Low-income Trap Research Articles

Asymmetric information, capacity constraint and segmentation in credit markets

PurposeThe purpose of this study is to propose a model of competition between a formal lender (bank) and an informal lender (moneylender) with informational asymmetry between these two lenders. Further, the authors introduce capacity constraint on the lending capacity of the moneylender and assume that borrowers differ in risk and wealth.Design/methodology/approachThe solution concept of Nash equilibrium has been used to derive the optimal strategies of the lenders.FindingsThe equilibrium strategies in most of the results depend on the difference between the expected returns from risky and safe projects where the risky project has higher expected returns. The credit market is segmented in terms of risk and wealth levels. Rationing of poor safe borrowers from the credit market is inevitable when the moneylender's capacity is sufficiently small, suggesting a low-income trap for them. Further, when moneylender has capacity constraint of some form, a zero-profit outcome is never a Nash equilibrium outcome.Research limitations/implicationsThere is a possibility of collusion between the lenders. However, the authors do not derive all possible outcomes under capacity constraintPractical implicationsWhen the informal lender has limited capacity, competition between formal and informal lenders may not alleviate credit rationing, instead aggravate the problem. Thus, the government should devise policies to ensure credit availability to resource poor householdsOriginality/valueWhile the literature models strategic interaction between lenders under the assumption of zero-profit (Bertrand Paradox) condition, this study shows that zero profit is not the only outcome under such a set-up. Also, in presence of capacity constraint of the moneylender, a zero-profit outcome is never a Nash equilibrium outcome for the lenders. There is an optimal contract at which the lenders differentiate in terms of repayment and collateral and earn positive profits under certain conditions.

The “Double Trap” in China—Multiple Equilibria in Institutions and Income and their Causal Relationship

While institutions are said to be poor in China in cross-country comparison, recent research indicates that at the provincial level, institutional quality plays in fact an important role for the economic success of a province, municipality, or autonomous region in China. Our paper aims to add further arguments to this discussion by focusing on the concept of club convergence. In particular, we analyze whether institutional quality in low-income provincial level administrative divisions converges to the level experienced by relatively highly developed ones or whether there exist multiple institutional clubs over the period 1997–2007 by using the log t test proposed by Phillips and Sul (Econometrica 75(6):1771–1855, 2007). Our findings indicate that there exist multiple institutional clubs within China, three rather small clubs which follow an above-average high institutional quality path and two clubs which find themselves on a relatively low institutional quality path and which together account for the majority of provinces and autonomous regions. Using the same methodology, we find that various members of the poor institutional clubs are additionally caught in a low-income trap. In a next step, we analyze the causal relationship between poor institutional traps and low-income traps in China by using a recursive bivariate probit model. We find evidence that institutional traps are important determinants of income traps, giving rise to the recently identified phenomenon of a ‘double trap’. Finally, our findings indicate that human capital and urbanization are additional important determinants of income traps, while globalization is decisive for avoiding poor institutional traps.

On the Role of Health in Climbing the Income Ladder: Evidence from China

This paper uses two large panel data sets in China to study the effects of a health shock on household income mobility from 1991 to 2016. We compare outcomes of households with a member who receives a health shock with comparable households that do not receive any health shocks. To do so, we match on demographic and worker characteristics of household members. At the aggregated level, a health shock lowers the probability of getting out of the low-income trap by 8.4 percentage points. At the household level, a health shock lowers household income per capita by 13.1%, and income position by 3.9 percentiles. We show that the decrease in labor productivity, measured in hourly wage, explains the majority of household income losses. Households who become poor due to a health shock continue to exhibit lower income mobility after three years.

Corporate Governance, Business Group Governance and Economic Development Traps

Every firm in a developed economy relies on the mere existence of countless other firms to keep prices competitive up and down all supply chains. Without this network externality, no firm forms; and without many firms, no network forms; locking in a low-income trap. Business group governance supersedes corporate governance in most developing economies and in the rapid catch-up development phases of most high-income economies by hierarchically coordinating firms in multiple industries, internalizing this network externality. High-income economies grow via creative destruction - creative firms imposing a negative externality upon firms they destroy or disrupt, but a larger positive innovation-related externality upon the whole economy. Business groups avoid creative self-destruction, innovation by one group firm that disrupts another. Corporate governance supersedes business group governance in high-income economies to facilitate productivity growth. If business group governance does not retreat, productivity growth is impaired and a middle-income trap can result. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Africa’s Natural Resource Wealth: A Paradox of Plenty and Poverty

Africa is blessed with vast natural resources and rich environments.  It is generously endowed with productive land and with valuable natural resources, which include renewable resources (such as water, forestry, and fisheries) and non-renewable resources (minerals, coal, gas, and oil). Natural resources dominate many national economies and are central to the livelihoods of the poor rural majority. These resources are the basis of income and subsistence for large segments of Africa’s population and constitute a principal source of public revenue and national wealth. Under the right circumstances, a natural resource boom can be an important catalyst for growth, development, and the transition from cottage industry to factory production. Indeed, with the right approach natural resources can be used to make the transformation from a low-value economy that relies on exports of primary commodities to one with a substantial labour-intensive manufacturing base. Ideally the development of these resources can be a blessing for the entire continent. But historically, those resources have often proved to be a curse than a blessing especially to the majority of the citizens in these African countries. It is commonly agreed that one of the avenues for getting many of the poorest African countries out of the low-income trap is to provide them with a big demand push that will generate enough demand complementarities to expand the size of markets and recover the fixed costs of industrialisation. Natural resource wealth could be used to pursue this goal. Unfortunately, in many African countries natural resource booms have only to a limited extent set off a dynamic growth process. This is largely due to failure to implement the right growth promotion policies and to ensure that strong institutions are in place, suggesting that it is very difficult to make the big push towards diversification and development of manufacturing in the resource-rich parts of Africa. The danger is that much of Africa is not industrialised and is stagnating in a staple trap, dependent on exports of a few mineral resources. In particular, oil resources and other point resource-dependency could, with the wrong policies, lead to this scenario. The failure of natural resource wealth to lead to the expected economic growth and development has been attributed to several factors, including the so-called “Dutch Disease”, rent –seeking by elites, poor governance and weak institutions. The paper explores these causes of the resource curse and suggests ways to get out of the syndrome.

The ‘Double Trap’ in China – Multiple Equilibria in Institutions and Income and Their Causal Relationship

While institutions are said to be poor in China in cross-country comparison, recent research indicates that at the provincial level, institutional quality plays in fact an important role for the economic success of a province in China. Our paper aims to add further arguments to this discussion by focusing on the concept of club convergence. In particular, we analyze whether institutional quality in low-income provinces converges to the level experienced by relatively highly developed provinces or whether there exist multiple institutional clubs over the period 1997-2007 by using the log t test proposed by Phillips and Sul (2007). Our findings indicate that there exist multiple institutional clubs within China, three rather small clubs which follow an above-average high institutional quality path and two clubs which find themselves on a relatively low institutional quality path and which together account for the majority of provinces. Using the same methodology, we find that various provinces of the poor institutional clubs are additionally caught in a low-income trap. In a next step, we analyze the causal relationship between poor institutional traps and low-income traps in China. Using a recursive bi-variate probit model enables us to control for the problem of endogeneity in the institutions-income relationship. We find evidence that institutional traps are important determinants of income traps, giving rise to the recently identified phenomenon of a ‘double trap’. Finally, our findings indicate that human capital and urbanization are additional important determinants of income traps, while globalization is decisive for avoiding poor institutional traps.

Changes in mortality and economic vulnerability to climatic hazards under economic development at the provincial level in China

Studies have reported that economic development can contribute to reducing vulnerability to natural hazards. However, there exist considerable variations in the association between economic growth and vulnerability, especially at the sub-country scale. Based on climatic hazard impact (indicated by mortality and direct economic losses (DEL)) and economic development data for 31 provinces in the mainland of China from 1990 to 2015, trends of disaster impact, and trends of vulnerability (indicated by mortality rate and DEL rate), were detected using the Mann–Kendall trend test at the provincial level. Next, the relationship between income and vulnerability was characterized. At the provincial level during 1990–2015, there was a clear transformation of the climatic hazard impact landscape from high average annual mortality to high average annual DEL. Both the mortality and the DEL rates presented downward trends for most provinces. The magnitude of vulnerability decrease was higher in the economically developed provinces compared to the underdeveloped provinces, and vulnerability declined nonlinearly with income increase. A vulnerability trap appears to exist approximately below 1600 US$ for income—above this threshold, a province’s vulnerability significantly decreased. Mortality and economic vulnerability to climatic hazards are correlated with economic development, but causal links between economic development and vulnerability reduction need further investigation. Our findings suggest that shortening the transitional period from the low-income trap and reducing inter-provincial disparity of economic development may be powerful tools for reducing vulnerability to climatic hazards, especially for economically underdeveloped regions. These should also be important considerations in developing efficient adaption strategies for climate change.

Point of View: The Low-Income Trap - Urgent steps are needed to end the cycle of poverty and debt

Point of View: The Low-Income Trap - Urgent steps are needed to end the cycle of poverty and debt

Escaping the Middle-income Trap - A Cross-country Analysis on the Patterns of Industrial Upgrading

With rapid industrial upgrading along the global value chain of manufactured goods, China has transformed, within one generation, from an impoverished agrarian society to a middle-income nation as well as the largest manufacturing powerhouse in the world. This article identifies the pattern of China?s industrial upgrading and compares it with those of other successfully industrialized economies and the failed ones. We find that (i) China (since 1978) followed essentially the same path of industrial upgrading as that of Japan and the ?Asian Tigers.? These economies succeeded in catching up with the developed western world by going through three developmental stages sequentially; namely, a proto-industrialization in the rural areas, a first industrial revolution featuring mass production of labor-intensive light consumer goods, and then a second industrial revolution featuring mass production of the means of mass production (i.e., capital-intensive heavy industrial good s such as steel, machine tools, electronics, automobiles, communication and transport infrastructures). (ii) In contrast, economies stuck in the low-income trap or middle-income trap did not follow the above sequential stages of industrialization. For example, many Eastern European and Latin American countries after WWII jumped to the stage of heavy industrialization without fully developing their labor-intensive light industries, and thus stagnated in the middle-income trap. Also, there is a clear lack of proto-industrialization in the rural areas for many African economies that have remained in the low-income trap. We believe that laissez-faire and ?free market? alone is unable to trigger industrial upgrading. Instead, correct government-led bottom-up industrial policies are the key to escaping the low- and middle-income traps.

Structural Adjustment Approaches and Policy Design of the Chinese Economy: A Comparison Between New and Old Structural Economics

The structural adjustment of China’s economy requires the support of economic theories dedicated to structural issues. But new structural economics (NSE) is significantly different from old structural economics (OSE) in terms of development strategies and policies. They expound on the paths of industrial structure improvement and steady economic growth for developing countries from two different perspectives, comparative advantage and first-mover advantage, which result in a toss-up. From the clashing theories and observations of the true state of Chinese economy, we can see that the core features of China’s current economic structure are a cumulative result of the insufficient “complementary” and “inducing” roles of government investment, which requires the introduction of certain investment models to design an effective structural adjustment plan. From the perspective of investment priority, scope (public service or production), motives, capacity and decision-making and multi-sectoral coordination, this paper analyzes the key connections between NSE and OSE and strives to design an appropriate and accurate investment plan from the perspective of stability, flexibility and underpinning in the hope of resolving the issues facing the structural adjustment of the Chinese economy. The first step is to identify investment priorities and enable the market to play the decisive role and the government the guiding role. The second step is to identify crucial nodes and adapt investments to trends of the new industrial revolution. The third step is to focus on the resolution of livelihood issues to steer China out of the low-income trap and clear of the middle-income trap. Not only do investment variables have to become an instrument to continuously improve China’s factor endowment structure, but also investment as a mechanism underpinning development has to be adopted throughout the entire duration of the process of reform to fulfill the goal of structural adjustment pursued by both NSE and OSE.

Food Processing Industries : An Engine for Growth in Uttar Pradesh

India is an agrarian economy where more than 70% of the population largely depends on agricultural and allied activities for its livelihood. Despite this, Indian farmers are in very poor socioeconomic condition. They are in low income equilibrium trap. U.P. has a comparative advantage in natural cultivation. U.P. has a strong potential for growing into a strong base of the food processing industry. This review paper focused on categorizing various activities related to food processing in U.P. with the aim of developing the present conditions of farmers and enhancing their economic contribution in national gross domestic product. We concluded that for breaking the low-income equilibrium trap, there is an urgent need of developing entrepreneurial skills amongst farmers and promoting micro agri-entrepreneurship in Uttar Pradesh.

Can Low-Wage Employment Help People Escape from the No-Pay – Low-Income Trap?

Abstract The experience of unemployment itself increases the risk of staying unemployed, and the unemployed face a high poverty risk. Moreover, experiencing poverty reduces the chances of reemployment. As wage inequality has expanded in recent decades, low-paid employment and in-work poverty have both risen. This study analyzes whether low-pay employment helps people escape the no-pay – low-income trap. Survey data from the German Socio-Economic Panel for the period 1995–2012 are used to estimate correlated random-effects probit models on the labor-market and income dynamics. The findings suggest that low-paid employment is especially helpful to exit the no-pay – low-income trap for persons who are long-term unemployed, as well as for those over 40 who have been unemployed for a short period of time. No indications of a low-pay – low-income trap are found.

Addressing the Middle-Income Trap: Experience of Indonesia

Middle-income trap (MIT) refers to a condition in which the middle-income countries are not able to follow the trajectory of an economic growth to achieve a new level as high-income countries. Using descriptive analysis, more than 30 countries are found to experience MIT including China and India. Some of countries in Africa are even experiencing low-income trap. Between 1970 and 2011 Indonesia was actually in a transition condition of low-income to middle-income economy. Indonesia has begun to face constraints that would inhibit the sustained growth, particularly on the supply side of the economy. It is better to do the anticipatory actions that can strengthen the economy’s fundamentals in order to avoid MIT. The estimated regression model used in this study indicates that the increase in current national income is affected by the previous national income and the share of gross fixed capital formation to GDP. So, to avoid MIT, the government of Indonesia should prioritize on investment for developing growth centers as well as for improving human resources and technology application.

Paramètres de traitement des plaques de psoriasis chroniques et résistantes par laser à colorant pulsé

Economists have long been interested on the role of childhood neighborhood and family characteristics in explaining adult income, with some emphasizing the importance of family over neighborhood characteristics in determining income. However, they seldom include persistence as a factor that can influence income, and the few that do always treat it as homogeneous across individuals. In spite of this, the importance of persistence should not be undermined because it is vital to understanding long term effect of variables on income, in addition to explaining the likelihood of a person to be trapped in a low income trap and the time taken to recover from a negative shock. As an extension to this literature, I add individual-level heterogeneity in income persistence and show it can be affected by childhood neighborhood variables. By applying a two-step correlated random effects GMM on the Panel Study of Income Dynamics dataset, I find that persistence is a significant factor in determining adult income, with average being about 0.38. However, I find that the poor have a higher persistence of income than the rich, implying that the poor are affected more when the macroeconomy changes. The poor also take a longer time to recover from a negative shock. Furthermore, I find that improving childhood neighborhood, especially neighborhood idleness rate, can help to increase adult income by lowering its persistence. My simulation exercise also shows that reducing idleness rate in childhood neighborhood by 1 percentage point of those earning in the bottom quartile of the income distribution can help to increase overall social welfare the most.

Childhood neighborhood conditions and the persistence of adult income

Economists have long been interested on the role of childhood neighborhood and family characteristics in explaining adult income, with some emphasizing the importance of family over neighborhood characteristics in determining income. However, they seldom include persistence as a factor that can influence income, and the few that do always treat it as homogeneous across individuals. In spite of this, the importance of persistence should not be undermined because it is vital to understanding long term effect of variables on income, in addition to explaining the likelihood of a person to be trapped in a low income trap and the time taken to recover from a negative shock. As an extension to this literature, I add individual-level heterogeneity in income persistence and show it can be affected by childhood neighborhood variables. By applying a two-step correlated random effects GMM on the Panel Study of Income Dynamics dataset, I find that persistence is a significant factor in determining adult income, with average being about 0.38. However, I find that the poor have a higher persistence of income than the rich, implying that the poor are affected more when the macroeconomy changes. The poor also take a longer time to recover from a negative shock. Furthermore, I find that improving childhood neighborhood, especially neighborhood idleness rate, can help to increase adult income by lowering its persistence. My simulation exercise also shows that reducing idleness rate in childhood neighborhood by 1 percentage point of those earning in the bottom quartile of the income distribution can help to increase overall social welfare the most.

The Emergence of Three Human Development Clubs

We examine the joint distribution of levels of income per capita, life expectancy, and years of schooling across countries in 1960 and in 2000. In 1960 countries were clustered in two groups; a rich, highly educated, high longevity “developed” group and a poor, less educated, high mortality, “underdeveloped” group. By 2000 however we see the emergence of three groups; one underdeveloped group remaining near 1960 levels, a developed group with higher levels of education, income, and health than in 1960, and an intermediate group lying between these two. This finding is consistent with both the ideas of a new “middle income trap” that countries face even if they escape the “low income trap”, as well as the notion that countries which escaped the poverty trap form a temporary “transition regime” along their path to the “developed” group.

Childhood Neighborhood Conditions and the Persistence of Adult Income

Economists have long been interested in the role of childhood neighborhood and family characteristics in explaining adult income. In the past, the importance of family traits has been emphasized over neighborhood characteristics in explaining income, and persistence - if included at all - has been treated as homogenous across individuals. The importance of persistence should not be overlooked because it is vital to the understanding of the long term effects of variables on income, the likelihood of a person to be trapped in a low income trap, and the time taken to recover from a negative shock. In this paper, I build upon the pre-existing literature by adding an individual level heterogeneity in income persistence and show that it is affected by childhood neighborhood variables. I apply a two-step correlated random effects GMM on the Panel Study of Income Dynamics Dataset and find that average persistence is about 0.38, with the poor having a higher persistence of income than the rich. This implies that the poor are affected more when the macroeconomy changes. I also find that the poor take a longer time to recover from a negative shock. My simulation exercise using this model shows that reducing idleness rate in childhood neighborhood of those earning in the bottom quartile of the income distribution can help to increase overall social welfare the most in the long run, when compared to other variables.