New Working Paper by Aart Kraay and David McKenzie: Do poverty traps exist?

This paper reviews the empirical evidence on the existence of poverty traps, understood as self-reinforcing mechanisms through which poor individuals or countries remain poor. Poverty traps, understood as self-reinforcing mechanisms through which poor individuals or countries remain poor, have captured the interest of many development policy makers, because poverty traps provide a theoretically coherent explanation for persistent poverty. They also suggest that temporary policy interventions may have long-term effects on poverty. However, a review of the reduced-form empirical evidence suggests that truly stagnant incomes of the sort predicted by standard models of poverty traps are in fact quite rare. Read the entire paper here.