Poverty Trap

Classical arguments: vicious circles and the big push

Ragnar Nurkse (1953) described the vicious circle of poverty with the line that a country is poor because it is poor. Low income means little saving, little saving means scarce capital and low productivity, and that means low income again. On the demand side, small markets weaken incentives to invest. Richard Nelson (1956) modeled a low-level equilibrium trap in which any rise in income is offset by population growth, returning per capita income to its original level, a modern version of the Malthusian mechanism. Rosenstein-Rodan (1943) proposed the big push: because industries create demand for one another, industrialization requires large-scale investment across many sectors at once, an idea Murphy, Shleifer and Vishny (1989) formalized as a model of multiple equilibria.

Multiple equilibria and micro mechanisms

In modern theory poverty traps are understood as multiple equilibria. As Azariadis and Stachurski (2005) summarized, in the standard Solow model poor countries grow faster and converge, but with threshold effects or increasing returns in production, economies below a certain capital level stay at a low equilibrium while only those above it move to a high one. At the individual level the nutrition trap is the classic case: Dasgupta and Ray (1986) modeled how people too poor to eat enough lack the strength to work and earn. Traps also arise when credit constraints prevent profitable investment or investment in education, and when people unable to bear risk choose only safe, low-return options. Mullainathan and Shafir (2013) proposed a psychological mechanism in which scarcity consumes attention and cognitive resources, making long-term decisions harder.

The aid debate and empirical evidence

Jeffrey Sachs (2005) argued that the poorest countries are trapped and need a big push of large-scale aid for health, agriculture and infrastructure. William Easterly (2006) countered that large top-down aid has repeatedly failed and that evidence for national poverty traps is weak. The debate continues the development controversies dating back to modernization theory and dependency theory. Abhijit Banerjee and Esther Duflo (2011) proposed testing specific interventions with randomized controlled trials rather than relying on grand theories, work recognized with the 2019 Nobel Prize in economics shared with Michael Kremer. Kraay and McKenzie (2014) concluded that evidence for national traps is limited but that traps may exist for particular regions or groups. Banerjee and colleagues (2015) reported that graduation programs giving the ultra-poor productive assets such as livestock together with training and consumption support produced lasting income gains in six countries, and Balboni and colleagues (2022) found in Bangladeshi data that only households whose assets crossed a threshold escaped poverty, supporting the existence of household-level poverty traps.

FAQ

What is a poverty trap in simple terms?

Being poor leaves no room to invest in savings, education or health, which keeps people poor, so without help above a certain level it is hard to climb out on one's own.

Do poverty traps really exist?

Evidence that whole countries are trapped is contested, but recent field experiments suggest that for the poorest households a trap can exist in which assets must cross a threshold before families escape poverty.

Sources reviewed: 2026-10-26

References

1. Nurkse, R. (1953). Problems of Capital Formation in Underdeveloped Countries. Oxford: Basil Blackwell.
2. Rosenstein-Rodan, P. N. (1943). Problems of industrialisation of Eastern and South-Eastern Europe. Economic Journal, 53(210/211), 202–211.
3. Nelson, R. R. (1956). A theory of the low-level equilibrium trap in underdeveloped economies. American Economic Review, 46(5), 894–908.
4. Murphy, K. M., Shleifer, A., & Vishny, R. W. (1989). Industrialization and the big push. Journal of Political Economy, 97(5), 1003–1026.
5. Azariadis, C., & Stachurski, J. (2005). Poverty traps. In P. Aghion & S. N. Durlauf (Eds.), Handbook of Economic Growth (Vol. 1A, pp. 295–384). Amsterdam: Elsevier.
6. Sachs, J. D. (2005). The End of Poverty: Economic Possibilities for Our Time. New York: Penguin Press.
7. Easterly, W. (2006). The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good. New York: Penguin Press.
8. Banerjee, A. V., & Duflo, E. (2011). Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty. New York: PublicAffairs.
9. Kraay, A., & McKenzie, D. (2014). Do poverty traps exist? Assessing the evidence. Journal of Economic Perspectives, 28(3), 127–148.
10. Dasgupta, P., & Ray, D. (1986). Inequality as a determinant of malnutrition and unemployment: Theory. Economic Journal, 96(384), 1011–1034.
11. Banerjee, A., Duflo, E., Goldberg, N., Karlan, D., Osei, R., Parienté, W., Shapiro, J., Thuysbaert, B., & Udry, C. (2015). A multifaceted program causes lasting progress for the very poor: Evidence from six countries. Science, 348(6236), 1260799.
12. Balboni, C., Bandiera, O., Burgess, R., Ghatak, M., & Heil, A. (2022). Why do people stay poor? Quarterly Journal of Economics, 137(2), 785–844.
13. Mullainathan, S., & Shafir, E. (2013). Scarcity: Why Having Too Little Means So Much. New York: Times Books.