Introduction

We usually associate recessions with the state of advanced economies whose income per person recedes and who suffer from increased unemployment. We thus tend to forget that poor countries have repeatedly shared the same fate, with one dramatic difference: those recessions are hitting poor and sometimes extremely poor populations.

The object of this chapter is threefold: first we point out that in the time span 1960–2010 many countries have never made any progress towards escaping a state of poverty, while suffering severe, repeated recessions. Second, we show that the traditional theoretical approach to the possible escape from such a state is seriously flawed. While the poverty trap is well understood and described as a stable equilibrium point in the well-known phase diagram of the capital–labour ratio, the traditional approach assumes the existence, higher on the capital–labour axis, of an unstable equilibrium. Such a construct – if it corresponded to reality – would imply that if some massive capital influx could be injected into that economy, income per person could increase towards a new, stable equilibrium. We will demonstrate that such an unstable equilibrium cannot exist, because it would imply a negative marginal productivity of labour. Finally, we will indicate necessary conditions that should be met by countries intending to escape poverty traps.

The bare facts

In figures 3.1a – 3.1d we describe the evolution over the period 1960–2010 of real GDP per person in 11 countries, together totalling more than 250 million people. To do so we relied on the Penn World Table set by Alan Heston, Robert Summers and Bettina Aten (Heston, Summers and Aten 2012). The numbers are expressed in 2005 constant US dollars at purchasing power parity.

These dramatic pictures reveal that none of these countries experienced improvement in their standard of living, and that all of them suffered from repeated 69 recessions. We now have to turn towards what traditional theory has to say about those poverty traps.