Poverty Trap

It takes money to make money, and if you don’t have any, well...you’ll be stuck. Stuck in a poverty trap. Systems with high barriers to entry have large poverty traps. Systems with low barriers to entry have lower poverty traps.

Let’s say you’re very poor and trying to figure out how to get on your feet. If you’re in Thailand, you might be able to get some help from family and friends enough to start a little street food cart. You don’t need permits, land, nada...just a little cart attached to your motorbike. And you need to stay in business long enough by making decent food, and you hope you don't get robbed. In the U.S., there exist way more barriers to enter the market as a food vendor: food permits...you probably have to rent or buy space...have a health inspector check you out, etc. It’s a lot harder, and a lot more expensive. But fewer (probably) gunpoint robberies.

If you don’t have enough capital to escape poverty, you’re in a poverty trap. Oftentimes, people aren’t making a high enough income to save up any meaningful amount to climb out of the hole of poverty. Some people might even be living at shelters while working a full-time job, and may or may not be able to get out of the poverty trap that way. You begin relying on government handouts to make ends meat. You stop fighting for a better life. You end up just focusing on how to "work the system," rather than bootstrap your own independence. You have no other choice.

The poverty trap helps to inform programs meant to get people out of poverty. If a little money is thrown at those in poverty via a program, but not enough, then that program isn’t going to have the best results. People need that critical mass of capital, or else they will stay dependent on aid. And when a lot of money is thrown (witness: the projects), an entire generation is created that relies only on government handouts, which have grown so big that replacing those handouts with a market-based, high-paying office job is virtually impossible.

While helping people attain the critical mass of capital is one type of program, other factors like healthcare programs affect the poverty trap, too. Researchers have found that poor health and disease-ridden areas can keep people in the poverty trap. Things like healthcare programs might ease the cost burden of health issues for those in poverty, which could leave them more of their own income to buy climbing gear to, uh...get out of that poverty trap.