Poverty Traps and Development: The Equity-Efficiency Trade-Off Revisited

The paper discusses some core reasons why poverty remains widespread in many developing countries: market failures combine with asset inequalities to result in poverty persistence, and often poverty traps from which the poor may not be able to emerge, even in a context of aggregate economic growth. As examples the paper discusses some theoretical implications and empirical evidence for three core market failures: credit market failures, externalities and uninsured risk. It also critically examines the interventions commonly used to address these problems and suggests some alternatives.