This blog post examines the debate surrounding geographical versus institutional factors as causes of poverty, exploring through diverse scholarly perspectives which conditions exert a greater influence on economic growth and escaping poverty.
Various viewpoints have been presented regarding poverty eradication and economic growth. Sachs, who emphasizes geographical factors as the cause of poverty, argues that initial support and investment based on foreign aid are absolutely necessary for people in poor countries to escape the so-called ‘poverty trap’. From his perspective, most poor countries are located in tropical regions where the threat of diseases like malaria is severe, leading to generally poor health and low labor productivity among their populations. People in these regions have such low income levels that they lack the means to invest in nutrition, sanitation, healthcare, or education. They also lack the economic foundation to purchase improved seeds or fertilizers, making it difficult to increase their income. In such circumstances, only through initial support and investment enabling the poor to escape the trap can productivity improvements, increased savings, and expanded investment become possible, ultimately leading to higher incomes. However, his argument is that poor countries lack the capacity to self-finance this initial support and investment, making foreign aid inevitably necessary.
The views of economists emphasizing the role of institutions differ markedly from Sachs’s claims. Easterly believes that government support and foreign aid do not substantially contribute to economic growth. He contends that the concept of a ‘poverty trap’ itself does not exist, arguing that for an economy to grow and overcome poverty, a free market must function properly above all else. From his perspective, government support for education or healthcare does not yield results when poor people themselves do not perceive the need. Effectiveness only materializes when individuals can choose what they need for themselves. For the same reason, he is skeptical of foreign aid. He particularly contends that when governments are corrupt, aid not only fails to improve the plight of the poor but actually exacerbates corruption. In response, Sachs argues that only by directly supporting the incomes of people in poor countries to help them escape the poverty trap can living standards improve. He asserts that this process strengthens civil society and establishes the rule of law.
Atsimoglu, who identifies bad institutions as the root cause of poverty, is also skeptical of foreign aid. However, he does not believe that leaving matters solely to the market will automatically improve bad institutions. He identifies political institutions as the most crucial reason why poor countries fail to adopt high-quality economic institutions conducive to growth. He argues that any institution inevitably creates groups that benefit and groups that lose out, meaning the direction of institutional adoption is determined not by the interests of society as a whole, but by the interests of those holding political power. Therefore, he emphasizes that for sustained economic growth to be achieved, political institutions must first change to enable the adoption of economic institutions that serve the interests of society as a whole.
Some economists interpret the importance of institutions more radically, positing an even more active role for external actors. Romer proposes a project where barren regions are opened to foreigners, allowing them to develop new cities equipped with high-quality institutions, as one way to import change from outside and break the vicious cycle of bad institutions. Collier argues that impoverished nations with virtually paralyzed economies are trapped in a vicious cycle of poor economic and political institutions, necessitating foreign military intervention if required to break this cycle. While controversial, this perspective aligns in part with recent international political discussions on the necessity of external intervention in countries experiencing extreme institutional collapse.
Meanwhile, Banerjee and Duflo argue against seeking universal solutions, insisting that poverty must be approached from the perspective that “every problem has its own unique solution.”
They emphasize policy design grounded in an accurate understanding of concrete realities, maintaining that even in the presence of bad institutions, significant room for improving institutions and policies remains. They explain various views on the poverty trap through the shape of a curve representing the relationship between current income and future income. The view that no trap exists assumes the curve is an ‘inverted L-shape’ that rises steeply before flattening. Conversely, the view that a trap exists assumes an ‘S-shape’ curve that starts gently, rises sharply after a certain point, and then flattens again. If the real world corresponds to an inverted L-shaped curve, even the poorest individuals gradually become wealthier over time. In this case, support can only shorten the time to reach that point; the level reached itself is independent of whether support is provided, making it difficult to argue that assistance is absolutely necessary. However, if the S-curve describes reality, people in the low-income segment converge toward a ‘low equilibrium’ over time, making support essential.
Banerjee and Duflo argue that in the real world, some are trapped in poverty traps while others are not, and the reasons for trap formation are diverse. Therefore, one should not definitively assert whether poverty traps exist; instead, multiple sample groups with identical characteristics except for a specific intervention should be formed to rigorously compare the effects of that intervention. Furthermore, they contend that only by repeating analyses across different regions and interventions can we understand how people actually live, what kind of help they need, and the demand for specific interventions. Only then can we gain knowledge that truly aids in poverty eradication. They conclude that the fundamental reason we fail to eradicate poverty lies, paradoxically, in the poverty of our own economic knowledge about poverty.
