Poverty traps, aid, and growth

This paper examines the empirical relevance of the poverty trap view of underdevelopment. We calibrate simple aggregate growth models in which poverty traps can arise due to either low saving or low technology at low levels of development. We then assess the empirical relevance of these specific mechanisms and their consequences for policy. We find little evidence of the existence of poverty traps based on these two mechanisms. When put to the task of explaining the persistence of low income in African countries, the models require either unreasonable values for key parameters, or else generate counterfactual predictions regarding the relations between key variables. These results call into question arguments in favour of a large scaling-up of aid to the poorest countries that are premised on the existence of such poverty traps.