Testing for the existence of poverty traps in Mexico

Abstract

The study of poverty has led to the development of a fourth generation of poverty measures that can distinguish the poor that will likely remain poor in the future from the poor that will be able to escape poverty. Testing the existence of a poverty trap involves showing that due to the presence of increasing returns to assets at certain levels an S-shape may exist in the asset accumulation process of households. There is a need to empirically test the existence of poverty traps to design more effective poverty reduction policies. Most previous applications of the asset-based approach are based on a single representative asset, on which households depend as their livelihood strategy, such as cattle for pastoralists. However, due to the existence of multiple livelihood strategies available to Mexicans in rural areas, a household’s assets must be summarized into a single asset index in order to proxy this household’s wealth. In addition, the application of non-parametric estimation techniques to poverty trap tests is more adequate because of the non-linear dynamics that a poverty trap would generate. For a polarized society like Mexico, which suffers blocked pathways of upward mobility, it is expected that a poverty trap would be shown to exist. However, the country-level analysis has found a single stable equilibrium level and no evidence on the existence of a poverty trap. Meanwhile, the regional analysis has not found evidence of regional poverty traps either, but has found sufficient evidence on the existence of a lower level single stable equilibrium in the South-Southeast region and a higher level single stable equilibrium in the Northeast region.