Poverty traps: the neglected role of vitality

This paper proposes an integrated framework that incorporates both the "physical" and the "behavioural" dimensions of poverty in developing countries and their consequences for aggregate savings behaviour. To this end a concept is introduced, labelled "vitality", which captures the idea that being near subsistence consumption levels not only has an impact on the ability to save, but also on the willingness to save. We introduce the notion of a "vitality threshold" which marks a situation where the willingness to invest into the future changes - this is represented by a change in the discount rates.

The recognition of transition paths from a "pessimistic", low-savings regime with high discount rates to an "optimistic" regime with relatively high savings enables us to analyse the transition of countries through various stages of development. In addition to this, we can shed new light on poverty traps by looking at below subsistence consumption scenarios. Finally we can infer specific policy implications concerning development aid. For instance, if a country is in a pessimistic, low-savings regime, we argue that a transfer should be high enough to push a country above the subsistence-level consumption threshold by far enough to enable it to reach the optimistic, high savings regime and consequently grow out of poverty. The existence of vitality thresholds implies that marginal changes in development assistance may have non-marginal long-term effects.

JEL Classification: O1,O2,I13

Key words: poverty trap, subsistence consumption, vitality, foreign aid