On opulence driven poverty traps

Abstract

Endogenous population growth, i.e., making the rate of population growth dependent on society's opulence, causes parametric changes to have a larger impact and can cause multiplicity of steady states in a dynamic intertemporal optimization framework. This provides a simple explanation for the possibility of differing growth paths between countries (using a standard production function) or another explanation of the ‘poverty trap’. We give two examples (‘opulence sensitivity’ and ‘production sensitivity’) that both give rise to three steady states in which poor (rich) countries will evolve over time to the low (high) income steady state. In both examples there are middle income countries that will choose the low (high) income steady state if they are impatient (patient), where patience is measured through the rate of time preference o. Foreign aid in the form of a large transfer of capital from abroad enables poor and impatient middle income countries to move to the high income steady state.