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Is there a nutrition-based poverty trap?

In economics, a poor individual is one that lacks sufficient financial resources to obtain adequate food, clothing, and medical care to participate in society. For a long time, medical science and psychology have highlighted the role of food and calorie intake in human development but, in economics, we are still quietly overlooking the effect of nutrition in poverty.

Though malnourishment may be history, famine is not. In fact, FAO, Food and Agriculture Organization of the UN, estimates that, worldwide, 842 billion people were undernourished in 2011-13.

Poor people have smaller budgets, which means a greater share of their expenditure is adjudicated to food. So, it comes without surprise that, the large increase in food prices witnessed in the end of the last decade (2006-2008 and again in 2010) had severe consequences such as decreasing the nutritional status of the poor and forcing them into a vicious cycle – also known as poverty trap, which is a spiraling mechanism that forces people to remain poor.

The idea is quite simple, with wage people buy food which gives them strength to work and earn wages. This establishes a relationship between income today and income tomorrow.

A necessary condition for a poverty trap to exist is that the capacity curve intersects the 45-degree line from below at some point (S-shape curve).

graph1

The S-shape curve is made of two relations, or functions: the relationship between wage and nutrition (how much better do you eat if you have little more income) and the relationship between nutrition and productivity (how much stronger do you become if you have a bit more to eat).

Assuming this hypothesis holds means the poor should eat as much as they can – after paying for unavoidable expenses, expenditure on food would first increase more than proportionately, and then less than proportionately. In economics, we say this exposes the decreasing marginal effects of increasing food consumption: the first calories are just used to survive, and the next ones are used for strength; as calorie intake increases, the marginal effect of consuming them decreases.

But if nutrition is so important, why don’t people spend every available cent on extra calories? What stands in the way of better nutrition for the underprivileged? And what are the possible policy implications of this?

To better understand the behavior of the poor we can start by looking at their choices. From PoorEconomics we know that, worldwide, people living with less than 1$ per day spend 45-75% of their household budget on food. The difference may be due to food prices but it also underlines different consumption choices.

The poor have two ways of increasing their calorie consumption: they can eat more by spending more money on food (quantity) or they can eat differently by spending money on more nutritious options (quality).

So, how does calorie intake relates to the poor? Angus Deaton estimates a regression function for log calories and log per capita expenditures in India and concludes that when total expenditure increases by 10%, the consumption of calories increases by about 3.5%. The fact is that, when given the possibility of spending more money on food, people have to choose between eating more and eating tastier food. For example, rice has higher nutritious value than shrimp but when given the possibility to spend more money on food, people may choose to eat more shrimp instead of only eating rice because it tastes better.

It would be interesting to discuss both income effects and substitution effects to better illustrate on this matter but, in summary, a poor household who is 10% richer spends about 7% of the increase on food, and this extra spending is shared 50/50: half on more calories and half to get better tasting or more expensive calories. Even among the poorest of the poor, an increase in economic well-being has a positive, but less than 100%, impact on calories consumed.

Numerous countries use food subsidies and food stamps to encourage greater nutrition. In India, for example, the government recently introduced a subsidy scheme for rice.  But before tackling the issue it is important to know if there actually is a poverty trap. If the previously discussed assumptions hold, a poverty trap opens the possibility of a “big push”: a minor action could have big benefits, which is socially desirable. But, if there is no real poverty trap, helping the poor in this way will simply be a form of wealth redistribution without efficiency gains.

 

Helena Isabel Rodrigues

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Author: studentnovasbe

Master student in Nova Sbe

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