Could Poor Countries Break Out of the Poverty Trap?

Parente and Prescott (1993) analyzed cross country economic growth data over the period 1960-1995 and concluded that there is no evidence supporting the existence of poverty trap. In our study we attempt to discuss this issue from the viewpoint of institutional economics. Although we do not provide strong evidence to prove the existence of poverty trap, we claim that Parente and Prescott’s (1993) argument is not sufficient to reject the poverty trap hypothesis. We highlight the strong association between economic development and economic institution. Gradual change and evolution of economic institution is critical for poor countries to break out of the poverty trap