Spatial Poverty Traps?

Can location make the difference between growth and contraction in living standards for otherwise identical households? Apparently so. Evidence of spatial poverty traps strengthens the case for investing in the geographic capital of poor people. Can place of residence make the difference between growth and contraction in living standards for otherwise identical households? Jalan and Ravallion test for the existence of spatial poverty traps, using a micro model of consumption growth incorporating geographic externalities, whereby neighborhood endowments of physical and human capital influence the productivity of a household's own capital. By allowing for nonstationary but unobserved individual effects on growth rates, they are able to deal with latent heterogeneity (whereby hidden factors entail that seemingly identical households see different consumption gains over time), yet identify the effects of stationary geographic variables. They estimate the model using farm-household panel data from post-reform rural China. They find strong evidence of spatial poverty traps. Their results strengthen the case - both for efficiency and equity - for investing in the geographic capital of poor people. This paper - a product of the Development Research Group - is part of a larger effort in the group to understand the geographic determinants of poverty and the implications for policy. The study was funded by the Bank's Research Support Budget under the research project Policies for Poor Areas (RPO 681-39)