A poverty trap is a cycle that keeps people in a state of poverty even when they attempt to lift themselves out. A number of factors contribute to the development of such cycles and economists have developed a variety of theories for addressing poverty traps created by social and economic policy. This issue is of especially pressing concern in developing nations, where poverty rates are often very high and aid organizations are working to improve conditions for people living in poverty while also making it possible for families to get out of poverty.
In a simple example of a poverty trap, many nations with social services use means testing to determine eligibility for those services. Government assistance is often structured to allow people to survive on a marginal level, in part because it does not keep pace with inflation, and also with the stated goal of incentivizing getting off benefits rolls. A person in poverty will qualify for social services, but if that person attempts to get work, benefits will be reduced proportionally according to income, leaving the person in the same position. Individuals who get enough work to totally support themselves may find themselves paying a high marginal tax rate, again putting them right back where they started.
Policy is not the only way to create a poverty trap. Nations with environmental problems and severe political instability can also have populations trapped in poverty by circumstances. If they try to escape those circumstances, they run into another set of problems linked with the turmoil in their nations, and may end up returning to the place they began.
People caught in poverty traps tend to give up after a certain point. After trying to escape the poverty trap and finding themselves in the same position, they return to the level where they can receive government assistance, benefits from aid organizations, and so forth. Some critics of means testing and the methods used to supply foreign aid have argued that these policies need to be changed to encourage people to escape from poverty and make it less likely that former recipients of such benefits will relapse into poverty and need assistance again.
Adjusting means testing standards, changing tax codes, making investments in the form of loans to support people trying to open businesses, and providing other forms of assistance designed to promote the development of wealth and additional income have been suggested as ways to address the poverty trap problem.
