I’ve been reading Poor Economics, which I highly recommend.
One of the authors’ central questions was “do ‘poverty traps’ exist? When and where?” A poverty trap works as follows:
Generally in microeconomics you expect to see diminishing returns to things. So for instance, the more income you have, the harder it is to find productive things to do with it.
That would suggest that the poor should find it much easier to productively invest their income than the rich (where “invest” is used in the loosest sense, e.g. it includes buying more food so that you have more energy and can do more work tomorrow).
But this is somewhat at odds with the observation that many of the poor tend to stay poor.
So there might be some kind of regime where actually there are increasing returns to investment; that is, for whatever reason the poorest of the poor don’t have access to these good investment opportunities.
In general, they seem to find that these investment opportunities exist in principle, but people don’t take them for a combination of a few reasons:
Poor information (not knowing e.g. how much school will improve kids’ incomes later)
Low trust/enforcement (e.g. not much trust in insurance companies to actually pay out; hard to enforce debts if borrowers decide to stop paying)
Behavioral economics (e.g. not being able to precommit not to spend savings in emergencies, hence not being able to save up for fertilizer for fields)
When put like this it’s not exactly surprising that people fail to make productive investments; it’s a problem in developed countries too! (Well, the “low trust” thing not as much, I suppose.)