Poverty Escape Plan Revealed by Computer Model of Economic Vicious Cycles

Infectious disease condemns poor countries to an endless cycle of of ill health and poverty. Now a powerful new computer model of the link between disease and economic growth has revealed how to escape

Poverty traps are insidious economic disasters that have terrifying consequences for individuals and indeed entire populations. When a self-reinforcing mechanism causes poverty to persist or increase, an entire generation of people can become trapped in a vicious circle of decline that can have catastrophic consequences.

One form of poverty trap occurs when a country suffers from poor health but does not have the economic clout to pay for better healthcare. If workers suffer from poor health, economic output goes down. And if economic output goes down, there is less to spend on healthcare. And if spending on healthcare drops, people become less healthy. And so on.

The question is how to break out of this kind of poverty trap. Today, we get an answer thanks to the work of Georg Goerg at Carnegie Mellon University in Pittsburgh and a few friends who have simulated the way disease can spread through a country and how this influences economic output.

They then tested two different ways of breaking the cycle. In the first, the country receives a large injection of capital from outside, development aid for example. In the second, the country increases the proportion of GDP it spends on healthcare, to bootstrap its own way out of the cycle.

And their conclusions are sobering. They say one of these methods works well while the other fails miserably.

The new model is relatively straightforward. It starts with a population in which people are able to work if they are healthy. Workers produce wealth, of which a certain portion goes towards healthcare.

When people are unwell, however, they cannot work at full pelt and so produce only a fraction of their healthy output. And the rate at which ill people return to health depends on the amount of money spent on heathcare.

Having created this model, Goerg and co introduce a disease which spreads through the population preventing sufferers from fully participating in the work force until they are cured.

These are exactly the conditions that trigger a poverty trap and the model allows them to explore the full space of possible outcomes.

In doing this, Goerg and co show how rich and poor countries fare differently. Imagine two countries with similar-sized populations but one that is rich and the other poor. When disease strikes, the absolute cost of treating these populations is the same but the poor country has to fork out a dramatically larger proportion of its GDP to cover the cost.

That has serious implications. In Goerg and co’s model, rich countries that already have a high economic output can increase the amount they spend on health without a significant impact on economic growth. That avoids poverty spiralling out of control.

By contrast, poor countries fare differently. A similar increase in spending on healthcare has a huge effect on GDP, in some cases causing the economy to shrink. When this happens, the short term effect is to treat the disease but the long-term health of the nation suffers causing the economic output to drop even further and triggering a vicious cycle of poverty.

Goerg and co’s conclusion is that increasing the proportion of GDP spent on healthcare cannot release a country from this kind of poverty trap. Indeed, it can do the opposite and trigger a vicious cycle of decline.

The other option is much more successful. This involves an injection of cash from outside the economy. If this injection is large enough and sustained for long enough, the government can spend more on healthcare without the economy suffering. That reduces levels of ill health which boosts the economy, creating more wealth to spend on healthcare and so on. The result is a virtuous cycle of improved health and increasing wealth.

“We find that a large influx of capital is successful in escaping the poverty trap, but increasing health spending alone is not,” they say.

Indeed, demographers observed exactly this kind of change during the 1960s and 70s in countries such as Saudi Arabia, Oman and Iran which received huge injections of cash thanks to the oil boom at that time. This led to a dramatic improvement of health as measured by child mortality rates and an ongoing increase in wealth .

How much cash does a country need to escape a poverty trap? Goerg and co say their model suggests that the money should be equivalent to halving the cost of disease treatment and prevention.

But this level of investment is not needed in the long term. Goerg and co say the same outcome can be guaranteed if the long term investment is equivalent to only 15 per cent of this cost.

Any less is a disaster, however. “Below this level of aid, even if a country is willing to spend a large share of its budget on health they cannot escape the poverty trap,” they say.

That’s an interesting result that could have an important impact on the way policy makers, governments and international aid organisations think about aid programs. Poverty is a problem that affects the entire world, not just those trapped in this depressing cycle. It is surely our job to change it.

Ref: arxiv.org/abs/1311.4079: Escaping The Poverty Trap: Modeling The Interplay Between Economic Growth And The Ecology Of Infectious Disease