Poverty traps: A nexus of work, credit and vulnerability

This thesis considers the case of a household in a developing country that operates an informal enterprise as its source of revenue. Therefore, the household is both a unit of consumption and a unit of production, with multiple levels of connection between its dual roles. Households that operate an informal enterprise face pervasive risk and vulnerability in meeting consumption needs but are unable to separate consumption and production risk. Various coping strategies are available to limit exposure to risk, with the focus here on the use of credit to smoothen consumption. Households that operate an informal enterprise crowd out enterprise investment when credit is used to smoothen consumption. Debt service requirements reduce future investment in the enterprise and lower future potential earnings. Using a unique dataset, The Urban Poor Home Worker Survey-Ecuador, this thesis employs various econometric techniques to explore the impact of past credit use and debt service on current enterprise investment. The results support the hypothesis that household that have used credit for consumption in the past have lower current investment than those that have not borrowed or borrowed for productive investment. Furthermore, considering households without current debt due to either not borrowing during the past 12 months preceding the survey or having repaid their debt, household that used credit for consumption purposes have lower current earnings, supporting the notion of enhanced vulnerability and poverty trap due to past credit use. Given the pervasive use of consumption credit for food and health care expenditure, to reduce vulnerability governments should provide low cost social services to the urban poor.