Poverty Dynamics in Nairobi’s Slums: Testing for State Dependence and Heterogeneity Effects

We investigate the factors underlying poverty transitions in Nairobi’s slums focusing on whether differences in characteristics make people more prone to enter poverty and persist in, or whether past experience of poverty matters on future states. Understanding these issues is essential for the design of effective policy programs aimed at enhancing the lives of the poor. The paper uses an endogenous switching model, which accounts for initial conditions, non-random attrition, and unobserved heterogeneity. Estimations are based on a panel dataset from the Nairobi DemographicSurveillance System. Results indicate that true state dependence (TSD) constitutes the major factor driving poverty persistence. There are little heterogeneity effects. Even when household and individual observed characteristics differ notably, the TSD size remains very large. Active anti-poverty programs aimed at breaking the cycle of poverty constitute then the most appropriate policies for taking people out of poverty and preventing them to fall back in.