THE POVERTY CYCLE

Syllabus Outcomes:

•Explain that in some countries there may be communities caught in poverty trap (poverty cycle) where poor communities are unable to invest in physical, human and natural capital due to low or no savings; poverty is therefore transmitted from generation and there is a need for intervention to break out of the cycle.

CAUSES OF POVERTY

The poverty trap (cycle): arises when people with low incomes have low ( or zero) savings – this leads to low or no investment in capital (physical/ human and natural). This again gives result in low or no growth in incomes once again. Poverty Cycle.

POVERTY CYCLE

A poverty cycle may occur in a family, a community or in an economy.

An important feature of the poverty cycle is that poverty is transmitted from generation to generation.

Low income

Low savings

Low investment

Low growth in income

Low productivity of labour and land

Low human capital

Low physical capital

Low natural capital

The Poverty Cycle

HOW IS POVERTY TRANSMITTED?

People earn very low incomes

Have low productivity/low skills/

and low physical capital

Have poor health and basic or no education

and poor housing

Cannot afford medical are for family – most

children are malnourished and

disadvantaged

Children don’t go to school due to cost or due to need to help

own family by working

Kids grow up with same disadvantages as their parents and poverty cycle repeat

itself

HOW IS POVERTY TRANSMITTED?

People in rural areas earn very low

incomes

Have low productivity/low skills/ and low

physical capital

Cannot buy or invest in modern

agricultural inputs (fertilizers, seeds,

irrigation)

Forced to overuse land and deplete its

nutrients –

Children inherit land with poor soil and low yields and low

output

Families inherit low income and poverty

HOW IS POVERTY TRANSMITTED?

Poor People don’t have

savings

Cannot make investment

because they cannot borrow

No investment in physical,

human and land capital

Productivity and output remain

low

Income remains low and family

suffer

Children inherit poverty cycle

BREAKING OUT OF THE POVERTY CYCLE

People trapped in poverty cycle cannot emerge from it on their own. Government intervention is needed for that to happen.

HOW??Government must undertake government policies aimed at increasing investment in merit goods and in different types of capital.

GOVERNMENT INTERVENTION

Government Investment

Physical Capital Infrastructure, water, sanitation, housing, roads, power supplies and land irrigation

Human Capital Heath, education, training

Natural Capital Conservation, environmental regulation and protection

Access to credit Low interest loans to finance private investment

Question: Where would the money come from to subsidize these investments??

ANSWERGovernment revenues if country is rich and has good source of revenues

BUT

what if the country is already poor? eg: Ethiopia

ANSWER

The whole country is then trapped in poverty cycle

What is then the solution??

Only one option – rely on foreign aid.