Poverty trap
Encyclopedia
A poverty trap is "any self-reinforcing mechanism which causes poverty
to persist." If it persists from generation to generation, the trap begins to reinforce itself if steps are not taken to break the cycle.
and capital markets, extreme environmental degradation
(which depletes an areas agricultural production potential), corrupt governance, capital flight
, poor education systems, disease ecology, lack of public health care, war, or poor infrastructure
.
Nations like this include Sierra Leone
and the Democratic Republic of the Congo
.
Jeffrey Sachs
, in his book The End of Poverty
, discusses the poverty trap and prescribes a set of policy initiatives intended to end the trap. He recommends that aid agencies behave as venture capitalists funding start-up companies. Venture capitalists, once they choose to invest in a venture, do not give only half or a third of the amount they feel the venture needs in order to become profitable; if they did, their money would be wasted. If all goes as planned, the venture will eventually become profitable and the venture capitalist will experience an adequate rate of return on investment. Likewise, Sachs proposes, developed countries cannot give only a fraction of what is needed in aid
and expect to reverse the poverty trap in Africa. Just like any other start-up, developing nations absolutely must receive the amount of aid necessary (and promised at the G-8 Summit in 2005) for them to begin to reverse the poverty trap. The problem is that unlike start-ups, which simply go bankrupt if they fail to receive funding, in Africa people continue to die at a high rate due in large part to lack of sufficient aid.
Sachs points out that the extreme poor lack six major kinds of capital
: human capital, business capital, infrastructure, natural capital, public institutional capital, and knowledge capital. He then details the poverty trap:
Sachs argues that sufficient foreign aid can make up for the lack of capital in poor countries, maintaining that, “If the foreign assistance is substantial enough, and lasts long enough, the capital stock rises sufficiently to lift households above subsistence.”
Sachs believes the public sector
should focus mainly on investments in human capital (health, education, nutrition), infrastructure (roads, power, water and sanitation, environmental conservation), natural capital (conservation of biodiversity and ecosystems), public institutional capital (a well-run public administration, judicial system, police force), and parts of knowledge capital (scientific research for health, energy, agriculture, climate, ecology). Sachs leaves business capital investments to the private sector, which would more efficiently use funding to develop the profitable enterprises necessary to sustain growth. In this sense, Sachs views public institutions as useful in providing the public goods necessary to begin the Rostovian take-off model
, but maintains that private goods are more efficiently produced and distributed by private enterprise. This is a widespread view in neoclassical economics
.
Poverty
Poverty is the lack of a certain amount of material possessions or money. Absolute poverty or destitution is inability to afford basic human needs, which commonly includes clean and fresh water, nutrition, health care, education, clothing and shelter. About 1.7 billion people are estimated to live...
to persist." If it persists from generation to generation, the trap begins to reinforce itself if steps are not taken to break the cycle.
Developing world
In the developing world, many factors can contribute to a poverty trap, including: limited access to creditCredit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
and capital markets, extreme environmental degradation
Environmental degradation
Environmental degradation is the deterioration of the environment through depletion of resources such as air, water and soil; the destruction of ecosystems and the extinction of wildlife...
(which depletes an areas agricultural production potential), corrupt governance, capital flight
Capital flight
Capital flight, in economics, occurs when assets and/or money rapidly flow out of a country, due to an economic event and that disturbs investors and causes them to lower their valuation of the assets in that country, or otherwise to lose confidence in its economic...
, poor education systems, disease ecology, lack of public health care, war, or poor infrastructure
Infrastructure
Infrastructure is basic physical and organizational structures needed for the operation of a society or enterprise, or the services and facilities necessary for an economy to function...
.
Nations like this include Sierra Leone
Sierra Leone
Sierra Leone , officially the Republic of Sierra Leone, is a country in West Africa. It is bordered by Guinea to the north and east, Liberia to the southeast, and the Atlantic Ocean to the west and southwest. Sierra Leone covers a total area of and has an estimated population between 5.4 and 6.4...
and the Democratic Republic of the Congo
Democratic Republic of the Congo
The Democratic Republic of the Congo is a state located in Central Africa. It is the second largest country in Africa by area and the eleventh largest in the world...
.
Jeffrey Sachs
Jeffrey Sachs
Jeffrey David Sachs is an American economist and Director of The Earth Institute at Columbia University. One of the youngest economics professors in the history of Harvard University, Sachs became known for his role as an adviser to Eastern European and developing country governments in the...
, in his book The End of Poverty
The End of Poverty
The End of Poverty: Economic Possibilities for Our Time is a 2005 book by American economist Jeffrey Sachs. It was a New York Times bestseller....
, discusses the poverty trap and prescribes a set of policy initiatives intended to end the trap. He recommends that aid agencies behave as venture capitalists funding start-up companies. Venture capitalists, once they choose to invest in a venture, do not give only half or a third of the amount they feel the venture needs in order to become profitable; if they did, their money would be wasted. If all goes as planned, the venture will eventually become profitable and the venture capitalist will experience an adequate rate of return on investment. Likewise, Sachs proposes, developed countries cannot give only a fraction of what is needed in aid
Aid
In international relations, aid is a voluntary transfer of resources from one country to another, given at least partly with the objective of benefiting the recipient country....
and expect to reverse the poverty trap in Africa. Just like any other start-up, developing nations absolutely must receive the amount of aid necessary (and promised at the G-8 Summit in 2005) for them to begin to reverse the poverty trap. The problem is that unlike start-ups, which simply go bankrupt if they fail to receive funding, in Africa people continue to die at a high rate due in large part to lack of sufficient aid.
Sachs points out that the extreme poor lack six major kinds of capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
: human capital, business capital, infrastructure, natural capital, public institutional capital, and knowledge capital. He then details the poverty trap:
The poor start with a very low level of capital per person, and then find themselves trapped in poverty because the ratioRatioIn mathematics, a ratio is a relationship between two numbers of the same kind , usually expressed as "a to b" or a:b, sometimes expressed arithmetically as a dimensionless quotient of the two which explicitly indicates how many times the first number contains the second In mathematics, a ratio is...
of capital per person actually falls from generation to generation. The amount of capital per person declines when the population is growing faster than capital is being accumulated ... The question for growth in per capita income is whether the net capital accumulation is large enough to keep up with population growthPopulation growthPopulation growth is the change in a population over time, and can be quantified as the change in the number of individuals of any species in a population using "per unit time" for measurement....
.
Sachs argues that sufficient foreign aid can make up for the lack of capital in poor countries, maintaining that, “If the foreign assistance is substantial enough, and lasts long enough, the capital stock rises sufficiently to lift households above subsistence.”
Sachs believes the public sector
Public sector
The public sector, sometimes referred to as the state sector, is a part of the state that deals with either the production, delivery and allocation of goods and services by and for the government or its citizens, whether national, regional or local/municipal.Examples of public sector activity range...
should focus mainly on investments in human capital (health, education, nutrition), infrastructure (roads, power, water and sanitation, environmental conservation), natural capital (conservation of biodiversity and ecosystems), public institutional capital (a well-run public administration, judicial system, police force), and parts of knowledge capital (scientific research for health, energy, agriculture, climate, ecology). Sachs leaves business capital investments to the private sector, which would more efficiently use funding to develop the profitable enterprises necessary to sustain growth. In this sense, Sachs views public institutions as useful in providing the public goods necessary to begin the Rostovian take-off model
Rostovian take-off model
The Rostow's Stages of Growth model is one of the major historical models of economic growth. It was developed by W. W. Rostow...
, but maintains that private goods are more efficiently produced and distributed by private enterprise. This is a widespread view in neoclassical economics
Neoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
.