Understanding Poverty Traps
- There are many causes of poverty. However, poor countries have several common characteristics which can be summarised in a poverty cycle diagram
Poverty is caused by a lack of both economic growth and human development
Development
- Low wages: represent the intersection of economic growth and human development and are the major cause of poverty
- Low wages are usually the result of unemployment, informal employment, a lack of skills, or a primary sector based economy
- Low wages are usually the result of unemployment, informal employment, a lack of skills, or a primary sector based economy
- Low levels of education and healthcare: cost money and with lower wage levels these are not accessible
- People find it harder to stay well or to recover from illness
- People find it harder to stay well or to recover from illness
- Low levels of human capital: low education and healthcare lead to low levels of human capital, which reduces productivity
- Low productivity: results in low wages and the cycle continues
Growth
- Low wages: represent the intersection of economic growth and human development and are the major cause of poverty
- Low saving: with low wage levels it is much harder to save as any money is spent on necessities
- Low investment: savings drive investment as firms are able to borrow money from commercial banks. Low levels of savings mean that banks have less money available for investment
- Low economic growth: low levels of investment hold back productivity and economic growth
