What is the Poverty Trap?

A poverty trap is a phenomenon that people can easily relate with because it exists in different economies, especially in the developing economies. A poverty trap is a mechanism that describes a situation whereby people find it extremely difficult to escape from a poverty-stricken state. When poverty persists in an economy, making it impossible for individuals to break free from poverty, a poverty trap exists. When poverty is prolonged from one generation to another, a poverty trap exists. This means there is a cycle of poverty which makes people remain perpetually poor.

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What Causes the Poverty Trap?

A poverty trap can occur in a country if individuals or citizens need to acquire a significant level of wealth before they can leave the poverty region. There are many reasons poverty traps exist, the major ones include the inability of people to get capital to acquire basic things or meet their needs. When there is a lack of capital or limited access to capital, poverty exists and persists in an economy. Aside from a lack of capital, poverty traps can occur if there is;

• Bad (corrupt) governance.
• Poor infrastructure and basic amenities
• Harsh environmental conditions
• Poor health and education
• Violence, wars, natural disasters, and epidemics.

Jeffrey Sachs, a researcher, and an economist pointed out that capital poverty can occur in six forms, these are poverty in human capital, natural capital, knowledge capital, business capital, infrastructure capital and public institutional capital. For individuals to escape poverty traps, the basic requirement is access to funds or capital with which they can acquire and meet their basic needs. In addition to access to capital, good governance is key as this will lead to the creation of good health systems, education systems, and other pertinent infrastructure. Some researchers also argue that one of the most effective ways for people to escape the poverty trap is for aid firms to give a significant amount of aid to countries in order to reverse poverty in the country. Below are some key points to know about a poverty trap;

• A poverty trap is a system or situation in an economy where individuals have poor access to capital and are unable to acquire basic things.
• A poverty trap is a reinforcing cycle of poverty, that is, poverty that has become persistent and extends from one generation to another.
• When people are poverty trapped, they find it difficult to escape from a state of abject poverty.
• There are several factors that cause poverty traps, they are lack of capital, poor education system, poor infrastructure, and poor healthcare.
• Economists argue that access to sufficient aid or capital is a key way to escape from poverty traps.

The Public and Private Role in Addressing the Poverty Trap

Jeffrey Sachs is a notable economist that did numerous studies that address poverty traps. One major solution to poverty traps that Sachs proffered is the need for both public and private enterprises to collaborate to effectively eradicate poverty trap. According to Sachs, both private and public investments are needed to tackle the menace of the poverty trap. When these sectors combine their efforts in addressing the poverty trap, the results are faster and more effective. For instance, if both the public and private sectors combine their investment strength towards infrastructure, human capital, natural capital. Knowledge capital, business capital, environment preservation, and others, there will be sustained growth that will raise people from poverty.

Example of a Poverty Trap

The amount of aid given by the government and private agencies with the aim of lifting people out of poverty is crucial in addressing a poverty trap. For example, if the government of a country gives aid of $1,200 monthly to a household or family to assist them and help them out of poverty if this amount is combined with the monthly or annual income of the family, it goes a long way in combating poverty trap. Aside from giving individuals aid, there are other ways that a country must devise in tackling poverty. For instance, paying attention to the healthcare sector, education system, environment conservation, and others can help lift people out of a poverty trap. In Rwanda for example, when genocide was at its peak, coupled with the civil war, improvement of the healthcare and insurance sectors help tremendously in addressing the poverty trap.

Related Topics

• Market Competition and Innovation
• New Technology and Positive Externalities

• Externality
• Network Externality
• Pigovian Tax
• Coase Theorem
• Agglomeration Diseconomies

• Education - Private and Social Rate of Return
• Government Approaches to Encouraging Innovation
• Public Good
• Public, Private, Club, Common Goods
• Excludable and Rivalrous Goods
• What is the Free Rider Problem for Public Goods?
• Free Rider
• Social Loafing
• Role of Government in Paying for Public Goods
• What is the Tragedy of Commons for Common Resources?
• Income Inequality
• Poverty Line?
• Poverty Trap
• Public Safety Net
• Measuring Income Inequality
• Lorenz Curve
• Ladder of Opportunity
• Tradeoff between Incentives and Income Equality