Poverty Traps (DP IB Economics)

Understanding Poverty Trap

• 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 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
     

• 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