Poverty Trap:

Linked combination of barriers to growth and development that forms a self perpetuating cycle.

Economic Barriers:

1. Income Inequality;
   1. High Income inequality> low levels of savings> low investment> low growth.
   2. Low income majority of population> low aggregate demand> low investment
   3. Low income> low tax revenue> low spending on merit goods or redistribution policies
   4. Low income> unable to access credits> low investment> unable to develop human capital.
2. Lack of access to Infrastructure
   1. Due to problems of financing, inadequate maintenance due to low govt revenue, limits accessibility to poor, rural areas due to financing, misallocation> may not always make best decisions.
   2. Improvements in infrastructure > greater economic development > for eg better roads reduce cost of transporting, Utilities such as stable power and water supply> important for production and good health, etc
3. Lack of access to Technology
   1. Lack of appropriate tech: developing require tech that complements abundant factor endowments. For eg more labor supply> labor intensive. But tech developed by developed countries is capital intensive> not appropriate
   2. Low financial resources to invest in Research and development of technologies due to low demand, low savings
4. Poor quality of human capital
   1. Increased levels of education> improve well being> more skills> greater social mobility(break out of poverty) and employability> more productive and efficient workforce. Moreover> greater literacy improve social attitudes towards women, less crime rates> development> long term economic growth
   2. Why: Less availability to credit to afford education and increase human capital and low govt budget to spend in schemes that promote. > since under provided> merit goods.
   3. Lack of access to healthcare> if better> less diseases> more life expectancy> economic development> greater productivity> Long term growth.
5. Dependence on primary sector production
   1. Dependence on primary exports> make developing countries vulnerable to price volatility> since demand and supply are inelastic> significant uncertainty in export revenue> volatility in GDP> Lowers income> lowers tax revenues to promote growth and development
   2. Unable to use protectionism policies to help diversity> low bargaining power
   3. Use a demand supply diagram for this
   4. This uncertainty also lowers investments> difficult to plan ahead
6. Access to international markets
   1. Trade barriers: Developed countries> impose higher tariffs on imports from developing> due to weaker bargaining conditions> trade agreements> low demand for exports> low GDP> low income
   2. Also impose higher tariffs to discourage diversification> higher value added activities> trade escalation> since they want raw materials.> increases dependence on primary
   3. Subsidies in developed countries for primary products damaging>unfair trade advantage> low demand.
      1. Effects: global misallocation,
      2. low export earnings> worse current account, GDP,
      3. Increase poverty amongst farmers> less savings> less investment
   4. Non tariff barriers too> discriminate
7. Existence of Informal Economy
   1. Reasons: lack of education, skills,> lack of opportunities
   2. Effects: Lack of social protection> minimum wage> worse living conditions> worse SOL, incomes
   3. Non payment of taxes> tax revenue lost> directed towards development> leads to lack of merit goods, infrastructure, etc
8. Indebtedness:
   1. High level of debt> impedes govt spending on ….development> as higher proportion goes to repayments
   2. High debt> necessities use of contractionary fiscal to low debt.
9. Landlocked countries
   1. unable to access ports for international trade> rely on neighbouring countries> high transport costs> low export competitiveness> low development
10. Weak institutional Framework
    1. Ineffective tax system:
       1. High dependence on indirect taxation>weak collection systems> significant corruption> concentration of political power in wealthy groups.
       2. Low tax revenues> due to corruption in collection> tax exemption for wealthy influential> reduces govt. ability to spend on merit goods> or development hindered
       3. Inequities> generally regressive> due to reliance on indirect taxation since they are easy to collect> tax evasions for rich> leads to income inequality
       4. Less involved in foreign trade> lower tariff revenue
       5. Informal markets do not pay taxes
    2. Banking system
       1. Importance of banking> reliable> incentive to save> provide loanable funds for investments> improve productivity> and loanable funds for households to improve human capital
       2. Exclusion of poor from access to credit> uncredited worthy> lack of collateral, lack assets> prevents poor from making investments for human capital or businesses.> raise out of poverty.
    3. Legal System and property rights
       1. Lack of property rights>impedes investment that drive EG> due to reluctance to build capital, land without properly defined property rights> also limits access to credit> prevents development of efficient markets fir buy and sell of properties, less tax revenue
       2. Lack of land rights> prevent low income groups from realising ownership
11. Gender inequality
    1. Women are deprived of economic and political opportunities> depresses living standards and deters EG
    2. Consequences
       1. With lack of access to education> women are less informed about health, diet, which decrease the welfare of family> well being decreases
       2. Lack of access to education> less education opportunities> low employability> low productivity> low income levels> impeded growth
       3. Quality f workforce is less
       4. Better knowledge> control over contraception> less children> population control
12. Lack of good governance
    1. Corruption: Occurs when legal system, public administration is weak and underdeveloped.
    2. Effects:
       1. Increase in cost of investment> due to corrupt payments and bribery
       2. Bribes are regressive> hurts low income
       3. Bribes divert funds away govt tax revenues> less budget to spend
    3. Political instability
       1. Wars, civil ward, etc> cause uncertainty> reduces investment, FDI, causes capital flight as perople are less certain and cannot make predictions> deters economic development