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Poverty Trap

Updated on April 11, 2024
Article byPriya Choubey
Reviewed byDheeraj Vaidya, CFA, FRM

What is Poverty Trap?

A poverty trap is an economic mechanism where a nation cannot escape the vicious cycle of poverty. It is a self-reinforcing condition witnessed in under-developed and developing countries due to poor access to capital and credit market access.

Some factors that push a country and its people under the poverty trap include capital shortage, inadequate credit facilities, corruption, improper infrastructure, inefficient public healthcare system, weak education system, and wars.

Key Takeaways

  • The poverty trap is an economic cycle where a nation witnesses poverty for generations and will keep on being poor since there is no way to elude it.
  • It is a condition caused by prolonged issues—capital shortfall, poor healthcare facilities, limited access to credit, inefficient education system, inadequate infrastructure, weak governance, corruption, epidemic, natural disaster, and war.
  • The government and aid agencies develop various programs to reduce the suffering—they provide food, shelter, healthcare amenities, income support, etc.
  • Sometimes, public assistance backfires—the poor become habituated to governmental support and lose motivation to work or earn money.

Poverty Trap Explained

A poverty trap is a mechanism where the people of a nation have been poor for years and will continue to do so. This is due to insufficient capital. Capital is required for subsiding poverty. In such a state, per person capital level is quite meager and keeps falling with time. The factors contributing to widespread poverty include inadequate healthcare amenities, prolonged disease, little credit facility, capital inadequacy, corruption, war, weak education system, and lack of infrastructure.

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The government’s efforts and programs to offer food, income support, shelter, healthcare facility, and other grants often aim to decrease the poverty level in the nation. But sometimes, public assistance backfires—the poor become habituated to governmental support. As a result, they have no motivation to work or earn money; this increases unemployment and poverty even more—creating an intense poverty trap. This self-reinforcing system can only be alleviated through massive capital investment.

In 'The End of Poverty: Economic Possibilities for Our Time' , Jeffrey Sachs suggests that the poverty trap can be reversed if public and private aid providers support start-ups as venture capitalists. Moreover, he highlights major factors responsible for sustained poverty—inadequate business capital, human capital, knowledge capital, public institutional capital, infrastructure, and natural capital.

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Example

Africa’s Poverty Trap

Africa’s primary concern is poverty and low living standards—affecting the lives of 1.4 billion people. In addition, the continent is under the debt trap of the West. China extended help to promote economic development, prosperity, and peace.

China’s foreign minister, Wang Yi, suggested the regional revitalization of Africa as a solution to economic challenges. He emphasized connectivity with neighboring countries—the enlargement and development of the Mombasa-Nairobi Railway and the Addis Ababa-Djibouti Railway. Wang also confirmed that China would provide 10 million Covid vaccines to Kenya.

Further, in the surge of development, China’s Belt and Road Initiative (BRI) focused on improving African infrastructure and economy—construction of ports, roads, railways, airports, and power generation capacity. Thus, China is addressing the critical issues and making a considerable investment.

Causes

The poverty trap is formed over the years—a nation has a significant population of poor people who have been in such a state for generations. They don’t have sufficient capital to flee poverty or improve their condition.

The other reasons behind this poverty cycle are discussed below:

  • Weak Education System: In a nation where people are deprived of affordable education, and there are only a few government schools and institutes across a wide region, poverty levels rise.
  • Poor Healthcare and Medical Facilities: When people struggle to pay off medical bills and cannot easily avail healthcare facilities, it drains their savings and income, making them financially vulnerable.
  • Lack of Infrastructure: Sometimes, the government fails to provide proper connectivity within the nation like adequate transportation, conveyance, and communication. Thus, even after willingness, people cannot improve their condition.
  • Improper Governance: Governments failing to manage national funds is another common cause of poverty—corruption and ineffective programs.
  • Limited Employment Opportunities: When limited job options exist, and most of these opportunities provide low wages, people are discouraged from working.
  • Natural Disaster, War, Distress, and Epidemics: Uncontrollable conditions like natural calamities and epidemics often harm the financial condition of the poor. Also, geographical distress or a state of war drains a nation’s wealth.
  • Adverse Climatic and Environmental Conditions: Many countries have unstable environments or climates—unsuitable for business activities. When industries struggle to function in such conditions, the unemployment levels rise.
  • Improper Sanitation: In a nation with poor sanitation, the chances of epidemics and illness are high—this results in increased hospital expenses—the poor are left financially weak.
  • Limited Access to Credit: Credit providers often ignore poor people due to a lack of confidence and a high risk of bad debts.

Frequently Asked Questions (FAQs)

How to escape the poverty trap?

It is difficult to move out of a sustained poverty trap; however, with constant efforts and external financial aid, the nation can successfully escape from it. Following are measures that can break the cycle of poverty:
– Downsize public benefits like income support and incentives
– Raise the minimum wage rate and flare more employment opportunities
– Discourage the long-term provision of unemployment benefits to the disabled and sick people
– Raise the tax-free income limit for the taxpayers.

Do poverty traps exist?

Although rare, poverty traps can be witnessed in a few remote, developing, and underdeveloped nations.

How does the poverty trap discourage people from working?

In a poverty trap, governments take measures to provide aid to the poor and prevent miserable conditions. Thus, the poor get access to basic amenities of life like food, healthcare, shelter, income benefit, and other grants. Unfortunately, all these facilities and support make people lazy and discourage them from working and earning their living. In addition, countries experiencing extreme poverty witness extremely low wages, discouraging people from working.

This has been a guide to what is poverty trap and its definition. We explain Jeffrey Sachs’ poverty trap meaning in economics, its causes, cycles, & examples. You may learn more about it from the following articles –

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