What is the “poverty trap”
A poverty trap is a mechanism which makes it very difficult for people to escape from poverty. A poverty trap occurs when an economic system requires a significant amount of various forms of capital in order to earn enough to escape poverty. When people do not have this capital, they can also find it hard to get it, creates a self-reinforcing cycle of poverty.
Breaking the “poverty trap”
Many factors contribute to the creation of a “poverty trap”, including: limited access to credit and capital markets, extreme environmental degradation (which depletes agricultural production potential), corrupt authorities, capital flight, low levels of education systems, disease ecology, lack of healthcare, war and poor infrastructure.
In order to escape from the trap of poverty, he argued that people in poverty must be given adequate assistance so that they can gain a critical mass of capital necessary to raise themselves out of poverty. This theory of poverty helps to explain why some aid programs do not provide a sufficiently high support level may be ineffective at raising people from poverty. If those in poverty do not acquire the critical mass of capital, then they will just remain dependent on aid indefinitely and regress using the composition.
In his book the end of poverty, Jeffrey Sachs recommends, as a way of combating poverty trap, institutions assistance should function as venture capital investors who Fund start-UPS. Sachs suggests that like any other startup, developing countries should receive the full amount of assistance necessary for them to begin to reverse the poverty trap. Sachs notes that extreme poverty, lack six major kinds of capital: human capital, business capital, infrastructure, natural capital, public institutional capital and knowledge capital.
Sachs details of this point of view:
A bad start with a very low level of capital per person, and then find themselves trapped in poverty because the ratio of capital per person actually falls from generation to generation. The amount of capital per person declines when the population is growing faster than capital is accumulated … the question for the growth of income per capita is the amount of capital accumulation is large enough to keep pace with population growth.
The role of the public and private sectors in addressing poverty traps
Sachs further postulates that the public sector should focus on investment in human capital (health, education, food security), infrastructure (roads, energy, water and sanitation, environmental Conservation), natural capital (conservation of biodiversity and ecosystems), public institutional capital (a well-run public administration, judicial system, police) and parts of knowledge capital (scientific research for health, energy, agriculture, climate, ecology). Business investment, he says, should be the private sector, which argues that Sachs will be a more efficient use of funding to develop the profitable enterprises necessary to sustain sufficient growth to lift all the people and the culture out of poverty.