Definition
Poverty cycle
A self-reinforcing cycle where low income leads to limited access to resources, which in turn prevents individuals or communities from improving their economic situation.
Figure 1 above illustrates the poverty cycle. As can be seen:
- Low-income households often spend the majority of their income in essential goods and services, causing low or none savings.
- Insufficient savings transform into low investment levels.
- As a result, low-income households end up with:
- Low physical capital (machinery, computer technologies...).
- Low human capital (poor health, poor labour skills...).
- Low natural capital (arable land, stock...).
- These low levels of capital result in low productivity of the labour and land owned by low-income households.
- This low productivity hinders the ability to gain a new higher-paying job, resulting in low-income growth.
- Without an increase in income, households in poverty end up where they started: with low incomes. This closes the poverty cycle.
As we will discover in the upcoming sections, breaking the poverty cycle requires:
- External intervention (transfer payments...).
- Targeted investment in:
- Education.
- Healthcare.
- Infrastructure.
- Improved access to:
- Credit.
- Markets.
- Technology.
