Analysis of Poverty Traps

The poverty trap was mainly appeared in developing countries, which was identified as "any self-reinforcing mechanism which causes poverty to persist." Which means If it continues from generation to generation, the trap begins to strengthen itself if effective steps are not taken to break the cycle. There are three economists found the reason of the reason of the formation of the poverty. Including Nurkse, came up with the idea of vicious circle of poverty in 1935, who believed that “A country is poor because it is poor”, which means a quantity and complex connection of the economy is the reason for the long—term poverty of developing countries. Myrdal, came up with the idea of Cumulative Causality theory in 1957, which means there are always exists causal relationship in the process of the dynamic developing of economy, so any element changes will cause other relative elements, the result will turn to endless vicious circle if even one element turns to bad situation. In 1965, Nelson came up with the idea of low-level equilibrium trap, according to the article, Nelson declared a different model that could give rise to such traps at both the macro and micro levels. Nelson develops a growth model with low saving and investment rates at low-income levels. He thought “Although the notion of low-level stagnation is scarcely new or different, it hoped that this paper does more than express the common knowledge of economists in a complicated manner.” In other words, Nelson believed that the low levels of per capita income people are too poor that they can not save and invest much, and this low level of investment results in a low rate of growth in national income. As per capita income rises above a certain minimum level. As a result, there is zero saving, a rising proportion of income will be saved and invested, and this will lead to higher rate of growth in income. In a word, Nelson thought that the main barrier of hindering the economic development in developing countries is because the population growth increases excessively, it is necessary to increase the investment of capital to make the balance of investment and production, to increase the per capita income.

According to the article, I would like to analyse Nurkes and Nelsons’ theory from the view of the supply-demand relationship. On the one hand, From the aspect of supply, the formation of the investment is a vicious circle itself, the economy of developing countries is in bad situation, the per capita income is low, which implies they have to use a large proportion of income to supply daily life consumption (M). Which lead to the low level and capacity of savings. The low capacity of savings is the main reason for the lack of investment formation. There is no chance to expand the production scale and to enhance productivity. The low productivity lead to low underproduction, and the low underproduction lead to low income. Back and forth, frequently taking the shape of the vicious circle of low income—low capacity of savings—the low productivity—the love underproduction -- low income.

On the other hand, from the aspect of demand. Because the economically backward developing countries, the low per capita income of people affects their capacity for buying and consuming. The weak purchasing power can not stimulate investment, the lack of investment became the biggest problem of promoting to expand the production scale and to enhance productivity. The low productivity reduces the production and leads to low income. Therefore, forms the vicious circle of taking the shape of the vicious circle of low income—low capacity of savings—the low productivity—the love underproduction -- low income.

According to the severe situation, we know that poverty traps did exist. However, there are some ways that policy—makers addressed some of the issue raised, which are effective. Policy—makers did carry out some effective policies besides regard supporting the poor as the only way to get rid of poverty traps. Which also advances with the time. Among them, to deal with the problem from the root, policy—makers strengthened the importance of education. Education can improve people’s competitive power, which can change the job category (Young). However, Parents who are in the poor situation do not have much money for their children as an educational investment. The communication rage among the poor people mostly belongs to the same level, if their neighbour’s children go out for work, parents may let their children discontinue their studies (Nawaz). That is why it is necessary for Policy—makers to set policies like reduce the cost of education or support the poor for their education. Which did a crucial part of changing the fundamental reason of poverty traps?

Works Cited

[1] Nawaz Shah. Microfinance and poverty reduction: evidence from a village study in Bangladesh; Journal of Asian and African Studies, 2010, Print.

[2] Young Frank W. Community decline and mortality; Health & Place, 2007. Print.

[3] M. Isabel Pasarín. Weighing social and economic determinants related to inequalities in mortality; Journal of Urban Health, 2004. Print.

[4] Vicious Circle of Poverty, Wikipedia, 2015. Web. 15 June 2.