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 redistributative 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 maintainence due to low govt revenue, limits accesibility to poor, rural areas due to financing, misallocation> may not always make best decisions.
   2. Improvements in infrastructure > greater economic dvelopemne > 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 capotal intensive> not appropriate
   2. Low financial esources to invest in Research and developemnt 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> mor eproductive and efficient workforce. Moreover> greater literacy imporve social attitudes towards women, less crime rates> developemnt> long term economic growth
   2. Why: Less availability to credit to afford education and increase human capital and low givt budget to spend in schemes that promote. > since underprovided> merit goods.
   3. Lak 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> volatitlity in GDP> Lowers income> lowers tax revenues to promote growth and development
   2. Unable to use protectinist policies to help diversity> low bargaining power
   3. Use a demand supply disgram for this
   4. This uncertainty also lowers investments> difficult to plan ahead
6. Access to international markets
   1. Trade barriers: Developed countries> impose higher tarrifs on imports from developing> due to weakeer bargaining conditions> trade gareements> low demand for exports> low GDP> low income
   2. Also impose higher tarrifs to discourage diversification> higher value added activities> trade escalation> since they want raw materials.> increases dependednce 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 farmenrs> less savings> less investment
   4. Non tarrif barriers too> discriminate
7. Existence of Informal Economy
   1. Reasons: lack of education, skills,> lack of opportunities
   2. Effecrs: Lack of social protection> minimum wage> worse living condiions> worse SOL, incomes
   3. Non payment of taxes> tax revenue lost> directed towards developemtn> leads to lack of merit goods, infrastructure, etc
8. Indebtness:
   1. High level of debt> impedes govt spending on ….developemnt> as higher proportion goes to repayments
   2. High debt> neccesates use of contractionary fisal to low debt.
9. Landlocked countries
   1. unable to access ports for international trade> rely on neigbouring countries> high transport costs> low export competitiveness> low deveopment
10. Weak institutional Framework
    1. Ineffective tax system:
       1. High dependence on indirect taxation>weak collection systems> significant corruption> concentration of political power inwealthy gExcroups
       2. Low tax revenues> due to corruption incollection> tax exemption for welathy influencial> 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 evations for rich> leads to income inequality
       4. Less involved in foreign trade> lower tarrif 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> uncrediworthy> lack of collatoral, lack assets> prevents poor from making investments for human capital or businesses.> raise out of poverty.
    3. Legal System and poperty rights
       1. Lack of property rights>impedes investment that drive EG> due to reluctance to build capital, land without properly defined propety rights> also limits access to credit> prevents development of efficient markets fir buy ans sell of propeties, less tax revenue
       2. Lack of land rights> prevent low income groups from realisaing ownership
11. Gender inequality
    1. Women are deprived of economic and policitical opportunities> depresses living standards and detters EG
    2. Consequences
       1. With lack of access to education> woemn are less informed about health, diet, which decrease the welfare of family> well being decreses
       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. Btter knowlege> control over contraception> less children> population control
12. Lack of good governance
    1. Corruption: Occurs when legal system, publicadministeration 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 grom tax reveues> less budget to spend
    3. Political instabilty
       1. wars, civil ward, etc> cause uncertainty> reduces investment, FDI, causes capital flight as perople are less certain and cannot make predictions> detters economic development