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Poverty trap


A poverty trap is a self-reinforcing mechanism which causes poverty to persist. If it persists from generation to generation, the effect can reinforce itself as a "cycle of poverty", if steps are not taken to break the trap.

In the developing world, many factors can contribute to a poverty trap, including: limited access to credit and capital markets, extreme environmental degradation (which depletes agricultural production potential), corrupt governance, capital flight, poor education systems, disease ecology, lack of public health care, war and poor infrastructure.

In the developing world, many factors can contribute to a poverty trap, including: limited access to credit and capital markets, extreme environmental degradation (which depletes agricultural production potential), corrupt governance, capital flight, poor education systems, disease ecology, lack of public health care, war and poor infrastructure.

Jeffrey Sachs, in his book The End of Poverty, discusses the poverty trap and prescribes a set of policy initiatives intended to end the trap. He recommends that aid agencies behave as venture capitalists funding start-up companies. Venture capitalists, once they choose to invest in a venture, do not give only half or a third of the amount they feel the venture needs in order to become profitable; if they did, their money would be wasted. If all goes as planned, the venture will eventually become profitable and the venture capitalist will experience an adequate rate of return on investment. Likewise, Sachs proposes, developed countries cannot give only a fraction of what is needed in aid and expect to reverse the poverty trap in Africa. Just like any other start-up, developing nations absolutely must receive the amount of aid necessary (and promised at the G-8 Summit in 2005) for them to begin to reverse the poverty trap. The problem is that unlike start-ups, which simply go bankrupt if they fail to receive funding, in Africa people continue to die at a high rate due in large part to lack of sufficient aid.


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