Development economics

Table of Contents

1. Topic pack - Development economics - introduction
2. 4.1 Economic development (notes)
   1. Economic development - introduction
   2. Development - pause for thought
   3. Economic growth and economic development
   4. Sustainability
   5. The sources of economic growth and economic development
   6. Natural factors
   7. Importance of agriculture
   8. Externalities
   9. Case study - farming in Kenya
   10. Human factors
   11. Population
   12. Physical capital and technological factors
   13. Institutional factors
   14. The consequences of growth for Development
   15. Common characteristics of economically less developed countries
   16. Poverty cycle
   17. Diversity among economically less developed nations
   18. International development goals
   19. Millennium Development Goals
   20. Case Study - Millennium Development Goals
3. 4.1 Economic development (questions)
4. 4.2 Measuring Economic Development (notes)
5. 4.2 Measuring development (questions)
6. 4.3 The role of domestic factors in economic development (notes)
7. 4.3 The role of domestic factors in economic development (questions)
8. 4.4 The role of international trade (notes)
9. 4.4 The role of international trade (questions)
10. 4.5 The role of Foreign Direct Investment (FDI) (notes)
11. 4.5 The role of foreign direct investment (questions)
12. 4.6 The role of foreign aid and multilaterial development assistance (notes)
13. 4.6 The role of foreign aid and multilateral development assistance (questions)
14. 4.7 The role of international debt (notes)
15. 4.7 The role of international debt (questions)
16. 4.8 The balance between markets and intervention (notes)
17. 4.8 The balance between markets and intervention (questions)
18. Print View

Poverty cycle

Poverty and income inequality are major factors holding back the development of many of the poorest countries on earth. Poverty is a grinding fact of life.

If you earn little, say just a few dollars a day, what chance do you have of saving any money, or owning a bank account? The acquiring of capital (including human capital) is impossible and the cycle continues through each generation.

Poverty cycle

Poverty can be very difficult to reduce as many economies struggle to develop and find themselves in what is known as the 'poverty cycle trap'. To develop economically, countries need to invest in new and improved capital.

However, investment needs funding and this requires savings.

Countries with low income and low savings levels have a lack of funds for investment, which in turn leads to lower incomes.

This is a continuing spiral of cumulative causation. Low incomes lead to low investment levels, which mean even lower incomes.

Less developed countries need to break the cycle to develop, but how can this be achieved? This poverty cycle is shown in diagrammatic form in Figure 1 below.

Figure 1 The vicious cycle of poverty

In a virtuous cycle, higher incomes will lead to higher savings and demand, enabling and encouraging more investment, raising productivity and thus increasing income.

When it comes to strategies and policies to encourage economic development, consider how the vicious cycle of poverty can be halted and a virtuous cycle put in its place.