Vicious Circle of Poverty - Online Tutor, Practice Problems & Exam Prep

The vicious circle of poverty describes how low per capita income leads to low savings and demand, resulting in minimal investment in capital goods and human capital. This cycle perpetuates low productivity and income, exacerbated by rapid population growth. Governments can break this cycle by establishing the rule of law, building infrastructure, promoting international trade, and controlling population growth. Advanced nations can assist through trade expansion, admitting temporary workers, and providing foreign aid, which collectively enhance economic development and productivity in developing countries.

Vicious Circle of Poverty

Now, let's discuss what's called the vicious circle of poverty. The vicious circle of poverty is basically the cycle that being poor causes you to stay poor. Okay? It's a vicious cycle because since you're poor, well, you tend to stay poor. Economists tend to think that the way to break out of the vicious cycle of poverty in these developing countries is to increase capital goods. Basically, the availability of capital goods will get us out of this cycle. It'll increase everything that's wrong with the cycle. So let's go ahead and look at this vicious cycle of poverty real quick. We'll start here with Low Per Capita Income. You're in a situation where you're not making much money. Basically, the country is poor and people are generally poor. Well, if you don't have much money, then you're not going to be saving much money because you need your money to survive. And you're not going to be demanding many products. You're not going to be getting a lot of things. So there's low savings and low demand when you're not making much money. Which leads to low investment in physical and human capital. Because if there's low demand, well, there's not a big need for new investment, for new products to be created, for new factories, right? Low investment will happen in these countries. And if there's low investment in physical and human capital, well, it leads to low productivity. Because the more physical capital that's available, these capital goods when there are factories available, tools, and equipment, it leads to higher productivity. But when it's not around, well, we have low productivity as well as human capital. When the population is uneducated, well, they're not as productive as well. And when you're not very productive, well it leads to not making much money, and we get back in this cycle here, right? And to make things worse, in a lot of these developing countries, there's also rapid population growth. Making the per capita income even lower because there's even more population making less income, right? So there's even more poor people falling into this vicious circle of poverty, okay? So that's basically how it works here.

These capital goods, they're basically saying by pumping up the physical capital here. It'll basically help break out of the cycle by investments into the physical capital, the capital goods of the country. Okay? So let's see the role that the government can play and that industrially advanced countries can play in breaking developing countries out of these vicious circles of poverty.

First, let's start with the government. The government can play a role by establishing the rule of law. We've mentioned before that governments in developing countries can tend to be corrupt, right? But by enforcing clearly defined property rights, it reduces investment risk. A lot of times, entrepreneurs and investors don't want to invest in developing countries because there's a risk that their property may be seized by the government. It may be stolen because there's not this rule of law that's clearly enforced. So by establishing a clear rule of law, it could help break out of the cycle. Next is Building Infrastructure. This is basically an investment in capital goods by building better roads, schools, education, and transportation systems, it can help boost the productivity of the nation. Being a global nation, participating in international trade, an open economy tends to grow faster than a closed economy because they're trading with other nations, they're getting investments from other nations. And finally, they can control population growth. Just like we saw in our chart above, population growth tends to add to the vicious cycle of poverty, right? So by offering birth control options or teaching their citizens about birth control, it can tend to help mitigate the circle of poverty from getting worse.

Advanced Nations can also play a role here. An Industrially Advanced Nation can help the developing nations grow by expanding trade. They can expand trade with these nations by basically lowering trade barriers. They can take away tariffs or quotas that they have with these countries to help these countries have places to sell their products overseas, basically. They can admit temporary workers. Now, this one can be good or bad. By admitting temporary workers, well, the migrant workers that work, let's say people come to the US to find jobs. Well, they're going to take money that they earn here, and they're going to send money back home to their families. So that their families have more income basically. So it helps their families have more income. However, this also causes problems because the migrants may choose to stay, right? So, they might find a job in the US and they might just decide, hey, I'm going to try and stay in the US rather than go back to their country. And finally, we have foreign aid, right? We can just basically send money to those countries, not only money but goods, food, and capital that we can send to those countries to help them develop, right? We can use programs to assist the growth of developing countries just basically through donations of all sorts. Alright, so that's the vicious circle of poverty. Let's go ahead and pause and move on to the next video.

Here’s what students ask on this topic:

What is the vicious circle of poverty?

The vicious circle of poverty is a self-perpetuating cycle where low per capita income leads to low savings and demand, resulting in minimal investment in capital goods and human capital. This lack of investment causes low productivity, which in turn keeps income levels low. Rapid population growth exacerbates the situation by further reducing per capita income. Breaking this cycle requires interventions such as increasing capital goods, improving infrastructure, and establishing the rule of law to encourage investment and productivity.

How can governments break the vicious circle of poverty?

Governments can break the vicious circle of poverty by implementing several key strategies. First, establishing the rule of law and clearly defined property rights reduces investment risk and encourages entrepreneurship. Second, building infrastructure such as roads, schools, and transportation systems boosts productivity. Third, promoting international trade by maintaining an open economy can lead to faster growth. Lastly, controlling population growth through education and birth control options can help mitigate the cycle's effects. These measures collectively enhance economic development and productivity.

What role do advanced nations play in breaking the vicious circle of poverty?

Advanced nations can assist in breaking the vicious circle of poverty in developing countries through several means. They can expand trade by lowering trade barriers, such as tariffs and quotas, allowing developing countries to sell their products overseas. Admitting temporary workers can also help, as these workers often send money back home, increasing their families' income. Additionally, providing foreign aid in the form of money, goods, food, and capital can support the development of these countries. These actions collectively enhance economic development and productivity in developing nations.

Why is low investment in physical and human capital a problem in developing countries?

Low investment in physical and human capital is problematic in developing countries because it leads to low productivity. Physical capital, such as factories, tools, and equipment, is essential for efficient production processes. Human capital, which includes education and skills, is crucial for a productive workforce. Without sufficient investment in these areas, productivity remains low, perpetuating low income levels and preventing economic growth. This lack of investment is a key component of the vicious circle of poverty, making it difficult for these countries to break out of the cycle.

How does rapid population growth affect the vicious circle of poverty?

Rapid population growth exacerbates the vicious circle of poverty by further reducing per capita income. As the population increases, the already limited resources and income are spread even thinner, leading to more people living in poverty. This increased population also puts additional strain on infrastructure, education, and healthcare systems, making it even harder for the country to invest in physical and human capital. Consequently, productivity remains low, and the cycle of poverty continues. Controlling population growth through education and birth control options can help mitigate these effects.