1. THE POVERTY CYCLE Syllabus Outcomes: Explain that in some countries there may be communities caught in poverty trap (poverty cycle) where poor communities are unable to invest in physical, human and natural capital due to low or no savings; poverty is therefore transmitted from generation and there is a need for intervention to break out of the cycle.

2. C AUSES OF P OVERTY The poverty trap (cycle): arises when people with low incomes have low ( or zero) savings – this leads to low or no investment in capital (physical/ human and natural). This again gives result in low or no growth in incomes once again. Poverty Cycle.

3. P OVERTY C YCLE A poverty cycle may occur in a family, a community or in an economy. An important feature of the poverty cycle is that poverty is transmitted from generation to generation.

4. Low incomeLow savings Low investment Low growth in income Low productivity of labour and land Low human capital Low physical capital Low natural capital The Poverty Cycle

5. H OW IS POVERTY TRANSMITTED ? People earn very low incomes Have low productivity/low skills/ and low physical capital Have poor health and basic or no education and poor housing Cannot afford medical are for family – most children are malnourished and disadvantaged Children don’t go to school due to cost or due to need to help own family by working Kids grow up with same disadvantages as their parents and poverty cycle repeat itself

6. H OW IS POVERTY TRANSMITTED ? People in rural areas earn very low incomes Have low productivity/low skills/ and low physical capital Cannot buy or invest in modern agricultural inputs (fertilizers, seeds, irrigation) Forced to overuse land and deplete its nutrients – Children inherit land with poor soil and low yields and low output Families inherit low income and poverty

7. H OW IS POVERTY TRANSMITTED ? Poor People don’t have savings Cannot make investment because they cannot borrow No investment in physical, human and land capital Productivity and output remain low Income remains low and family suffer Children inherit poverty cycle

8. B REAKING OUT OF THE POVERTY CYCLE People trapped in poverty cycle cannot emerge from it on their own. Government intervention is needed for that to happen. HOW?? Government must undertake government policies aimed at increasing investment in merit goods and in different types of capital.

10. G OVERNMENT I NTERVENTION Government Investment Physical CapitalInfrastructure, water, sanitation, housing, roads, power supplies and land irrigation Human CapitalHeath, education, training Natural CapitalConservation, environmental regulation and protection Access to creditLow interest loans to finance private investment Question: Where would the money come from to subsidize these investments??

11. A NSWER Government revenues if country is rich and has good source of revenues BUT what if the country is already poor? eg: Ethiopia ANSWER The whole country is then trapped in poverty cycle What is then the solution?? Only one option – rely on foreign aid.