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Barriers

A poverty cycle (poverty trap)

Arises when low incomes result in low savings, permitting only low investments in physical, human and natural capital, and therefore low productivity of labor and of land. This gives rise to low, if any, growth in income (sometimes growth may be negative), and hence low incomes once again.

How to break poverty cycle

  • Government undertake some investments in human (education, health) physical (roads, water supplies – infrastructure) and natural capital (conservation and regulation of the environment to preserve environmental quality)
  • Government take steps to ensure that poor people can participate in private sector activities, such as access to credit (borrow).

Micro-credit schemes

They are small loans that are provided to very poor families (who do not have collateral/ security) to help them engage in productive activities, build small businesses or use for emergency relief.

Controversial issues in micro-credit

  • Micro-credit schemes contribute to the growth of the informal sector. Microenterprises operate for the most part in the informal sector, which is unregulated by the government, where workers have no social protection and where exploitative conditions often prevail.
  • Some extremely poor and highly unskilled people may be harmed by micro-credit because they usually lack skills necessary to begin a microenterprise.
  • Interest rates in micro-credit schemes are too high.

Benefit of micro-credit

  • They provide an incentive for people to save because of a return (interest) on savings. The greater the savings in an economy, the greater are the funds available to be invested.
  • They provide businesses and farmers with credit to open, run and expand their businesses and farms. Investment increases output and growth.
  • They provide consumers with credit that can be used for investments in human capital (education for their children, essential medical care), increasing the productivity of labor and contributing to growth and development.
  • Access to credit is very important for poverty alleviation: investments in human capital rises the incomes of the poor and improve the distribution of income.

Formal sector

It refers to the part of an economy that is registered and legally regulated.

Informal sector

Lies outside the formal economy, and refers to economic activities that are unregistered and legally unregulated. (The informal sector is responsible for a large and rising share of urban employment. In developing countries, one-half to three-quarters of total nonagricultural employment is in the informal sector.)

  • Property rights: legal ownership rights over an asset, allow people to own & benefit from private property.
  • If not protected / guaranteed, no incentive to invest on R&D & innovation.
  • Unclear property rights: difficult for market-oriented policies to be successful.

Education

  • Raises workers’ productivity as they are more educated.
  • Enables people to read / write / communicate, more discussion &debate, so, it promotes social change.
  • Improves women’s role in society: better political / economic / social participation and leadership; there are high correlations between women’s education and child survival rates and fertility rates.
  • Improves levels of health (further reinforces workers’ productivity): improved education levels, in particular literacy rates, improve levels of health in society.

Health

  • Raises workers’ productivity as they can live longer & healthier lives.
  • Healthier workforce = a more productive labor force.
  • Readily enables people to enjoy higher living standards.
  • Improve in health = safest way to achieve a more equitable income distribution.

Dual economy

Arises when there are two different and opposing sets of circumstances that exist simultaneously.

  • Wealthy, highly educated people and poor, illiterate people
  • A formal and informal urban sector
  • A high productivity industrial sector and a low productivity traditional sector
  • A low productivity agricultural sector and a high-productivity, urban industrial sector.

Various kinds of dualism often characterize less developed countries. One of the challenges of economic development is to eliminate every aspect of dualism and develop less polarized and more uniform economic and social structures.

Empowerment

To eliminate the deprivations and create conditions of equality of opportunities.

Gender inequality

Deprivations faced by women and girls.

  • in health: higher mortality rates
  • in education and training: opportunities to receive education
  • in the labor market: discrimination and more unpaid responsibilities (child-rearing, household chores)
  • in inheritance rights and property rights: passed mainly to men
  • in access to credit: lack property tight restrictions in obtaining credit
  • in income, wealth and poverty

Positive externalities of women’s empowerment

  • Improvements in child health and nutrition and lower child mortality.
  • Improvements in educational attainment of children: the more educated the mother, the more educated the children.
  • Quality of human resources. The impacts of increased education and incomes of women on levels of health and education of their children have enormous cumulative effects on the quality of human resources in a country.
  • Lower fertility leads to lower population growth

Positive externalities of equality in income distribution

  • High income inequality may lead to lower overall savings because the groups with the highest savings rates ae the middle classes and not the wealthiest.
  • An improved income distribution increases the demand for locally produced goods and services. This leads to increase in production, so the employment and income rises.
  • A more equal distribution of income leads to greater political stability; highly unequal distributions can lead to social dissatisfaction, unrest and political instability, resulting in lower growth.
  • Highly unequal income distributions mean that the poor are unable to obtain credit which lead to fewer investment on education and health care and lower growth and development.

Infrastructure

Means the essential facilities and services such as roads, airports, sewage treatment, water systems, railways, telephone, and other utilities that are necessary for economic activity.

It should be obvious that improvements in infrastructure will lead to greater economic development. For example, better roads and better public transport allow children to get to school, adults to get to the market, and goods to get to potential buyers.

  • Facilitate economic activity: efficiency rise which brings down cost.
  • Much-needed capital goods help attract foreign investment.
  • Reduce/minimize effects of natural disasters (earthquakes, tropical storms, hurricanes.

External debt

The relationship between the debt service ratio and the GNP, the relationship between the present value of debt service to exports are exceeded.

Heavily indebted poor countries (HIPC)

Appropriate technology

Technology that is appropriate for use with existing factor endowments.

Labor-using (labor-intensive) technologies

Use more labor in relation to capital. They result in increases in local employment and the use of local skills and materials, increases in incomes and poverty alleviation, and save on the use of scarce foreign exchange.

Capital-using (capital-intensive) technologies

Use more capital in relation to labor. In developing countries with large supplies of labor they displace workers and increase unemployment, reduce incomes a throw people into poverty, and require skill levels that may be costly and difficult to acquire, as well as the use of foreign exchange for imports.

Natural resource endowments

Countries differ vastly with respect to their natural resource endowments (the resources they possess through nature). Some have marketable natural resources (oil, natural gas, minerals, etc), while others have few or none.

Human resource endowments

  • Climate Countries differ in their climate, which is also important in determining the nature of economic activities. Climate differences are a factor determining types and methods of agricultural production, animal husbandry, and even labor productivity.

  • History Many developing countries are former colonies of European powers. Some acquired their independence much later than others. Their experiences as colonies have influenced the development of their institutions.

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