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Poverty Trap for Developing Economies

Mark Johnston

16th September 2010

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The graphic below I found useful in explaining how developing countries find it so hard to grow. All of the impoverished household income goes to consumption, just to stay alive.

There are no taxes and no personal savings. Nonetheless, depreciation and population growth continue relentlessly. The result is a fall in capital per person and a negative growth rate of per capita income. That leads to still further impoverishment of the household in the future. The figure depicts a vicious circle of falling incomes, zero savings and public investment, and falling capital per person as a result. This graphic is taken from Jeff Sachs’ book – The End of Poverty – a good read.

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Mark Johnston

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