The vicious circle of poverty describes a self-perpetuating cycle where poverty leads to conditions that keep individuals and nations trapped in a state of low income. This cycle begins with low per capita income, which limits savings and reduces demand for goods and services. Consequently, low demand results in minimal investment in both physical and human capital, leading to low productivity. Without sufficient physical capital, such as factories and tools, and with a poorly educated workforce, productivity remains low, perpetuating low income levels. Additionally, rapid population growth exacerbates the situation by diluting per capita income further, as more individuals share the same limited resources.
To break this cycle, increasing the availability of capital goods is essential. Capital goods, which include machinery, tools, and infrastructure, can significantly enhance productivity. Governments in developing countries can play a crucial role in this process by establishing the rule of law, which protects property rights and reduces investment risks. This legal framework encourages entrepreneurs and investors to commit resources to the economy.
Investing in infrastructure, such as roads, schools, and transportation systems, is another vital step. Improved infrastructure boosts productivity and facilitates participation in international trade, which is often more beneficial than a closed economy. Furthermore, controlling population growth through education and access to birth control can help mitigate the pressures of rapid population increases on economic resources.
Industrially advanced nations can also assist developing countries by expanding trade opportunities. Lowering trade barriers, such as tariffs and quotas, allows these nations to access larger markets for their products. Additionally, admitting temporary workers can provide financial support to families in developing countries through remittances, although this may lead to challenges if workers choose to remain in the host country. Finally, foreign aid in the form of financial assistance, goods, and services can support the development of these nations, helping them to escape the vicious circle of poverty.