The Vicious Circle of Poverty
A widely held notion is that underdeveloped countries are caught in a vicious circle of poverty. According to P.T. Bauer, this thesis tends to be basis for important policy proposals and for the suggestion that substantial economic progress of poor countries requires drastic sacrifies at home, supplemented by foreign aid.
The cycle starts with the fact that beacause of economic issues, many are earning low income making it difficult for them to save. Lack of saving prevents the capital accumulation necessary for the income to increase. Other theories mention the narrow markets hinder the emergence and extension of the specialist needed for higher income. The demand is too small to admit productive investment, which helps to alleviate the economy when it is a foreign country investing and prevents opportunities from opening up. The government revenues are not enough for the establishment of effective public services. Low income leads to malnutrtion and ill health which leads back to preventing the economy to rise and become productive. What goes into aid?
