New video tutorial covering the Poverty Cycle. See notes and link below.
Stage 1: Households generate low income (Y) due to being a low-skilled household. Low-skilled households are vulnerable in the labor market as they have low leverage in wage negotiations with employers. In addition, low-skilled households usually only own labor as a factor of production. Thus, they only generate one stream of Y into the household, which is a low wage. The household of the entrepreneur typically owns several resources. As an entrepreneur that seeks to maximize profit, the entrepreneur will try to raise the price of their goods while reducing costs. For most firms, labor is the biggest cost. Thus, entrepreneurs will reduce wages over time as a means to increase profits. As a result, the gap between rich & poor households widens.
Stage 2: Households that generate low Y will generate low or no ability to save financial capital.
Stage 3: If a household is unable to save financial capital or has low savings, they will be either unable to invest in physical, human or natural capital.
Stage 4: Investments in Physical Capital for a low income household could include tools to increase productivity. For a poor farmer, investments in new farming tools can help increase the productivity of their land resource.
Stage 5: Investments in Human Capital through education and healthcare (positive production and consumption externalities) can increase the quality of human capital from low-skilled to middle-skilled to high-skilled over time.
Stage 6: Investing in Natural Capital—the world's stock of natural assets including geology, soil, air, water, and all living things—can assist in escaping the poverty cycle by transforming these assets into sustainable flows of "natural income".
Stage 7: If there are no or low investments into Capital resources, then Labor, Land, and Capital will generate low productivity.
Stage 8: Low or no change in productivity will lead to low or no change in the growth of household income.
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1. The Poverty Cycle in Haiti: Environmental Degradation
In Haiti, the poverty cycle is driven by the depletion of natural capital. This creates a feedback loop where survival needs destroy the very resources required for future income.
Deforestation: Extreme poverty & a lack of affordable energy lead over 90% of the population to rely on charcoal. This has resulted in the removal of nearly all primary forest cover.
Soil Erosion: Without tree roots to anchor the soil, tropical rains wash away fertile topsoil. This leads to low agricultural productivity, as the land can no longer support stable crop yields.
Low Income: Since a vast majority of the rural population relies on subsistence farming, the degraded land leads to food insecurity & plummeting incomes.
The Loop: Because farmers are now poorer, they lack the capital to invest in fertilizers or sustainable technology, forcing them to further over-extract remaining resources just to survive, restarting the cycle.
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2. Developed World: The "Squeeze" on the Middle-Income
In developed economies, the poverty cycle is manifesting as a savings & investment trap due to the rising cost of living (inflation in housing, energy, food).
Reduced Discretionary Income: As necessities take up a larger share of the household budget, the "margin" for saving disappears.
Lack of Financial Cushion: Without savings, households cannot weather idiosyncratic shocks (illness, job loss, car repairs), often forcing them into high-interest predatory debt.
Human Capital Stagnation: Middle-income families may forgo "investments" in their own future, such as private training, higher education for children, or health preventative measures, to pay for immediate bills. This limits future earning potential & risks intergenerational poverty.
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3. The Macro Poverty Cycle
Low GDP per Capita: The average citizen earns low income, the tax base is narrow & informal.
Low Tax Revenue: The government cannot collect enough revenue to fund large-scale infrastructure or social safety nets.
Underinvestment in Human Capital: Due to the lack of funds, the government cannot provide quality education or healthcare.
Low Productivity: A workforce that is under-skilled or unhealthy is less productive. This results in low economic growth & low per capita. Without external intervention (aid or FDI), the state remains unable to "bridge" the gap to a higher equilibrium.