The vicious cycle of poverty

this is a summary of the article by P.T. Bauer, “The Vicious Cycle of Poverty and the Widening Gap”

About Bauer

Peter Thomas Bauer, Baron Bauer (1915May 2, 2002) was a world-famous developmental economist.

Bauer is best remembered for

  1. his opposition to the widely-held notion that the most effective manner to help developing countries advance is through state-controlled foreign aid; foreign aid not only fails to promote economic progress but may actually retard this process
  2. private property rights are necessary and sufficient (in addition to smith’s rudimentary baseline).

Adam smith wrote in the ‘wealth of nations‘ in 1776, that “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things” . Bauer echoed Smith’s sentiment. According to him, “Emergence from poverty requires effort, firmly established private property rights, and productive investment.”

Bauer was born in Hungary, taught at LSE,  Prime Minister  Margaret Thatcher was his his friend and admirer.

Nearly all of Lord Bauer’s greatest contributions concerned development economics, international development and foreign aid. Bauer sought to convince other development experts that central planning, foreign aid, price controls, and protectionism perpetuate poverty rather than eliminate it, and that the growth of government intervention politicizes economic life and reduces individual freedom.

For Bauer, the essence of development was the expansion of individual choices, and the role of the state to protect life, liberty, and property so that individuals can pursue their own goals and desires. Limited government, not central planning, was his mantra.

state or central planning implies concentration of power in the hands of an elite that ultimately leads to corruption and abuse.

sounds familiar?

About the article


the article challenges popular themes that

  • ‘countries are poor because they are poor’
  • that there is a ‘vicious cycle of poverty’ and
  • that to get out of it what is required is
  1. drastic sacrifices at home
  2. massive aid from abroad

the above ‘wrong’ themes serve as basis for academic, government and literary thinking and for most current policies and measures.

1. the ‘invalid’ vicious cycle theory

developing nations can not get their heads abouve water- poverty itself set obstacles to its own conquest

  • low level income makes savings impossible, thus no capital accumulation neceassiry for increase in income
  • narrow markets obstruct specialization, needed for higher income
  • demand is too small to permit productive investment
  • government revenues are insufficient for effective public services
  • malnutrition and poor health keep productivity low
  • lock of profitable opportunities for private investments

it is this thesis, or accumulation of reasons, that the article would like to challange

2. invalidity

argues that empirical evidence refutes the theory

3. empirical evidence

evidence is provided to the contrary, showing that developing economies are developing

4.  international demonstration effect

demonstration effect states that should the vicious cycle be broken, another one is waiting: contact with advanced economies is damaging to underdeveloped economies, is encourages consumption vs savings

5. consideration of objections

3 considerations that may be objections to the anti vicious cycle theroy:

a.  thesis does not argue that there is progress throughout the underdeveloped world

b. recognition of material progress in some parts of the under developed world is not a plea for laissez-faire or any other policy

c. advanced sectors in under-developed countries are outposts of advanced economies which do not improve the economic prospects of the local population

6. aspects and implications of change

cash crops as insturment of material advance is discussed

7. impact of change

discussion of difficulties of adapting insitutions and attitudes to fast changing conditions

8. appeal of the vicious cyle

discussion of why the vicious cycle has become so popular

widening gap?

9. the vicious cycle and the widening gap

developed countries are developing and under developed countries are stagnating. so there is an ever-widening gap.

not true without looking at a broad set of issues including:

  • concept
  • interpretation
  • measurement
  • comparison

10. ambiguities in the Concept of the Gap

11. distinction between Developed and Underdeveloped countries

12. problems of international income comparasons

13. population growth and the widening gap


14. further implications of population growth

15. the national income as index of welfare

16. wider considerations on the Gap

some groups may be adjusting better than others. so need to consider widening of relative differences of average incomes between groups over time with adjustments for age.

17 conclusion

arguments for ever-widening gap do not indicate or consider:

  • what is measured (changes in differences, ratios)
  • between which groups
  • over what period

these arguments (vicious cycle, ever-widening gap) are used to promote policy

the gap arguments’ limitations are less clear and therefor more effective to promote policy and course of action. it adds fear to guilt of the West. it promotes urgency and an attendant feeling

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One Response to “The vicious cycle of poverty”

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