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the Climate Change

Poverty Reduction and Growth

Poverty can dampen growth when market imperfections (market failures, incomplete or uncompetitive markets) combine with investment indivisibilities, fixed costs, and strategic complementarities.

Investment Capacity Constraints 

Investment is critical for growth and to escape from poverty. Since fixed costs and indivisibilities are the norm, the poor may run into problems when they wish to invest because they are unable to come up with enough cash savings of their own, and they usually find themselves shut out of lending markets. Low-income levels are a fundamental reason why the poor cannot save enough money to finance productive investments.

The poor run up against yet another obstacle when they want to borrow: steep transaction costs and high interest rates that make credit a losing proposition. An analysis of various microfinance institutions showed that those that are financially sustainable have nominal interest rates ranging from 30 percent to 50 percent.

Actions to foster the development of financial institutions and services that truly serve the needs of the poor are a potential growth booster as well. In some cases subsidies to help defray fixed costs for equipment, machinery and human capital can be a more efficient approach to encourage the poor to invest more. Also, actions to lessen the moral hazard and adverse selection problem would help: for example, bolstering property rights for the poor, land market reforms to give poor people readier access, and further development of institutional vehicles such as group credit.