Abstract for: Modeling the Dynamics of Poverty Trap and Debt Accumulation

Absolute poverty is all pervasive in most developing countries and particularly in Africa (Gore 2002; Sachs, Mcarthur et al. 2004) and Ghana is no exception. For instance, the growth rate per capita for sub-Saharan Africa was negative in the 1980s, i.e. about -2% per annum and about -1% per annum during the 1990s (Birdsall, Claessens et al. 2002). Most common explanation for why countries fail to achieve economic growth focuses on corrupt leadership, inability to make productive use of loans and culture that impede modern development (Korner, Maass et al. 1987; Sachs 2005). However, in recent years, the idea that poverty itself causes economic stagnation has gain attraction and engages the attention of researchers. In this paper, we developed a system dynamics model based on the system dynamics adaptation of poverty traps and debt overhang theory to establish the causal structural mechanism that explains poverty traps and determine internal poverty trends and its link with public debt accumulation. We find out that the decline of per worker income in Ghana is attributed to significant reduction of investment coupled with high population growth. The policy analysis proposed increasing investment,(preferably FDI) as the best policy to reduce poverty and public debt accumulation.