ECO 312: Economic Development Submitted to: Mrs.

Losialoi

Department of Commerce School of Business and Economics 20th November 2013 Poverty is much more than a curse By 12-0203 Joshua Mwangi

POVERTY IS MUCH MORE THAN A CURSE. Introduction Poverty is the inability to afford the basic human wants. These include food and non-food items. Evidence of poverty can be seen almost everywhere, but most severe poverty exists in developing nations. Severe poverty results into slums, homeless people and poor suburbs. Poverty is a collective condition of poor groups or individuals. The entire country can be poor and in order to prevent stigmatization, we refer to such countries as developing nations. Recent estimates based on two surveys, rural and national showed that poverty is more severe in rural areas. This is caused by inadequate basic social services. Most rural households do not have enough income to pay for essential expenditures. The European Unions working definition of poverty is: Persons, families and groups of persons whose resources (material, cultural and social) are so limited as to exclude them from the minimum acceptable way of life in the Member State to which they belong. The World Bank considers that [t]he developing world has already attained the first Millennium Development Goal (MDG) target of halving the 1990 poverty rate by 2015,1which is the case if one compares the 1990 extreme poverty rate of 43.1%to that in 2010 of 20.6%.In addition, worldwide, the number of people living in extreme poverty (defined as less than $1.25 a day) fell from 1.8 billion in 1990 to 1.4 billion in 2005. However, the economic crisis in the last few years is reversing the gain in fight against poverty. The burden of poverty falls on women and children in many countries but especially Africa. As the Nobel prize-winning economist AmartyaSen put it, [the] identification of poverty with low income is well established, but there is, by now, quite a substantial literature on its inadequacies.2 He notes four types of contingencies that determine variations in the impact of (low) income and that cause us to appreciate that poverty is more than just low income: individual physical characteristics,

1 2

World Bank, Poverty,available at:<http://www.worldbank.org/en/topic/poverty>. Sen,The Idea of Justice (Allen Lane, 2009) 254.

environmental conditions, social conditions, and behavioural expectations within the community.3 These characteristics vary by individual, family, and society such that a given level of income may result in one person living in poverty in terms of their capability to lead a life they value, compared to another with the same income but whose functionings (the term used by Sen for what you actually do) provide a higher level of happiness or well-being. In sum, real poverty (in terms of capability deprivation) can easily be much more intense than we can deduce from income data.4 Measuring Poverty There are various ways of measuring poverty. The first one classifies Poverty as absolute poverty or relative poverty. Calculation of absolute poverty is based on a set standard, which is constant over time and between countries. For illustration, an absolute measurement can be the number of people eating less food than is necessary to maintain the human body. On the other hand relative poverty is partly socially defined and dependant on the existing social context. For example, we can take the possessions of the poorest one third of a given population and compare it with that of the richest one percent of that population (Panon, 2004). The poverty line as defined by the European Union is a relative measure based on economic distance. It sets the level of income at 50% of the average household earnings. The UNDP Human Poverty Index is a compound index, based on a number of component measures that measure a summary statistic on the economic welfare of the poor in a society. The index is better than a simple indicator. Poverty is multi-dimensional issue and a relative concept, and thus different factors and different expectations need to be taken into account in different countries. For the Mediterranean basin, we adopt one of the two indices developed by UNDP: HPI-2, an index for developed countries. The Human Poverty Index ranks countries according to an index of several factors, which differ between developing and developed countries. While calculating the number of

3 4

Ibid, 255-6. Ibid, 256.

people living on extremely low income is a convenient way of identifying poverty, it is widely acknowledged that the definition of poverty is broader than income data. The U.S. however calculates poverty levels based on absolute poverty measure. The United States poverty line, which was established in 1963, calculates poverty based on the dollar. The economic food plan is multiplied by a factor of three since food costs accounts for approximately a third of the total earnings. However, due to inflation the calculations are updated annually. The two measures relative and absolute are based on an individuals annual earnings and do not consider total wealth. Critics of the measures say that ignoring someones total wealth amounts to the calculations being erroneous. They argue that total wealth should be included since it is a major component of economic welfare. Other methods of measuring poverty are poverty guideline and poverty thresholds. Poverty guideline is used to establish eligibility of a number of programs while poverty threshold is calculated after a period of one year. Poverty threshold is based on the existing population survey for a given month. For illustration, calculation of 1998 poverty threshold was established by using the 1999 March population survey. Research shows that economic growth has the overall effect of reducing poverty. Using income data of more than 90 countries, it was proved that whenever there is economic growth there resulted in poverty alleviation. Countries with higher growth rates saw greater decline in poverty levels (Perotti, 1996). Economic growth is accompanied by a rise in employment and higher wages. These results in a significant growth in gross domestic products and government revenue hence lower levels of poverty. Increased government revenue helps the government to spend more on social sectors such as education and health thus leading to poverty alleviation. Generally, an increase in gross domestic product produces a growth in life expectancy, higher primary school enrolment and a reduction in child mortality rates. Inequality as sociologists argue is an economic problem first and then political and social problem. They say that of all the natures of inequality, the most important one is the economic nature. The economic nature of inequality can be understood best when it is based on the structure of income

distribution and its effects on economic development and social stability. Economic inequality has along history. Many people have desired equal distribution of resources. There have been arguments saying that social conflicts and severe confrontation between classes is caused by the economic inequality. They believe that fair distribution of resources will result in reduction in social friction hence sustained economic growth. A theory that has existed for approximately half a century maintains that economic inequality changes as economic growth change (Roberto, 2004). It relates factor movement between areas where there is unfair distribution of wealth, which states that distribution does not have to be even. The theory concludes that if there is fair distribution of resources will result in higher productivity leading to economic growth. Solutions to Poverty In order to mitigate these problems of poverty, economic growth must be stimulated. This is because the two are tied together. There should be economic liberalization. Economic rights when extended to the poor results in poverty reduction. When the poor have property rights to land, they have the means to reducing poverty; this important strategy is the best a nation can employ (Rodrguez, 2000). Possessing land increases the wealth status of poor people greatly. Liberalization of trade, prices and exchange rates have far-reaching effects in the economy. Privatization of government owned firms also enhances assists in reducing economic decline and restores a nation back to economic self-sustenance. When the poor have land, agricultural activities and opportunities are created. Small or average households in rural areas experience growth as they benefit from employment and income generated from agriculture. Although statistics from household income are unavailable, indicators like improved enrolments in schools and improved health are evidence of economic progress. Increasing capital, which is one of the factors of production, enhances economic growth. Human capital is important for economic growth since one cannot engage in productive economic activity unless he is healthy. Human capital in terms of education also has direct influence in economic development. Good infrastructure and technology enhance market reforms. Countries that strategize to

have economic growth must invest in road network, railways, ports and telephone systems. Experience shows that improving infrastructure and technology is a working formula for economic development. From history, the steam engine initiated the rapid economic growth in Europe. Mobile phone technology has created economic development even in poor and rural sections, bringing with it economic freedom by making financial services available to the poor. Obtaining aid is another useful way of alleviating poverty. Aid as a form of social security provides money in the economy. Basic income grants or grants from international financial institutions are successful anti poverty program. Such programs enable causes rapid economic growth. Most developing nations have huge debts and hardly raise enough money from exports to settle these debts. Such nations should receive debt relief. Debt cancellation should be encouraged to allow the poor nations to advance economically. Poverty In Africa In Africa, one of the causes of poverty is politics. A few individuals or families instead of ideologies, institutions and public policies control the political arena. This causes rivalry and power struggle, which more often results in violence. In such apolitical system, there is little or no economic growth (Dohlman & Soderback, 2007). If at all the government puts in place measures to alleviate poverty, the big men in the system are the beneficiary of such measures. There exists a general lack of policy to improve the lives of impoverished majority. In order for there to be any significant economic growth, the government should involve the poor people in formulating and implementing poverty alleviation programs. The government should not assume that it knows what will be beneficial to the poor more than the poor themselves will. Projects should be approved if it will promote the welfare of the poor people rather than some contractors who stand to benefit from the projects (Uphoff, 2000). The citizens of these nations must speak boldly stating what they know will assists them and refuse to entertain the white elephant projects. Other measures that can be taken include funding agricultural activities to increase food production and fighting the rampant corruption. The Grameen Bank approach is effective in alleviating poverty especially in the rural setting. Regardless of how much someone is poor. He has potential, which remains under utilized. This is what

the founder of grameen bank Muhammad yunus realized. He observed if this potential can be utilized, the poor man will not only change his own life but will influence the lives of many more people in a community. Professor Yunus therefore created a microfinance organization that gives small loans to the poor without requiring security. He also established a community development bank, which offers group based credit. Apart from this, the bank has created several developments oriented enterprises such as energy providing, fabric and telephone companies (Cavaye, 2000). The micro financing is focused on supporting community-based projects. It promotes training needs in order to bring out the potential locked up in individuals. This is a major way of maintaining effective sustainable change process. Apart from building capacity for development within the community, it also creates an enabling environment for people to achieve there potential. Through these programs, it has emerged that occurs when individuals posses skills necessary to address their issues and are confident of their ability to participate. Everyone desires that he be treated with respect, the programs ran by this organization has put this in consideration. Therefore, the Grameen Bank approach has remained effective and has resulted in effective poverty alleviation. These programs have been engaged in many communities in third world nations for more than twenty years and are highly successful. Poverty and Foreign Aid Of itself, foreign aid is not the solution to global poverty. As has been seen from various attempts to relieve poverty in certain areas of Africa, the situation has basically remained the same for the past few decades. For example, if one looks at the efforts that were made in 1985 by the "band aid" concerts to change poverty on the African continent, and to shame politicians into giving more aid, the results had a limited lifespan. The biggest problem with foreign aid is the management of it. Just pouring money and resources at a problem does not mean that it will be eradicated for good. In many respects the aid given is more an attempt by the donating governments to quieten the concerns being voiced by their own

populace than a real effort to end poverty itself. There has to be an overall strategy for eliminating poverty, within which foreign aid is but a small part of the process. Poverty is a social and infrastructure problem for all nations, including the emerging and third world countries. Unless these underlying causes are addressed all the aid will do is to provide temporary relief. To alleviate the scourge of poverty in third world countries one has to address certain key factors. 1) The political structure - by helping the development of a truly democratic process within the nation there is the opportunity to achieve a greater distribution of wealth and more fairness within the society, thus reducing the high numbers of those who are living within the poverty trap. Similarly, this process will lead to a situation that reduces civil conflict, which is often the cause of increasing national poverty. 2) The community infrastructure -Handing out food or other aid does not help people to maintain a standard of living that will keep them out of poverty. One also has to provide them with the aid to enable communities to build a community structure and culture that encourages employment and trade into the area. Only by assisting such nations to build their infrastructure in this manner, will these nations be able to reach and sustain a lifestyle that keeps them out of poverty in the longer term. 3) International Trade Third world countries have to be embraced within the international trading community, encouraged and helped to build strong and vibrant industries that can compete on the world stage. As has been evidenced in areas of Asia where this has happened, given the opportunity, these countries can become self-sufficient and dramatically reduce the poverty levels within their own borders, using their own self-generated income to do so. Eventually this will provide additional market places for the global organisations to trade with, thus increasing prosperity for all concerned, including the poorer nations.

Thus it can be seen that foreign aid, unless it is accompanied by a strategy of sustainability and is joined with political and global trade will, cannot provide a solution to global poverty. When a natural disaster occurs, be it tidal wave, earthquake or whatever, and the national government of a country impacted is incapable of meeting the needs of its survivors, the international community nearly always rallies round to help, or at least tries to. Some repressive regimes attempt to refuse or constrain the methodology of that help, but even in these cases, the international community's desire to help usually manages to get through in some form. While a considerable amount of such help is monetary, a large component takes the form of food, medical supplies and on the ground assistance from a wide range of caring and capable volunteers; from doctors and nurses tending the injured through to engineers and builders resurrecting the area's infrastructure and providing replacement homes. Surely, if such help is provided by people who are not citizens of that country, it should be considered "foreign aid". Just because it is generally described as a "disaster recovery program" or some such, does not disqualify this premise. There are a large number of non-governmental organizations (NGOs), whether charities or not, that provide assistance in what we call the "developing nations". For many of these, it is the sole reason that they exist. The people who support these NGOs through, often tax-deductible, donations may be said to be supplying foreign aid in a monetary form, but the majority of this aid reaches those in need in the form of food, medicine, education, infrastructure and small-scale repayable and normally repaid loans for economic development. Such NGOs frequently participate in "disaster recovery programs" as well, but their main aim is to provide the assistance that allows people trapped in poverty to overcome the constraints they face. And they are frequently successful. This is a form of foreign aid that brings hope, but also instills a sense of achievement and control in those the NGOs have the sadly limited resources to benefit.

When it comes to foreign aid supplied to nations in need by the governments of the developed nations, the situation is significantly different. It is clearly this situation that has resulted in the feeling articles that have responded negatively in this debate. Understandably so. Such foreign aid is predominantly financial, although some of the donating nations have included military materiel as well as money in their "aid". Let's consider that first. The most prominent justification offered to the public of nations that supply military aid is the need for security in the nation being aided, so that humanitarian aid can then reach the people in need. This certainly sounds legitimate. But does the actuality we see in our News programs, at least where we might have a small chance of receiving unbiased ones, match this proposition. From what I have seen, I would have to say not. Although, since the end of the Cold War, it is considerably better than it was. Few nations receiving military aid to suppress rebels within their borders appear to adhere to any concept of democracy. Even when cease fire agreements are arranged and elections take place, the governments of these nations only seem to be willing to accept the will of the people if that will expresses itself by supporting them. If it doesn't or even if they don't expect it to, we tend to see totalitarian measures used to manipulate the result or suppress the political opposition. Hardly, circumstances to encourage programs to alleviate the poverty of what is usually the vast majority of the citizens of these nations. Financial aid given by the governments of developed nations to the governments of developing nations has a number of problems. These fall primarily in three areas: the greed and corruption inherent in the receiving government's ministers the strings the "aiding" government attaches to the aid the debt burden of the receiving nation. When the nation receiving financial aid is based on a social system that incorporates graft as an established and normal part of its cultural background, it is hardly surprising that the powers that be in such a nation epitomize this characteristic. When 90 percent or more of foreign aid is siphoned off into the pockets of a small elite, why shouldn't the public of the aiding nations perceive that foreign aid as ineffective.

When foreign aid is offered on the basis of a political return, can we really expect the dominant forces in the receiving government to use it effectively? If they are willing to accept moneys with such strings attached, are they not likely to be the type of people that will redirect it into their own pockets rather than use it to help their people. For example, several Pacific Island and landlocked African nations have received "foreign aid" from Japan dependent on their joining the International Whaling Commission (IWC) and voting in favor of letting Japan resume commercial whaling. How much of such aid has gone to benefit their populaces might be considered questionable; the ethical validity of aid offered under such constraints is certainly so. Many, possibly most, developing nations that receive foreign aid in the form of financial resources have considerable debts owing to financial organizations including the World Bank. Even when the governments of such nations have the ethical wherewithal to want to improve the lives of their people, they are often forced to first make payment on the interest they owe; not the capital debt, merely the accruing interest. This is why those attempting to reduce world poverty in recent years have been so strongly advocating that the debt of impoverished nations be "written-off". Even the NGOs operating in many of the developing nations are forced to provide graft to "officials" to enable them to do their good works. Does that mean that their efforts are wasted? That the "foreign aid" they are providing is not working towards the eradication of poverty? Global poverty is not limited to the developing nations. There is no nation currently extant on our planet that does not have people living below what is called the "poverty line". On the basis of our current technological, industrial and agricultural abilities, despite a population that well exceeds the ability of our planet to support if we returned to the hunter/gatherer societies of pre-history that are advocated by some back-to-nature proponents, we are quite capable of providing sufficient for all.

That we don't is due to the political and economic systems we employ in our global society. The supposedly democratic or communist, and the unapologetically totalitarian political cultures. The growth rather than sustainability oriented capitalist economics current in most, if not all, nations; no matter what their professed political systems. It is unlikely that we will change these sufficiently or in time to limit the environmental problems we are bestowing on future generations; it's possible that through effectively administered and provided foreign aid, we can at least alleviate the suffering of billions afflicted by poverty. Generosity to others is an inherent component of our human natures, perhaps it can prevail over the animal nature we seem to imbue to our social systems

References Cavaye, J. (2000). Rural Community Development, Rural Extension Centre, Gatton: Queensland.
Dohlman, E & Soderback, S. (2007). Economic growth versus poverty reduction: A hollow debate?

Retrieved on February 22, 2011 from

http://www.oecdobserver.org/news/fullstory.php/aid/2173/Economic_growth_versus_poverty_reductio n:_A__93hollow_debate_94_.html

Panon, S. (2004). The Grameen Bank Approach to Community Engagement. Retrieved on February 22, 2011 from http://www.engagingcommunities2005.org/abstracts/Paton-Sandy-final2.pdf Perotti, R., (1996). Democracy, Income Distribution And Growth: What The Data Says. Economic Growth Journal, 1(6): 149-187. Roberto, P. (2004). Political Equilibrium, Income Distribution, and Growth. Review of Economic Studies 60(4): 755-776. Rodrguez, F. (2000). Inequality, Economic Growth and Economic Performance: A Background Note for the World Development Report 2000. Retrieved on February 22, 2011 from http://siteresources.worldbank.org/INTPOVERTY/Resources/WDR/Background/rodriguez.pdf Uphoff, N. (2000). Poverty and Inequality: A Life Chances Perspective. Retrieved on February 22, 2011 from http://www.arts.cornell.edu/poverty/Papers/Uphoff_poverty_and_development.pdf World Bank, Poverty,available at:<http://www.worldbank.org/en/topic/poverty>.

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