The Economics of Poverty

'Big Data,' 'Internet of Things,' 'Venture Capital investments,' 'Bitcoin mining' - it might seem that today's reality is virtually preoccupied with umpteen phrases straight from the lexicons of the worlds' greatest visionaries.

Obviously, it is crucial to think ahead of time and ponder various visions of growth and facilitate forthcoming development. Nonetheless, you do not need to think back far to realize how rare it is to hear a discussion on potential solutions to global penury at least half as exuberant as a conversation on futuristic visions of self-driving cars or underground tunnels eliminating hectic traffic jams in Los Angeles.

Therefore, I urge you to imagine this situation: you have a family to feed, bills to pay, everyday necessities to provide to your beloved ones, and... only $1.90 in your pocket every day. Mission impossible, right?

Unfortunately, this scenario is the reality of more than 700 million people across the globe.

According to the United Nations' Sustainable Development Goals, the resolute deadline to "end poverty in all its forms everywhere" is designated to be the year 2030. So, what exactly do we need to do in order to solve one of the greatest humanitarian crises in just nine years from now? In an attempt to answer this question, we ought to delve a little bit deeper into the economics of poverty.

Theoretical aspects of poverty

Let's begin by summoning some basic measures like the International Poverty Line. It is a monetary threshold used to determine whether someone is living in poverty or not. This value is regularly estimated by the World Bank based on corresponding data representing each country, subsequently converted into dollars. Currently, the state of extreme poverty is defined as living on less than $1.90 per day, which is a reality affecting 10% of the world's population.

According to the World Economic Outlook 2020 report published by the International Monetary Fund, all of the ten world's poorest countries are located in Africa, with Burundi, the Central African Republic, and the Democratic Republic of the Congo topping this disquieting list.

The average value of their purchasing power parity – a macroeconomic measurement used to e different countries' productivity and living standards - is estimated to be approximately $ 1'181, contrasting with a PPP of over $ 90'000 for countries situated on the opposite side of this classification.

Based on social, economic, and political criteria, we can distinguish the following types of poverty:

• absolute poverty - involving the scarcity of basic resources like food, water, healthcare, shelter, or education;

• relative poverty - based on a comparison between the financial situation of individuals and the standards pervading their social environment;

• situational poverty - occurring temporarily due to adverse events;

• generational poverty - handed over from one generation to another due to the family's inability to escape the ongoing poverty cycle;

• rural poverty - observed in rural areas with a population below 50'000 inhabitants;

• urban poverty - present in metropolitan (and often overcrowded) regions with a population exceeding 50 000 people.

The main causes of destitution

In order to discuss poverty eradication, we need to understand its main causes in the first place. Destitution - as befits a severe global issue - stems from a wide range of complex problems, amongst which inadequate access to nutritious food and clean water often takes the lead. Common reasoning suggests that it is poverty that causes hunger; however, this dependency also works in the opposite direction, preventing people from improving their conditions due to the lack of energy or health issues caused by malnutrition.

Other factors responsible for rising poverty include global conflicts that put the lives of millions on hold, lack or very little access to livelihoods and jobs, or severe outturns of climate change. Lack of proper infrastructure (ranging from roads and bridges to cell phones and internet infrastructure) and poor education also personify the key reasons for destitution. According to the estimates by UNESCO, "171 million people could be lifted out of extreme poverty if they left school with basic reading skills". Insufficient government help and exacerbating inequality also pose two serious hurdles we need to deal with if we want to get rid of poverty in the future.

Why should we all care about combatting poverty?

Despite being one of the most distressing issues humanity faces, poverty is relatively rarely discussed compared to other common subjects like the technological development of societies or professional fulfillment of individuals.

The tendency to somehow 'neglect' this issue is deeply entrenched in the conviction that poverty solely impacts only two social groups: those directly struggling with it or humanitarian organizations fervently trying to help them. And this should be nowhere near the truth. Why?

One of the most renowned answers to this question has been offered by Kofi Annan, the Seventh Secretary-General of the United Nations. On the International Day for the Eradication of Poverty, he has aptly observed that: "Extreme poverty anywhere is a threat to human security everywhere." Why is that?

The explanation is relatively simple. Amongst some of the most severe implications of poverty, we can distinguish the growing occurrence of crime, the spread of various dangerous illnesses, high mortality rates, and acute social conflicts.

It is relatively easy to see that these threats can have a wide range of distressing results affecting the wellbeing of entire societies, including even the best-situated individuals. The necessity to combat poverty - especially in its most radical versions - continuously affecting millions of people worldwide - should not originate just from natural, humane empathy. Living in safe and peaceful conditions while experiencing high levels of economic prosperity definitely lies in everyone's interest.

How to combat global poverty?

So, the next question is: are there any "magic bullets" to end global poverty?

Unfortunately, according to the leading specialists in this topic: no. However, there are numerous actions that can take us several steps further towards combatting this issue: providing the poverty-stricken with access to critical information (especially regarding disease-protection methods), constructing programs supporting professional and financial development of the impoverished, or helpful innovations like microcredit.

For instance, microfinancing has been one of the main drivers of Cambodia's success in transitioning from wartime to peace and has significantly helped in establishing savings, loans, insurance, and money transfers in favor of its poorer citizens.

Quoting the work of Esther Duflo and Abhijit Banerjee – two Nobel Prize winners awarded for their experimental approach to alleviating global poverty - "The field of anti-poverty policy is littered with the detritus of instant miracles that proved less than miraculous."

There is an immense need for innovative, evidence-based solutions in order to help people escape extreme poverty. Governments need to change perspectives of their programs not only to lift people above the poverty line but also to help them stay above it in the long term.

One of the most widespread and intensely researched versions of the 'big solution' is called the Graduation approach (more precisely: the BRAC Ultra-Poor Graduation Initiative). It is defined as a "time-bound sequence of interventions addressing the multidimensional causes of extreme poverty." Those interventions are carefully adapted to local realities and range from livelihood training, transfers of productive assets, providing people with the basics of financial education, and in-person coaching sessions. These actions, designed on four crucial pillars ("social protection, livelihood promotion, financial inclusion, and social empowerment"), are helping people "graduate" from poverty into self-sufficiency.

Did it work?

Do not get misled by the skepticism-planting tone of my question. It worked – the research from the London School of Economics and Political Science presented in December 2015 has found that: "more than five years after completing [the program] in Bangladesh —and more than seven years after the initial transfer of productive assets—93 percent of participating households experienced long-term gains." The average income increase was estimated to be 37%, while the labor productivity increase has arrived at the level of 361%!

What about simply donating money and other resources to the poverty-stricken?

The idea of regularly providing impoverished people with financial or physical resources to solve one of the most severe global issues has become a quite widespread vision throughout the last two decades.

And this is what the researchers get particularly anxious about. "But why?" you might ask.

Obviously, it does not mean that you should not help a poor person asking for a dollar in front of the grocery store. Or that you should not donate to organizations helping people forced to live in grueling conditions.

Instead, what I am talking about here, is that we need to get a proper perspective on this issue. In today's post, we are not talking about solving individual cases of poverty once in a while. Instead, we are scrutinizing potential solutions to a massive global crisis, whose scale is even larger than we might have the courage to admit or imagine.

As a civilization of particularly canny creatures, human beings admire all types of 'quick fix' solutions. Simply donating a predetermined sum of money to the poverty-stricken is actually the least demanding denouement we can choose. Unfortunately, just as Efosa Ojomo has observed: "Cash transfers to the poor won't solve poverty."

The sad truth is that actually donating to the poor can make them even poorer, enclosing their lives in a vicious cycle of destitution.

Some of the ideas look incredible on paper, so noble that reading them might instantly get crowds enlightened. Nonetheless, the issue lies in the fact that impoverished communities often cannot sustain donated resources. Additionally, supplying some nations with water in response to water pollution is also a shortsighted solution that does not factually solve the basic problem. If the developed answer is not fully adapted to the local circumstances (including the infrastructure and laws), it is designated to be just a band-aid on the wound; a band-aid needed in the short-term but unhelpful in the long run.

One of the key concepts in the fight against poverty should be expanding the ability of local entrepreneurs to satisfy the needs of local markets. When particular items are imported by developing countries and provided there for free, apart from offering temporary help, they actually kill the ability of local producers to sustain their businesses. And that, obviously, perpetuates the calamity of poverty.

It is crucial to understand that empowering local entrepreneurs lifts the entire economy, raising the living standards of the employers and creating workplaces for potential employees.

Exceptional determinants of this issue

The obstacle of poverty has always been painfully pervading societies of each country we can point out on the map. International conflicts and climate change have already aggravated the progress in poverty reduction. Meanwhile, the pandemic has exacerbated this issue to the levels much more severe than expected - the World Bank's article from October 2020 throws a drastic vision at its readers, highlighting that COVID-19 is about to "add as many as 150 million extreme poor by 2021," adding that "eight out of ten 'new poor' will be in middle-income countries."

Fortunately, the Graduation approach has proven to be effective in also in this case, mitigating even the worst economic results of the pandemic. According to the program's official data, as many as 95% of Graduation participants in Bangladesh and 67% in the Philippines were able to pursue the livelihoods obtained through the programs during the pandemic; meanwhile, the financial literacy training has supported 75% of Graduation participants in the Philippines, enabling them to efficiently manage their savings during lockdowns.

There are real chances to win the battle against poverty.

Nonetheless, it requires patience, careful considerations, and willingness to learn from gathered evidence. Governments have the greatest resources, capacities, and opportunities to adhere to this objective. Therefore, by influencing policy changes focused on long-term betterment instead of shortsighted 'quick fix' solutions to poverty, as well as by encouraging the use of science and innovation to foster the growth of impoverished nations, we can contribute to help millions of people escape the claws of extreme poverty worldwide.

At the end of the day, proper solutions to the great problems are often not as far from us as we might suspect.