Sunday, 27 January 2013

Poverty reduction in developing countries depends almost exclusively on high economic growth



Poverty reduction is a subject that has attracted a lot of debate in past three decades. Poverty is a global challenge that goes beyond social and political issues to include economic issues. Therefore, solutions aimed at breaking the vicious cycles of poverty cannot be limited to political and social policies, but call for radical set of measures that are comprehensive and well-coordinated. Indeed, the aforementioned is the cardinal principle that guide strategies formulated to address poverty problems.  A large part of this ongoing debate in the contemporary society is based on issues relating to how this impending social and economic problem can be addressed. A number of scholars have singled out economic growth as the ultimate solution to poverty. This is relatively because economic growth brings with it a number of reforms i.e. structural, regulatory and trade that play a major role in addressing poverty related issues. According to Mega (2010), although economic growth is a major influencer in poverty reduction, its sustainability calls for macroeconomic stability. Therefore, it is apparent that economic strategies aimed at reducing poverty are much intertwined with macroeconomic stability of a state. This essay seeks to dissect the issue of poverty and how economic growth is its ultimate cure. In addition, it will look at economic policies advanced by developing economies to address the issue.
Poverty has fallen relatively over the past 50 years, but the rates vary from one country to another or from one continent to another. For example, Asia has done remarkably well in reducing its poverty levels with countries like China and India leading the pack. However, in a sharp contrast, mild progress has been witnessed in developing economies i.e. the sub Saharan Africa, where individuals languishing in abject poverty have since doubled over the past two decades (Adams 2004). In the past, agricultural productivity growth rates were closely related to poverty reduction rates. This implies that economies that reported rapid growth rates in agricultural productivity also experienced great results in matters poverty reduction.  In Asia, increased levels of productivity courtesy of advanced levels of technology enabled it to fast track its way out of abject poverty by increasing incomes and wages of producers and workers respectively. In addition, increased levels of production led to the reduction of commodity prices. These contributions brought with it new opportunities relatively because agricultural success provided a strong economic basis of diversification. However, despite years of investment in advanced technologies i.e. in the acquisition of state of the art agricultural technologies, developing economies are still ravaged by poverty and acute hunger. The hunger problem is relatively tragic when the populace rely heavily on rain water to grow products, singling out economies in sub Saharan Africa where the effects of new technologies is yet to be fully harnessed and production related to agricultural production is relatively low or has otherwise stagnated in most areas (Zaman et al. 2011).  
Most developing economies are striving to achieve Millennium development goals (MDGs) i.e. of reducing by half the number of people living below a dollar a day by the year 2015 (Yao 2005). To achieve this with much ease, developing economies need to increase its productivity levels in agriculture as it remains the most appropriate driver for economic growth and is responsible for breaking the vicious cycles of poverty. This is relatively because a good number of populace in developing economies relies largely on agriculture for their daily survival. In developing economies, scholars assert that agricultural growth is relatively more beneficial to persons living below a dollar a day in comparison with other sectors of the economy. Furthermore, they observe that improved productivity in agriculture has been a paramount factor in the determination of the speed in which poverty has been reduced and to what extent in the past 50 years (Babayeva & Bayramov 2008).
Economic growth is a distinct primary factor that plays a cardinal role in influencing poverty. Numerous studies have established that there is a strong relationship between poverty reduction and the per capita income of an economy.  These scholars borrowed heavily from not only income but also non-income poverty measures. A recent study by  Ichida and Moser (2001), stretching to four decades and covering 80 countries established that, the income associated with the lower carder of the population i.e. a fifth of the population rose relatively with the economic growth of a country. In addition, the study also established that there was no substantial difference between the impacts of an increase in the income of the poor i.e. in developing economies in relation to developed ones. That is, the poverty reduction and economic growth that resulted from the formulation of sound policies was relatively good for those in abject poverty as it was good for an entire population. Further studies assert that the accumulation of capital by the private sector is responsible for driving economic growth. From the aforementioned assertion, it is apparent that there is need for developing economies that are keen in reducing their poverty levels to foster good environment i.e. by formulating sound policies that will encourage and facilitate investment by the private sector. That is the only way capital investment can be guaranteed and there is no other easy way or magic bullet that can increased private investment rates. In addition, together with stable macroeconomic policies, there is need for an economy looking to reduce its poverty levels to extent its policy areas to address matters privatization, liberalization of trade, labor market reforms, reforms in the judicial and the financial sectors (Bjornlund 2009). Reforming the above sectors will certainly increase investment in the public sector especially the priority sectors whose effects to populace cannot be neglected i.e. education and health sectors.
Macroeconomic stability of a country plays a cardinal role in increasing not only investment but also development of private sector (Bjornlund 2009). In addition, it plays an integral role in fostering the economic growth of a country. Macroeconomic stability is often intertwined with investment, economic growth and productivity of a country. Despite the difficulty in ascertaining the angle of causation, the above explanations affirm that macroeconomic instability and poor economic growth of a country are intertwined. It is therefore apparent that the economic growth of a country relies more in the stability of macroeconomic policies. Economies deprived off macroeconomic stability scare both domestic and international investors. These scared investors seek for other investment avenues outside these countries i.e. places where they are assured of good returns to their investment.  Elhadary and Samat (2011), asserts that both private and public investments are influenced negatively by macroeconomic instability in an economy and uncertainty. Therefore, an economy that is seeking to break the cycles of vicious poverty need to encourage investments by fostering a good environment where investors are assured of good returns to their investment. In addition, developing countries need to devise ways that will enhance privatization of public corporations. This way, the management of these facilities will be enhanced and will create more job opportunities to its citizens (Freeman 2009).
According to Epaulard (2003), an economy is able to realize macroeconomic stability when there is a balance between major economic relationships. These major economic relationships include, relationship between demand and supply, Savings and investments, the terms of trade, balance of payment and   revenues and expenditure. However, the aforementioned relationships do not necessarily need be an exact balance for an economy to be said it is experiencing macroeconomic stability. Imbalances in these relationships i.e. excess supply or deficits related to fiscal or current accounts are very well compatible with the macroeconomic stability of a nation given that a state is able to finance them in an appropriate and suitable manner. Macroeconomic stability of a county is largely dependent on both the management of macroeconomic aspects and the structure of key sectors in the economy and markets. Therefore to foster macroeconomic stability of a nation and relatively reduce poverty levels, there is need for governments in developing economies to formulate and implement sound structural reforms that will go a long way in strengthening and improving the operations of not only the markets but also the key sectors (Ichida & Moser 2001).
Negative economic growth rate together with macroeconomic instability expose the poor to a lot of burden. For example, inflation effects often rattle the poor badly. This is relatively because they hold most of their assets in liquid form. In addition, they are often disadvantaged as they lack the ability to protect and defend their incomes from the adverse effects of inflation. Therefore, run away prices of basic commodities often erode the wages together with assets of this populace living below a dollar a day in comparison to those individuals who are well off (Adams 2004). Moreover, high levels of inflation also jeopardize economic growth. These effects disadvantage the poor who bank on the trickling effects of economic growth for their wellbeing as they often utilize liquid money in their daily economic transactions. In addition, low economic growth that is largely related to unstable macroeconomic environment often has lasting impacts on poverty.   For example the phenomenon works by shocking the human capital of those envisaged in abject poverty. In developing countries especially Africa, children often drop out of school during such economic crisis. Similarly, emerging economies i.e. those of Latin America have reported reduced school figures due to adverse shocks of terms of trade (Jalilian & Kirkpatrick 2005).
Despite being accredited as an ultimate solution to poverty, efficiency of economic growth often varies between situations. Distribution patterns together with sectorial compositions are two important characteristics that aid in the determination of economic growth impacts on poverty reduction. Therefore, given that benefits accrued from economic growth reduce poverty levels courtesy of an existing system of income distribution, then societies that advocate and stand for equity will be able to harness fully the benefits of growth and reduce their poverty levels (Mega 2010). Numerous studies have established that responsiveness of poverty reduction to economic growth often increases relatively when inequality levels of a state are lowered. The above is fully backed by empirical studies that have established that given a country has a sound and equal income distributing channel, the impact of economic growth to the poor folk will be much greater. Other scholars have asserted that great equality is often derived from low economic growth and that a tradeoff exists between equity and growth when matters poverty reduction is considered. However, in accordance to recent studies, it’s apparent that there exists no trade off as such and that economic growth is enhanced by the various dimensions of equity (Guillermo & World Bank 2006).
Sectorial growth on the other hand plays a cardinal role in establishing the effects economic growth on poverty. As per conventional wisdom, it is acceptable to assert that increased growth of those sectors in the economy where the concentration of the poor is high will greatly bring down the levels of poverty compared to growth of those sectors that are distant from the poor. Indeed, this conventional wisdom beats logic and is a close tautology. For example, developing economies whose a good percentage of citizens reside in the rural areas, a relative growth in agricultural production reduces the aggregate poverty levels because such a growth avails or else increases income levels accrued by poor farmers and peasants. In addition, it relatively increases the demand for commodities in the market, often those that are produced with much ease by the poor folk. According to Tungodden, Stern and Kolstad (2004), most developing economies have witnessed a reduction in poverty levels courtesy of not only agricultural sector growth but also those of other tertiary sectors. However, the contributions of manufacturing sector to poverty reduction are mild in comparison to agriculture. Despite massive contributions of agricultural growth towards the reduction of poverty levels in developing economies, there is need to align manufacturing sector towards this goal. This is relatively because agricultural contributions are only beneficial in the short run and might dwindle in the long run and may lead to an increase in poverty levels (Pedro 2006).
In developing economies, poverty is predominantly rural, that is most of the poor people reside in the rural areas and agriculture is predominantly central to persons living in the rural areas. A good number of persons in developed countries are engaged in agriculture. For example, in Sub Saharan Africa, over 70 percent of the population is engaged in agriculture whereas in southern Asia, about 67 percent of their population engages in agriculture for a living (Read 2010). Therefore, any significant improvement of agriculture production will translate in the improvement of rural incomes. To be able to fully understand how improvements in agriculture breaks the vicious cycles of poverty, there is need to monitor the developments over a long period of time. Scholars who have invested a good amount of time in this assessment assert that agricultural productivity has raised incomes of rural folk in two ways. First, agriculture has relatively increased the incomes of poor farmers. Secondly, agriculture has widened employment opportunities to the general population in the rural areas. These two aspects are paramount in the eradication of poverty in the rural areas. From the above, it is apparent that any individual who devotes his/her time to agriculture is able to harness additional income. Workers who exchange their efforts for wages are able to bargain for better wages from the persons who own the means of production.  Increases levels of their income implies that these persons are able to access basis commodities i.e. goods and services with much ease. This is relatively because they have a wider financial muscle. On the other hand, the owners of means of production are able to sell their produce at a profit. They then utilize the profits to improve their standards of living (Thirkell-White 2009).
In conclusion, it is evident from the above discussion that economic growth and poverty reduction are interrelated. That is an economy experiencing increased levels of economic growth is well placed to break the vicious cycles of poverty than those economies that experience mild economic growth. In addition, it is evident that most developing economies especially those in the sub-Saharan Africa has a large percentage of a population that is engaged in agriculture. Therefore, to break the vicious cycles of poverty, there is need to increase the productivity of agriculture. The overreliance in agriculture by these developing economies is a ticking time bomb. This is relatively because; agriculture is often interfered with fluctuations in the global market. Developing governments therefore need to formulate sound policies that will enable it cushion it from fluctuations in the global markets and be able to address the impending issue of poverty in a radical basis. From the above discussion, it is evident that manufacturing sector is playing a very minimal role in reducing the acute levels of poverty in these states. Therefore, there is need for governments in developing economies to encourage foreign and local investors by providing a good business environment where high returns to investment are guaranteed. Finally, there is need to create awareness on the need to acquire advanced skills that can be utilized in manufacturing firms to harness better wages.

List of references
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Bjornlund, H 2009, 'Is water and land redistribution a driver of economic growth and poverty reduction? Lessons from Zimbabwe', Water International, vol 34, no. 2, pp. 217-229.
Elhadary, YAE & Samat, N 2011, 'Political Economy and Urban Poverty in the Developing Countries: Lessons Learned from the Sudanese Experience', Journal of Geography & Geology, vol 3, no. 1, pp. 63-76.
Epaulard, A 2003, Macroeconomic Performance and Poverty Reduction (EPub), International Monetary Fund, New York.
Freeman, A 2009, 'The Poverty of Statistics and the Statistics of Poverty', Third World Quarterly, vol 30, no. 8, pp. 1427-1448.
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Ichida, T & Moser, G 2001, Economic Growth and Poverty Reduction in Sub-Saharan Africa, issues 2001-2112, International Monetary Fund, New York.
Jalilian, H & Kirkpatrick, C 2005, 'Does Financial Development Contribute to Poverty Reduction?', Journal of Development Studies, vol 41, no. 4, pp. 636-656.
Mega, V 2010, Sustainable Cities for the Third Millennium: The odyssey of Urban Excellence, Springer, New York.
Pedro, A 2006, 'Mainstreaming Mineral Wealth in Growth and Poverty Reduction Strategies', Minerals & Energy, vol 21, no. 1, pp. 2-16.
Read, R 2010, 'Trade, Growth and Poverty Reduction: Least Developed Countries, Landlocked Developing Countries and Small States in the Global Economic System', Journal of Development Studies, vol 46, no. 3, pp. 597-599.
Thirkell-White, B 2009, 'Poverty Reduction in Indonesia: Why Pro-Poor Growth Requires more than 'Getting Institutions Right', Labour, Capital & Society, vol 42, no. 1/2, pp. 140-166.
Tungodden, B, Stern, N & Kolstad, I 2004, Annual World Bank Conference on Development Economics--Europe 2003:, World Bank, Washington.
Yao, S 2005, Economic Growth, Income Distribution And Poverty Reduction In Contemporary China, RoutledgeCurzon, London.
Zaman, K, Rashid, K, Khan, MM & Ahmad, M 2011, 'PANEL DATA ANALYSIS OF GROWTH, INEQUALITY AND POVERTY: EVIDENCE FROM SAARC COUNTRIES', Journal of Yasar University, vol 6, no. 21, pp. 3523-3537.


2 comments:

  1. Investing through an income protection plan in a country where the economy is unstable is a wise move.

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