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Wednesday, October 15, 2008

Solving the Poverty problem

The global elites are debating about eradication of poverty. Let me quickly summarize my view on poverty.

What is poverty problem?
Poverty is not going to go away. At any point in time there will be poor people. The real problem of poverty is that poor people do not have the means to move out of poverty. In other words, this is structural poverty. I have looked at this in my earlier post - “Why certain people stay poor?"

Poverty that will not go away should be transient poverty. Where people fall into poverty because of illness or bad luck etc but have access to resources to help them get back into income generating households.

The solution
The poverty solution will have two main elements. First is identification of threshold for the economy. Second is enabling this segment with tools and resources to move out of poverty cycle.

Poverty and its relation to population under certain threshold income
I have a problem with calculation of this threshold income. Generally, poverty is defined as people earning under a certain threshold income. The threshold income, therefore, is calculated using consumer price indices of various items required for minimum subsistence.
Rather threshold income should be X-sigma deviation from median population. This approach is far more likely to identify target population.

Poverty and relation to people at bottom of income pyramid.
Poverty is not about people being at the bottom of income pyramid. There will always be people at the bottom of the pyramid. The argument is what if the bottom is higher now. I have a problem with this approach as well. If everyone is higher then we have inflation. It means poor people though not poor by definition, continue to get low quality goods. To add to this they are not even defined poor so no reform reaches them.

Why this solution does not work?
Readers will recognize that the solution I have proposed is not new. And experience suggests it does not work. The main reason is lack of other infrastructure.

  1. Poverty reduces access to legal protection. Poor people do not have resources (mainly time – as it directly impacts income) to strive for justice. Hence they can be taken for a ride.
  2. Poverty increases current or future health-care expenses. As I highlighted earlier, healthcare represents a snake in this snake-and-ladder game of climbing the income pyramid. Rising healthcare cost are sure to keep poor families continuously poor.
  3. Poverty reduces probability for higher education thereby creating ceiling for income growth of the household. Thus occasional poverty (in a lifecycle of a family) become sustained or structural poverty.
  4. Poor people do not have time to identify best employment opportunities for themselves. They have to go by word of mouth or past skills.

The legal and healthcare related infrastructure can prevent poor household from sinking further. It is a down-side protection. Then you need up-side push. This requires infrastructure like free education, employment exchanges, access to finance for entrepreneurship, technical support for diversification of household income etc.

In sum…
Poverty is recognized to be the bane of the modern economic landscape. But escaping structural poverty is possible.

Legal and healthcare infrastructure is systemic necessity. A lot of work has been done on education for the poor as well. Mobile phone based employment exchange for the poor is technically feasible. Access to capital through micro-finance is well researched. All the pieces of the puzzle are in place. It is just a matter of connecting the dots.

This post is dedicated to Blog Action Day 2008 on Poverty.

Previous posts on poverty:
1) Layout of poverty (Jan 10, 2008)
2) Why certain people stay poor? (Dec 03, 2007)
3) Selling costly products to bottom of pyramid (Nov 08, 2007)
4) How city development impacts poverty - Why Bihar should ensure there are no slums in Mumbai? (Dec 03, 2005)