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POVERTY

 

 

by Valentino Piana (2006)

 
     
 
 

Contents


 
 

1. Significance

 
 

2. Poverty in terms of consumption

 
  3. Poverty in terms of income  
  4. Poverty in terms of health  
 

5. Poverty with respect to other dimensions

 
 

6. Poverty in terms of constrained and delayed life cycle

7. Determinants

 
  8. Impact on other variables  
  9. Long term trends  
  10. Business cycle behaviour  
 
11. Formal models
 
 

12. Data

 
 
 
 
 
 

Significance

Poverty is a severe constraint on normal living. It is a forced reduction in consumption, due to insufficient income and menacing surrounding conditions.

The poor are a social group whose dimension depends on overall per-capita GDP but, even more, by inequality in income distribution.

There are several levels of absolute poverty between extreme poverty, at the one end, and normality, at the other.

Relative poverty threshold is a percentage of the overall average in income or consumption in a society, allowing for context-specific indications.

Contrary to the neoclassical approach based on utility, evolutionary economics emphasises the limited choice of the poor and a need-based approach with a criterium of sufficiency (satisfaction point), such as the one introduced in this paper.

Poverty in terms of consumption

The most extreme poverty leads to permanent and unescapable hunger, insufficient and unhealthy diet. Hunger and malnutrition weaken the body, the mind and the capability to work. It becomes a trap because of feedbacks between low occupability, low productivity, low income and hunger.

International aid is directed towards countries where hunger is endemic, but they are usually insufficient and not timely to overcome the poverty trap and the dependence of the poor from the will of the donor.

Throughout its life, the human being is subject to health risks. The poor is subjet to them more often, more severely, and he's worse equipped to react to them. Diseases can be food-borne (with a link to bad diet) and contagious (with network effects). Medecines and medical advice can be so costly that the poor spend too large a part of their meagre income for health or even cannot afford the best remedies. The welfare state is a collective response to health problems, but many poor countries have only limited coverage in welfare.

Garments are used to protect the body from daily and seasonal distress, with the poor having only a limited set of garments, often inadequate in physical or social terms.

Shelter is offered by houses and equivalent buildings, with poor lacking them altogether (homelessness) or partially (e.g. collective dormitories, slums, etc.).

Educational goods, such as books, newspapers, magazines, can be skipped altogether from the cumulative bundle and current consumption of the poor, with resulting lack of crucial information, including for democratic participation. Again, free public schools have been used in societies for level the cultural levels, but school success is still dependent on family background, unless strong countervailing mechanisms are in place.

Due to price rises beyond the overall price level increase, certain specific goods might have reached so high prices that a person that earlier could afford them is now prevented form consuming them.

In other words, the poor do not satisfy their basic needs through adequate quantity and quality of goods and services, not only in terms of level but also in terms of uncertainty and risk of negative shocks - as you can explore in this software and the related paper.

Less visible - but not less real - is the level of poverty that, although allowing daily satisfaction of basic needs, imposes a closed life without social activities, trips, enjoyment of culture.

Poverty in terms of income

Constantly zero income - out of unemployment - of a socially isolated person without a previously cumulated capital is the most extreme poverty condition. In rather short time, unless reversed, this can lead to zero consumption and death.

However, the most frequent condition of the extreme poor is a life of limited irregular income flows due to single occasions, possibly obtained through the family and social networks.

In many cases, the normal chain from of personal skill & time to employment, wage, and income is broken down, with the poor searching directly for consumption goods (as food), feeling unable to get a job, either because of lack of available jobs or because of his perceived or real inability to perform.

Moreover, the activities put in place in search for food are highly inefficient and usually unsustainable in the long run.

In other cases, the job is irregular and badly paid (in terms of level and effective payments after promises). Working poor are, furthermore, working all the time but getting so low hourly wages that total monthly wage is unsufficient to cover basic expenditure. All their wage is normally spent on consumption with no savings, especially if they feel that there is some stability over time assured.

Below this condition, in case of irregular income , the poor can try to accumulate - once and for all - a small capital (or cumulative bundle) to face negative shocks; since banks are costly and may refuse to open an account to e.g. an homeless, he might keep with himself a certain amount of money or exchangeable things, with all the risks of being robbed.

In other words, decumulating savings is a short-living unsustainable tactics used by the poor as a reaction to negative shocks but does not substitute the need for a stable flow of income of sufficient amount.

Poverty in terms of health

Because of material deprivation in the family of origin an in its own, the poor can have precarious health, go too late to the doctor, save on essential medecines, accept humiliating and tough workplaces in unsafe environments. All this can lead to a significantly shorter life than the rich.

Illness is one of the most frequent reason for a poor not to pay back loans (even micro-loans), while being a key concern from a all-round care for the client, so that a relevant issues for microfinance is to provide access to healthcare.

Poverty with respect to other dimensions

Poverty is often associated with low education, learning problems, narrow experience of different places, difficulties in finding friends outside the circle of the poor unproper or repellent social image.

Ethnic minorities or migrants have often a larger proportion of poor than the rest of the population.

In family terms, single mothers with little children, on the one hand, and large families with many children, on the other, are particularly at risk of poverty.

Poverty can be connected to the lack of interest for public life, elections and other occasion of participation (e.g. trade unions or civic initiatives), to the effect that low participation makes the policymakers more inclined to look for consensus of other, wealthier, social groups, which weakens the capability of public authorities to tackle poverty and its disadvantages.

Poverty in terms of constrained and delayed life cycle

Birth, childhood, cognitive and emotional development, maturity, education achievement, mating, marriage, children, pension: these are just few of fundamental "steps" in life, whose exact timing and sequence has a wide individual and social variation across time and space.

"Event History Analysis" can explore not only entry, spells and exit from poverty but also the reason for averages in such ages and deviations from averages. If income level, uncertainty and dynamics exert a significant impact on such "life transitions", the poor can be forced to postpone or even to renounce to some of them.

For instance, long transitions between schools and work or delays in having children (out of economic difficulties and uncertain perspectives) are important expressions of poverty and the fight to poverty can focus on such life transition in a comprehensive way (as obstacles tend to cluster and removing just one might not be enough).

Determinants

Underdevelopment is the cause of the largest number of poor in the world. Low per-capita GDP levels, due to low employment, productivity and wages, plus income inequality result in large shares of the population living with less than 1 or 2 $ per day.

Specific needs could be particularly difficult to be satisfied in certain countries, as with food where desertification and primitive agriculture constrain harvesting or as with devasted houses by hurricanes or as with health during epidemics of contagious diseases.

However, social and political causes and mechanisms are by far more important in explaing why, in face of difficulties, no adequate policies are expressed and implemented by governments.

In particular, in dictatorships the will of the poor can be simply ignored, or repressed, by the ruling elites. In democracy, the poor may not go to the polls or vote for irresolutive politicians who promise specific advantages for the voter but no policies for the social advancement of the poor as a group. The middle class and the rich can meanwhile make an alliance to exclude the poor from countries' priorities.

Income inequality is the major determinant of poverty both in developed and non-developed countries. Rising unemployment is a major source of spreading poverty. Lack of access to crucial assets and services (health care, schooling, infrastructure) exclude the poor from the very beginning. By contrast, access to finance as with microfinance is a viable strategy for exiting poverty.

When employed, the poor earn low hourly wages and can work less hours than needed to reach a "sufficiency" threshold of income and consumption opportunity. If self-employed, the poor face bad deals, a lot of unremunerated hours and risks of every kind. Increasing the productive and fair remuneration of working hours is a key direction for reducing poverty, as the poor have 24 hours a day as the rich.

In short, poverty is related to:

* low intensity of paid work, both for demand (limited demand by the employer) and supply reasons (other ways to spend time eg. looking for employers / clients);

* low wages and delays in payroll payments;

* household composition, with children and elderly people possibly being an (economic) burden dragging the whole family back;

* financial distress, e.g. previous debt to be paid back, skyrocketing interest rates on mortgages for the house, etc.

An excellent and comprehensive review of poverty in Europe, its determinants and relations to income distribution and the labour market is here.

Individual choice, personal and family trajectory, exogenous negative shocks can lead specific persons to the edge of poverty, with alcoholism, narcotics, and gambling being some of the sources of marginalization.

Many poor report a major negative shock that put in motion a vicious circle leading to poverty. For instance, the death of the husband bringing home the largest share of income in the family, an hurricane hitting the house, the loss of the job at late age, a disease of a member of the family requiring expensive medicines, etc. After the events, further cumulative negative paths took place, such as debt, failure in debt repayment, collapse of marriage, etc. Insurance covering the first, and the further, event could have counterbalanced at least in part the effect on the family and on the overall life trajectory. But the poor tend to be un-insured and there is often a lack of insurance contracts covering their risks. Income-adjusted premiums and state subsidies for premiums can address the first issue while micro-insurance is a key tool to address the second one.

The collapse of welfare and safety nets, possibly the result of intentional state policies and of attepts to cut public deficits, leads to deeper poverty, lower enrolment in schools, lower occupability, territorial divergence, and social disgregation.

Impact on other variables

The poor buy less (smaller quantities, narrower bundles, less often) and restrict themselves to worse quality goods (less performing, older, less innovative) than the middle class or the rich, obtaining a lower level of need satisfaction and a narrower cumulative bundle.

Thus, sales are lower when a large part of the population is poor (than they have would be otherwise). Total business turn-over, production, value added and employment are consequently reduced.

In countries and regions where poverty is widespread, vertical product differentiation exhibits a tendence towards low quality goods, with innovation hampered. R&D efforts are diverted from targeting horizontal differentiation features particularly useful to the poor. Goods suitable to the poor are not invented or diffused enough (as the fixed costs of R&D would not be recovered by too small profit margins on variable costs).

The poor tend to consume their entire income (apart from occasional precautionary savings), so usually personal savings will be low. Capital accumulation is more difficult there, with FDI unlikely to target local demand; FDI could be attracted by low wages, but skilled labour might be difficult to find. The linkages between poverty, illiteracy and exports are explored in this paper.

Tax revenue will be low because it is ineffective to tax the poor, because of meagre tax base and necessarily low tax rates. In utility, welfare and political terms, it is too painful to raise tax from the poor. In addition, their income comes often from the grey economy. This creates a vicious cycle with low GDP requiring a pro-development economic policy (e.g. infrastructure) but the state having difficulties in funding it. External aid might be needed to break this cycle, as for example occurs with the structural funds provided by the European Union to backward sub-national regions.

Persistent perspective of poverty may lead people to migrate abroad, looking for employment to send money home as remittances.

To the extent poverty is associated with urban segregation, criminality and violence can be high as a result, depending also on general cultural climate, with urban regeneration being an integrated strategy to fight poverty.

Long term trends

The United Nations Millennium Goals indicate the overall goal of halving, between 1990 and 2015, the proportion of people whose income is less than $1 day. Eradicating poverty is the stated goal of World Bank.

However, the absolute number of the poor has been rising for decades in most developing countries, with the percentage fall over globe's population being due largely to a handful of countries, as China and India.

In developped countries, a bottom group of poor is consolidating, with social marginalization and cumulative feedback mechanisms, trapping the poor down.

Poverty eradication is a key goal that should be coupled with sustainable development and the mitigation of climate change. In this vein, our book on "Innovative Economic Policies for Climate Change Mitigation" puts forth the proposal of leveraging microfinance for the diffusion of clean tech across the poor.

Business cycle behaviour

Poverty is anti-cyclical, widening and deepening during recessions. Recovery and booms are not always capable of reducing poverty below certain thresholds, due to social marginalization and difficult occupability of the poor.

Formal models

The poor and the rich: a comparison in need satisfaction

The decision-making routines of the poor

Product innovation in a polarized society

Data

Poverty in EU 2011

Multidimensional poverty 2010: the Human Development Report [11 MB]

Poverty in Africa 2006

Poverty by region of the world: population living below poverty lines, 1981-2001

Share of all USA workers earning poverty level hourly wages, 1973-2000

Consumption by income class

 

 

 
 
 
 
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