Less poverty, but how? Part 2

This is the second of a series of three articles on the theme of poverty. In the first article we took a look at a general outline of poverty, in this second article we will look more in depth at what is being done in the world today to address this human condition.

The consensus on how to bring economic and social development together with poverty eradication has often been blurred. The majority of multi- and bi-lateral institutions (United Nations, World Bank, International Monetary Fund, African Development Bank, Asian Development Bank, etc.) have their own views on the matter, and this is often troubled by the single governments’ politics and policies. Some of this divergence can be attributed to each institutions’ mission, mandate and limited resources. As a result, theories, policies and practices on how to tackle poverty are often variegated with a lavishing of resources and policy focus. In this post, we will briefly examine four main approaches to tackling poverty.

1Increasing land rights is often cited as one of the key strategies in reducing poverty. In other words, this signifies giving farmers the security of tenure, while at the same time ensuring that land transactions remain low. Why can farmers’ subsidies reduce poverty? Because farmers represent three quarters of the total poor, and an increasing in agricultural productivity can have exponential impacts on the lowest income strata of population as wealth increases, food prices are reduced, and the overall economy develops. Such a strategy can have potential benefits as a stronger sense of ownership, together with an adequate market value of land, can and do incentivize farmers in increasing outcomes of production. In China for instance, the abandonment of collective farming has represented some of the key factors in poverty reduction, whereas in India this was achieved through a simplified bureaucracy. However, the empowerment of small farmers in some countries has often had critical effects. It is the infamous case of Zimbabwe, which used to feed and supply crops to the rest of Africa. Here, the majority of land was concentrated in the hands of a minority of highly skilled and specialised Afrikaner and European descendant farmers. When President Mugabe commenced implementing the controversial land reform policy, this translated in white farmers being forced out of their land. This was not a peaceful process, as many of them were killed, women were raped, and their houses burnt down to ashes. Some of them despite having lived for generations in the region had no other choice than seeking shelter in the UK, whereas some others sought to re-establish their activity in neighbouring countries such as Zambia, South Africa or Botswana. From being one of the greatest crop exporters in Africa, today Zimbabwe is a country that has recently faced a complete bankruptcy, and where mismanaged land remains largely unproductive.  An extremely interesting article outlining the outcomes of Mugabe’s land reform policy was recently written by Lydia Polgreen and published by the New York Times with the title: ‘In Zimbabwe, land take over a golden lining’. Supporting land rights can have beneficial effects for certain societies; however for other it has represented their ruin.

2Debt relief was one of the trendy topics during the end of the 90s and the beginning of the new century. As protests worldwide erupted against the World Trade Organisation, the World Bank, and other ‘evil’ institutions, demonstrators demanded their governments to cancel the debt of the poorest countries. Debt relief is often cited as another important approach in reducing poverty. Over the years, developing countries have incurred in substantial amounts of debts towards banks and other foreign governments. This has translated in burdening nations with onerous interest repayments that have often exceeded their own GDPs or volumes of export.  Hence, the idea that poor countries which are not forced anymore to repay their loans can better employ these funds for more socially minded enterprises such as health and education. The World Bank (WB) and the International Monetary Fund (IMF) established in 1996 the Heavily Indebted Poor Countries (HIPC) initiative. This comprehensive approach born as a result of cooperation between these two institutions aims at ensuring that no poor country faces a debt burden it cannot manage. To date, debt reduction packages under the HIPC Initiative was conceded for 36 countries (with a vast majority of them being on the African continent), providing US$75 billion in debt-service relief over time. It has yet to be seen the efficacy of such a policy, however its noble intentions are undoubtable. As good as it may sound; debt relief does not always work in the hoped outcome. And this is mostly due to the fact that governments towards which debt relief is directed have not properly managed their resources and finances.  Essentially, as Dambisa Moyo audaciously illustrated in her widely renowned and successful book ‘Dead Aid’, debt relief policies have often translated in two main instances. On the one hand, it has brought to an increase in corruption as more capitals became readily available to political elites and their cronies. On the other, the perception that governments can have limitless borrowing without commitment to repayment has often scared out private investors, and therefore turning the economy into chaos. Debt relief can and has to be effective; however, its application must be extremely selective.

3Social policies aimed at tackling poverty are often those aimed at increasing the average level of education, fostering gender equality, the strengthening of labour regulations and the promotion of equal employment opportunities. These are frequently crafted under political guidance from the UN and other related institutions and are seldom left without implementation until an external donor support them with adequate funding. Still, the outcomes of these policies are scarcely measurable. Such a condition makes it complex for governments and donor agencies to identify areas where to intervene. Most of the objectives of social policies are incorporated in the Millennium Development Goals (MDGs). However, as it was stated in the previous article, not only the outcomes are difficult to assess, but also how to deliver such targets is a complicated task. Nonetheless, it still remains hard to separate these areas of intervention from the normal activities of governments. As such, social policies remain some of the mostly underestimated strategies for tackling poverty.

4Nowadays, there is a growing resentment against banks and financial institutions. The financial crisis has been affecting a vast portion of our recent lives. A plethora of political movements across Europe seek to dismiss banks and the services they offer. Yet, living a life without financial services seems unimaginable for most of people in the developed world. And it is very difficult indeed, no matter what country you are from. Without financial services essential life achievements such as paying for education, saving money for special events, or the purchase of essential work equipment appear as unsurmountable tasks. Let alone buying a car or a house. However, as research conducted in 2011 by the WB has demonstrated, approximately 2.5 billion working-age adults worldwide are exactly in that condition. They live a life without those financial services that most of us take for granted. So the question is, how do they manage? Well, the answer is not so easy. There are many methods someone can save without actually ‘saving’. For example, have some cash available but no bank where to store it? A solution can be represented by buying livestock or a small piece of land. No insurance? Then throw a feast in the village so that they social ties can help you when a crisis occurs. Nonetheless, no matter how much someone seeks to prevent adversities there will be always a time when cash will be scarce. Sooner or later, this moment comes for everybody. So, what to do in that case? Most of people in developing countries would turn to a loan shark, with extremely high interest rates that would make life hard for almost any person. This would then result in the loan not being repaid, with the borrower borrowing further to repay the previous amount and thus creating a negative spiral of worsening economic conditions. You do not need to be an economist to understand that this. Such a condition is not only morally unacceptable, but it is also economically unviable on a large scale for a flourishing and healthy economy. There appear to be robust empirical evidence that appropriate financial services can help to improve household welfare and spur small enterprise activity. And not only, economies with deeper financial intermediation and better access to financial services grow faster and have less income inequality. Consequently, it can be seen why a variety of countries have made financial inclusion as one of their top economic priorities. Over the years, the path to achieve financial inclusion has shifted from microcredit (small loans provided to business owners) to proper microfinance, also referred as ‘responsible finance’, which entails the delivery of retail financial services in a transparent, inclusive, and equitable fashion (BMZ, CGAP, and IFC, 2011). The next article will look specifically into how microfinance actually works and what are the different school of thoughts that characterise it together with my personal experiences in this amazing field of work. Be back soon.

Andrea Ottina

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