The problem of Poverty

Poverty in the world

A person is experiencing poverty when they are deprived of basic human needs such as food, clothing, shelter, safe drinking water, healthcare and sanitation, and minimal educational opportunities.

Worldwide statistics show that people born into poverty are likely to remain poor especially when the economic system of the country works against them with no access to healthy food, decent housing, and proper sanitation facilities. This is called the cycle of poverty. Therefore, the concept of poverty, whether absolute or relative, isn't simple. It doesn't only involve economics but it is also a social and political problem in nature.

What is absolute and relative poverty?

Let’s study briefly the difference between absolute and relative poverty and why it matters.

Absolute poverty

Absolute poverty can be expressed in terms of the status of an individual whose material well-being is below the reasonable minimum level according to the standards of living of the society they belong to. The ‘standard of living’ is measured by the aggregate market value of the private goods and services the person consumes.

Because absolute poverty compares household poverty relative to the economic circumstances of a country, what absolute poverty looks like can vary from country to country.

Individuals living in absolute poverty are not exposed to their country's economic growth. That is to say that even if the economy grows, these people remain in poverty.

Relative poverty

Relative poverty occurs when a household earns less than 50% of the average household income level. These households have some money, but they can only cover the basic necessities and nothing else. This type of poverty is a result of changes in the economic conditions of a country and is essentially a problem of inequality of income distribution.

Relative poverty questions how far a household's standard of living is in comparison to the richest people and is sometimes described as relative deprivation. People in this category are not completely poor but their standard of living is different from the average individual or household in a country.

Causes and effects of poverty

Poverty has major consequences for children, their health, and their communities. Poverty is a vicious cycle passed down from generation to generation. It also has a number of negative consequences including illness, hunger, and inadequate sanitation.

The causes of poverty

Let’s explore some causes of poverty.

• Wage inequality: people with lower skills and education find it hard to get a job. Even if they do, they are underpaid or exploited. This is harmful in economies that do not have a minimum wage level or unemployment benefits as it can add to the relative poverty index. The increase in more part-time and temporary jobs has decreased the demand and need for full-time jobs with proper skills. Hence, there is a divide in wages.

• Unemployment: the rapid demand for more temporary jobs and part-time jobs has left individuals underemployed and has created a limit to potential income-earning opportunities. The changing structure of the UK economy as a result of deindustrialisation has resulted in the loss of jobs. The Covid-19 pandemic has made things worse: in the past years, the country has recorded the highest unemployment levels and the number of furloughed workers. This has resulted in structural unemployment and hysteresis.

• Hysteresis occurs when someone is unemployed for a long time. This deteriorates their skills and makes it difficult for the person to find jobs. Ultimately, it leads to long term unemployment.

• Economic inactivity: long term unemployment leads to economic inactivity as people who are unemployed would seek more government benefits to sustain themselves. In recent years, the percentage of people relying on state benefits has alarmingly increased, which shows an increase in the relative poverty index.

• Regressive taxes: indirect taxes have potentially put a higher burden on the poor, therefore causing an increase in income inequality. Although the overall tax burden has remained unchanged, the indirect tax and VAT charged on certain goods such as petrol, alcohol and others extract a higher percentage of income from the low-income earners especially when they are affected by unequal wages.

• Pensioners and old age: pensioners are more at risk of relative poverty as they earn significantly less than the average. However, pension poverty has seen a sharp decline due to the rise in the real value of state pension.

• Inheritance: this allows wealth inequality to be passed on and multiplied from generation to generation.

Impact and effects of poverty

Poverty is a very dangerous issue in today's society and has effects that impact not only individuals but may result in destabilising whole economies.Some of the effects of poverty on individuals and the economy are listed below:

• Health: high rates of poverty lead to lower life expectancy, poorer standards of health, and underdeveloped infants. Malnutrition has been an important issue of increasing poverty that affects children's cognitive development.

• Poor sanitation: people living in poverty are not able to access basic safe sanitation, which makes them vulnerable to fatal diseases. This may relatively not impact as much but it shows how it affects their situation.

• Education: reports mention people living in poverty often have to choose between eating a meal or getting an education. In certain economies with high poverty index, children are forced to work in order to support the family, which leaves them with poor literacy skills. This limits their ability as adults to escape the vicious poverty cycle.

• Economy: without proper education, it is difficult to progress into a higher paying job with good opportunities. This hinders a country’s economic growth and productivity. Most developing countries are shown to have a high poverty rate which limits their rate of economic growth.

Poverty in the UK: an overview

The UK has long struggled with poverty. The last decade of public service cuts has pushed families farther into poverty across the country. Many people's lives were rendered even more difficult by the Covid-19 pandemic, as many were laid off, lost income due to the furlough scheme, and suffered higher living costs while in lockdown.

People on low incomes were anticipating a rough 2021–22 winter due to expected welfare cuts and rising heating prices. This meant that many people would be unable to purchase food and would be forced to rely on food banks. Some people also struggled to pay for household costs, transportation, or internet access.

The problem is not specific to unemployed people. In-work poverty reached a new high right before the pandemic, with experts blaming low wages, high rent, and meager benefit payments for the large number of families living in poverty despite working.

Prior to the Covid-19 pandemic, median household net income was finally increasing steadily again: it increased by 3% in real terms over two years from 2017–18 to 2019–20 according to the Institute for Fiscal Studies.

However, in the 12 years leading up to the previous recession, only 9% growth overall was recorded. If the pre-financial-crisis average of 2.2% annual growth had persisted since 2007–08, median income would have been about 20% greater by 2019–20 than it was.

Significant reductions in unemployment have driven up poor household earnings since 2007–08. The percentage of low-income people who live in a workless home has decreased from 45% in 2007–08 to 33% in 2019–20. This helped to enhance wages at a time when cuts to working-age benefit payments (since 2010) had the opposite effect.

Absolute income poverty has decreased over time, from 22% prior to the Great Recession to 18% in 2019–20.¹ This decrease was seen across all key demographic groups (children, retirees, and working-age non-parents), but it was minor in comparison to previous improvements in absolute poverty. There has also been a recent progressive decrease in material deprivation among children and retirees.

Is poverty an economic or a social problem?

The United Nations has stated that the problem of poverty is an ethical, social, economic and political imperative of mankind. It has suggested that governments across the globe address its root cause and provide solutions to ensure the people have access to productive resources such as credit, education, and a healthy standard of life.

A social perspective throws light on the problem of poverty in all its dimensions. This approach offers a different perspective on poverty eradication. It advocates the empowerment of people living in poverty and their full participation in all aspects of political, social, and economic life while also designing and implementing policies that affect the most vulnerable groups of society.

An integrated strategy towards poverty eradication requires implementing policies geared to a more equitable distribution of wealth, income, and social protection coverage. This social perspective should contribute to the debate on the effectiveness and limitations of current poverty reduction strategies.

From a socio-economic perspective, to understand poverty we require a thorough evaluation of the impact of economic and social policies on the poor and vulnerable groups of society. A Poverty and Social Impact Analysis (PSIA) serves as a tool to assess both economic and social impact reforms on the different social and income groups in society.

Solutions to the problem of poverty

The UN aims to eradicate poverty by 2030 as part of the Sustainable Development Goals and has already set in place a number of economic policies to tackle this problem.

Over the past decade, there has been marked progress in reducing poverty. The year 2015 recorded about 10.1% of the world's population living below the absolute poverty index and this number fell to 9.3% in 2017 according to United Nations Statistic Division.

Although the proportion of people who live on $1.90 has dropped by 52 million, the rate at which poverty has dropped has slowed down. Between 1990 and 2015, the rate at which poverty dropped was one percentage point annually, whereas it was half a percentage point between 2015 and 2017.

Policies to reduce poverty in developed economies

Let’s explore some of the proposed solutions to poverty.

Sustained economic growth

Promoting economic growth will result in more total income and more jobs and would also result in better distribution of income and wealth in society. However, it is also a concern that more economic growth may not lead to a trickle-down effect. Instead, it could widen the relative poverty rate because it benefits the highly skilled and wealthy class more than those at the bottom.

Unemployment reduction

Unemployment is a major cause of poverty leading to more dependents on state benefits. Poverty and unemployment are often geographical problems that affect specific depressed areas of a country. This can be solved through government policies and supply-side policies to build better infrastructure (transport and communication) and free training schemes that provide a stimulus to create new jobs.

Progressive taxes

Increasing progressive tax rates on income will take more income from the high-income earners, allowing for more tax revenue redistribution, and increase welfare benefits for the poor income earners. This can be an effective way to reduce relative poverty as it would allow for economic relief to those who need it the most.

National minimum wage

Another effective way to reduce poverty would be to increase the national minimum wage. This would eliminate the exploitation of those on the lowest incomes, thus reducing wage inequality. In the UK, the number of people working on minimum wage has increased to 2 million in 2020.¹

A potential problem of increasing the minimum wage is that it may cause unemployment due to firms' inability to afford labour. If the firms have monopoly power, then they may be able to afford higher wages.

Policies to reduce poverty in developing economies

To reduce poverty in developing economies, the focus may be on different policies.

• Education: greater spending on education and training can enable a higher-skilled workforce.

• Foreign aid: aid from developed countries can be used to invest in better health care and education. However, some argue aid can encourage dependency.

• Diversification of economy away from agriculture to manufacturing: this enables greater economic development but may be difficult to do without the right skills and infrastructure.

Sources

1. UK Parliament, National Minimum Wage statistics, https://researchbriefings.files.parliament.uk/documents/CBP-7735/CBP-7735.pdf