Economics (0455) | Poverty

Welcome to Economic Development: Understanding Poverty

Hello future Economists! This chapter is incredibly important because it deals with one of the biggest challenges facing the world: poverty. Understanding poverty isn't just about defining terms; it's about seeing how economic principles affect real people and how governments try to improve living standards.

We will break down what poverty means, what causes it, and the key policies governments use to fight it. Don't worry if some terms sound complicated—we'll use simple examples to make sure everything sticks!

Section 1: Defining Poverty (The Two Types)

In Economics, we don't just talk about 'being poor.' We distinguish between two main types of poverty, which helps governments decide how to measure and tackle the problem.

1.1 Absolute Poverty (Life-Threatening Poverty)

Definition: Absolute poverty occurs when people cannot afford the basic necessities for survival.

• What it means: The inability to access essential goods and services like food, clean water, shelter, clothing, and basic healthcare.
• The Standard: This is often defined using an international poverty line (e.g., living on less than $1.90 a day, though this figure changes).
• Did you know? Absolute poverty tends to be more prevalent in developing countries, though pockets can exist anywhere.

Analogy: Think of absolute poverty as falling below the minimum survival line. If you are in absolute poverty, you are fighting to stay alive.

1.2 Relative Poverty (Poverty Compared to Others)

Definition: Relative poverty occurs when people have an income substantially lower than the average income in their country, meaning they cannot afford the standard of living considered normal for that society.

• What it means: You can survive, but you are excluded from normal economic life. For example, not being able to afford a car, a warm coat, or sending your children on school trips.
• The Standard: This is usually measured as a percentage of the median (middle) income in a country (e.g., earning less than 60% of the median income).

Key Takeaway:

The difference is simple: Absolute poverty is about survival (a fixed minimum standard), while Relative poverty is about inequality and comparison within society (a changing standard).

Section 2: The Causes of Poverty (Why People Are Poor)

The syllabus requires you to understand several key reasons why individuals and families fall into poverty. These factors often overlap and reinforce each other.

2.1 Unemployment

If a person loses their job, they lose their primary source of income.

• Cause: Losing a job due to a recession (cyclical unemployment), or due to lack of skills needed for new industries (structural unemployment).
• Impact: Without regular income, households quickly struggle to meet mortgage payments, rent, and daily expenses, leading to financial crisis and poverty.

2.2 Low Wages

Poverty can affect people even if they are working. These people are sometimes called the working poor.

• Cause: Working in low-skill, low-productivity jobs where the demand for labour is weak or where employers offer minimum pay with few benefits.
• Impact: The wage earned is simply insufficient to cover basic living costs, especially in high cost-of-living areas.

2.3 Illness and Disability

Health issues are a massive cause of poverty globally.

• Cause: Serious or long-term illness prevents a person from working, removing their income. In countries without free healthcare, medical bills can be catastrophic, wiping out savings and driving families into debt.
• Impact: Income drops sharply, while expenditure (costs) often increases due to medical treatment.

2.4 Age

Age affects a person's ability to earn and their financial needs.

• The Young: Children in households where parents are poor are highly likely to remain poor (the cycle of poverty).
• The Elderly: When workers retire, their income usually drops dramatically (they move from a full salary/wage to a state pension or retirement fund payments). If they did not save enough during their working life, they can easily fall into poverty.

Key Takeaway:

The causes of poverty (Unemployment, Low Wages, Illness, Age) are all factors that restrict an individual's ability to earn a sufficient income over time.

Section 3: Policies to Alleviate Poverty and Redistribute Income

Governments use a variety of tools, often called the "Economic Toolkit," to try and reduce poverty and manage the distribution of income in society.

3.1 Promoting Economic Growth (The Rising Tide)

Policy: Government policies aimed at increasing the Real GDP of the country (e.g., tax cuts for firms, investment in infrastructure).

• Mechanism: When the economy grows, firms hire more workers (reducing unemployment) and wages tend to rise as demand for labour increases. This is often the most powerful way to reduce absolute poverty.
• Limitation: Growth doesn't always benefit everyone equally. If growth only creates high-skill jobs, the low-skilled might be left behind, worsening relative poverty.

3.2 Improved Education and Training

This is a key long-term solution focused on increasing the quality of labour (a factor of production).

• Mechanism: By investing heavily in education, vocational training, and skills development, workers become more productive and possess skills that are in higher demand.
• Impact: This helps workers escape low wages by qualifying them for better-paid jobs, reducing the risk of both absolute and relative poverty in the future.

3.3 More Generous State Benefits

State benefits (also known as social security or welfare payments) are direct payments or aid provided by the government to those who need them.

• Mechanism: Benefits act as a safety net for those who are unemployed, too old to work, or suffering from illness/disability. They provide a minimum level of income.
• Examples: Unemployment benefits, pensions for the elderly, housing assistance, or free school meals.
• Evaluation Point: While essential for tackling absolute poverty, high state benefits can sometimes disincentivise people from working (known as the "poverty trap" or "unemployment trap").

3.4 Progressive Taxation (Redistribution)

Taxation is the main way governments fund state benefits and public services.

• Definition: A progressive tax system means that the proportion of income paid in tax increases as income rises. High earners pay a higher percentage rate than low earners.
• Mechanism: This system takes a larger share of wealth from the rich and uses that revenue to fund services (like free healthcare, education, and state benefits) which primarily benefit the poor. This is a crucial tool for redistributing income and tackling relative poverty.
• Contrast: A regressive tax (like sales tax/VAT) takes a higher proportion of income from the poor.

3.5 National Minimum Wage (NMW)

Policy: This is a legal requirement stipulating the lowest wage rate per hour that employers are allowed to pay their workers.

• Mechanism: The NMW directly addresses the cause of low wages. By raising the floor for pay, it ensures that full-time workers can earn a more reasonable living, reducing relative poverty.
• Evaluation Point (A Trade-Off): While NMW helps workers, if it is set too high, firms might reduce the number of staff they hire or cut back on production, potentially leading to increased unemployment. Governments must find the correct balance.