Economic Growth And Poverty Reduction

Introduction

Economic growth is perceived to be among the most vital tools of poverty reduction and enhancing the quality of life in emerging economies. Different case studies, analytical analyses have given evidence that sustained economic growth is crucial for the achievement of the millennium development goals, and not in terms of reducing the number of people living on less than $1 to half, but also in other aspects. Economic growth can lead to virtuous circles of prosperity and prospect. For example, a strong economy will provide employment to the citizens, which will improve other aspects of the economy, at the same time, parents will be motivated to invest in their children’s education because they know that these children will get the necessary jobs. Such an environment can lead to the development of a strong and vibrant entrepreneurs, which has the potential to establish an accountable governance system. In short, a strong economic growth will advance human development, which, in turn enhances further economic growth. However, under diverse conditions, the same rates of economic growth can lead to different effects on poverty, employment opportunities, and human development indicators. The degree to which economic growth reduces poverty index, is dependent of the extent to which the poor citizens take part in the process of economic growth and enjoy its yields. Hence, both the pace of growth and its trends, are crucial features when it comes economic growth as a determinant of poverty reduction.

A successful approach to poverty reduction ought to have its fundamental measures to enhance rapid and sustainable economic growth. The challenge has always been to combine economic policies that would allow the poor to take part in the opportunities provided without any hinderance and also contribute to further growth. Such polices include intervening to make the labor market favorable to the poor, reduce social inequalities and increase financial inclusion. Most emerging states in Asia, such as India have concentrated in ‘inclusive economic growth,’ as their model of development and poverty eradication. India’s most recent development plans included two main objectives, which are economic growth and rendering economic growth more inclusive to all the citizens. Therefore, the subsequent chapters will examine the direct outcomes of economic development and how they lead to poverty reduction.

Investment, Productivity and Technological Innovation

According to a study by Nel and Stephen (2016) a strong and vibrant economic growth process needs very high rates of investments. In a practical sense, investment helps to increase a country’s productivity through technological innovations, which is also influences the rate of economic growth through different types of investments.

Private Investment.

Any type of investment and technological innovations are major drivers of employment creation and labor incomes. Even so, it is essential to underline a close linkage between institutions and other determinant of economic growth. Besides, private investment works best when complimented with public investment to improve competitiveness and establish new prospects. The particular importance of public investment is expanding infrastructure and communication and enhance the skills of the labor force.

Public investment and Infrastructure

No country can have a sustained growth without having an impressive index on public investment, health and education. Islam (2016) underlined the essence of education, health and infrastructure in the current economy. A fundamental factor is that governments in the developing states should acknowledge their own infrastructure investments (which is always proxied by the availability of electricity, roads, and other infrastructure) are essential compliment to the private sector. For example, in fast-paced economies public investment in infrastructures leads to 5-7% of the GDP. A case example of China, Thailand and Vietnam, the total infrastructure investment is more than 7% of the total GDP. Past studies, suggested that 5-7% is the appropriate percentage for sustained growth. Besides, the essence of investment as facet of poverty alleviation drives the importance of savings in a state. Lastly, public investment can be utilized as a tool to reduce inequality and increase equality of opportunity, which is another facet of poverty alleviation.

Inclusive Growth, Redistribution, Equality and Inequality

Through the discussion above, it is now determined that for sustained poverty alleviation, economic development has to be inclusive. In the 1950s inequality was perceived as recipe to poverty alleviation, such that men were seen as the people in charge of the family, and therefore they were entitled to more salaries and wages than women. Recent studies have disputed such notions, and advocated for equality. Since countries with high equality index have are likely to realize improved economic growth and at the same time reduce the poverty index.

Neaime and Gaysset (2018, p. 231) contended that there are various ways in which the increase of inequality derails the overall growth index in a state. First is that inequality affects development through the structures of the market and the microeconomic incentives. It enhances the agency costs in the land rental and credit market. In contrast, an affirmative distribution of wealth will reduce the credit limitations, and more accessibility to credit, which Neaime and Gaysset (2018, p. 234) stated that has a positive impact on the economic growth rate. If borrowing capability of individuals are sustained, transferring capital to the poorest will increase the total productivity and ensure poverty alleviation. Secondly, inequality tends to lead to regimes that will limit access to the basics of economic development such as education and the market. Thirdly, inequality generates macroeconomic volatility, that is evaluated by the standard deviation of the yearly growth in the Gross Domestic Product. Contrarily appropriate distribution of wealth has the potential of reducing instability at the individual level, which resolves the effect of instability on the poverty alleviation. One way of ensuring equal distribution of resources, is by first ensuring that the resources are available for dispensation, which can only be done though economic growth. Lastly, inequality affects growth is through fairness. It is a fact that fairer societies present their citizens with more social support and capital. Therefore, they are able to share the costs and benefits of enhancing economic policies (Ahmad 2015, p. 118). Fairness also helps to facilitate various decrees on the deliverance of public goods, which beneficial to the society through poverty alleviation strategies such as provision of water, electricity, healthcare and education.

Financial Development

Finance is an important determinant of a sustainable growth. Kareem (2015) revealed that an efficient local financial system is an essential factor for poverty eradication in various countries. A study by Li and Zhang (2019) revealed that if Argentina had experienced the level of financial intermediary development of an average developing state between 1960-1995, then it would have had an extra one percent growth in its current GDP per capita income. Practically, states that have established financial systems tend to have lower poverty index. The magnitude of the stability of banking policies and the liquidity in the stock market can have a positive influence on the growth of different sectors of the economy, which trickles down to the reduction of poverty index. Also, the efficacy in the financial system has the potential of easing the financial limitation that limit firm and industrial expansion. It is important to note that one way of creating employment for the local citizens is through firm and industrial expansion. Therefore, accessing external capital is among the channels through which financial development matters for growth due to the fact that it allows financially limited companies to expand.

Ogbeide and Agu (2015, p. 439) revealed that a deficient distribution of idiosyncratic individual human capital risk because of the inconsistencies in the financial market can constrain poverty allievation strategies in the long run. Hoffmann (2017, p.101) concerned himself with the issue of whether the financial development has an impact of the holistic development of a state, and rather revealed that financial development impacts on the rate of convergence. The researcher revealed that financial development leads to the failure of some states to converge for the development rate of their global technology limit. According to the report given by the world bank, an efficient financial system has the capability of helping various poverty eradication programs by mobilizing savings, allocating the relevant funds to invest in different sectors, and the redistribution of risks, however, the maturation pattern of different financial factors differs among states. The economic crisis that were experienced in the 1990s raised various concerns on financial instability that can lead to poverty. In this regard Barbier, Bishop, Aylward, and Burgess 2019, p. 80) Found that financial gaps are likely to precede most financial crises. Besides, the international market is perceived to be unstable because of the information asymmetries. In the domestic level, progress will majorly rely on how a government builds its institutions, improves their informational frameworks, and lastly attain more competent political framework that will reduce the influence of political elites. Another critical issue for the fiscal sector in its support for improved access to finance and specially to increase small business’s access to finance.

Foreign Direct Investment

As much as FDI has been posively associated with poverty eradication the developing sates, there is no consensus on whether FDI is an essential determinant of sustained poverty eradication methodology. A cross analysis from various states have found mixed evidence on the relationship between FDI and economic growth, majorly this is because of the fact that incoming FDI when viewed in terms of GDP is very small. Boukhatem (2016, p. 214) stated that FDI can only promote growth if a state has additional institutions like an established financial market or a liberalized trade to ensure that FDI benefits the country. Irrespective of whether FDI can independently contribute to the economic growth or not, it is evident that policies and institutions that are essential for growth could also be among the factors that attract FDI and at the same time influence development. Even so, a crucial thought that favors the promotion of FDI, is that it is a vital channel of technological transfer that can lead to innovation, and ultimately poverty reduction. Besides, technological innovations are among the main facets of sustained growth. The knowledge that has been acquired in the global market through FDI also lay the groundwork for economic catch-up and a sustainable growth pattern. Liberalizing international trade leads to the following factors as pointed out by Gindling (2018); it leads to more specialization which leads to gains the aggregate factor productivity by permitting governments to their spheres of comparative advantage. It also broadens the potential market, which gives room for domestic companies to take advantage of the relevant economies of scale and improve their general productivity. Lastly, trade liberalization decreases the incentives for companies to conduct rent-seeking activities which in most cases are not productivity.

Case Study of Brazil

Brazil is among the few states that has achieved the status of an upcoming country in the last two decades. It is ranked as the 7th most established economy in the world between 2002 and 2009. The country recorded an average growth of 4.4% growth in GDP between 2004 and 2010, which was a result of economic boom and an improving labor market, which led to the creation of over 10 million jobs. The income growth between 2001 and 2009 of the lest poor in the economy was 7% per annum, while that of the richest state was 1.7%, which subsequently led to the reduction of inequality by 9%, which was evaluated through the Gini Index of each household per capita. These shifts led to a rapid decrease in absolute poverty, which was assessed by $1.25 per day poverty line, from 14% on 2001 to below 5% in 2009 (Gindling 2018). All these figures are a result of economic growth that started in the 1970s, when Brazil was under a military dictatorship rule. During this period, the economy grew by 8.6% per year, then later followed by a huge foreign public debt to finance public spending. As much as these figures were impressive, the growth realized was not able reduce social inequality due to the fact that there were deficit expenditure on human capital and education. Most Brazilians left their rural homes and migrated the fast-paced industries regions, which led to a huge increase in the workforce, and at the same time the informal sector flourished (Clementi and Schettino 2015, p. 932). The unplanned migration led to unplanned towns, lack of basic amenities such as hospitals, which is still a problem up to date.

Since 2012, 22 million Brazilians have been lifted from extreme poverty, which is definitely a win-win situation, although the country still has a long way to go. However, in 2014, the Brazilian economy started to dwindle, however, the Brazilian labour market has continued to grow, which has prompted an increase in the real wages, and therefore a strong household expenditure. It is evident that the economic growth in Brazil has reduced the percentage of extreme poverty from 15% in the late 20th century to less than 9% in the start of the 21st century. The reduction has been speedy and sustained at the same time (Döring, Santos, and Pocher 2017, p. 345). As per the GDP values from 1980 to 2000, it is clear that the country experienced a tremendous economic growth. At the same time, the country experienced an increase in the mean year of schooling for the adult population from 2.6 years in the 1990s to 6.75 in the early 2000. At the same time, the industrial sector has also been stable, and the public expenditure on education has improved with more than 25% in the 1990s.

Conclusion

From various perspectives, poverty is multidimensional and multi-faceted. From this discussion it is clear that economic growth reduces extreme poverty; this is the key conclusion that has been derived from the analyses above and prior studies. At the same time absolute poverty is highly correlated with the decrease in poverty, in a way that high levels of poverty is linked to very slow decrease in poverty, while at the same time low levels of poverty is linked to high reduction of poverty. However, from the analyses, it is also clear that economic growth is not a sufficient tool when tackling extreme poverty. Therefore, poverty reduction ought to be triggered via various elements, and different sectors. The fact, that economic growth alone cannot facilitate poverty reduction, explains the reason why poverty exists at the face of economic growth. Various scholars such as Todaro have established economic models, which has revealed that education prevents individuals from changing their occupation and at the same time improve their lives from poverty. Most people in lower class in most cases do not have the necessary qualification that are needed to meet the eventualities demanded in the labor market, which isolates this class of people.

References

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