Reducing Poverty

Economic Development and Economic Growth

A rise in real GDP is economic growth: the economy produces more.

Economic development: an improvement in people's living standards and welfare, measured by health, education and freedom from poverty as well as income.

Growth can drive development, but it doesn't guarantee it. A country can grow by exporting oil while most people stay poor. The Human Development Index combines income, health and education to measure development (unit 2.4.2).

When an economy grows:

• Workers: firms expand → more jobs, often moving people from farm work into better-paid factory or service jobs → higher incomes → fewer households below the poverty line.
• The government: incomes and spending rise → more tax revenue → more spent on schools, clinics and clean water → better health and education for poor households.

How much growth reduces poverty depends on:

• Who gains: if the gains go mainly to owners of land, mines or capital, inequality widens and poverty falls slowly (unit 3.6.1).
• Where the jobs are: growth in cities may not reach poor rural areas.
• How the extra revenue is used: corruption or spending on the army leaves less for health and education.

International Aid and Improvements in Welfare

International aid: money, goods or expertise given or lent on generous terms by one country, or by an organisation such as the World Bank, to help another.

It comes in two main forms:

• Humanitarian aid: short-term help after a disaster or war, such as food, shelter and medical care.
• Development aid: longer-term funding for projects such as schools, vaccination programmes, roads and power supplies. It can be a grant or a soft loan, a loan at a low interest rate.

The United Nations target is for high-income countries to give 0.7% of their national income (GNI) as aid.

Aid can improve welfare in several ways:

• Health: aid pays for vaccines, clean water and clinics → fewer children die and fewer adults are too ill to work → higher productivity and incomes.
• Education: aid builds schools and trains teachers → more children learn to read and count → better-paid jobs as adults.
• Infrastructure: aid funds roads and power → lower costs for firms and farmers → more investment, jobs and trade.

How well aid works depends on:

• Corruption and governance: money taken by officials or spent on the wrong projects never reaches the poor.
• Dependency: a country that relies on aid may do less to raise its own taxes or build its own industries.
• Tied aid: aid that must be spent on the donor's own goods or firms costs more and may not fit local needs.

Non-Governmental Organisations (NGOs)

Non-governmental organisation (NGO): a not-for-profit organisation, independent of government, that works on a social or environmental problem. Oxfam and Save the Children are UK examples.

NGOs run projects on the ground, such as wells, schools and health clinics, give emergency relief and campaign for changes in policy. Much of their money comes from donations, and some comes from governments' aid budgets.

• Strength: they work closely with local communities → projects suit local needs and reach people governments miss → less money lost to corruption.
• Weakness: each NGO is small and relies on donations → projects are local and funding can stop → they can't replace a government's schools and hospitals.

Poverty Reduction Policies

A government can also act directly. The main policies, and how each reduces poverty:

• Education and health spending: free schools and clinics → healthier, more skilled workers → higher productivity and pay for the next generation.
• Cash transfers: regular payments to poor families → more spent on food and schooling → fewer in absolute poverty. Brazil's Bolsa Família pays families on condition their children attend school and have health checks.
• Progressive taxes and benefits: higher earners pay a larger share of their income in tax → the money funds benefits for low-income households → the gap narrows and relative poverty falls (unit 3.6.4).
• A minimum wage: pay rises for the lowest earners → fewer working households in poverty (unit 3.5.3).
• Microfinance: small loans to people banks won't lend to → they buy a sewing machine or livestock → a small business and a steady income.
• Attracting trade and FDI: foreign firms open factories → jobs and skills → higher incomes (unit 3.1.2).

Which policy works best depends on:

• Time lags: cash transfers help at once; education raises incomes only when today's pupils start work.
• Targeting: in countries with large informal economies, a minimum wage or income tax reaches few of the poorest, so direct transfers and public services do more.
• Incentives: benefits withdrawn sharply as income rises can discourage work (the poverty trap, unit 3.6.4).