Development And Poverty

Development And Poverty

We wish to learn

How is poverty defined?
Why are we concerned with poverty?
What are the causes of poverty
What can be done to reduce poverty ?
The relationship between poverty, development and the environment

Jump to: [1. Less Developed Countries and Poverty] [2. Poverty and the Environment] [3. Causes of Low Per Capita Output in Less Developed Countries] [4. How can less developed countries acquire capital?] [5. Development, Poverty and the Environment][Suggested Readings]

01/04/2006

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1. Less Developed Countries and Poverty

Economic development is an important factor in reducing poverty and in generating the resources necessary for human development and environmental restoration. The real per capita output is an indicator that defines the real output per person in a nation. It is calculated by dividing real GNP in a nation by the nation’s population. Nations are classified according to their real per capita output as follows:

Real per capita output
Low income	<US$750
Lower-middle income	>US$750<US$2,900
Upper-middle income	>US$2,900<US$9,000
High income	>US$9,000

Personal income is defined as the amount of money that households have available to spend before paying personal taxes. Table 1. presents an example of how personal income is calculated starting with GNP. There is great disparity in levels of per capita income among nations in the world. In general countries with per capita incomes less than US$1,000 per year are referred to as the less developed countries. The poverty income threshold is defined as the income level below which a person or family is classified as being poor. The poverty threshold used by the World Bank to measure poverty in the developing nations is US$370 per person per year. Today, it is estimated that 1.3 billion people in less developed countries are living on less than one dollar a day. In Africa, for example, the per capita income in some very poor countries is less than US$200 per year.

Table 1. From GNP to Disposable Income

Nominal
amount in 1989
(billions of dollars)

Step 1
Less:
Equals: Gross national product
Capital consumption allowances
Net national product $5,200.8
-554.4
$4,646.4

Step 2
Less:
Equals: Net national product
Indirect business taxes and other adjustments*
National Income $4,646.4
-423.1
$4,223.3

Step 3
Less:

Plus:

Equals:
National Income
Social security payroll taxes
Corporate profits
Net interest paid
Government transfer payments
Personal interest and dividends and business transfers
to individuals
Personal income
$4,223.3
-476.8
-311.6
-445.1
604.5

680.4
$4,384.3

Step 4
Equals: Personal income
Personal taxes
Disposable income $4,384.3
-658.8
$3,724.5

*Other adjustments are a deduction of business transfer payments such as pensions, a statistical discrepancy and an addition of subsidies less current surplus of government enterprises.
SOURCE: U.S. Department of Commerce, Survey of Current Business, August, 1990.

In the U.S. the measure of poverty is based on a Department of Agriculture survey in the 1950s that showed that families spent about one-third of their incomes on food. Consequently, the poverty threshold is set at three times the cost of an economy food plan defined by the Department of Agriculture. The thresholds vary according to the size and age composition of a family, and it is updated every year to reflect the cost of living increases. The U.S. poverty threshold for a family of four, between 1985 and 1997, is shown below:

Year Poverty Threshold*
1997	$16,404
1996	$16,036
1995	$15,569
1994	$15,141
1993	$14,763
1992	$14,335
1991	$13,924
1990	$13,359
1989	$12,674
1988	$12,092
1987	$11,611
1986	$11,203
1985	$10,989

*Poverty Threshold is weighted average threshold, for a family of 4

In contrast with the income definition of poverty, a broader definition is presented by the Human Poverty Index (HPI), developed by the United Nations Developing Program (UNDP). The HPI includes measures of low life expectancy, illiteracy, and lack of access to health services, drinking water, and adequate nutrition. All these are human conditions associated with poverty. Human poverty and income poverty sometimes coincide, but not always. In some instances, like in Latin America, the percent of income poor in a country may be larger than the percent of human poor, implying that the poor are better off since they have more choices and opportunities due to services provided by the government. Figures 1-3 show the relationship between poverty and some human conditions.

Figures presented by the United Nations in 1996 indicate that the gap between rich and poor countries is growing: the income ratio between the richest 20% and the poorest 20% of the world population went from 30 to one in 1960, to 61 to one in 1991. Within some countries the gap between rich and poor is also increasing. Income inequality is a source of social instability and armed conflict, which in turn are detrimental to economic development. A long term solution to this problem is commitment by governments to provide better services (education and health care) to the poor.

2. Poverty and the Environment

Poor people in the less developed countries, who cannot meet their subsistence needs through purchase, are forced to use common property or private resources such as forests for food and fuel, and ponds and rivers for water. Consequently, they suffer most directly the consequences of environmental degradation, whether caused by their own actions or by consumption on the part of higher-income groups. Figures 4-6 show the contribution to environmental degradation by less developed and developed countries.

Figure 6

For example, overuse of water resources by the poor, driven by population pressure, has resulted in some contamination and exhaustion. Urban populations are also increasingly using rivers to dispose of untreated sewage and industrial effluent. The result is that the health of those dependent on untreated sources of water is increasingly at risk.

The poor often have no alternative when the environment resources they depend on are degraded. Consequently, undependable food supplies, unsafe drinking water, polluted air, and unsanitary conditions contribute significantly to reduced life expectancy and high child mortality. These conditions, in turn contribute to population growth as the poor make fertility decisions to compensate. Children are valuable- they gather fuel, collect drinking water, and care for aging relatives. But, because many children die, it is necessary to have many. The result is a vicious cycle: a larger population leads to more poverty and more pressure on the environment.

3. Causes of Low Per Capita Output in Less Developed Countries

The problems of a particular nation with low per capita output are unique. It is possible, however, to list some basic causes:

Lack of capital and low rate of savings.

The key to economic growth is accumulation of capital, and to accumulate capital requires savings. In less developed countries workers have little physical capital (roads, structures, bridges, equipment, vehicles, etc) to work with. As a result, their productivity is low and output per capita is low. Consequently, there is little or no savings, which in turn is necessary to accumulate capital.

Lack of human capital.

Human capital is as important as the physical capital. Often the labor force in less developed countries is illiterate or lacks necessary training.

Old fashion production methods.

The use of old technology is related to the lack of physical and human capital.

Political instability and government policies that discourage production.

Less developed countries are sometimes plagued by guerilla warfare, political insurgence, and political corruption which create the wrong environment for investment and production. All these problems are linked with each other and may require assistance from international organizations or other nations to be resolved.

4. How can less developed countries acquire capital?

Here are some suggestions:

Gifts of direct aid and technical assistance from developed nations.

Trade with foreign nations to obtain capital: increase exports of agricultural and industrial products.

Direct investment of private corporations. To attract private foreign investment usually requires social and political stability, good transportation and communications infrastructure, and human capital, all or some of which may be lacking in the less developed countries.

Loans from a number of unique public international financial institutions, such as, the World Bank and the International Monetary Fund. The World Bank provides loans at reduced interest rates to help developing nations acquire capital. The International Monetary Fund (IMF) lends to countries over the short term to remedy balance of payments deficits, and requires in exchange rigorous economic policy measures from the borrowing nation to cut internal expenditures and increase exports.

5. Development, Poverty and the Environment

The World Bank’s ultimate objective is the reduction of poverty in the less developed world. In the past, however, development projects encouraged by the World Bank and other international financial organizations have been detrimental to the environment and to the poor. Some development projects have deprived the poor of access to the natural resources on which their livelihoods depended. For example, farmers have been evicted from their lands by dams, logging concessions, and large scale agricultural and industrial projects. The financial cost of this destructive approach to development is immense. Financial institutions while aiming to reduce poverty through development may be, in fact, creating poverty.

The poor are also affected by the debt acquired by developing countries through loans for development. In order for the countries to service their debts, they must earn foreign exchange. Consequently, they are encouraged by the international financial institutions to reduce domestic expenditure and to export more. In many countries, the impact of these policies on the poor has been devastating, since they have implied a drop in wages and a slashing of education and health services.