How can poverty be reduced?

Posted by Prachi Kishore on 29 May, 2018

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3 Solutions

Bribe the poor

Posted by Arunima Kumar on 29 May, 2018

In 1995, the Mexican peso crashed and the economy contracted by 6 percent. At the time, Santiago Levy, the deputy finance minister, realized that the country’s antipoverty programs were going to fail its poor. The programs were a hodgepodge of food subsidies, adopted in response to powerful food producers. They were inefficient because they targeted foods everyone ate, rich and poor. Some even targeted foods the poor don’t eat, such as bread – poor Mexicans eat tortillas.

Mr. Levy saw a looming disaster – but also an opportunity to build political support for an antipoverty program that worked. Stealthily, he organized a pilot project to test a new idea in Campeche, far away from the capital so it would draw little notice. He began a program to pay poor mothers to keep their children in school and take their kids to the health clinic. He compared the results to poverty figures in a group of similar villages without the program. It was a great success. Data in hand, he persuaded President Ernesto Zedillo to phase in the new program and phase out the food subsidies.

Oportunidades, formerly called Progresa, is now embraced by all parties in Mexico and, with financing from the World Bank, is helping virtually every poor family. It not only focuses anti-poverty spending on those who really need it, it does so in a way that encourages families to break the cycle of poverty for their children.

The average family in Oportunidades gets $35 a month – about a quarter of the rural family income. Families with many children in school can get up to $153 a month, a ceiling imposed to avoid providing incentive to have more children.

From the beginning, Oportunidades built in rigorous evaluation. Those studies have shown that it does focus its help on Mexico’s poorest people, and that the money is producing good results. Children are bigger and healthier. Oportunidades has also cut child labor and led to more schooling – in rural areas, for example, the number of children starting high school increased 85 percent. Moreover, by paying women, Oportunidades has augmented their power inside the family without increasing domestic violence.

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Microcredit: The 62-cent solution

Posted by Arunima Kumar on 29 May, 2018

In 1976, a Bangladeshi economist named Muhammad Yunus came upon a group of 42 artisans. They made crafts such as chair seats, and used materials lent to them each day at exorbitant rates of interest by the buyer of their work. They were forever in debt, unable to turn enough profit to buy their materials in advance at market prices. Mr. Yunus gave the group a loan from his pocket that averaged 62 cents per person. With that, they bought their freedom.

Twenty years later, the Grameen Bank, the organization Mr. Yunus founded, has lent small sums of money to 6.7 million people in Bangladesh, almost all of them women, many of whom had never before touched money. It offers savings, insurance, home mortgages, pension funds, scholarships, credit for families to buy fertilizer, build latrines or dig wells, and a program of no-interest loans for beggars,so they can offer candy or dried chiles for sale as they go house to house.

Microcredit now reaches nearly 100 million clients in more than 100 countries. The World Bank has found that microcredit accounted for 40 percent of the entire reduction in moderate poverty in rural Bangladesh —and that it had an even bigger impact on extremely poor borrowers.

Microcredit raises an entire village’s standard of living – even non-borrowers’ lives improve. (Lending to men, by contrast, proved not to affect poverty at all.) Studies of microcredit programs all over the world show that it produces higher incomes and better-fed children, and improves a family’s ability to survive illness or drought.

What Mr. Yunus and Grameen did was show how an idea helping a few hundred people could be expanded to help millions. Grameen has also struck the proper balance – it is sustainable and profitable, with $600 million in savings from borrowers as capital. At the same time, it has never forgotten that its mission is to fight poverty, not maximize profit. It charges interest rates far lower than other commercial microlenders.

Grameen developed a model now in use globally. Although it is a bank, in many ways it is the opposite of a bank. Traditional banks in poor countries do not lend to the poor — administrative costs are too high, and the poor were thought to be bad risks. Normal banks stick close to business districts, require collateral, and lend mainly to men.

Grameen turned this on its head. Instead of collateral, Grameen depends on social pressure to guarantee loans. Women form borrowing groups of five, and must pay back their loans regularly for others in the group to be able to get one; borrowers must pledge to eliminate dowry, eat vegetables, have small families and educate their children — requirements not likely to be found at conventional banks.

Microcredit started as an antipoverty program, but continues as a business. That is one reason it has grown and grown while other forms of aid fight for governments’ dollars and attention.

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Raise the minimum wage

Posted by Arunima Kumar on 29 May, 2018

Raising the minimum wage is the first step to reducing income inequality. Its sharp decline in real value means the lowest wage earners have no chance in keeping pace with those whose incomes are tied to the stock market or who have university degrees. Wages need to rise to a livable level.

Living wages take into account various costs an individual or family will encounter over the course of a year. These include food, childcare, healthcare, housing, transportation, and other necessities that vary by geographic location. Each city has a different living wage. Establishing a minimum wage fails to take into account any expenditures; the minimum wage needs to be tied to the living wage.

Since the living wage varies for each city, the government should make the minimum wage the lowest living wage of all cities for which data are available. The government also needs to mandate that each city adjust its minimum wage to equal the living wage and either tie it to inflation or necessitate that it change year by year based on rising prices of basic expenditures. This will ensure no individual will live in poverty and everyone will be able to afford the most basic needs.

The primary objection to raising the minimum wage or tying it to a living wage is the assertion that a higher value would increase unemployment. However, there is no economic consensus that raising the minimum wage necessarily leads to job loss.

Economist David Card examined a case in 1992, when the American state of New Jersey raised its minimum wage while Pennsylvania did not. Card found “the number of jobs actually went up in New Jersey…compared to the number of jobs in Pennsylvania”. The takeaway from this study is higher wages don’t necessary lead to unemployment. Higher wages can actually create employment by increasing the consumer power of low-income individuals, who will see an increase in wages and be able to spend more, thereby creating jobs.

Arindrajit Dube of the Brookings Institute in Washington D.C. asserts the decline in the real value of the minimum wage is a primary cause of income inequality and the best way to combat inequality is to raise the wage, adjusting as needed for cost of living. San Francisco provides a current case study. Until Seattle raised its minimum wage to $15 an hour, San Francisco had the highest minimum wage in the country. Unemployment actually dropped below 5 percent in San Francisco.

Indeed, the government of Singapore, a nation that takes economic growth seriously, has overseen sustained increase in median income for Singaporeans over the last five years. Median monthly income from work of full-time employed citizens increased by 30 percent during the period. The technocratic government achieved this increase by public sector initiatives to raise incomes of low-wage workers. Yet, the unemployment rate of Singapore remains a low 1.9 percent.

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