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Poverty menace: still a long way to go

The nature of poverty is complex, and its causes are diverse. It is characterized by a lack of access to essential goods, services, assets, and opportunities to which every human being is entitled. There should not be any hunger, everyone should live in peace and have access to basic education and primary health care services. Poor households need to sustain themselves by their labor and be reasonably rewarded and should have a degree of protection from external shocks. In addition, individuals and societies are also poor — and tend to remain so — if they are not empowered to participate in making the decisions that shape their lives. There is still a long way to go, however. Poverty remains at unacceptable levels and progress has been uneven across the Asian region in particular and whole world in general.

The nature of poverty is complex, and its causes are diverse. The poor may not have acquired essential assets or capabilities because they live in remote, conflict-prone, or resource-poor areas. They may be vulnerable due to age, health, living environment, or occupation. Economic stagnation may limit opportunities for gainful or productive employment. The poor may be denied access to assets or services because they belong to an ethnic minority or a community considered socially inferior, or simply because they are female, disabled, or just different. At a broader level, poverty may stem from situations where gross inequality persists because of vested interests and entrenched power structures. The great diversity of the conditions and causes of poverty implies that intervention to reduce it must be tailored to particular circumstances.

An effective strategy for poverty reduction should have:

  • Sustainable Economic Growth Policies for Poor
  • Inclusive Social Development
  • Good Governance

These three points constitute the framework of poverty reduction and are closely linked and mutually reinforcing. Successful poverty reduction therefore requires policies that simultaneously strengthen all three. The relative importance of each pillar will depend on country circumstances at a particular time.

Within the framework of these three strategy points, interventions for poverty reduction can be:

Short Term: that sustain basic services to the poor

Medium Term: Targeted interventions

Long Term: that builds human resources, stimulate pro-poor growth, and encourage expansion of the private sector.

Rapid, broad-based economic growth is the single most important factor in sustaining poverty reduction. Moreover, a dynamic public policy and an active state role in creating enabling conditions for rapid economic growth is very important.

The economic growth and poverty rapport is two-way in nature; High, sustained growth increases labor demand and wages, reducing poverty. Better earnings lead to increased labor productivity and growth. Growth also improves public revenues and enables more public spending on physical and social infrastructure, helping reduce poverty as well as improving an economy’s productive potential.

Policies for labor-utilizing growth

While economic growth favors poverty reduction, broad-based, labor-utilizing growth will have a stronger impact. A combination of sound macroeconomic management and policies that encourage steady growth in employment has proven to be a powerful pro-poor measure. Such policies include the gradual removal of market-distorting interventions. Other policies in this category are those that develop a conducive environment for the private sector and those aimed at increasing employment and income-generating opportunities for women and other groups that may be outside the formal labor force. Similarly, opportunities for self-employment have made an important contribution to poverty reduction.

Essentially, the private sector- the engine of growth, has a direct role in poverty reduction. It can participate in building physical and social infrastructure including provision of basic services that will benefit the poor. For the private sector to contribute more effectively to the delivery of such services, an enabling environment must be established, and the financial sector must be developed. As the role of the private sector expands, the role of the government should shift from the owner and producer of goods and services to that of a facilitator and regulator. An effective regulatory framework becomes critical to promote competition, enforce fair practices and standards, and ensure that essential services reach the poor.

Infrastructure development can contribute to poverty reduction both indirectly by fostering growth and development, as well as directly through job creation and improving access to economic activities and basic social services. For an economy to grow, expanding infrastructure and related services that enhance capacity and efficiency are essential. Expanding opportunities at the local level requires integration with national markets which infrastructure can facilitate.

 

Another important way to accelerate growth is regional cooperation that offers larger markets, economies of scale, and division of labor. Such cooperation is especially useful for small countries with limited options.

Environmental sustainability is central to pro-poor economic growth. Growth will be short-lived if it does not conserve the natural environment and resources. Although much damage in the past was caused by powerful vested interests, the pressures of poverty and population compound the threat through deforestation, overgrazing, and depletion of fish stocks. The rural poor are often forced to live on fragile lands and waters that require sensitive resource management in the face of increasing degradation. The urban poor are exposed to disease and illness resulting from overcrowding and polluted living conditions. Poverty reduction strategies need to incorporate policies and actions that enhance the quality and productivity of the environment and natural resources.

As a matter of fact a country in debt will not be able to afford good schools, and a poorly educated workforce will be less capable of fixing problems and creating conditions that will attract foreign investment. As per IMF, World Economic Outlook Database (April 2019); Pakistan ranked 54 in the list of poor countries with $ 5,839 per capita, preceding by Bangladesh ranked 50 ($ 4,993). India ranked 68 with per capita $ 8,484.

Microfinance services have emerged as an effective tool for financing micro-entrepreneurs to alleviate poverty. NGOs are the leading practitioners of sustainable development through financing micro-entrepreneurial activities. The micro-loans have a statistically significant positive impact on the poverty alleviation index and consequently improve the living standard of borrowers by increasing their level of income. Financing micro-entrepreneurs for job creation and income generating activities shows some success in many developing countries. The link between poverty and natural environment is often mentioned in the ‘sustainable development’ debate. Subsequently, poverty alleviation is necessary to deal with by any effective program related to sustainable development. One fifth of the world population are living in extreme poverty. About 2.5 billion people live on less than $2 a day.

Half of the world’s working-age adults which are about 2.5 billion are still do not have access to financial services of regulated financial institutions. Therefore, to start or maintain a micro-enterprise, they have to depend upon informal moneylenders for loans. It is estimated that there are more than 3100 microfinance institutions providing loans to over 100 million clients to lift them out of poverty. Financing micro-entrepreneurs with small, but collateral free loans, has emerged as a promising and effective tool for alleviating poverty. It focuses on providing credit services to the poor, yet income generating ventures without collaterals.

Role of Microfinance

In the past 25 years, microfinance service has been considered as one of the most significant innovations in development policy around the world. Beside, microcredits, the microfinance service also offers services such as consulting and training for the microenterprise, along with market information. They also provide access to wider market which is very often not in the reach of micro-entrepreneurs due to their lack of knowledge and other administrative steeplechases. We have witnessed the role of microfinance, since the few years, has received significant attention, from both policy makers as well as academics. Hence the microfinance can contribute to the sustainable development goals such as gender inequality by empowering women through microfinance, by establishing the financial capital to promote sustained and inclusive economic growth. Purposefully, the microfinance plays a vital role for the poor to raise their own microenterprises to escape from poverty.

The microfinance is often seen as a concept useful for achieving sustainable development, but criticized as it is not regulated and lending often happens informally and many potential borrowers are not aware of the benefits and risks of products and services offered by microfinance institutions. Many are not able to access loans, mainly due to their illiteracy.

Many researchers contended that the commercial microfinance institutions have the same outreach and impact as their non-commercial counterparts. Some sees it as a mission drift towards a more commercial direction that focuses on financial returns for microfinance institutions rather than on poverty alleviation. Some evidences has been found for a negative correlation between the financial efficiency of microfinance institutions and the outreach to the poor. Their results suggest that a pure commercial approach has less impact on sustainability goals, such as poverty alleviation and empowerment. The commercially oriented microfinance institutions tend to grant less but higher loans to richer borrowers in order to decrease costs.

The author, Nazir Ahmed Shaikh, is a freelance columnist and is an educationist by profession. Currently he is associated with SZABIST as Registrar and could be reached at nazir.ahmed@szabist.edu.pk

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