Extreme Poverty – Causes and Opportunities

The key finding of the last blog post was that extreme poverty has been declining sharply for about two decades, resulting in fewer people living in extreme poverty than ever before. In the following, we will look at the causes of extreme poverty and try to find methods to help poor people in a long-lasting way.

First of all, we should clarify the question. Knowing about the poverty reduction, the question is not necessarily of how poverty occurs, but rather why extreme poverty still occurs in so many countries.  Using scientific methods, the course of extreme poverty can be reconstructed back to 1820. The poverty rate back then was around 94% of the world’s population (with extreme poverty defined as an income of less than $2 per day). At that time, extreme poverty was clearly visible and an everyday phenomenon. It was only in the wake of industrialization that living standards improved and the proportion of people living in extreme poverty got reduced ever more rapidly. With approximately 705 million people living in extreme poverty in 2015, this phenomena (as shown in the last post) is nowadays largely confined to sub-Saharan Africa, India and some other poverty hot spots. We should therefore keep in mind that extreme poverty also played a major role in rich industrialized countries such as Germany or the US until only a few generations ago and should ask ourselves why this is still the case in some countries.

The effect of industrialization brings us to the first result, which is evident from several scientific papers: Extreme poverty decreases with rising national incomes. This can also be seen in the following chart from the poverty publication on “Our World in Data” by Max Roser:

 

 

Here, the proportion of the population living in extreme poverty was plotted against the per capita gross domestic product for various countries with high poverty rates. We can identify the trend from the upper left to the lower right and can verify the thesis of the correlation between poverty and GDP.

A closer examination of the World Bank’s World Development Indicators reveals further correlations between extreme poverty, life expectancy and school attendance: the higher the life expectancy in a country and the longer the school duration, the lower the poverty rate in that country appears to be.

In addition to these correlations, there are many other causes of extreme poverty and poverty in general. Examples of mechanisms that could potentially have an effect on the persistent occurrence of extreme poverty are climate change, colonialism, political systems and conflicts, geographical restrictions, and consumer behaviour in the western world. Instead of trying to quantify in any way whatsoever the impact of these highly complex areas on extreme poverty is, we should focus on evidence of successful action against extreme poverty. This is followed by the second graphic of this post (also from “Our World in Data” by Max Roser):

 

 

The results of two methods to reduce extreme poverty are presented: The blue bars show the results of one of the most effective poverty reduction efforts and the green bars show the results of migration from the listed countries to the USA. First, we will have a look at the poverty reduction program. This consists of 6 methods by which poor people are supported over a longer period of time, e. g. through direct financial aid, regular home visits or saving plans. The light blue bars show the effect of this program in terms of the annual average increase in consumption per household. The dark blue bars show the total benefits of the program minus its costs, assuming that the benefits will last forever. The green bars show the estimated annual profit from migration to the US. As you can see here, a multi-dimensional aid program will only bring about a quarter of the profits from migration per year.

Migration to a wealthier country is therefore very helpful to reduce extreme poverty, but is unfortunately not a viable solution due to the increasing visible conflicts with the inhabitants of the target countries.

Another potential aid in the fight against poverty are jobs which have been created due to globalization. These (often underpaid) job opportunities do indeed reduce the income-based poverty rate, but lead to longer-term problems with health and other areas of the well-being of poor people. When we analyse the effect of such efforts, we should therefore consider multidimensional aspects of the benefits, rather than just looking at the income-based poverty definition.

On the other hand, according to several scientific papers, larger, well-directed and structured transfers of money can bring long-term benefits for poor people without harming them in other areas. These direct money transfers together with the multidimensional aid efforts thus seem to be a real way of reducing extreme poverty in the long term. However, if you look at OECD data for the Official Development Assistance (ODA) of industrialized countries worldwide, you get sobering results: Germany reached just 0.70% of GDP for development aid in 2016, much of which was spent on overcoming the refugee crisis. The US reached only 0.19% of GDP in 2016, whereas the United Arab Emirates had the highest amount of development aid efforts with 1.21% of the GDP.

The rich Western world has the potential to support developing countries far more than it is currently the case. In my opinion, the task of us inhabitants of these countries is to draw attention to this fact and to persuade our politicians to commit themselves to raising development aid efforts. As we have worked out in this blog post, the reduction of extreme poverty is very much linked to economic growth. An individual person may have little influence on this macro process, but he or she can make a relatively simple contribution to well-directed, direct financial aid through donations.

Non-profit organizations such as GiveWell evaluate how well different charities pass on donated money to people in need. In addition to criteria such as transparency and verifiable success, GiveWell places particular emphasis on the idea of effective altruism: the basic attitude of using donations as effectively as possible to maximize happiness.

So if we want to do something about extreme poverty, we should, on the one hand, draw our fellow human beings’ attention to the existence of extreme poverty, which has perhaps been forgotten, and try to persuade our politicians to act. On the other hand, instead of buying expensive clothes or luxury goods, we should maybe ask ourselves if we shouldn’t use the money to help poor people instead.

In the next blog post we will complete this series on extreme poverty with a collection of all the facts and results found and then devote ourselves to the next problem.

 

Sources and further information:

Again, the main source of this post is the publication on “Our World in Data”:

Basic papers on which the publication and thus this blogpost is based are collected here:

  • Bourguignon, François and Christian Morrisson. 2002. “Inequality Among World Citizens: 1820-1992 .” American Economic Review, 92(4): 727-744. DOI: 10.1257/00028280260344443. Available here.
  • Dollar, David and Aart Kray (2002) – Growth is Good for the Poor. In Journal of Economic Growth. September 2002, Volume 7, Issue 3, pp 195–225. Available here.
  • Banerjee, A., Duflo, E., Goldberg, N., Karlan, D., Osei, R., Parienté, W., … & Udry, C. (2015). A multifaceted program causes lasting progress for the very poor: Evidence from six countries. Science, 348(6236), 1260799. Available here.
  • Clemens, M. A., Montenegro, C. E., & Pritchett, L. (2016). Bounding the price equivalent of migration barriers. Working Paper. Available here.
  • Fiszbein and Schady (2009) – Conditional Cash Transfers. World Bank Policy Research Report. Available here.
  • Blattman, C., & Dercon, S. (2016). Occupational choice in early industrializing societies: Experimental evidence on the income and health effects of industrial and entrepreneurial work (No. w22683). National Bureau of Economic Research.

Also the World Bank and OECD databases:

Here is the website of GiveWell and the site of effective altruism:

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