According to the late Professor Dudley Seers, the purpose of economic development is to reduce poverty, inequality, and unemployment. What his postulations imply is that poverty reduction is one of the core objectives of economic development in countries across the world. Given the multidimensional nature and complexity of poverty, how can policymakers think about it in a structured manner?
A simplified framework of poverty reduction essentially has two components and can be explained by the easy analogy given below.
Assume that there is a country or state with inputs such as labor and capital that it can use to generate economic activity that is geared towards creating outputs. This country or state generates income as part of this economic process, which is a fixed amount at a particular point in time, but that can, of course, change over time. Analogously, we can simply think of the total income generated in the country or state as a loaf of bread (or a pie if we prefer). Absolute economic poverty is simply a section of the population that does not have adequate resources (or the slice of bread or pie in our analogy) to address basic needs.
Now comes the first crucial component of the poverty reduction framework-the size of the bread or pie. As the bread or pie grows larger, there is naturally more income in the country or state for the population at large. No matter how you slice up the bread or pie across the population, if the size of the bread or pie is too small, the country or state will naturally find it harder to tackle poverty. A simple proxy for the size of the bread or pie is the Gross Domestic Product, which is measured in national accounts in countries (and, more recently, states) around the world. Alternatively, we could also adjust for population by using GDP per capita, which can be especially useful for the purposes of cross-country (or state) comparisons.
It’s not just the size of the bread or pie that matters.
The second component relates to the way the bread or pie is shared across the population. Naturally, if income generation within a country or state is concentrated within a certain section of the population, that automatically means that the rest of the population would have to survive with a smaller share of the pie. The GINI coefficient is one metric of income inequality measured in countries (or states across) the world, which gives us a rough picture of how equitably income is shared in a country. Alternatively, there are other metrics, such as the share of the total income being earned by the top 10 percent or 1 percent of the income distribution.
With the basic structure of the poverty reduction framework in place, we can add some more complexity to each component and explore interlinkages with different forms of economic policy. Starting with the first component, we can see that economic growth is at the heart of poverty reduction. Without a pie that keeps getting bigger in size, countries or states would find it incredibly difficult to tackle poverty.
While enabling economic growth is a long and complex topic, here are some related questions: What type of macro (economic) policies could be implemented in the country (or state) to ensure sustainable economic growth? How can the production processes in different sectors of the economy be improved to increase total factor productivity? What type of market/coordination failures does the government need to address to enable private sector development?
The second component is primarily distributional, which relates to how equitably the income is shared within a country (or state). At the same time, it is important to remember that this second component is closely related to the first one because the concentration of economic growth is also about equity. If the bread or pie becomes bigger in a way that concentrates income within a few hands, then it will be sliced in a manner that leaves a lower share of resources for the rest of the population.
Again, the topic of equity is long and complex, but here are a few related policy questions: Should the government invest in social safety nets or cash transfer programs for the section of the population living below the poverty threshold? Should the government consider the implementation of progressive taxes to reduce income inequality? What are the ways to ensure that the benefits of economic growth are widely distributed within the economy?
As you can see from the above, poverty reduction is a complex challenge with several nuances. It requires countries to both increases the size of the pie itself and ensure that it is shared with the population in an equitable manner. Without the size of the bread or pie growing, countries (or states) would have less income to be shared across the population. Without an equitable share of the bread or pie, the income would be concentrated in a few hands, leaving a lot less for the rest of the population.
Countries (or states) that can ensure the presence of both components are more likely to have a poverty reduction strategy that is able to deliver good results.