Poverty reduction effectiveness: local implementation versus broader international scope

¶ … Poverty Reduction occur on a Local Scale or must it be in a Broader Scope to be Meaningful? Discuss with Reference to Specific Examples.

One of the biggest issues that a host of governments and international organizations are wrestling with (i.e. The UN) is how to effectively eliminate poverty. This is because, a number of different programs have been implemented in the past that were suppose to have a dramatic impact on reducing levels. Yet, in reality they are having limited effects at addressing the underlying causes. Instead, most of the money that is intended to tackle these challenges is squandered through: government bureaucracy and corrupt leaders.

A good example of this can be seen by looking no further than Tanzania. After gaining independence in the 1961, the country began to experience 6% economic growth. This caused many international aid organizations and donors to provide increased amounts of funding for a variety of activities. These were designed to encourage economic development and the reduction of poverty. However, many of the governmental institutions were squandering these funds and focusing exclusively on supporting economic growth. Over the course of time, this made any kind of programs ineffective. At which point, the country would experience decades of negative economic growth. The below table illustrates the how this was occurring with the GDP levels from 1961 to 1985. (Mammo 1999 pp. 56 -- 57)

Tanzania GDP Growth 1961 -- 1985

Time Frame

Percentage GDP Growth

1961 -- 1967

6%

1967 -- 1973

-4.3%

1973 -- 1979

-2.5%

1979 -- 1985

-1.4%

(Mammo 1999 pp. 56 -- 57)

These figures are significant, because they are illustrating how efforts to support economic activity are not working. As many of these funds, are not addressing the root causes of the problems. Instead, they are focused on increasing economic growth through: the reduction of trade barriers and social programs that are deal with the lingering amounts of poverty. This is because, most of the funding that they received was often tied to various stipulations (i.e. The removal of trade barriers). Then, when you combine this with increased amounts of corruption, meant that many of the programs are ineffective. Once this begins to happen, the economy will go into a never ending spiral of stagnation. This is when you can see long periods of negative economic growth and no improvements in addressing poverty levels. The reason why, is because many nations have squandered the money they were receiving and they are forced to pay the debt service on the amounts that they received. This will serve as a way of making the problem worse, as this is allowing economic stagnation to occur. (Mammo 1999 pp. 56 -- 57)

Further evidence of this can be seen with a report that was released by the OECD in 1991. They found that one of the main reasons why anti-poverty and economic aid programs were not working is due to the fact that countries have shifted their priorities. As, they have begun to divert funds away from poverty reduction and economic growth initiatives. With many underdeveloped nations focusing, on paying the interest on the outstanding debt service that they received. This is important, because it is illustrating how international efforts to address poverty reduction have failed. (Mammo 1999 pp. 56 -- 57)

As a result, a new kind of focus must be taken in effectively tackling the problem. However, the issue as to the levels of responsibility has been increasingly brought into question. This is because, many people believe that poverty reduction efforts must be locally focused by: taking into account the culture and specific regionalized factors that are affecting these levels. To determine the best approach for dealing with these challenges requires comparing if poverty reduction is effective on: a micro or macroeconomic level. Once this takes place, it will provide the greatest insights as to what kinds of strategies need to be utilized to effectively tackle the consistently high rates of poverty.

Current Efforts to Tackle the Problem

According to World Hunger.org, there are currently 1.34 billion people who are considered to be living in poverty. The basic definition that they are using is someone who is living on less than $1.25 per day. Furthermore, they determined that that the underlying levels of poverty are tied directly to economic well being. As they found that there are number of different factors that can have a direct impact on rates to include: the over control / utilization of resources, war and climate change. At the same time, they also determined that many nations who begin to have large amounts of poverty will fall into a downward cycle of reduced output. This is because these high levels will have an impact on public perceptions (which will feed negative sentiments that are causing slower growth). The below table illustrates the underlying poverty rates around the world. (World Hunger 2011)

Worldwide Poverty Rates

Region

% of the Population Living in Poverty

Total Population (in millions)

East Asia / Pacific

16.8%

1,884

Latin America / the Caribbean

8.2%

South Asia

40.4%

1,476

Sub-Saharan Africa

50.9%

Europe and Central Asia

4.0%

Middle East / North Africa

4.0%

(World Hunger 2011)

This is important, because it is showing how poverty can impact different regions of the world and large segment of the population. As a result, this has lead to shift in thinking on how to effectively tackle the problem.

International Efforts

The main focus in reducing poverty was established as a part of the Millennium Development Goals (MDGs) in 2000. The emphasis of this program was to reduce the amounts of global poverty worldwide in all developing and developed nations around the globe by 2015. There are total of eight different objectives that the plan is addressing to include: the eradication of poverty / hunger, universal primary education, promoting the empowerment of women, reducing child mortality rates, combating infectious diseases, improving maternal health, environmental stability and establishing global partnerships for development. (What are the Development Goals 2011)

Since the implementation of these goals, the effects that they have been having on different regions have been mixed. In some cases, the overall amounts of poverty are dramatically being reduced. While in other areas of the world, the situation is continuing to become worse. An example of this can be seen with comments from UN Secretary General Ban Ki Moon who said, "Encouraging progress has been made in a significant number of least developed countries. This is no small feat; it shows that the MDGs are achievable. Far more than that, these nations need the tools with which they themselves will use to create jobs, generate income and unleash the continent's own potential." (Aid and Fairer Trade 2010) This is important, because it is showing how tremendous amounts of progress have been made in addressing the levels of poverty around the world.

Micro Economic Programs to Reduce Poverty

Another approach for effectively reducing poverty is: to focus on specific micro economic factors that could have an impact on the lives of individuals. This is when you are tackling the problem, by providing the people in areas that have severe amounts of poverty with: the financial resources to improve their lives. The most notable components of these kinds of programs include: easy access to financing, tools to improve their lives (i.e. computers, livestock or new plants); educational services and information technology. These different elements are important, because they are illustrating the views of many economists. They believe that poverty is the result of poor people not having access to resources that can improve their lives. Evidence of this can be seen with comments from the economist Milton Freedman who said, "The poor stay poor, not because they are lazy but because they have no access to capital." (Macro Economic Development 2011) This is significant, because it is showing how these kinds of programs are an effective alternative. As they can reduce poverty by focusing on the lack of resources that many low income individuals have.

According to AID Indonesia, there are several different reasons why these programs have been proven to be so effective. A few of the most notable include: the funds are controlled locally, they are creating a sense of empowerment for communities and they focus on long-term solutions for addressing chronic unemployment. These different elements are important, because they are highlighting the benefits that these kinds of programs are offering a wide variety of individuals around the globe. (Macro Economic Development 2011)

A good example of how successful these programs are can be seen with poverty eradication efforts in Cambodia. During the 1990's the first of these institutions began to appear. They were part of an effort to: help rebuild an economy that had been devastated by genocide and civil war. The results of this program are: that interest rates began to decline and a transformation took place in society. What was happening was these loans were allowing many individuals the chance to be able to start small businesses. This helped to increase the wealth in the community, as they hired more people to work for them. At which point, spending began to increase and more people began to seek out similar loans to start their own businesses. This created transformation for many people within local communities, who had no access to outside resources for assistance (such as women). In Cambodia, these loans helped 70% of rural women to improve their lives. As a result, this has lead to a transformation within society. (Microfinance in Cambodia 2011)

However, there have also been situations that have developed with a wide variety of borrowers facing financial challenges. This is because the interest rates on the loans are so high that they are difficult for most people to make their loan payments. At which point, many bankers will often engage in strong arm tactics to ensure that all borrowers are making their payments. At the same time, many critics will claim that these banks have done little to reduce poverty in many of the poorest countries of the world. (Mallaick 2009)

Evidence of this can be seen with a documentary conducted by Al-Jazeera. They found that number of these kinds of banks will often engage in unscrupulous lending practices of encouraging individuals to take out these loans. Then, they will utilize aggressive collection methods to force people to make their payments.

One of the most notable is the Grameen Bank of Bangladesh. What has been happening is past employees, have stated that the company policy is if someone cannot back the loan you are suppose to forgive the debt. To keep defaults to a minimum, bank managers have encouraged collectors to engage in tactics such as: harassment and making verbal / physical threats to ensure everyone is making their payments. This is problematic, because it is highlighting how many of these kinds of microfinance banks have become focused on increasing their profit margins at the expense of poor people. In response to these kinds of issues, many governments have increased regulation of these banks. This is a part of an effort to improve transparency and help address the possible abuses that are occurring. (Muhammad Yunu's Forced Exit 2011)

When you analyze both sides, it is clear that many of these concerns are overblown by critics. The reason why, is because there are different levels of poverty in communities. Those individuals that are living in abject poverty are the most likely to face increased challenges. This raises the possibility that they may default on the loan.

A good example of this can be seen with research that was conducted by Morduch (2002). He found that there were several different factors that had an impact on the ability of someone to be able to make their payments. To include: the type of poverty that the borrower is exposed to, the ideas they have, if there is a viable plan and if they are saving some of what they earn. These different standards will help to effectively target those who can benefit the most. (Morduch 2002)

At which point, Morduch recommends creating special types of financing that can be directly focused on the lower income groups. If this approach can be utilized, it will ensure that all microfinance programs are effective at helping everyone. Over the long-term, this will reduce poverty by directly going after the problem at the source. (Morduch 2002)

That being said, many of the concerns about high default rates from the critics are unfounded in some cases. Evidence of this can be seen in Cambodia, where the total loan default rates were 1%. According to the World Bank, the average amount of loans that are in this category account for 5% of the total amounts that are underwritten. (Microfinance in Cambodia 2011) This is significant, because it is showing how these kinds of programs can be effective at reducing poverty. However, there needs to be tremendous amounts of transparency and strict government regulations to prevent possible abuses. At the same time, there must be various loan products that are targeted towards different levels of poverty. If this kind of an approach can be taken, it will ensure that that these programs are effectively tackling the problem. While being able to ensure high levels of accountability, which will create economic growth in the future.

Conclusion

Clearly, the best strategy for effectively reducing poverty around the world is through the use of micro financing on the local level. This is because, it focuses on providing resources to individuals that will help them to improve their lives. Over the course of time, this has shown to be effective in countries such as Cambodia.

When you compare this with the macroeconomic approach that is being taken through the MDGs it is less efficient. The reason why, is because this kind of strategy is providing funding to national governments. Where, they will distribute the funds that are received throughout the economy using their discretion. The problem with this approach is that money is allocated based on political or economic reasons. Once this takes place, it means that any kind of efforts to reduce poverty will be mitigated (due to the fact that it is not addressing the causes of the problem). This is troubling, because it means that certain countries such as Rwanda appear to be making progress. Yet, beneath the surface the situation is only becoming worse.

As a result, those programs that focus on local communities and the individuals within them will have the greatest impact. The reason why, is because they are tackling the problem at the source. Even though, this approach is not completely eradicating poverty, it is a step in the right direction in comparison with other programs.