INTRODUCTION: Poverty refers to the condition of not having the means to afford basic human needs such as clean water, nutrition, health care,education, clothing and shelter. This is also referred to as absolute poverty or destitution. Relative poverty is the condition of having fewer resources or less income than others within a society or country, or compared to worldwide averages.
Contents:
Significance
Poverty in terms of Consumption
Poverty in terms of income
Poverty with respect to other dimension
Determinants
Infact on other variables
Long term trends
Business Cycle behaviour
Formal models
Significance
Poverty is a severe constraint on normal living. It is a forced reduction in consumption, due to insufficient income and menacing surrounding conditions.
The poor are a social group whose dimension depends on overall per-capita GDP but, even more, by inequality in income distribution.
There are several levels of absolute poverty between extreme poverty, at the one end, and normality, at the other.
Relative poverty threshold is a percentage of the overall average in income or consumption in a society, allowing for context-specific indications.
Contrary to the neoclassical approach based on utility, evolutionary economics emphasises the limited choice of the poor and a need-based approach with a criterium of sufficiency (satisfaction point).
Poverty in terms of consumption
The most extreme poverty leads to permanent and unescapable hunger, insufficient and unhealthy diet. Hunger and malnutrition weaken the body, the mind and the capability to work. It becomes a trap because of feedbacks between low occupability, low productivity, low income and hunger.
International aid is directed towards countries where hunger is endemic, but they are usually insufficient and not timely to overcome the poverty trap and the dependence of the poor from the will of the donor.
Throughout its life, the human being is subject to health risks. The poor is subjet to them more often, more severely, and he's worse equipped to react to them. Diseases can be food-borne (with a link to bad diet) and contagious (with network effects). Medecines and medical advice can be so costly that the poor spend too large a part of their meagre income for health or even cannot afford the best remedies. The welfare state is a collective response to health problems, but many poor countries have only limited coverage in welfare.
Garments are used to protect the body from daily and seasonal distress, with the poor having only a limited set of garments, often inadequate in physical or social terms.
Shelter is offered by houses and equivalent buildings, with poor lacking them altogether (homelessness) or partially (e.g. collective dormitories, slums, etc.).
Due to price rises beyond the overall price level increase, certain specific goods might have reached so high prices that a person that earlier could afford them is now prevented form consuming them.
In other words, the poor do not satisfy their basic needs - as defined by Amartya Sen - through adequate quantity and quality of goods and services, not only in terms of level but also in terms of uncertainty and risk of negative shocks.
Poverty in terms of income
Constantly zero income - out of unemployment - of a socially isolated person without a previously cumulated capital is the most extreme poverty condition. In rather short time, unless reversed, this can lead to zero consumption and death.
However, the most frequent condition of the extreme poor is a life of limited irregular income flows due to single occasions, possibly obtained through the family and social networks.
In many cases, the normal chain from of personal skill & time to employment, wage, and income is broken down, with the poor searching directly for consumption goods (as food), feeling unable to get a job, either because of lack of available jobs or because of his perceived or real inability to perform.
Moreover, the activities put in place in search for food are highly inefficient and usually unsustainable in the long run.
In other cases, the job is irregular and badly paid (in terms of level and effective payments after promises). Working poor are, furthermore, working all the time but getting so low hourly wages that total monthly wage is unsufficient to cover basic expenditure. All their wage is normally spent on consumption with no savings, especially if they feel that there is some stability over time assured.
Below this condition, in case of irregular income , the poor can try to accumulate - once and for all - a small capital to face negative shocks; since banks are costly and may refuse to open an account to e.g. an homeless, he might keep with himself a certain amount of money or exchangeable things, with all the risks of being robbed.
In other words, decumulating savings is a short-living unsustainable tactics used by the poor as a reaction to negative shocks but does not substitute the need for a stable flow of income of sufficient amount.
Less visible - but not less real - is the level of poverty that, although allowing daily satisfaction of needs, imposes a closed life without social activities, trips, enjoyment of culture.
Poverty with respect to other dimensions
Poverty is usually associated with low education, precarious health, unproper or repellent social image, narrow experience of different places, difficulties in finding friends outside the circle of the poor. Ethnic minorities or migrants have often a larger proportion of poor than the rest of the population.
In family terms, single mothers with little children, on the one hand, and large families with many children, on the other, are particularly at risk of poverty.
Determinants
Underdevelopment is the cause of the largest number of poor in the world. Low per-capita GDP levels, due to low employment, productivity and wages, plus income inequality result in large shares of the population living with less than 1 or 2 $ per day.
Specific needs could be particularly difficult to be satisfied in certain countries, as with food where desertification and primitive agriculture constrain harvesting or as with devasted houses by hurricanes or as with health during epidemics of contagious diseases.
However, social and political causes and mechanisms are by far more important in explaing why, in face of difficulties, no adequate policies are expressed and implemented by governments.
In particular, in dictatorships the will of the poor can be simply ignored, or repressed, by the ruling elites. In democracy, the poor may not go to the polls or vote for irresolutive politicians, with the middle class and the rich making an alliance to exclude the poor from countries' priorities.
Income inequality is the major determinant of poverty both in developed and non-developed countries. Rising unemployment is a major source of spreading poverty. Lack of access to crucial assets and services (health care, schooling, infrastructure) exclude the poor from the very beginning. By contrast, access to finance as with microfinance is a viable strategy for exiting poverty.
Individual choice and exogenous negative shocks can lead specific persons to the edge of poverty, with alcoholism, narcotics, and gambling being some of the sources of marginalization.
Impact on other variables
The poor buy less (smaller quantities, narrower bundles, less often) and restrict themselves to worse quality goods (less performing, older, less innovative) than the middle class or the rich.
Thus, sales are lower when a large part of the population is poor (than they have would be otherwise). Total business turn-over, production, value added and employment are consequently reduced.
Vertical product differentiation exhibits a tendence towards low quality goods, with innovation hampered. R&D efforts are diverted from targeting horizontal differentiation features particularly useful to the poor. Goods suitable to the poor are not invented or diffused enough.
The poor tend to consume their entire income (apart from occasional precautionary savings), so usually personal savings will be low (where poverty is widespread). Capital accumulation is more difficult there, with FDI unlikely to target local demand; FDI could be attracted by low wages, but skilled labour might be difficult to find. The linkages between poverty, illiteracy and exports are explored in this paper.
Tax revenue will be low because it is ineffective to tax the poor, because of meagre tax base and necessarily low tax rates. In utility, welfare and political terms, it is too painful to raise tax from the poor. In addition, their income comes often from the grey economy. This creates a vicious cycle with low GDP requiring a pro-development economic policy (e.g. infrastructure) with difficulties in funding it.
Persistent perspective of poverty may lead people to migrate abroad, looking for employment to send money home as remittances.
To the extent poverty is associated with urban segregation, criminality and violence can be high as a result, depending also on general cultural climate.
Long term trends
The United Nations Millennium Goals indicate the overall goal of halving, between 1990 and 2015, the proportion of people whose income is less than $1 day. Eradicating poverty is the stated goal of World Bank.
However, the absolute number of the poor has been rising for decades in most developing countries, with the percentage fall over globe's population being due largely to a handful of countries, as China and India.
In developped countries, a bottom group of poor is consolidating, with social marginalization and cumulative feedback mechanisms, trapping the poor down.
Poverty eradication is a key goal that should be coupled with sustainable development and the mitigation of climate change. In this vein, our book on "Innovative Economic Policies for Climate Change Mitigation" puts forth the proposal of leveraging microfinance for the diffusion of clean tech across the poor.
Business cycle behaviour
Poverty is anti-cyclical, widening and deepening during recessions. Recovery and booms are not always capable of reducing poverty below certain thresholds, due to social marginalization and difficult occupability of the poor.
Formal models
1.) The decision-making routines of the poor
2.) Product innovation in a polarized society
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