Solving Poverty - Possibility or Paradox
Imagine that you are unemployed and have been seeking a job for months. The welfare programs have helped cover food, utility and rent, but you are hardly getting by. Finally, you hear back from a job application and receive your first paycheck in months and things seem to be getting better. But there’s a catch! Your job pays just enough to disqualify you from the unemployment benefits, however not enough to cover all your living costs. Somehow now you end up with less income than when you were unemployed. Economists call this demoralizing situation the welfare trap.
How do we eradicate poverty? That is the question that underpins the majority of welfare programs. But what if by asking this question, we are limiting our capacity to actually eradicate poverty?
Poverty traps explain why this might be true. These are economic and environmental circumstances that reinforce themselves perpetuating poverty for generations. Some poverty traps are tied to an individual’s circumstances, like lack of access to healthy food or education. Others can affect an entire nation like corrupt governments or climate change.
One of the key causes and maintainers of poverty is a lack of natural resource endowments and insufficient access to natural resources, which is related to its multifaceted nature and protracted existence. Even with some advances, it is still more challenging for those living in spatial poverty traps where ‘geographic capital’ (the physical, natural, social, political and human capital of an area) is low and poverty is high, partly as a result of the geographic disadvantage.. Poor agronomic potential in these rural economies is correlated with few options for diversifying sources of income. This is made worse by a lack of infrastructure, isolation, and social or political exclusion.
Most societies throughout history employed strategies to reduce poverty, and to help people in poverty meet their basic needs. Before the 20th century, religious groups and charities led such initiatives. Today these are called welfare programs and usually take the form of government provided subsidies for essentials such as housing, food, energy and healthcare. However the cruel irony of welfare traps is that it stems from the very policies that are meant to battle poverty.
Typically these welfare programs work on a means tested theory, meaning that people who fall below a certain level of income are eligible for benefits. The idea behind this is that the aid goes to the people who need it the most. But it also means that people lose access as soon as they earn more than the qualification threshold regardless of whether they are financially stable or not. This cycle is harmful to both those in poverty and those outside of it.
Economic theories assume that humans are rational actors and will weigh the cost and benefits of their options and choose the most advantageous path forward. If people in poverty know that they’re not going to have any benefit from working , they are incentivized to thrive off of the government benefits. A person’s income is their primary motivator, except for personal values and social values, and if their basic needs are not being fulfilled they will not work. This leads to a slowdown in the economy- pushing people to the edge of poverty and making it a cycle.
The shift of global poverty from low-income countries to middle income countries is an instance of the poverty trap. Haiti is a classic example of a country that seems to be heading down-not up -in terms of economic stability. It is not simply immiserated; it is in fact substantially poorer than it was half a century ago.
Some people suggest that the feedback loop could be removed by eliminating government assistance programs altogether. But this solution is not realistic and is also inhumane. Is there a way to redesign policies that don't penalize people for working?
Governments have tried to circumvent this problem in different ways. One way is to allow people to continue receiving benefits for a given period even after being in employment, and gradually reduce it over the preceding period. These policies still remove some incentive to work, but the risk of welfare trap is lower. Some governments also provide benefits like education, child care and healthcare equally across all citizens.
A proposed solution to this would be taking the idea of universal benefits one step further, a universal basic income could be provided. This would be a fixed amount given to all members of a society, regardless of wealth or employment status. This could eradicate the welfare traps since any wages earned would supplement the benefits rather than replace it. This creates a stable income floor, beneath which no member of the society can fall. This basic income will stop people from tipping to the edge of poverty in the first place.
Economists and analysts have been trying to overcome this problem for decades. They have made use of a multitude of solutions, albeit on a limited scale, therefore their effectiveness on a larger scale , for the entire world is often questioned. Only by empowering people to have a long term change in their lives and community can we break the cycle of poverty.