The Poverty Trap

The poverty trap is defined by economists as the self-sustaining cycle of poverty where the future income is almost always projected to be lower than the subsisting one. While it is evident that this poverty trap is incredibly vicious, it is also true that some countries all over the globe have managed to disentangle themselves from abject poverty. This policy paper interrogates the poverty trap phenomenon to fulfill three key objectives.
First, it sets forth an argument as to why some countries have fallen into the poverty trap. Secondly, the paper identifies some of the strategies that the countries that managed to escape the poverty trap appropriated to free themselves. Lastly, on an optimistic note, the paper discusses the implication of the reduction of the gap between the rich and the poor to MNCs such as Walmart. The analysis indicates that it is in the best interest of the rich countries and MNCs to reduce the poverty gap as it will enhance global stability for the rich countries and expand the consumer base for the MNCs.
Causal Factors
Poverty trap is a complex phenomenon with an equally complex interaction of numerous factors that cause and sustain it. The most prevalent factor is political instability. This is arguably the major causal factor. Research reports from international bodies such as IMF, World Bank, and the UN shows that nearly 65% of the countries trapped in abject poverty are marred with political instability (Orvis & Drogus, 2013, p. 78). Nearly 70% of the world’s poorest people reside in countries with political conflicts characterized by civil wars such as Somalia, Myanmar, Chad, Liberia, South Sudan, and Venezuela among many others. Political instability exacerbates the poverty levels because it reduces productivity (Barrett & Carter, 2013, p. 980). It impedes the ability of the population to successfully engage in economic activities, to gain income, and improve their welfare. Political stability is, thus, a key ingredient in achieving economic success and fighting poverty.
An additional major factor is poor governance. Some of the countries trapped in the vicious cycle of poverty are not marred with civil conflicts but are plagued with poor governance. Countries such as Zimbabwe and North Korea have stagnated economically and have large sections of their populations living below the poverty line because of poor governance. This is often characterized by unprecedented misappropriation of public funds by government officials and other financial scandals (Summer, 2011). These instances of corruption robs the wider population because it is only the few individual involved in these corrupt projects who benefit. The rest of the population continues to wallow in poverty. Good governance provides a platform for the formulation of progressive economic policies that will, ultimately, improve the welfare of the citizens.
Another major causal factor is the curse of the natural resources. A good number of the countries struggling to get out of poverty are endowed with natural resources (Barrett & Carter, 2013, p. 978). The problem is that if there is no sensible management of the resources, it prompts civil conflicts as the various sections of the population fight for their share of the natural resources. This has been the case in countries such as South Sudan, Libya, Venezuela, and some parts of Nigeria. Apart from the civil conflicts that are likely to arise due to mismanagement, there is also a phenomenon where the country channels all of its resources towards the exploration of the natural resource to the detriment of the wider population (Orvis & Drogus, 2013, p. 92). This is so because, more often than not, the proceeds from such an exploration do not trickle down to all the citizens; it only benefit a few elites. Over-investing in the exploration of natural resources in some instances does not have a commensurate benefit as a fair distribution of resources would have had.
Escaping the Trap
While the poverty trap is, evidently, vicious and self-sustaining, some countries have managed to free themselves and achieve economic progress. It is estimated that over the past four decades, nearly 30 countries including countries such as South Korea, Bolivia, Zambia, and Ghana among others, have managed to escape the poverty trap and are on their way to economic progress. To clearly identify some of the strategies that can help a country escape the poverty trap, this paper will now focus on one country; the chosen one in this instance is Zambia which achieved a middle-income earning country status in 2011.
One of the strategies that facilitated this economic progress is addressing political conflicts. During the 1980s and 1990s, the country was plagued with incessant civil and ethnic conflicts (OECD, 2012, p. 32). The civil strife exacerbated the poverty levels as in the absence of peace there is little that can be achieved in terms of economic growth. The country instituted strong democratic apparatus in the late 1990s and has, since the turn of the millennium, been peaceful and a leading democracy in Africa punctuated by peaceful transition of power. The ensuing political stability has allowed the country to focus its efforts on improving the economic welfare of its citizens.
An additional strategy was to deal with the curse of the natural resources. Despite being referred to as a curse, these factors that exacerbate poverty in mineral-rich countries are artificial and can be addressed. Zambia, a world leader in copper mining and exportation (OECD, 2012, p. 44), was also plagued with civil conflicts as the different ethnic communities fought to have control over mining activities in Zambia. The country addressed this by devising a formula that guaranteed that each community benefits from the country’s exploration of copper and other minerals. The country also established a mining authority to regulate mining and distribute the proceeds from mining activities. This diversification of proceeds from copper exploration into the other sectors of the economy facilitated the improvement of welfare and prompted economic growth.
The last key strategy was the proper sourcing and appropriation of international aid. In the 1990s and early 2000s, nearly 40% of the nation’s budget was comprised of donor funding (OECD, 2012, p. 28). This over-reliance on donor funding had been one of the major reason Zambia was wallowing in poverty because at times the donor did not provide the funds they had promised while in other instances, the conditions for funding by the donors were unfair and outright detrimental to the wellbeing of the country. Most of this funding was then channeled to NGOs which were tasked with improving the safety net and general welfare of the population (Summer, 2011). The government changed this approach and became astute in the appropriation of foreign aid. From 2002, the government started appropriating the donor funding to build infrastructure to prompt economic vibrancy. A substantial part of it was also channeled to target the bulging middle class. By 2012, the country had managed to address its over-reliance on foreign donors; only a paltry 5% of its budget was being funded by through donor funding (OECD, 2012, p. 36). The adoption of a long-term economic perspective enabled Zambia to astutely appropriate the funding it received to meaningfully benefit the wider population and inspire economic growth.
Implications
The reduction in the poverty gap between the rich and poor countries around the globe will, undoubtedly, be beneficial to all. With regards to the rich countries, the implication of such a reduction is that there would be global stability. There will be a stabilization of the global economy and fewer extreme fluctuations in prices, which promotes global trade (Orvis & Drogus, 2013, p. 89). Furthermore, the rich countries will benefit in that they will not feel morally obliged to donate to the poorer countries as the poor countries will also be in a position to support themselves. With regards to the MNCs such as Walmart, such a gap reduction portends greater profitability (Barrett & Carter, 2013, p. 989). A reduction in the poverty levels in the poor countries mean that such countries will gradually form part of the prospective and real market for Walmart and other MNCs. The reduction in the poverty gap will, therefore, enhance the consumer base which, in turn, enhances the probability of optimizing profitability for Walmart and other MNCs.
Conclusion
In this policy, I have interrogated the poverty trap phenomenon delineating the causal factors, the intervention strategies, and the implications of lessening the gap between the rich and poor countries to the rich countries and to the Walmart and other MNCs. The first conclusion is that with regards to the poverty trap phenomenon, the major causal factors are political upheavals, poor governance, and the mismanagement of natural resources. In this instance, Zambia strengthened its democracy, aptly managed its natural resources, and astutely appropriated its foreign aid to achieve economic progress and escape the poverty trap. Reducing the global poverty gap is beneficial to the richer countries and MNCs as it will provide a more stable global economy and expand the consumer base for Walmart and others to optimize their revenues and profits.