Growth was the major element behind the reduction of global poverty from 1990 to 2010. Developing countries’ GDP has grown at a rate of roughly 6% per year over the last decade, 1.5 percentage points faster than it did from 1960 to 1990. Despite the largest global economic crisis since the 1930s, this occurred. Following the recession, the three regions with the greatest number of impoverished people all experienced high GDP growth: East Asia at 8% per year, South Asia at 7%, and Africa at 5%. According to a preliminary estimate, every 1% rise in GDP per capita reduces poverty by 1.7 percent.
However, GDP is not always the best indicator of living standards and poverty alleviation. It is usually preferable to examine household consumption using surveys. Martin Ravallion, the World Bank’s head of research until recently, conducted 900 such surveys in 125 developing nations. According to his calculations, consumption in emerging countries has expanded at a rate of just under 2% per year since 1980. However, since 2000, there has been a significant increase. Annual growth before it was 0.9 percent; after that, it jumped to 4.3 percent.
What is the relationship between GDP and poverty?
Because economic growth has little effect on income disparity, it helps to alleviate poverty. In the data set, annual income disparity rises at a rate of less than 1%. Economic growth tends to improve incomes for all members of society, even the poor, because income patterns are largely stable over time.
Is poverty reflected in GDP?
Living standards have risen all throughout the world as a result of economic expansion. Modern economies, on the other hand, have lost sight of the reality that the conventional metric of economic growth, gross domestic product (GDP), just measures the size of a country’s economy and does not reflect the welfare of that country. However, politicians and economists frequently use GDP, or GDP per capita in some situations, as an all-encompassing metric for measuring a country’s progress, combining economic success with societal well-being. As a result, measures that promote economic growth are perceived as positive for society.
We now understand that the reality is more complicated, and that focusing just on GDP and economic gain as a measure of development misses the negative consequences of economic expansion, such as climate change and income inequality. It’s past time to recognise GDP’s limitations and broaden our definition of development to include a society’s quality of life.
This is something that a number of countries are starting to do. In India, for example, where we both advise the government, an Ease of Living Index is being developed to gauge quality of life, economic ability, and sustainability.
Our policy interventions will become more aligned with the qualities of life that citizens actually value, and society will be better served, if our development measures go beyond an antagonistic concentration on increased productivity. But, before we try to improve the concept of GDP, it’s important to understand where it came from.
The origins of GDP
The contemporary idea of GDP, like many of the other omnipresent things that surround us, was born out of battle. While Simon Kuznets is frequently credited with inventing GDP (after attempting to quantify the US national income in 1932 in order to comprehend the full magnitude of the Great Depression), the present concept of GDP was defined by John Maynard Keynes during WWII.
Keynes, who was working in the UK Treasury at the time, released an essay in 1940, one year into the war with Germany, protesting about the insufficiency of economic statistics in calculating what the British economy might produce with the available resources. He stated that the lack of statistics made estimating Britain’s capacity for mobilization and combat problematic.
According to him, the sum of private consumption, investment, and government spending should be used to calculate national income. He rejected Kuznets’ version, in which the government’s income was represented but not its spending. Keynes observed that if the government’s wartime purchase was not factored into national income calculations, GDP would decline despite actual economic expansion. Even after the war, his approach of measuring GDP, which included government spending in a country’s income and was driven by wartime necessities, quickly gained favor around the world. It is still going on today.
How GDP falls short
However, a metric designed to judge a country’s manufacturing capability in times of conflict has clear limitations in times of peace. For starters, GDP is an aggregate measure of the value of goods and services generated in a certain country over a given time period. There is no consideration for the positive or negative consequences produced during the production and development process.
For example, GDP counts the number of cars we make but ignores the pollutants they emit; it adds the value of sugar-sweetened beverages we sell but ignores the health issues they cause; and it includes the cost of creating new cities but ignores the worth of the crucial forests they replace. “Itmeasures everything in short, except that which makes life worthwhile,” said Robert Kennedy in his famous election speech in 1968.
The destruction of the environment is a substantial externality that the GDP measure has failed to reflect. The manufacturing of more things increases an economy’s GDP, regardless of the environmental damage it causes. So, even though Delhi’s winters are becoming packed with smog and Bengaluru’s lakes are more prone to burns, a country like India is regarded to be on the growth path based on GDP. To get a truer reflection of development, modern economies need a better measure of welfare that takes these externalities into account. Expanding the scope of evaluation to include externalities would aid in establishing a policy focus on their mitigation.
GDP also fails to account for the distribution of income across society, which is becoming increasingly important in today’s world as inequality levels rise in both the developed and developing worlds. It is unable to distinguish between an unequal and an egalitarian society if their economic sizes are identical. Policymakers will need to account for these challenges when measuring progress as rising inequality leads to increased societal discontent and division.
Another feature of modern economies that makes GDP obsolete is its disproportionate emphasis on output. From Amazon grocery buying to Uber cab bookings, today’s cultures are increasingly driven by the burgeoning service economy. The concept of GDP is increasingly falling out of favor as the quality of experience overtakes unrelenting production. We live in a society where social media provides vast amounts of free knowledge and entertainment, the value of which cannot be quantified in simple terms. In order to provide a more true picture of the modern economy, our measure of economic growth and development must likewise adjust to these changes.
How we’re redefining development in India
In order to have a more holistic view of development and assure informed policymaking that isn’t solely focused on economic growth, we need additional metrics to supplement GDP. Bhutan’s attempt to assess Gross National Happiness, which takes into account elements including equitable socioeconomic development and excellent governance, and the UNDP’s Human Development Index (HDI), which includes health and knowledge in addition to economic prosperity, are two examples.
India is also started to focus on the ease of living of its population as a step in this approach. Following India’s recent push toward ease of doing business, ease of living is the next step in the country’s growth strategy. The Ease of Living Index was created by the Ministry of Housing and Urban Affairs to assess inhabitants’ quality of life in Indian cities, as well as their economic ability and sustainability. It’s also expected to become a measurement tool that can be used across districts. We feel that this more comprehensive metric will provide more accurate insights into the Indian economy’s current state of development.
The ultimate goal is to create a more just and equitable society that is prosperous and provides citizens with a meaningful quality of life. How we construct our policies will catch up with a shift in what we measure and perceive as a barometer of development. Economic development will just be another tool to drive an economy with well-being at its core in the path that society chooses. In such an economy, GDP percentage points, which are rarely linked to the lives of ordinary folks, will lose their prominence. Instead, the focus would shift to more desirable and genuine wellbeing determinants.
Why is GDP not a good indicator of poverty?
GDP is a rough indicator of a society’s standard of living because it does not account for leisure, environmental quality, levels of health and education, activities undertaken outside the market, changes in income disparity, improvements in diversity, increases in technology, or the cost of living.
What impact does GDP have on a country?
- It indicates the total value of all commodities and services produced inside a country’s borders over a given time period.
- Economists can use GDP to evaluate if a country’s economy is expanding or contracting.
- GDP can be used by investors to make investment decisions; a weak economy means lower earnings and stock values.
What are the five factors that contribute to poverty?
Around 8% of the global population is living in extreme poverty, but do you know why? We examine 11 of the most significant causes of world poverty.
Living on less than $2 a day may seem impossible, but it is a reality for approximately 600 million people around the world today. Approximately 8% of the world’s population lives in extreme poverty, which is typically defined as surviving on less than $1.90 per day.
There is some positive news: that number was 1.8 billion people in 1990, indicating that significant progress has been made. While many people doubt that extreme poverty can be eradicated, we at Concern believe it is not only achievable, but also within our lives. There isn’t any “Although there is no “magic bullet” solution to poverty, recognizing its causes is a solid start. Here are 11 of them, completely updated for 2020.
1. MARGINALIZATION AND INEQUALITY
“Inequality” is a simple, but sometimes misleading phrase for the systematic hurdles that prevent some groups of people from having a voice or being represented in their community. All groups must be included in the decision-making process for a population to overcome poverty especially when it comes to having a say in the things that determine your status in society. Some of these may be visible, while others may be more subtle.
Gender inequality, caste systems, and marginalization based on race or tribal affiliations are all economic and social disparities that imply a lack of access to the resources necessary to live a full and productive life. When these factors are added to the many combinations of vulnerability and hazards that make up the rest of this list, a marginalized community may become even more prone to the poverty cycle.
2. DISPUTE
Conflict is one of the most common types of risk that contributes to poverty in today’s world. Large-scale, long-term violence, such as that seen in Syria, can bring society to a standstill, destroying infrastructure and forcing people to flee (often with nothing but the clothes on their backs). Syria’s middle class has all but vanished in the tenth year of conflict, and more than 80% of the population now lives in poverty.
However, even minor acts of violence can have devastating consequences in already troubled communities. Farmers, for example, will not invest in planting if they are concerned about their harvests being stolen. Women are also the ones who bore the brunt of conflict, which adds another element of inequity to the equation: Female-headed households become highly common during moments of conflict. Women and their families are particularly susceptible since they often have trouble finding well-paying work and are frequently excluded from community decision-making.
HUNGER, MALNUTRITION, AND STUNTING are three things that come to mind when thinking of hunger, malnutrition, and stunting.
You may believe that hunger causes poverty (and you would be correct! ), but hunger is both a cause and a maintainer of poverty. If a person doesn’t eat enough, they won’t have the strength or energy to work (or their immune system will weaken from malnutrition and leave them more susceptible to illness that prevents them from getting to work).
The first 1,000 days of a child’s life (from conception to birth) are critical in determining their future health and likelihood of avoiding poverty. If a mother is undernourished during pregnancy, her children may suffer from wasting (low weight for height) or stunting (low height for age). Stunting in children, both physical and cognitive, can have long-term consequences: Adults who were stunted as children earn 22% less than those who were not stunted as children. Stunting adds to GDP losses of up to 16 percent in Ethiopia.
ON AVERAGE, ADULTS WHO WERE STUNTED AS CHILDREN EARN 22% LESS THAN THOSE WHO WEREN’T STUNTED. STUNTING HAS BEEN LINKED TO GDP LOSSES OF UP TO 16 PERCENT IN ETHIOPIA.
4. ESPECIALLY FOR MOTHERS AND CHILDREN, POOR HEALTHCARE SYSTEMS
Extreme poverty and ill health are frequently linked. Malaria, diarrhea, and respiratory infections, which are easily avoidable and curable in nations with underdeveloped health systems, can be lethal, especially in young children. When people have to travel long distances to clinics or pay for medicine, it depletes already low-income households’ finances and assets, potentially pushing a family into extreme poverty.
Pregnancy and childbirth can be life-threatening for certain women. Access to high-quality maternity healthcare is limited in many of the countries where Concern works. When it comes to obtaining care, pregnant and breastfeeding moms confront a variety of obstacles, ranging from not being allowed to visit a clinic without a male chaperone to receiving substandard or even violent care from a doctor. This is particularly true for adolescent girls aged 18 and under, putting expectant moms and their children at danger of sickness and death.
5. ACCESS TO CLEAN WATER, SANITATION, AND HYGIENE IS LIMITED OR NON-EXISTENT
More than 2 billion people do not have access to safe drinking water at home. This means that every day, people (particularly women and girls) spend approximately 200 million hours walking considerable distances to acquire water. That’s valuable time that could be spent working or studying for a better position later in life.
Contaminated water can also cause a variety of waterborne illnesses, ranging from the mild to the deadly. Poor water infrastructure, such as sanitation and hygiene facilities, can exacerbate this problem or create additional barriers to escaping poverty, such as preventing females from attending school during their periods.
6. CHANGE IN THE CLIMATE
Climate change causes hunger, whether through a lack of water (drought) or a surplus (flooding), and its consequences contribute to the poverty cycle in a variety of ways, including disproportionately hurting women, causing refugees, and even influencing violence. Climate change, according to the World Bank, has the potential to force more than 100 million people into poverty over the next decade.
Many of the world’s poorest people feed and earn a livelihood through farming or hunting and gathering; Malawi, for example, is 80 percent agricultural. They frequently have barely enough food and assets to get them through the next season, with no reserves to fall back on if the harvest is poor. As a result, when climate change or natural disasters (such as the massive droughts produced by El Nio) leave millions of people without food, they are pushed further into poverty, making recovery even more difficult.
7. INADEQUATE EDUCATION
Not everyone who lacks an education lives in abject poverty. However, the vast majority of the severely poor lack access to education. Many obstacles to education exist around the world, such as a lack of funds for uniforms and books, a bias against girls’ education, or any of the other reasons of poverty listed here.
Education, on the other hand, is sometimes referred to as the great equalizer since it can provide access to jobs and other resources and skills that a family requires to not only survive, but prosper. According to UNESCO, 171 million people could be pulled out of poverty if they graduated from high school with basic reading abilities. Poverty puts education at risk, yet education can also assist to alleviate poverty.
8. POOR INFRASTRUCTURE AND PUBLIC WORKS
Consider the situation where you need to get to work but there are no roads to bring you there. Alternatively, torrential rains have flooded your road, making travel impossible. Rural towns can be isolated due to a lack of infrastructure, which includes everything from roads, bridges, and wells to light cables, cell phones, and the internet. Living off the grid frequently entails being unable to attend school, work, or visit a market to buy and sell products. Traveling longer distances for basic services not only consumes time, but it also costs money, trapping families in poverty.
Isolation limits one’s options. Many people find it difficult, if not impossible, to transcend extreme poverty when they lack opportunity.
9. LACK OF SUPPORT FROM THE GOVERNMENT
Many people in the United States are aware of the various social welfare programs available to them if they require medical or nutritional assistance. However, not every government can provide this level of assistance to its residents, and without that safety net, vulnerable families are more likely to fall farther into poverty. Ineffective governments contribute to numerous of the other reasons of severe poverty described above, as they are unable to provide vital infrastructure or healthcare, as well as maintain the safety and security of their inhabitants in times of conflict.
10. JOBS OR LIVELIHOODS ARE IN SHORT SUPPLY
This may appear to be a no-brainer: People will confront poverty if they do not have a job or a source of income. Many traditional livelihoods are under threat as a result of dwindling access to productive land (typically due to conflict, overpopulation, or climate change) and overexploitation of resources such as fish and minerals. In the Democratic Republic of Congo (DRC), for example, the majority of the population lives in rural villages where natural resources have been plucked during centuries of colonial domination, and people have been forced away from their source of income and food due to land conflict. More than half of the population now lives in abject poverty.
11. INSUFFICIENT RESERVES
All of the above risk factors can be weathered if a family or community has reserves in place, from conflict to climate change to a family sickness. Unemployment caused by conflict or illness can be compensated for through cash reserves and loans. If a harvest is ruined due to a drought or natural calamity, proper food storage methods can help.
These resources are frequently unavailable to people living in extreme poverty. When a risk becomes a disaster, they resort to negative coping methods such as taking children out of school to work (or even marriage) and selling possessions to buy food. That may help a family get through one difficult season, but it will not help them go through another. The repeated shocks can push a family into extreme poverty and prevent them from ever recovering in communities that are regularly subjected to climate extremes or prolonged conflict.
In economics, what is poverty?
Poverty is defined as a lack of sufficient funds to cover basic requirements such as food, clothing, and shelter. Poverty, on the other hand, is much more than a lack of resources.
Hunger is poverty. Poverty is defined as a lack of shelter. Being sick and unable to see a doctor is a sign of poverty. Poverty is defined as a lack of access to education and the inability to read. Poverty is defined as not having a job, anxiety for the future, and living day by day.
Poverty has numerous faces, which change from place to place and across time, and is described in a variety of ways.
Poverty is frequently a circumstance from which individuals wish to be free. So poverty is a call to action for both the rich and the poor, a call to transform the world so that many more people have enough to eat, a safe place to live, access to education and healthcare, safety from violence, and a say in what happens in their communities.
Poverty is defined by the inability to participate in recreational activities; the inability to send children on a field trip with their classmates or to a birthday party; and the inability to pay for medication for an illness.
These are all the expenses that come with being impoverished. Those who are barely able to pay for food and shelter are unable to contemplate these additional costs. There are negative implications for society when people are removed from society, when they are not properly educated, and when they have a higher frequency of sickness. Poverty has an impact on all of us. Our economy is impacted by the growing costs of the health-care system, the justice system, and other systems that give assistance to those living in poverty.
While the World Bank Organization has made significant progress in measuring and assessing poverty, it is still working to establish indicators for the other dimensions of poverty.
Identifying social indicators to measure education, health, access to services, vulnerability, and social exclusion are all part of this endeavor.
There is no single cause of poverty, and the consequences vary from instance to case. Poverty varies greatly depending on the circumstances. Being impoverished in Canada is not the same as being poor in Russia or Zimbabwe. Within a country’s borders, disparities between affluent and poor might be significant.
Regardless of the various classifications, one thing is certain: poverty is a multifaceted social problem. Regardless of how poverty is defined, everyone can agree that it is a problem that needs to be addressed. It is critical that all members of our society work together to ensure that all of our members have the opportunity to fulfill their full potential. It makes it easier for us to aid one another.
What is the significance of GDP in the economy?
GDP is significant because it provides information on the size and performance of an economy. The pace of increase in real GDP is frequently used as a gauge of the economy’s overall health. An increase in real GDP is viewed as a sign that the economy is performing well in general.
What information does GDP provide about the economy?
The Gross Domestic Product (GDP) is not a measure of wealth “wealth” in any way. It is a monetary indicator. It’s a relic of the past “The value of products and services produced in a certain period in the past is measured by the “flow” metric. It says nothing about whether you’ll be able to produce the same quantity next year. You’ll need a balance sheet for that, which is a measure of wealth. Both balance sheets and income statements are used by businesses. Nations, however, do not.
How does a larger GDP improve living standards?
Real GDP is a stronger indicator of living standards than nominal GDP. A country that produces a lot will be able to pay greater wages. As a result, its citizens will be able to purchase more of the abundant produce.
Why is GDP a flawed metric?
In reality, “GDP counts everything but that which makes life meaningful,” as Senator Robert F. Kennedy memorably stated. Health, education, equality of opportunity, the state of the environment, and many other measures of quality of life are not included in the number. It does not even assess critical features of the economy, such as its long-term viability, or whether it is on the verge of collapsing. What we measure, however, is important because it directs our actions. The military’s emphasis on “body counts,” or the weekly calculation of the number of enemy soldiers killed, gave Americans a hint of this causal link during the Vietnam War. The US military’s reliance on this morbid statistic led them to conduct operations with no other goal than to increase the body count. The focus on corpse numbers, like a drunk seeking for his keys under a lamppost (because that’s where the light is), blinded us to the greater picture: the massacre was enticing more Vietnamese citizens to join the Viet Cong than American forces were killing.
Now, a different corpse count, COVID-19, is proving to be an alarmingly accurate indicator of society performance. There isn’t much of a link between it and GDP. With a GDP of more than $20 trillion in 2019, the United States is the world’s richest country, implying that we have a highly efficient economic engine, a race vehicle that can outperform any other. However, the United States has had almost 600,000 deaths, but Vietnam, with a GDP of $262 billion (and only 4% of the United States’ GDP per capita), has had less than 500 to far. This less fortunate country has easily defeated us in the fight to save lives.
In fact, the American economy resembles a car whose owner saved money by removing the spare tire, which worked fine until he got a flat. And what I call “GDP thinking”the mistaken belief that increasing GDP will improve well-being on its owngot us into this mess. In the near term, an economy that uses its resources more efficiently has a greater GDP in that quarter or year. At a microeconomic level, attempting to maximize that macroeconomic measure translates to each business decreasing costs in order to obtain the maximum possible short-term profits. However, such a myopic emphasis inevitably jeopardizes the economy’s and society’s long-term performance.
The health-care industry in the United States, for example, took pleasure in efficiently using hospital beds: no bed was left empty. As a result, when SARS-CoV-2 arrived in the United States, there were only 2.8 hospital beds per 1,000 people, significantly fewer than in other sophisticated countries, and the system was unable to cope with the rapid influx of patients. In the short run, doing without paid sick leave in meat-packing facilities improved earnings, which raised GDP. Workers, on the other hand, couldn’t afford to stay at home when they were sick, so they went to work and spread the sickness. Similarly, because China could produce protective masks at a lower cost than the US, importing them enhanced economic efficiency and GDP. However, when the epidemic struck and China required considerably more masks than usual, hospital professionals in the United States were unable to meet the demand. To summarize, the constant pursuit of short-term GDP maximization harmed health care, increased financial and physical insecurity, and weakened economic sustainability and resilience, making Americans more exposed to shocks than inhabitants of other countries.
In the 2000s, the shallowness of GDP thinking had already been apparent. Following the success of the United States in raising GDP in previous decades, European economists encouraged their leaders to adopt American-style economic strategies. However, as symptoms of trouble in the US banking system grew in 2007, France’s President Nicolas Sarkozy learned that any leader who was solely focused on increasing GDP at the expense of other indices of quality of life risked losing the public’s trust. He asked me to chair an international commission on measuring economic performance and social progress in January 2008. How can countries improve their metrics, according to a panel of experts? Sarkozy reasoned that determining what made life valuable was a necessary first step toward improving it.
Our first report, provocatively titled Mismeasuring Our Lives: Why GDP Doesn’t Add Up, was published in 2009, just after the global financial crisis highlighted the need to reassess economic orthodoxy’s key premises. The Organization for Economic Co-operation and Development (OECD), a think tank that serves 38 advanced countries, decided to follow up with an expert panel after it received such excellent feedback. We confirmed and enlarged our original judgment after six years of dialogue and deliberation: GDP should be dethroned. Instead, each country should choose a “dashboard”a collection of criteria that will guide it toward the future that its citizens desire. The dashboard would include measures for health, sustainability, and any other values that the people of a nation aspired to, as well as inequality, insecurity, and other ills that they intended to reduce, in addition to GDP as a measure of market activity (and no more).
These publications have aided in the formation of a global movement toward improved social and economic indicators. The OECD has adopted the method in its Better Life Initiative, which recommends 11 indicators and gives individuals a way to assess them in relation to other countries to create an index that measures their performance on the issues that matter to them. The World Bank and the International Monetary Fund (IMF), both long-time proponents of GDP thinking, are now paying more attention to the environment, inequality, and the economy’s long-term viability.
This method has even been adopted into the policy-making frameworks of a few countries. In 2019, New Zealand, for example, incorporated “well-being” measures into the country’s budgeting process. “Success is about making New Zealand both a terrific location to make a livelihood and a fantastic place to create a life,” said Grant Robertson, the country’s finance minister. This focus on happiness may have contributed to the country’s victory over COVID-19, which appears to have been contained to around 3,000 cases and 26 deaths in a population of over five million people.