POVERTY reduction is one of the core objectives of economic development in countries across the world. Given the complexity of the poverty challenge, how can we think about it in a structured manner?

A simplified framework of poverty reduction essentially has two components and can be explained by an easy analogy given below.

Assume that there is a country with inputs, such as labour and capital, that it can use to generate economic activity which is geared towards creating outputs. This country generates income as part of this economic process, which is a fixed amount at a particular point in time but that can, of course, change over time. Analogously, you can simply think of the total income generated in the country as a pie (or a cake if you prefer). Absolute economic poverty is simply a section of the population that does not have adequate resources (or the slice of the pie in our analogy) to address basic needs.

Now comes the first crucial component of the poverty reduction framework — the size of the pie. As the pie grows larger, there is naturally more income in the country for the population at large. No matter how you slice up the pie across the population, if the size of the pie is too small, the country will naturally find it harder to tackle poverty. A simple proxy for the size of the pie is the Gross Domestic Product which is measured in national accounts in countries around the world. Alternatively, you could also adjust for population by using GDP per capita, which can be especially useful for the purposes of cross-country comparisons.

It’s not just the size of the pie that matters.

The second component relates to the way the pie is shared across the population. Naturally, if income generation within the country is concentrated within a certain section of the population, that automatically means that the rest would have to survive with a smaller share of the pie. GINI coefficient is one metric of income inequality measured in countries across the world which gives us a rough picture of how equitably income is shared in a country. Alternatively, there are other metrics, such as the share of the total income being earned by the top 10 per cent or 1pc in income distribution.

With the basic structure of the poverty reduction framework in place, we can add some more complexity to each component and explore interlinkages with different forms of economic policy. Starting with the first component, you can see that economic growth is at the heart of poverty reduction. Without a pie that keeps getting bigger in size, countries would find it incredibly difficult to tackle poverty.

While enabling economic growth is a long and complex topic, here are some related questions: what type of macroeconomic policies could be implemented in the country to ensure sustainable economic growth? How can the production process in different sectors of the economy be improved to increase total factor productivity? What type of market/ coordination failures does the government need to address to enable private sector development?

The second component is primarily distributional, which relates to how equitably the income is shared within a country. At the same time, it is important to remember that this second component is closely related to the first one because the concentration of economic growth is also about equity. If the pie becomes bigger in a way which concentrates income within a few hands, then it will be sliced in a manner that leaves a lower share of resources for the rest of the population.

Again, the topic of equity is long and complex, but here are a few related policy questions: should the government invest in social safety nets or cash transfer program­mes for the section of the population living below the poverty threshold? Should the government consider the implementation of progressive taxes to reduce income inequality? What are the ways to ensure that the benefits of economic growth are widely distributed within the economy?

As you can see from the above, poverty reduction is a complex challenge with several nuances. It requires countries to both increase the size of the pie itself and to ensure that it is shared with the population in an equitable manner. Without the size of the pie growing, countries would have less income to be shared across the population. Without an equitable sharing of the pie, the income would be concentrated in a few hands, leaving a lot less for the rest of the population.

Countries that can ensure the presence of both components are more likely to have a poverty reduction strategy that is able to deliver good results.

The writer has a doctorate from the University of Oxford and is graduate of the Harvard Kennedy School of Government.

Twitter: @KhudadadChattha

Published in Dawn, January 30th, 2022