The Misconceptions about Poverty

Many governments all over the world have made attempts to abolish poverty. However, most of them have not succeeded. The theme of eradicating poverty has been common to both socialists as well as capitalists. However, no one seems to have been able to solve the problem. It is likely that the problem itself has been misunderstood. This is the reason why the solution is so elusive. In this article, we will understand some of the misconceptions that the governments have about poverty and how these misconceptions derail the entire process.

Misconception #1: Poverty Has To Be Eradicated By Welfare

Governments all over the world believe that it is the job of the government to somehow remove poverty by enacting certain schemes that reallocate more money to the poor. The idea is to construct more schools and libraries, hospitals or anything that raises the standard of living for the poor people. The government needs to undertake such construction and give it away to the poor community. With the passage of time, now, eradicating poverty means that the government also has to be responsible for providing healthcare services to the poor. The idea that government must pay people if they are not able to find employment is also part of this ideology.

The problem is that all of these measures do not benefit the poor people at all! Temporarily, poor neighborhoods may see some swanky new buildings and hospitals. However, in the long run, the same people end up being entrenched even further in the cycle of poverty because of the government’s actions. This is because governments don’t really have the money to implement all these schemes. As a result, they borrow the money required for these schemes. Over time, these loans need to be paid back along with the interest that is due to them. The government usually accomplishes this by printing more money. They simply print the money and pay back the bondholders.

The problem is that printing money creates inflation. Inflation increases the prices of goods and services. Poor people spend a lot of their money on essential goods and services. Hence, when the prices rise, they are the ones that have to cut back their expenditures by practicing austerity. In effect, the poor people end up paying for the swanky new schools and hospitals that are built in their neighborhoods. The government ends up taking the credit for doing the good work!

This has happened several times and at several places in the world. The poor really need to understand that if a government is following an inflationary policy, it can’t really be doing well for the people. This is because it is a known fact that inflation is a hidden tax that disproportionately affects the poorest citizens in the nation.

Misconception #2: Poverty Has To Be Measured Using Median Income

The United Nations has a strange way of measuring poverty across the world. This is the reason why countries like America appear to have a bigger poverty problem than its neighboring Mexico. We all know that the reality is different from this. Hence, questions regarding the viability of the scale being used to measure poverty are raised.

The UN measures poverty by using a two-step process:

  1. The first find the median income of a country
  2. They, then find the percentage of the population that has less than 50% of the income compared to the median income. These people are considered to be living under the poverty line

The problem with this approach is that if the median income is already very low, there will be very few people who will fall under the poverty line as per this definition. This is the reason why countries like Mexico which have a lower median income seem to have less poverty as compared to the United States which has a higher median income.

The correct way to define poverty is to come up with a basket of goods that are essential for survival. Then, a price tag should be attached to that basket of goods. The income of the population should be compared against that basket of goods instead of being compared with 50% of the median income.

Misconception #3: GDP Growth Eradicates Poverty

Governments often use GDP figures to explain how successful their endeavors have been. However, the problem is that there is very little correlation between the GDP numbers and the actual increase in household earnings. Several pieces of research have shown that even though the GDP of a nation continues to rise, there could still be increasing poverty and increasing social inequality. This is because the benefits of the GDP increase mostly accrue to the corporations or to people who are part of the formal economy. In most cases, the poorest people belong to the unorganized sector which is different from the formal economy. Data related to the unorganized sector is not easily available. Hence, policy making is not an easy task.

The bottom line is that poverty can only be eradicated by the free market. Most individuals are driven by the need to get out of the vicious cycle of poverty. They do not need a socialist government to help them do that. In fact, as we have already seen in the above article, a socialist government is actually an impediment to the process.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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