Open access peer-reviewed chapter

Poverty Reduction Strategies in Developing Countries

Written By

Collins Ayoo

Submitted: June 1st, 2021 Reviewed: November 2nd, 2021 Published: February 2nd, 2022

DOI: 10.5772/intechopen.101472

From the Edited Volume

Rural Development

Edited by Paola de Salvo and Manuel Vaquero Piñeiro

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Abstract

The existence of extreme poverty in several developing countries is a critical challenge that needs to be addressed urgently because of its adverse implications on human wellbeing. Its manifestations include lack of adequate food and nutrition, lack of access to adequate shelter, lack of access to safe drinking water, low literacy rates, high infant and maternal mortality, high rates of unemployment, and a feeling of vulnerability and disempowerement. Poverty reduction can be attained by stimulating economic growth to increase incomes and expand employment opportunities for the poor; undertaking economic and institutional reforms to enhance efficiency and improve the utilization of resources; prioritizing the basic needs of the poor in national development policies; promoting microfinance programs to remove constraints to innovation, entrepreneurship, and small scale business; developing and improving marketing systems to improve production; providing incentives to the private sector; and, implementing affirmative actions such as targeted cash transfers to ensure that the social and economic benefits of poverty reduction initiatives reach the demographics that might otherwise be excluded.

Keywords

• poverty
• poverty reduction
• inclusive economic growth

2. Some definitions and statistics

3.2 Economic and institutional reforms

An important step in reducing poverty in developing countries is the implementation of economic and institutional reforms to create conditions that attract investment, enhance competitiveness, ensure increased efficiency in the use of resources, stimulate economic growth, and create jobs. If well designed and implemented, these reforms can be instrumental in strengthening governance and reducing endemic corruption and poor accountability that have contributed to the poor economic performance of several developing countries [23, 27]. Some reforms that are needed include the strengthening of land tenure systems to encourage risk-taking and investment in productive income-generating activities; improving governance to ensure greater inclusivity, transparency and accountability; reducing the misuse of public resources and unproductive expenditures; ensuring a greater focus on the needs and priorities of the poor; maintaining macroeconomic stability and addressing structural constraints to accelerating growth e.g. by reducing the high costs of doing business and excessive regulatory burdens; and involving the poor, women, and the youth in decision-making [8]. These reforms can benefit the poor by improving their access to land and other productive resources and by ensuring that their needs and priorities are adequately considered in policy making. Developing countries also need to reform their tax systems to make them more efficient and pro-poor.

3.3 Promoting microfinance institutions and programs

Lack of finance is a major constraint to the establishment of small scale businesses and other income generating activities in impoverished communities in several developing countries [48, 49]. Through microfinance institutions, this constraint can be removed and the much-needed credit provided to small businesses that are often unable to access credit from formal financial institutions. In this way, micro-credit can be instrumental in stimulating economic activity, creating jobs in the informal sector, increasing household incomes, and reducing poverty [1, 3, 28, 43, 48, 50, 51, 52]. Vatta [53] has noted that microfinance institutions have good potential to reach the rural poor and to address the basic issues of rural development where formal financial institutions have not been able to make a significant impact. Some advantages of obtaining credit from microfinance institutions include less stringent conditions with regard to providing collateral thus easing access to credit; the possibility of the poor obtaining small amounts of loans more frequently thus enabling the credit needs for diverse purposes and at shorter time intervals to be met; reduced transaction costs; flexibility of loan repayment; and an overall improvement in loan repayment. The small informal self-help groups that are often the units for microcredit lending are also valuable for social empowerment and fostering learning, the development of skills, entrepreneurship, exchange of ideas and experiences, and greater accountability by the group members [49, 54]. Sachs [4] supports microfinance as a viable and promising path to poverty alleviation and cites Bangladesh as a country where micro-credit has contributed to a reduction in poverty through group lending that enabled impoverished women who were previously considered unbankable and not credit worthy to obtain small loans as working capital for microbusiness activities. He further notes that by opening to poor rural women improved economic opportunites, microcredit can be instrumental in reducing fertility rates and thus improve the abilities of households to save and provide better health and education for their children.

3.4 Improving the marketing systems

According to Karnani [55], the best way to reduce poverty is to raise the productive capacity of the poor. Efficient marketing systems are vital in enabling the poor to increase their production because they permit the delivery of products to markets at competitive prices that result in increased incomes. This is also the reason why developing countries need to explore ways of expanding export markets. The plight of cotton, rice, tea, coffee, and cashew nut farmers in Kenya demonstrates the importance of improving the marketing systems. Weaknesses and inefficiencies in the marketing of these commodities has resulted in the impoverishment of the farmers who face problems such as damage to their harvests, low commodity prices and thus low profits and incomes, and exploitation by middlemen. By improving the marketing system, the growers of these commodities can benefit from better storage that would cushion them from price fluctuations, the pooling of their resources that would enable a reduction of their costs, and the processing of their products to enable value-addition and an improvement on the returns. The implementation of these measures can stimulate local, regional, and national economies; underpin the establishment of a robust agro-industrial sector; create jobs; increase production and incomes; and, contribute to equitable and sustained reduction of poverty.

3.5 Cash/income transfer programs

The fight against poverty needs to consider the fact that among the poor are those who cannot actively participate in routine economic activities and are therefore likely to suffer exclusion from the benefits of economic growth. This category of the poor include the old and infirm, the sick and those afflicted by various debilitating conditions, families with young children, and those who have been displaced by war and domestic violence. Special affirmative actions that transfer incomes to these groups are required to provide for their basic needs and ensure more equity in poverty reduction. In impoverished regions where children contribute to the livelihoods of their families by supplying agricultural labor and participating in informal businesses, income transfer programs can provide families with financial relief and enable regular school attendance by children. Such investment in the education of the children is vital in improving their human capital and prospects for employment and can therefore play an important role in long term poverty reduction [7, 8, 56]. Kumara and Pfau [57] analyzed such programs in Sri Lanka and found that cash transfers in the country significantly reduced child poverty and also increased school attendance and child welfare. Barrientos and Dejong [58], Monchuk [59], Banerjee et al. [60], Page and Pande [23], Hanna and Olken [61], and World Bank [8] strongly support cash transfer programs and contend that these programs are a key instrument in reducing poverty, deprivation, and vulnerability among children and their households. They cite South Africa, Bangladesh, Brazil, Mexico and Chile as examples of countries where cash transfer programs have significantly reduced poverty and vulnerability among poor households. They also point out that cash transfer programs are beneficial to households because they are flexible and enhance the welfare of households given that households are free to use the supplemental income on their priorities.

Cash transfer programs are central to social protection that is much needed in developing countries that face heightened social and economic risks due to structural adjustments driven by globalization. As noted by Sneyd [2], Monchuk [59], Barrientos et al. [62], and Barrientos and Dejong [58], globalization has resulted in greater openness of developing economies and exposed them to changes in global markets leading to a greater concentration of social risk among vulnerable groups. They regard social protection as the most appropriate framework for addressing rising poverty and vulnerability in the conditions that prevail in developing countries. They recommend that if significant and sustained reduction in poverty is to be achieved, cash transfer programs be accompanied by complementary actions that extend economic opportunities and address the multiple dimensions of poverty such as food, water, sanitation, health, shelter, education and access to services. Fiszbein et al. [29] strongly support the increased use of social protection programs such as cash transfers to alleviate extreme povery and estimate that in 2014 these programs prevented about 150 million people from falling into poverty. It needs to be noted that although well designed cash transfer programs can be effective in reducing poverty, they are expensive and may be difficult to finance in a sustained manner [23]. However, by reducing wasteful expenditures and instituting tax reforms, the required resources can be freed for investment in cash transfer programs [29]. The viability of this approach is evident in the case of Bangladesh and a number of central Asian countries that have been able to successfully finance cash transfers from their national budgets. Countries that are not able to finance cash transfer programs from their own resources need to explore the possibilities of securing medium-term support from international organizations [4, 7, 29, 58, 63].

A major concern that several researchers have expressed regarding cash transfer programs is that they have a short term focus of alleviating only current poverty and have thus failed to generate sustained decrease in poverty independent of the transfer themselves. Critics of cash transfers also argue that they are a very cost ineffective approach to poverty alleviation and an unnecessary waste of scarce public resources. Furthermore, they claim that many cash transfer programes are characterized by unnecessary bureaucracy, high administrative costs, corruption, high operational inefficiencies, waste, and poor targeting. The overall result of these weaknesses is that program benefits have to a large extent failed to reach the poorest households. Where these shortcomings exist, they need to be identified through rigorous audits and addressed through improved program design. But more fundamentally, it also needs to be recognized that cash transfer programs are not simply handouts but are investments in poor households that regard the programs as their only hope for a life free from chronic poverty, malnutrition and disease.

4. Selected case studies on poverty reduction in developing countries

The goal of poverty reduction can be achieved through sound policies that address the root causes of poverty, promote inclusive economic growth, prioritize the basic needs of the poor, and provide economic opportunities that empower the poor and enable them to improve their standards of living [6, 8, 64]. In what follows we present a few case studies from sub-Saharan Africa, Asia and Latin America to illustrate real world examples of policies that have resulted in significant reduction in poverty. Policy makers can learn important lessons from these case studies in their attempts to combat poverty in different contexts.

4.1 Sub-Saharan Africa

Several countries in Sub-Saharan Africa have developed poverty reduction plans that are currently being implemented to improve the standards of living of the poor and vulnerable. In Kenya where poverty is widespread and is estimated to exceeed 60 percent, the key elements of the poverty reduction strategy are facilitating sustained and rapid economic growth; increasing the ability of the poor to raise their incomes; improving the quality of life of the poor; improving equity and the participation of the poor in decision-making and in the economy; and improving governance and security [65]. The government has also implemented macroeconomic reforms to reduce domestic debt burden and high interest rates - this is expected to promote higher private-sector led growth and thus contribute to poverty reduction. An important action that is being carried out to reduce poverty in Kenya is promoting agricultural production. This focus is underpinned by the fact that the majority of Kenyans derive their livelihoods and income from agriculture and live in rural areas. Some specific poverty reduction measures in Kenya that target the agricultural sector include providing subsidized fertilizers and seeds; encouraging the growing of high value crops; rehabilitation and expansion of irrigation projects; and, provision of subsidized credit to alleviate capital contraints. To support agricultural production, the government has also prioritized the strengthening and streamling of the marketing system and the expansion of rural roads to improve the access of the poor to markets, increase economic opportunities, and create employment. Robust efforts are also underway to increase agricultural exports as a means for stimulating domestic agricultural production and increasing the country’s foreign exchange earnings. Other poverty reduction measures that are being implemented in Kenya are the promotion of small scale income generating enterprises; subsidization of education and health care to reduce the costs to poor households; school-feeding programs; rural employment schemes through public works projects; investments in technical and vocational training to enable the youth acquire skills in areas such as carpentry, masonry, and, auto mechanics; and, family planning programs to reduce the fertility rates.

In collaboration with international development partners, Kenya and other low and middle income countries in Sub-Saharan Africa have been implementing cash transfer programs on a limited scale to address extreme poverty and assist vulnerable households. The cash transfers were unconditional in the intial phases with disbursements made to all applicants. Subsequently however, and based on the lessons learned from the earlier phases, several countries have redesigned their cash transfer programs and made them conditional and contingent on means-testing. This is important given the severe budget contraints that developing countries face, the need to target the cash transfers on the poorest and most vulnerable households, and the need to ensure that social protection expenditures are efficient and result in the greatest reduction in poverty. Egger et al. [66] conducted an empirical study of a cash transfer program in rural western Kenya between mid-2014 and early 2017 and concluded that the program had several positive effects on both the households that received the cash transfers and those that did not. Some specific benefits attributable to the cash transfer program were an increase in consumption expenditures and holdings of durable assets by households; increased demand-driven earnings by local enterprises; increased food security; improved child growth and school attendance; improvement in health of members of the recipient households; female empowerment; and, enhanced psychological well-being. Furthermore, the cash transfer program had a stimulatory effect on local economic activities and these effects persisted long after the cash disbursements. The experience with cash transfer programs demonstrates that they can contribute significantly to a reduction in extreme poverty if they are scaled up, and if they are well designed and targeted at the poorest households.

Since March of 2020, Kenya’s progress in poverty reduction has been adversely affected by the COVID-19 pandemic that is estimated to have increased the number of the poor by an additional 2 million through adverse impacts on incomes and jobs [24, 67]. The containment measures that were implemented in response to the pandemic significantly slowed economic activity, reduced revenues from household-run businesses, exacerbated food insecurity, and posed a serious threat to the lives and livelihoods of large segments of the population. Some of the actions that the government of Kenya took to address these challenges included allocating more resources to the healthcare sector to combat the pandemic; instituting taxation and spending measures to support healthy firms from permanent closure in order to protect jobs, incomes and the productive capacity of the economy; and, scaling-up social protection programs to offset the increase in poverty and protect the most vulnerable households [24, 67].

4.2 Asia

A number of countries in Asia have developed and implemented programs that have been impactful in significantly reducing extreme poverty. According to the Asian Development Bank (ADB) [68], these programs were predicated on rapid economic growth driven by innovation, structural reform, and the application of private sector solutions in the public sector. Asia’s progress in raising prosperity and reducing poverty is evident from the fact that since 1990 over a billion people have emerged from extreme poverty and also from the fact that in the decade spanning 2005–2015 more that 611 million people were lifted out of extreme poverty – four-fifths of these were in China (234 million) and India (253 million) [68]. The general approach that governments of Asia have taken to poverty reduction include accelerating economic growth, increasing the delivery of social services, developing lagging areas, increasing investments to generate jobs, promoting small and medium-sized enterprises, redistributing incomes, balancing rural–urban growth, and developing social protection interventions [68, 69].

Social protection programs are vital in cushioning poor and vulnerable households from crises they are unable to cope with and that are likely to cause an overall reduction and degradation of their physical and social assets [68]. This is exemplified by the food stamp program that was implemented in 2008 through a partnership between the Government of Mongolia and the ADB. The food stamp program was put in place at a time when the overall poverty rate in Mongolia was 32.6 percent of the population with about 5 percent of the population being categorized as extremely poor. There was also a high level of food insecurity in the country and a high inflation rate that had reached 32.2 percent [68]. To help reduce the adverse impact of food insecurity and high inflation, the government of Mongolia established a food subsidy program that targeted poor households. The program was very effective in assisting the poor to buy enough floor, rice and other basic commodities and also freed up money that the poor could then spend on other necessities. Following the introduction of this program, school attendance by children increased and their mean grades improved [68]. The program also supported the poor households in developing alternative food sources. The ADB [68] notes that the participants in the food stamp program also learned valuable skills in backyard gardening, food storage and food preservation with many of them reporting significant earnings from vegetable production. Thus, the program contributed directly to poverty reduction by mitigating the adverse effects of the food and financial crises on the poor and is a strategy that developing countries need to seriously consider in their efforts to reduce povery and improve living standards.

5. Conclusions and policy implications

Poverty is a serious challenge that developing countries are facing today and requires focused and sustained action to significantly reduce it, break the cycle of poverty, and improve the standards of living. Although income is the yardstick that is most commonly used to measure and assess it, poverty is multidimensional and entails diverse aspects of well-being that include food, water, sanitation, health, shelter, education, access to services and human rights [20]. According to the World Bank, the extent of poverty is highest in Sub Saharan Africa, South Asia, and Latin America where the number of the poor has been increasing due to high population growth and modest economic performance in these regions. Various reports also indicate that the youth are the majority of the population in these countries so that targeting them can be effective in reducing poverty. Developing countries are currently in various stages implementing policies aimed at reducing poverty and vulnerability, and improving the standards of living. Promoting inclusive economic growth is vital not only in increasing output and incomes but also in ensuring that the benefits of economic growth are broadly shared. Some ways of promoting inclusive economic growth are investing in infrastructure and technology; liberalizing trade and expanding export markets; providing incentives to small and medium businesses; providing fiscal stimulus to the economy; ensuring macroeconomic stability; and improving public management and governance [8, 26, 33]. The implementation of these measures in an integrated manner can have positive economy wide effects, incentivize the private sector, create the much needed employment opportunities, and reduce the levels of poverty.

Poverty reduction can also be enhanced through microfinance institutions that not only provide credit to small borrowers who are often unable to access credit from formal financial institutions, but also mobilize domestic savings and channel these savings towards income generating activities [43]. This role of microfinance institutions is particularly important in developing countries where most businesses are small scale and face severe financing constraints [43, 48, 51, 52]. The available empirical evidence demonstrates that microfinance has been instrumental in supporting income generating activities in impoverished regions and thus contributed to the provision of basic needs and reduction of poverty. Developing countries can also address the challenge of poverty by improving the efficiency and competitiveness of their economies. This can be accomplished through economic and institutional reforms that reduce the cost of doing business, strengthen the linkages between various sectors of the economy, protect property rights, reduce corruption, and foster greater accountability in public management. Tax regimes also need to be reformed to make them more efficient, provide incentives to small businesses, effect redistribution in favor of the poor, and generate more resources that can be used to finance critical services such as education, health, water and sanitation, and shelter for the poor. Furthermore, through tax reforms employment opportunities can be expanded as a key step in poverty reduction. Finally, carefully designed affirmative actions and social protection programs need to be included as a key pillar of the poverty reduction strategies of developing countries given that there will invariably be groups in society whose unique circumstances result in their exclusion from the economic and social benefits of conventional poverty reduction measures. This is the rationale for the cash transfer programs that several developing countries are increasingly implementing to reduce poverty and vulnerability. The private sector and international development institutions can play an important role in poverty reduction in developing countries by providing expertise and the supplemental resources and assistance that are needed to implement poverty reduction plans. Success in poverty eradication requires a focus on areas where poverty is widespread and the use of innovative and practical policy instruments that are most likely to lift the greatest number of the poor out of poverty. It is a goal that is attainable through collaboration among all stakeholders, prioritization of the basic needs of the poor, the determination to improve economic performance to realize inclusive economic growth and break the vicious cycle of povery, empowering the poor to take control of their future, and by mainstreaming poverty reduction into national policies and actions.

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Written By

Collins Ayoo

Submitted: June 1st, 2021 Reviewed: November 2nd, 2021 Published: February 2nd, 2022