The Solution to Poverty is Circular

The real solution is not eradicating just poverty.

There is but one aspect that is constant: Poverty. It has been a constant and burning issue. According to the World Bank’s estimates, in 2016, 10.7 percent of the world’s population lived with less than $1.90 a day, which is around 767 million people. But, the decrease in poverty in recent years was the greatest in East Asia and Pacific region, especially in China and Indonesia, as well as in the South Asia region, particularly in India. The highest level of poverty is still in Sub-Saharan Africa.

Solutions to this problem have been several. Some insist on foreign aid, claiming that poor countries need a financial booster to be pulled out from the “poverty trap”, and initiate economic development. However, this assistance generally goes to the wrong side, it is not sufficient, and may not be a permanent solution. On the other hand, advocates of the free market believe that the only solutions are free trade and open markets, which have not proved to be helpful either, to quite a large extent. Therefore, the only permanent solution seems to increase employment, or better said to create productive jobs that will increase earning power. An ecoomy must be able to boost its development from the inside, by itself.

Microfinance projects still remain the more valuable options in economies striving to increase the number of companies and scope of their business. However, in practice, it seems to be much harder and more complicated than in theory, because most people for whom these funds are intended, do not have enough skills, ideas, necessary assets for investment, credit collaterals, or the knowledge, to even prepare a good business plan. Also, such companies usually are very small and do not have the advantages of economies of scale, have low productivity, and they often earn very little. As a result, liquidity is at a very low level, because they are often forced to borrow on a short-term basis, which is a much more expensive option. In addition, the obligations to the state, in terms of taxes and benefits, are also generally high. In the end, they have a lot of difficulties in penetrating the market alongside larger and much stronger companies.

There is a detail that we miss here. The real problem is not poverty. It is the lack of awareness that poverty creates problems of illiteracy, unemployment and vice versa. And the lack of goodwill from the State’s side cannot be undermined. This situation can be improved in two ways – to increase employability and to create conditions for sustainable employment. First, it is necessary to implement various programs for education, vocational training or professional reorientation on the occupations that are more requested in order to prepare people to become self-employed or employees. Second, although the private sector creates jobs, the state must create favorable conditions for efficient and profitable businesses. There are many initiatives that the state can implement, such as an appropriate fiscal policy, subsidizing certain industries, the establishment of a guarantee fund, reducing or subsidizing of taxes and benefits, and in turn, stimulation of aggregate demand.

Developing countries should encourage growth especially in labor-intensive and low-skill sectors, such as agriculture and small manufacturing units. This has proved to be a successful solution in China. Furthermore, SMEs need to focus on specialization and covering the market niches, or using strategies like outsourcing and strategic alliances with larger companies. Since SMEs are generators of economic development, sources of innovation and entrepreneurial talent, as well as significant creators of new jobs, each state should provide them with unmitigated support development and enrichment of business.

 

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