The Monetary Approach to Poverty: Strengths and Weaknesses

By Fabian Soria

Poverty has been created by the economic and social system that we have designed for the world.
It is the institutions that we have built, and feel so proud of, which created poverty.
It is the concepts we developed to understand the reality around us, made us
see things wrongly. […] It is our policies borne out of our reasonings and
theoretical framework, with which we explain interactions among
institutions and people, that caused this problem for so

many human beings.”

Muhammad Yunus, Nobel Peace Prize 2006

When we read about poverty in the news, most of us know more or less what it means. But what are they exactly talking about? When an academic publishes a paper on poverty reduction, what exactly is he proposing to reduce?

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Bolivia in the Flat World

In China, when you are one in a million – there are 1300 other people just like you. Microsoft saying in Beijing

Globalization has recently shifted into warp drive, integrating the world and increasing competition in a way we have never experienced before. Many services that used to be non-tradable (like accounting), are now being done just as well on the other side of the globe at a fraction of the cost.

And many services that previously could only be supplied by large organizations can now be done just as well, or better, by independent individuals (news reporting, for example). Barriers are tumbling down all over the world, and everybody with an Internet connection and an imagination can do really well (1). Read More »

The Worst Way to Use the Hydrocarbon Revenues

It is not quite clear which is the best way to use exceptional oil and gas revenues (1), but the worst way is probably for the government to use expected future revenues as collateral to borrow money. This would not only increase inequality and poverty during the boom (see How can $700 million in hydrocarbon revenues be bad for the poor?), but also burden future generations with excessive debt, which become difficult to service after the boom has ended.

Ecuador is a scary example of that (2). After discovering oil in the rain forest in 1967, Ecuador quickly became the second biggest oil exporter in South America. By 1974, oil accounted for half of all export earnings (like Bolivia’s gas now) and approximately half of the government budget.

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True Public Goods, Local Consumption or Imported Goods

The impacts of windfall profits such as foreign aid or hydrocarbon revenues depend crucially on how the money is spent and/or invested. There are basically the following three options:

      1)True Public Goods:

Theoretically, the most growth and welfare enhancing option is for the government to invest the money in true public goods. True public goods are goods/services which enhance the productivity and welfare of everybody by making life and business easier. A classic example is a road which allows goods and persons to move around much easier, and, importantly, the fact that one person uses the road does not preclude others from also using the road (1).

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