Policies to alleviate poverty and redistribute income: promoting economic growth

Economic Development – Poverty (Cambridge IGCSE 0455)

Objective

To understand the causes of poverty and evaluate the policies that can alleviate poverty and redistribute income, with particular reference to how economic growth can be used as a tool for poverty reduction.

1. Definitions (AO1)

  • Absolute poverty: living below a fixed poverty line that reflects the minimum income needed to meet basic needs (e.g., the World Bank’s US$1.90 per day).

  • Relative poverty: living significantly below the average standard of living in a society (often measured as a percentage of median income).

  • Poverty head‑count ratio: the proportion of the population whose income is below the defined poverty line.


    Formula: Head‑count ratio = (Number of people below the poverty line ÷ Total population) × 100 %

2. Causes of Poverty (AO1)

  1. Unemployment – especially structural and frictional unemployment that leaves people without a regular income.

  2. Low wages – even when employed, workers may earn less than the minimum needed for a decent standard of living.

  3. Illness & poor health – high disease burden and limited access to health services reduce productivity and increase out‑of‑pocket expenses.

  4. Age‑related factors – children, the elderly and other dependents often have little or no income of their own.

  5. Environmental factors – natural disasters, climate change and resource depletion can destroy livelihoods, particularly in rural/agricultural economies.

Other factors (often highlighted in the syllabus)

  • Insufficient economic growth

  • Unequal distribution of income and wealth

  • Limited access to quality education and health services

  • Poor infrastructure and low productivity

  • Political instability and weak institutions

3. Policy Approaches to Alleviate Poverty

Policies fall into two broad categories. Both aim to raise living standards for the poorest groups, but they work in different ways.

3.1 Growth‑oriented policies

Increase the size of the economy (GDP) so that more resources become available for all.

  • Investment in physical capital – roads, ports, electricity, water supply.

    Example: Kenya’s “LAPSSET” corridor created construction jobs and improved market access for farmers.

  • Human‑capital development – free/subsidised primary & secondary education, vocational training, adult literacy programmes.

  • Macroeconomic stability – low inflation, sustainable public finances, stable exchange rates; encourages private investment.

  • Trade liberalisation – reducing tariffs and non‑tariff barriers, promoting export‑led growth.

    Example: Bangladesh’s garment export boom after adopting trade‑friendly policies.

  • Technology adoption & R&D – incentives for firms to adopt new production techniques; support for innovation hubs.

3.2 Redistributive (equity‑focused) policies

Directly target the income and wealth gap.

  • Progressive taxation – higher tax rates on higher incomes or wealth; revenue used for social programmes.

  • Social safety nets – cash transfers, unemployment benefits, food or fuel subsidies; often means‑tested.

  • Public provision of services – free or heavily subsidised health care, primary education, clean water.

  • Minimum‑wage legislation – sets a legal floor for wages to protect low‑skill workers.

  • Land reform – redistribution of under‑utilised land to smallholder farmers; can improve agricultural productivity.

  • Micro‑finance and credit schemes – provide small loans to entrepreneurs who lack collateral.

4. How Economic Growth Reduces Poverty

  1. Job creation – new firms and expanded sectors (e.g., manufacturing, services) increase demand for labour, lowering unemployment.

  2. Higher incomes – growth raises average wages and profits; per‑capita income rises, moving households above the poverty line.

Mathematically, if Y is national income and N the population, per‑capita income y = Y/N. When Y grows faster than N, y rises, reducing the poverty head‑count ratio.

5. Evaluating Policy Effectiveness

Examiners look for a balanced evaluation using the following criteria:

  • Efficiency – does the policy achieve the desired outcome with the least waste of resources?

  • Equity (fairness) – does it target the poorest groups and reduce income inequality?

  • Administrative feasibility – can the government implement, monitor and enforce it effectively?

  • Fiscal sustainability – can the policy be financed without creating large, unsustainable deficits?

  • Potential side‑effects – e.g., work disincentives, inflationary pressures, or damage to domestic industries.

6. Summary Table of Key Policies

PolicyMechanism (How it works)AdvantagesDisadvantages / Risks
Infrastructure investmentImproves productivity and lowers transport costs; creates construction jobs.Stimulates growth; attracts private investment; long‑term benefits.High upfront cost; long gestation period; risk of mis‑allocation.
Progressive taxationHigher tax rates on higher incomes; revenue used for redistribution.Reduces inequality; funds social programmes.May discourage investment or encourage tax evasion if rates are too high.
Cash‑transfer programmesDirect payments to low‑income households (means‑tested).Immediate poverty relief; simple to administer.Risk of dependency; targeting errors; requires reliable data.
Trade liberalisationLower tariffs & non‑tariff barriers; open markets for exports.Boosts growth; expands consumer choice; encourages efficiency.Short‑term pressure on uncompetitive domestic industries; possible job losses.
Education subsidiesFree or reduced‑cost schooling; scholarships for disadvantaged groups.Builds human capital; long‑term growth driver; improves social mobility.Requires sustained funding; quality must be maintained; benefits are long‑term.
Minimum‑wage legislationSets a legal floor for hourly wages.Protects low‑skill workers; can reduce extreme poverty.May lead to reduced employment if set above productivity levels.
Land reformRedistributes under‑utilised land to smallholders.Improves agricultural productivity; empowers rural poor.Potential for conflict; requires secure land‑title systems.

7. Suggested Diagram for Exams

Typical relationship between GDP per‑capita (x‑axis) and the poverty head‑count ratio (y‑axis). The downward‑sloping curve shows that higher per‑capita income is associated with lower poverty rates. Mark three points to illustrate: (i) rapid growth with a large fall in poverty, (ii) modest growth with a small fall, and (iii) growth without poverty reduction (highlighting the need for inclusive policies).

8. Concluding Remarks

For sustainable poverty reduction, policymakers must combine:

  • Growth‑oriented reforms that expand the size of the economy and create jobs, and

  • Redistributive measures that ensure the benefits of growth reach the poorest groups.

Balancing efficiency, equity, administrative feasibility and fiscal sustainability is essential. Well‑targeted social safety nets, investment in human capital and infrastructure, and a stable macro‑economic environment together provide the most robust pathway to lifting people out of poverty.