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Economic Causes of Poverty Essay

Poverty is the deprivation of necessities that that determine the quality of life. These necessities comprises of the basic human needs and better education which directly influences the type of employment and income earned and enable one to fight poverty. In October 2008 World Bank revised the poverty line to 1. 25 US dollar per day from 1 US dollar per day. After revision of the poverty line measure, an estimated 1. 4 billion people were found to live at this poverty line or below (Otlin, 2008). There is an upward poverty trend; for instance in 2004, 984 million people were living on or below the line of measure i.

e. 1 US dollar whereas in 1981, 1. 9 million were living on or below the poverty line (Weaver & Park, 2007). Among other causes of poverty, economic causes which include capital flight, unemployment, low income, unfair property laws and unfair trade has really made poverty alleviation in developing countries a complicated issue despite the efforts of these countries to fight against poverty. Rapid flow of money outside a country or any other assets commonly known as capital flight is a major economic cause of poverty.

In most cases the movement is due to instability and reduced returns. Investors move their money from one investment to another, either within the same country or to a different country to avoid high inflation and search for stability and increased returns. Capital flight is mostly witnessed in a country with currency instability and sometimes the outflows are intensive thus affecting the whole financial system of the country (Epstein, 2005). The loss of confidence and devaluation of the affected country burdens the citizens and their properties lose the nominal value.

This resorts to reduced purchasing power of assets of a country making it very expensive to import goods. Due to devaluation of the economy’s currency, inflation comes in. Consequently, the currency unit can only purchase fewer goods thus accelerating poverty. Capital flight also hampers investment which may reduce economic growth of the developing economies. Unemployment is another economic cause of poverty. It usually occurs when one is ready and able to work but there is no work for him/her. The inadequacies of basic human needs and better education are normally as result of un-employment.

A country where there is a higher rate of unemployment, the Growth Domestic Product (GDP) is low since most people are not working. According Epstein (2005), unemployment is a primary cause of temporal poverty. The moment people get job, they supplement their incomes and thus reduce poverty levels. Sounder further says that poverty increases with increase in unemployment duration. People without jobs can be having skill which can improve production, but since they have not been employed, their skills may not be utilized.

This can result is low productivity in the country. In other cases, un-employment can be a social cost to the society. Issues like crimes, terrorism and drug abuse which may be as a result of poverty, marginalization and unemployment are costly to eliminate. Money which can be used to alleviate the living standards is used for fighting crimes instead. Unemployment brings income inequality which widens the gap between the rich and the poor. Winefield (2002), points out that unemployment leads to delay in experience gain which reduces productivity.

Moreover, in countries which provide job search allowance, the government expenditure goes high because more people are entitled to these allowances. This can force the government to reduce money given to other crucial sectors for example agricultural sector which can be a source of livelihood to the country’s population. Taxes may also increase due to high government expenditure resulting to increase in prices of commodities. Low income means that people will have a limited purchasing power. Winefield (2002) points out that, low income earnings place people near or on at the poverty line.

He further argues that, raising the incomes by increasing the wages without dismissing their job opportunities has historically minimized poverty rates. According to his research findings, increasing minimum wage will help reduce poverty levels, however minimal. Small household budgets experience the greatest impacts since they have a limited purchasing power. This has facilitated poverty in developing countries. Increases in food prices and an instant steep rise in agricultural commodities is another economic cause of poverty.

The rise in food prices can be attributed to increased demand of staple commodities, higher energy prices especially fuel and electricity which affects transportation and production costs of agricultural products and farm inputs e. g. fertilizer and pesticides. Food prices may also rise due to lack of alternative market outlets for agricultural product and low yields of cereals (Anker, 2006). Competition between industrial commercial organizations is healthy and encouraged by market economies. However, unfair property laws by competitors and use of malicious ways to gain business mileage e. g.

making false and direct attack to a competitor may scare away potential investors. At times it happens despite the fact that a code of conduct has been set to guard against this behavior. Unfair competition which comprises of all acts and practices during industrial and commercial transactions which are contrary to honest practices may hamper selling and buying of good and services. Unfair competition may include confusion caused in relation to another enterprise’s products or its activities, acts that are misleading for instance, false implications of a competitor’s product, and damaging the goodwill of the competitors.

All this may lead to unfair competition which causes decline in sale of goods or services. Eventually, this will translate increased levels of poverty in the affected economies due reduced sales, exports and other losses that may arise from unfair trade. In conclusion, poverty alleviation is a complex issue to deal with. It requires that all relevant stakeholders get rid of their selfish interest so that they can deal with the root causes of poverty.

All causes of poverty ranging from economic, governance, demographic and social factors, environmental factors, if looked into by good governance, transparency in public expenditure, strengthening of management capacity and improvement of the public service delivery will help in promoting a competitive private sector environment for development and trade regime liberalization. This can contribute greatly to poverty alleviation in the world and especially in developing countries in Africa, Latin America and East Asia.

A fair trade between developed and developing countries is fundamental if the question of poverty in developing countries is ever to be addressed. For instance, disruption of trade in Africa has greatly affected the process of integration in business. As a result poverty levels have increased undermining and lowering the livelihoods of small scale farmers and producers as well as depriving the young people their rights.


Anker, R. , (2006); Poverty Lines around the World: A New Methodology and Internationally Comparable Estimates. International Labor Review Journal, Vol. 145

Epstein, G. A. , (2005); Capital Flight and Capital Controls in Developing Countries. ISBN 184376931X, 9781843769316, Edward Elgar Publishing. Otlin, J. , (2008); The Causes of Poverty: Thinking Critically about a Key Economic Issue. Journal of Social Education, Vol. 72 Weaver, C. & Park, S. , (2007); The Role of the World Bank in Poverty Alleviation and Human Development in the Twenty-First Century: An Introduction. Global Governance Journal, Vol. 13 Winefield, A. H, (2002); Unemployment, Underemployment, Occupational Stress and Psychological Well-Being. Australian Journal of Management, Vol. 27

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