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How to Understand and Fight Poverty and Inequality in the 21st Century



Poverty and (Economic) Inequality Defined

Poverty and inequality are two related but distinct concepts that affect the well-being of people and societies. In this blog post, we will explore what they mean, how they are measured, and why they matter.

What is poverty?

Poverty is the condition of not having enough resources or income to meet one’s basic needs, such as food, clothing, shelter, health, and education. Poverty can be absolute or relative, depending on how it is defined and measured.

Absolute poverty refers to a situation where a person’s income or consumption falls below a certain threshold that is considered necessary for survival. This threshold is often called the poverty line, and it can vary across countries and over time, depending on the cost of living and the minimum standards of living. For example, the World Bank uses an international poverty line of $2.15 a day, which reflects the average value of national poverty lines in some of the poorest countries in the world. Anyone who lives on less than $2.15 a day is considered to be in extreme poverty1.

Relative poverty refers to a situation where a person’s income or consumption is low compared to the average or median income or consumption of the society they live in. This means that relative poverty is not only about the lack of material resources, but also about the lack of social inclusion and participation. For example, the OECD uses a relative poverty line of 50% of the median household income of each country. Anyone who lives on less than half of the median income is considered to be in relative poverty2.

What is inequality?

Inequality is the uneven distribution of resources, income, wealth, opportunities, or outcomes among individuals or groups within a society. Inequality can be measured in different ways, depending on what aspect of well-being is being considered. Some common measures of inequality are:

  • The Gini index, which ranges from 0 to 1, where 0 means perfect equality (everyone has the same income or wealth) and 1 means perfect inequality (one person has all the income or wealth). The higher the Gini index, the more unequal the society is.
  • The share of income or wealth held by different groups, such as the top 10%, the bottom 40%, or the middle 60% of the population. The higher the share of income or wealth held by the top group, or the lower the share held by the bottom or middle group, the more unequal the society is.
  • The ratio of income or wealth between different groups, such as the top 10% and the bottom 10%, or the top 1% and the bottom 50% of the population. The higher the ratio, the more unequal the society is.

Why do poverty and inequality matter?

Poverty and inequality matter because they have significant impacts on the lives of people and the functioning of societies. Some of the consequences of poverty and inequality are:

  • Reduced human development: Poverty and inequality can limit the access and quality of education, health, nutrition, and other essential services, leading to lower levels of human capital, skills, and productivity. Poverty and inequality can also increase the exposure and vulnerability to various risks, such as disease, violence, conflict, and natural disasters, leading to lower levels of security, resilience, and well-being.
  • Reduced economic growth: Poverty and inequality can hamper the potential and opportunities of individuals and groups to participate in and benefit from the economic activities, leading to lower levels of income, consumption, savings, and investment. Poverty and inequality can also create inefficiencies and distortions in the allocation and use of resources, leading to lower levels of innovation, competitiveness, and productivity.
  • Reduced social cohesion: Poverty and inequality can erode the trust and cooperation among individuals and groups, leading to lower levels of social capital, civic engagement, and democratic participation. Poverty and inequality can also generate resentment and frustration, leading to higher levels of conflict, violence, and instability.

How can poverty and inequality be reduced?

Reducing poverty and inequality requires a comprehensive and coordinated approach that addresses the multiple and interrelated causes and effects of these phenomena. Some of the key elements of such an approach are:

  • Promoting inclusive and sustainable growth: This means creating more and better jobs, increasing the productivity and competitiveness of the economy, diversifying the sources and sectors of growth, and ensuring that the benefits of growth are widely shared and environmentally friendly.
  • Strengthening social protection and redistribution: This means providing adequate and accessible social safety nets, such as cash transfers, subsidies, pensions, and insurance, to protect the poor and vulnerable from shocks and risks. It also means ensuring a fair and progressive tax system, and investing in public goods and services, such as education, health, infrastructure, and justice, to improve the opportunities and outcomes of the population.
  • Enhancing social mobility and equal opportunity: This means removing the barriers and biases that prevent individuals and groups from reaching their full potential, such as discrimination, exclusion, and segregation. It also means promoting the access and quality of education, training, and lifelong learning, to enhance the skills and employability of the workforce.
  • Fostering social dialogue and participation: This means encouraging the involvement and representation of all stakeholders, especially the poor and marginalized, in the design and implementation of policies and programs that affect their lives. It also means ensuring the transparency and accountability of the institutions and actors that govern the society.

Conclusion

Poverty and inequality are complex and multidimensional challenges that require a holistic and evidence-based response. The Savvy Wallet is committed to providing you with the latest information and analysis on these issues, and to help you make informed and responsible financial decisions. Stay tuned for more posts on this topic, and feel free to share your comments and questions below. Thank you for reading!


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