Poverty

Absolute and relative poverty

▶

The key insight: a household can be relatively poor in a rich country while having a far higher income than someone in absolute poverty elsewhere. The two measure different things, one measures survival, the other measures exclusion from normal life in your own society.

This also explains a result that looks strange at first: economic growth can lift millions out of absolute poverty while relative poverty stays the same or worsens, because the benchmark rises with average income.

Causes of poverty

• Unemployment: no wage income, and reliance on benefits where they exist.
• Low wages: being in work does not guarantee escaping poverty. "In-work poverty" is common.
• Illness and disability: preventing work, and often adding medical costs.
• Old age, where pensions are small or absent.
• Lack of education and skills, which traps people in low-paid work and passes disadvantage to their children.
• Large family size relative to income.
• Discrimination limiting access to jobs and pay.
• Poor infrastructure: no clean water, electricity or transport to reach work.
• War, conflict and natural disasters.
• The poverty cycle: this is the central idea and worth stating as a chain:

1. Low income
2. little or no saving
3. no money to invest in education, health or tools
4. low productivity
5. low income again.

Breaking that cycle is what most anti-poverty policy is really trying to do.

Policies to reduce poverty

The recurring trade-off: measures that redistribute income work quickly but may weaken incentives and must be funded; measures that raise productivity work slowly but are more durable. The strongest answers say a combination is needed.

Worked example

A low-income country wants to reduce poverty.

1. Many families lack the money to keep children in school
2. children leave early and take low-skilled work
3. they earn little as adults and cannot afford schooling for their own children
4. the poverty cycle repeats across generations.

Two policies compared:

• Cash transfers to poor families raise incomes immediately and can be conditional on children attending school. Fast and effective, but ongoing, expensive, and dependent on the government's ability to fund and administer them.
• Free primary education and school meals attacks the root cause and raises productivity for a lifetime. But it takes at least a decade to show results, and needs teachers, buildings and books the country may struggle to fund.

Judgement. Transfers relieve poverty now; education prevents it later. A government facing severe poverty realistically needs both, which is precisely why conditional cash transfers, paying families on condition that children attend school, have become a common policy.

Common exam mistakes

• Confusing absolute with relative poverty.
• Saying economic growth eliminates relative poverty; it does not, because the benchmark moves.
• Assuming everyone in poverty is unemployed. Low pay causes in-work poverty.
• Listing policies without giving a drawback of any.
• Forgetting the poverty cycle, which explains why poverty persists across generations.

Exam technique

Define both types of poverty precisely when the question asks for a distinction; that is usually a 4-mark question with two marks each.

For causes, group them: no income (unemployment, old age, illness), low income (low wages, few skills), and structural (discrimination, poor infrastructure, conflict).

For policies, always pair a fast-acting redistributive measure with a slow-acting productivity measure, and say why both are needed.

Building an answer

4 marks, "Explain the difference between absolute and relative poverty."

Absolute poverty is being unable to afford the basic necessities for survival, food, clean water, shelter, basic healthcare. It is measured against a fixed line, such as the World Bank's international poverty line, and can in principle be eliminated.
Relative poverty is having an income well below the average in your own society, commonly below 60% of median income. It is measured against others, so it exists in every country regardless of how rich that country is.

6 marks, "Analyse policies a government could use to reduce poverty."

Progressive taxation and benefits transfer income from higher to lower earners directly, raising the incomes of the poorest immediately.
A national minimum wage raises the pay of the lowest-paid in work, though if set too high it may reduce the number of jobs available to exactly those workers.
Investment in education and training raises long-run earning power, attacking the cause rather than the symptom, but takes a generation to work.
Provision of free healthcare and schooling raises real living standards without raising money incomes, and prevents the illness and lost schooling that keep families poor.
The strongest answers note the trade-off: redistribution helps now but may weaken incentives, while education helps permanently but not for years.

The cycle of poverty

Worth learning as a chain, because it explains why poverty persists across generations:

1. Low income
2. little saving
3. no investment in education or health
4. low skills and poor health
5. low productivity
6. low income again.

Breaking the cycle requires an intervention from outside it, which is the argument for free education, healthcare and targeted aid.

Causes of poverty

Unemployment and low wages; illness or disability preventing work; lack of education and skills; discrimination limiting opportunity; conflict and instability; a weak or absent welfare system; and inherited disadvantage passed between generations.

A real case to quote

Brazil's Bolsa Família. Cash transfers to poor households conditional on children attending school and receiving vaccinations. It reduced poverty immediately through the transfer, and attacked the cycle through the conditions, an unusually clean example of a policy aimed at both the symptom and the cause at once.

Quick revision

• Absolute poverty: cannot afford basic necessities; measured against a fixed line; can be eliminated.
• Relative poverty: income far below the national average; exists in every country; cannot be eliminated.
• Causes: unemployment, low wages, illness, old age, lack of education, discrimination, poor infrastructure, conflict.
• Poverty cycle: low income → no saving → no investment in skills → low productivity → low income.
• Policies: growth, progressive tax and benefits, minimum wage, education, healthcare, infrastructure, pensions, microfinance.
• Redistribution is fast but costly; education is slow but durable.

Not the topic you were looking for? Describe what you are stuck on in your own words and we will take you to the notes that answer it.