Poverty & Economic Development The link between poverty and economic development

The financial services sector and poverty alleviation

Infrastructure

Governance

Trade and Investment

Human Capital

Trade and investment

In this paper, we explore the importance of the poverty and economic development dimensions such as infrastructure, private sector development, entrepreneurship, trade and investment and human capital. This is done while keeping in mind the ethical and governance issues like accountability and fairness and their influence on economic development. The content is discussed within the context of a financial services institution operating within African countries. In this paper, we also discuss the steps that the board and senior management of a company can take to address these issues, and describe which steps you would regard as the most effective.

Introduction

The link between poverty and economic development has often been a subject of several discussions and studies (Roemer & Gugerty,1997;Hull,2009; Loayza & Raddatz, 2006; Satchi & Temple,2006;Stevans & Sessions,2008).The financial service sector is therefore one of the most affected by the poverty and economic level statistics. In this paper, we explore the importance of the poverty and economic development dimensions such as infrastructure, private sector development, entrepreneurship, trade and investment and human capital. This is done while keeping in mind the ethical and governance issues like accountability and fairness and their influence on economic development. The content is discussed within the context of a financial services institution operating within African countries. In this paper, we also discuss the steps that the board and senior management of a company can take to address these issues, and describe which steps you would regard as the most effective.

The link between poverty and economic development

Extant literature has attempted to demystify the alleged link between poverty and economic development. Most of these studies have clearly demonstrated that a certain level of sectoral growth pattern has an effect on the level of poverty reduction. The work of Loayza and Raddatz (2006) indicated that growth in the unskilled intensive sectors of the economy contributes to a significant level of poverty reduction. The work of Satchi and Temple (2006) on the other hand indicated that growth in the agricultural sector lads to a significant increase in poverty while the growth in most urban sectors would lead to a reduction in poverty. The work of Coxhead and Warr (1995) found that increases in the levels of agricultural productivity ultimately leads to a reduction in poverty levels. Financial services sector fall under this category. There is however, a general lack of consensus on the identification of the specific sectors that are most critical for poverty reduction as well as whether changes in either employment or productivity would ultimately lead to the greatest impact.

The financial services sector and poverty alleviation

The financial service sector has a role in the alleviation of poverty in our society. These duties must be fulfilled as an ethical obligation of the concerned entities. Other than gaining profits, these institutions must ensure that they capitalize on economic growth in order to alleviated poverty in their areas of operation.The financial sector is noted by Yahie (2000) to play an important role in poverty alleviation. On the other hand, it is worth noting that the concepts of poverty and economic development can be banked on by financial service sector participants in order to make significant gains in profit. This however, must be done within the confines of corporate governance with issues of ethical corporate operations being adhered to. Each and every financial institution operating in Africa must therefore take note of the various factors that are responsible for driving a strong, sustained, shared and clean (SSSC) economic growth (WEP,2010).

Financial services development is noted by Khan et al. (2011) to be an effective instrument in the reduction of poverty. The financial sector can therefore be used in achieving this objective by improving its efficiency, by increasing its range, by improving financial sector regulation as well as by increasing access of the general population to the financial services.

Financial instability is indicated by Khan et al. (2011) to lead to a direct and indirect negative effects on individuals and the society in general. This instability has its toll on the poor of every country. This is because of their inability to diversify their risk through the skillful investment in foreign banks. This can further be attributed to the less negotiation power that they have (McKinnon,1973).

Poverty is one of the main factors that have hindered economic development...

Even though a number of analysts argue that when economy of a given nation is capable of experiencing constant growth, poverty levels would automatically decrease. According to Panagariva, Dollar and Kraay (2002), economic development normally has a lot of effects on poverty reduction and a steady economy of a nation leads to a significant reduction in poverty levels.. There are a lot of distributional outcomes that usually come as a result of economical growth through competitive market structure. For example countries such as South Korea, Singapore, Taiwan and Hong Kong which started on a great economic path have been able to reduce poverty level substantially (Panagariya, 2002; Ames, 2000, Dolla and Kraay, 2002).
However, some analysts do argue that economic development is essential but not enough to bring about poverty reduction. Surely, the process of starting economic growth in the country usually makes worse the inequality and poverty in the community. Therefore if better efforts are not taken then the side effects of the economic reduction may increase the level of poverty index and therefore increase social bitterness and constantly offer a platform of most popular unhappiness that may be able to impact the process of economic growth negatively. Some level of redistribution and redressing economic inequalities in society is necessary to obtain stable economic growth (Ravallion, 2001; Bruno and Ravallion, 1998).

This paper seeks to study the connection between governance and how to decrease the poverty index while focusing on how to reduce poverty in Africa through economic development. The study further examines how infrastructure, governance, human capital and trade and investment relate to the economic growth of Africa and their links to poverty eradication throughout the continent.

Infrastructure

The pace of infrastructure development in Africa has been too slow which creates a lot of deficit due to high demand of economic growth. Statistically, approximately 40% of the continent's population is access to roads and electricity, while 60% are not access to either electricity or better roads. This however, create unfriendly environment for economic growth in Africa. It was noted by Ford and Poret (1991) that transport and energy are the key sector of infrastructure which is vital for the economic growth of a country. It facilitates both domestic and international trade which improves global integration into the worldwide economy. However, Africa has witnessed a lot of economic under development because of its infrastructure deficit which has been in the existence for many years. This reduced the pace of economic growth hence causes the increase level of poverty index.

Moreover, the best answer which can be given to explain how infrastructure or transport facilitates to the increase economic growth is the reduction of the cost of transportation and improvement of accessibility. These are generally being referred as the core transportation benefit. They do not only directly affect the production and growth but also play a role in economic growth using other different important ways. They come down to increase production and economic development through rationalization and reorganization of the fabrication, enhanced production and most higher level of domestic and foreign direct investment which affects the cost of labor and production (Ford & Poret, 1991).

Governance

Governance is a strong factor that determined the economic growth of a nation. Besides that there are links between governance and poverty. Poverty in its form is present because of some of the poor governance which has been in existence for many decades across the Africa continent. Good governance normally includes a number of issues which make the environment favorable for economic development activities to take place without any obstacle. As stated by Kaufmann (2003, p. 5.) governance is the biggest parameter to the level of poverty in a nation. Therefore bad governance usually reduces the economic development a country because of corruption, lack of democracy and employment of incompetent personnel. Furthermore, practicing the right governance is the best way of reducing poverty in our society. This can only happen when there is a serious link between the people and the state which can allow the government to serve the concern of the public and encourage the common good central to poverty alleviation.

Generally, governance issues involve decentralization of people to the people, rule of law, proper delivery of most basic services and democracy which are ingredients to good governance and a key factor to the reduction of poverty. They are mechanisms through which the energies and creativity of the poor can be unbounded, they can gain voice and power and make the state responsive to their needs and demands. In other words, participate actively in making decisions that affect their life chances and engage the process…