The Role of Investment in Poverty Reduction

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This essay is an attempt to explain the role of investment in poverty reduction. In order to achieve this, an exposition of the theoretical assumptions on the linkages between investment and poverty reduction will be undertaken. In addition, relevant definitions and practical examples will be cited. A conclusion will then be drawn from the discourse.

As is well known, poverty is multi-dimensional. There are several different indicators of well-being (e.g. education, health, nutrition, security), and a minimum level deemed acceptable by society associated with each. Poverty is a complex phenomenon that has attracted numerous definitions that have centered on its characteristics, extent, and measurement. The World Bank (2001) arbitrarily defines it as the inability of people to attain a minimum standard of living. However, this definition raises other question pertaining to what is meant by minimum standard of living, how such a level is measured, and the extent to which a single measure can be sufficient to encompass a phenomenon of a multifaceted immensity.

However, for argument’s sake, this essay will adopt Todaro & Smith’s (2008) definition of poverty as a lack of basic human needs, such as adequate and nutritious food, clothing, housing, clean water, and health services ---these being fundamental for the promotion of human dignity and welfare. Therefore poverty reduction entails pursuing policies that are focused on the general improvement in human welfare.

Anderson et al. (2006:3) define (net) public investment as public expenditure that adds to the public physical capital stock. This would include the building of roads, ports, schools, hospitals etc.

The UN Millennium Project (2005) has re-emphasized the need for a ‘big push’ strategy in public investment to help poor countries break out of their poverty trap. The report argues that, to enable all countries reduce poverty, there should be identification of priority public investments to empower poor people, and these should be built into MDG-based strategies that anchor the scaling-up of public investments, capacity-building, resource mobilization, and official development assistance. Seven main investment-and-policy clusters are identified in the areas of rural development; urban development; health systems; education; gender equality; environment; and science, technology and innovation.

However, the contribution of public investment to growth and poverty reduction has not always been as positive or as significant as one might expect. Despite the development of increasingly sophisticated methods for assessing the desirability of public expenditure during the 1960s and 1970s, large increases in public investment in many developing countries between 1974 and 1982 often yielded few returns (Little and Mirrless, 1990).

There are, of course, many possible reasons for this, including some unconnected with public investments (e.g. declining terms of trade for developing country exports). Nevertheless, there is a possibility that at least one of the reasons was that the methods available to assess the desirability of public investment alternatives were flawed, badly implemented, or ignored.

Looking at methodologies for assisting policy-makers in deciding an optimal investment portfolio is, therefore, fundamental in furthering our understanding of the linkages between public investment, growth and poverty reduction, and of the ways in which economic policy-making can become a better tool for promoting positive development outcomes. In recent years, there has been an increasing interest in Public Expenditure Management (PEM) systems, and the ways these can deliver on a government’s poverty reduction objectives. In the 1980s and 1990s the focus was largely on macroeconomic stability and aggregate fiscal discipline whereas more recently, criteria for resource allocation and issues of efficiency and effectiveness of public spending have come to the fore,...
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