The Economics of Poverty: Taking a step back (Part 2.1)

** 1st Draft (28/11/2017)

Our first two articles on poverty (article 1 and its extension 1.1) placed great emphasis on the fact that poverty should not be defined as a disease but rather a symptom of many other economic, political and social ailments. With just this slight change to the conventional wisdom, it has opened up new doors of discussion, allowing new angles of perception as well as new solutions to the age-old question of chronic poverty.

A Review and an Add-on to part 1 of the series: Capability Theory

The first article talked about poverty as an indication of a deep-seated problem of persistent inter-generational capital deficit, which is exacerbated by the borrowing constraint the worse-off people have to confront, especially in the developing world where financial infrastructure is weak. One of the points, which I suspect is not well understood by the majority, introduced in the first article was the shocking claim that being poor is actually expensive, in both relative and absolute terms. That is, not only the poor has to pay more as a percentage of their income for the many goods and services available in the free world, but they simply and literally have to pay more (in absolute term) for goods and services due to, for instance, the lack of ability to afford labour/time saving apparatus and the myriads of services tailored for the middle-class (to reduce risks). I hope I was convincing enough in making the case; otherwise, I leave it to you to do the fact-check.

I was far from the finishing line though. We can go further as to look at the rate at which a poor person’s body absorbs and utilizes nutrient, which is generally lower than his better-off counterpart. Even doing away with this depressing condition, the goods and services (those of similar price to ours) are probably of lower quality and (for food) nutritional value. This leads to the assessment on “nutritional capabilities” based off of The Capability Approach first articulated by the famous economist and philosopher, Amatya Sen, in the 1980s. Capability Theory is what, hereinafter, we refer to the above concept put forth by Sen. Capability Theory is essential to the understanding of poverty. It gazes beyond the restrictive and mechanical definition of poverty that relies solely on a rather subjectively drawn poverty line. Capability Theory points at a new direction of study, which is the focus on human capabilities to live a good life. What does this imply? If we thoroughly ponder, we will see that it is a simple definition, yet rich in substance. Why? Because according to this newly defined poverty, even one is considered relatively well-off by traditional benchmark, one can still be poor. In other words, a disabled person in a least-developed nation earning 20 an hour is still poor if she cannot afford a life a20 note can guarantee her in a more advanced nation. Her power to command resources might be crippled by her physical impairment and by the unfavourable environment in which she exists. For example, she might not be able to purchase proper treatment or care-taking service, quality food, or even to be mobile enough to enjoy independence if the country she resides in has no such means made accessible and available to her. Capability Theory, hence, concerns itself with not just individual’s ability but also the presence of enabling environmental factors for a good life.

Crossing the “Capital Deficit” Bridge: An introduction to Adverse Geographical Conditions

In the second article on poverty, I expanded the discussion further to include the adverse effects of inter-general capital deficit at the larger social/national level. Immediately after, I did a short rant on some of the obvious ways to UN-SOLVE (if that is even a verb) the problem such as private interest rate ceiling (cap) and minimum wage (which can potentially increase consumption loan through inflationary expectation, and eventually, decrease the amount of loanable capital directly and/or indirectly via rising interest rate).

In this article, however, we shift our focus to a brand new concept: Adverse Geographical Conditions. Before that, a good closure on the capital deficit problem we discussed at length in the previous article is needed. To begin with, it is worth keeping in mind that inter-generational capital deficit is not a standalone problem. It is generated and sustained by many other poverty-inducing factors. So, I will try to tie the knot for article 1 and 1.1 by venturing a bit further into the reason why inter-generational capital deficit exists and persists in certain parts of the world beyond the scope of our previous two articles, particularly by showing how capital deficit is related to the current subject we are discussing. .


A few months ago, I had a great conversation with a friend from Mongolia, who was wondering why his ancestor settled in that cold uncomfortable region (of course, that is a good question considering the Mongols were invading left and right and could have easily settled in coastal and less chilling region). Well, administrative capacity might have been one of the causes, and they might have as well just chosen it on a whim. But, if you want an explanation on the economic side (these assume the mongols were forward-looking and commanded respectable knowledge on the lay of the land), I can think of a few reasons on the spot.

First and probably the most obvious explanation is that cold region is not plagued with disease as frequent as warmer regions. Tropical climate, for instance, is more susceptible to the spread of disease intra- and cross-species alike. The disease-prone environment naturally results in higher rate of loss in livestock, and thus, leads to lower capital accumulation and, almost invariably, capital deficit for smallholders (farmers owning small plots of land). Not only that, the depreciation rate of goods in hotter countries is also higher. Meat, among many other agricultural outputs, perishes much faster than it would in colder region. Consequently, farmers with relatively primitive technology at hands face considerable challenges in storage management, which brings us to the second problem.

Storage life

That is storage of goods (defined broadly as all primary, intermediate and final goods). Investment in more capable storage technology in hotter climate requires substantially more resources due to there being more pest, disease and the sheer speed of chemical reaction (that causes food to spoil) at higher temperature (for every 18°F rise in temperature, the rate of chemical reaction is doubled). Of course, physical damage to fruit and vegetable occurs at cold temperature as well, but intuitively speaking, it is relatively easier and less costly (i.e. less technological and capital intensive) to build effective insulation than to keep things refrigerated. Hence, spoilage problem is a tremendous challenge for countries with hot climate, not to mention the level of humidity, exposure to sunlight, etc. As a result, their citizens also confront more difficulties in storing and accumulating capital for investments conducive to better future income-generating ability.


Geographical disadvantages appear in other guises as well. Another more apparent economic disadvantage arising from geographical endowment is being landlocked. Landlocked countries find it harder to gain access to world market, which in turn increases transaction and transportation cost of goods and services. It should be of no surprise that most of the landlocked nations are poor; in fact, the gap in per capita income growth is quite large compared to those with coastlines.

Historical factors: Colonialism and Initial Institutions

Furthermore, geographical characteristics of a nation played a huge part in the history that ultimately decided the type of economic and political institutions it adopted later on (with only few exceptions/outliers). It interplayed with colonialism during the colonial era when several European powers traversed the ocean on a mission to conquer and establish their colonies in the continent of Africa, Asia, America and Oceania. Countries in tropical climate around the equator line suffered greatly from the extractive institutions installed by the colonialist nations, whereas those in the colder climate benefited a great deal more in the long-run from the remaining inclusive governing system set up by their colonial masters. Long story short, European people were accustomed to colder climate akin to that of their home continent. The feudal system, economic and political constraints of the period were some of the driving force that impelled the Europeans to bid farewell to their hometown in pursuit of better livelihood in the uncharted land. When encountering a continent of similar climatic conditions to the one from which they originated, they were without doubt more likely to settle there. Having experienced the hardship imposed upon them by the feudal lords, the new occupants of the land also sought for better institutions suitable for higher degree of freedom and well-being. In turn, it led to the constitution of rule of law, political and economic institutions that are inclusive (i.e. that favour welfare of the mass instead of the rich and powerful few) and conducive to rapid growth. Modern United States, Canada, and Australia are the fruit of those endeavours.

On the contrary, such conquest means that the ocean could have led them anywhere on the pale blue dot we call Earth. People ventured in hope of coming across something they can call treasure. The first embodiment is as explained earlier, a land where one could call home and thrive. The second embodiment of such treasure is probably just as favourable to the monarch and merchants, though not to the ordinary Joe seeking to build a home. The latter, I am referring to the continent with unfamiliar geographic conditions, with hot and unbearable weather, with lethal diseases that invaded the body and killed the potential settlers. Think of South America, Asia, and Africa (with a few exceptions like Singapore and South Africa that diverted from the predicted path, though with good reasons that we will keep for later articles). These parts of the newly discovered continents then were deemed unfit for long-term residency and thus were primarily treated as goldmines to be extracted and left to their own device. In other words, the Europeans found it unsuitable for living, and consequently, under European’s control, the governing institutions that emerged in those regions were predominantly extractive institutions aiming at nothing but sucking dry the resources their colonies had to offer. Such institutions severely crippled the development of proper political and economic institutions later on. There are many reasons, but let us discuss just a couple for the sake of brevity.

First, unlike inclusive institutions, extractive institutions, just as the name suggests, favours the allocation of resources away from the majority to the hands of the minority group of elites. These top elites were the one that gained the most from the European masters in terms of arm support, financial and various other forms of aids to keep their authority and economic exclusivity intact. The elite would thus do their utmost to drain resources from the bottom and the middle as tributes to the Europeans.

Second, extractive institutions do not promote innovations and adoption of new ideas as these could potentially reverse the role and give more power to command resources to the mass. Extractive institutions resist change because change means unstable grip on power by the elite and monarch alike. For instance, the grant of patent (exclusive rights to commercialise one’s invention) to inventors in the United States have been a major force in destroying and re-creating power balance within the country (the so-called Creative Destruction). Simply put, since power is seen as the amount of resources at one’s command, those with great mind and executive skills are able to amass more resources and therefore more power. The new rich either co-exists or topples the old rich. The association of merchants (the new rich) as a result of industrial revolution, for instance, were able to seize a huge portion of control on politics and economy from the tight grip of the sovereign in England. This uncertainty was what the elite and monarch of the past feared the most. Extractive institutions the European masters installed in the regions of foreign climate to them (mostly hot regions) helped secure power for the top few by either eliminating or reducing to a large degree the risks mentioned.

Lessons learnt

Poverty has always been a deep-rooted challenge in many parts of the world. As a society, we have grown considerably and our ingenuity in countering poverty issues deserves commendation. The room for improvement, however, is still taking up a lot of space. Cost-effectiveness is still an issue in many designs of policies. There are countless approaches to refine our methods, but one major improvement to be made is to educate as many people (policy makers, development agents, students, and non-experts alike) as possible about poverty, and the best way to do that is to first paint a clear picture of poverty from all different angles. That is to understand that poverty is not inherent, but at the same time, not every poor family should be blamed for their predicament. There are times when upgrading the capacity of people proves to be an effective channel to alleviating poverty, but there are also times when solving the innate disadvantages they face constitutes a better and more efficient approach. Of course, these solutions can be anything ranging from correcting institutional efficacy to teaching people to adapt to unfavourable geographic conditions. Clearly, the story does not end here, but I doubt many will persevere to reach the end of this article. For now, I shall tidy up my writing. Still, if you have endured through laborious reading till the end, then I thank you and I hope you find this article interesting and educating. In the next episode, we will talk more about poverty and other issues related to it including Hyperbolic Discounting.