A friend working for a development agency had been assigned to countries in Asia-Pacific region to work on poverty reduction projects. When I asked him how he helped these countries reduce poverty, he couldn’t explain his work in ordinary language and, instead, talked in terms of basic principles that were not clear and transparent. Then he made a joke with slight exaggeration that his assignment does help reduce his own poverty! As always, most development agency staff get well paid, regardless of the quality of work they do.

Indeed, the concept of poverty reduction can mean many things to many people. This gives leeway to camouflage the issue by stating it in very general and technical terms.

The most popular understanding of poverty reduction is that the effort helps reduce the number of people below the poverty line, although the poverty line itself is a murky concept. Even if the poverty line is assumed to be an unambiguous subject, there are no firm guidelines about implementing it—what exactly must be done to lift people above the poverty line and keep them there. Should this be done with free distribution of food and other essentials, finding the poor a job, or support them with welfare benefits?

Many countries do take this route to poverty reduction but this poses an enormous challenge in implementation—mainly in terms of minimising the leakages that characterise all the government-funded distribution programmes. Also, the distribution system involves budgetary costs that often escalate out of control because of the endemic corruption that usually accompanies them.

Because of the complexity of putting in place an efficient distribution mechanism, many government programmes have opted for cash benefits made available to low-income families to help raise their incomes above poverty level. The logic is that cash benefits go directly to recipients without official intermediation, which reduces the abuse and mismanagement of funds. Additionally, benefit receiving families have more freedom using the government money to maximise their satisfaction than if this is done through government intermediaries.

Another channel of poverty reduction that is being tried out in many of the semi-developed countries such as India is that of the work programme. Under this programme, the government guarantees work for a fixed period during the year at the market-wage rate, generally in the form of seasonal work for rural farm workers.

Offer of guaranteed work during off-season has proved to be an effective measure of poverty reduction, because work done under this programme helps build useful capital items like rural roads and irrigation schemes that have immediate effects on productivity, and the opportunity cost of labor-use in off-season projects is very low or even zero. However, the assumption is that projects are chosen to yield results quickly and that work is supervised by professional staff, helping to reduce wastage and the extent of leakage of the earmarked funds.

Finally, we can mention the use of credit schemes to help the very poor for starting a business, on the style of the Grameen Bank of Bangladesh. The scheme is implemented through a bank loan given to a group of entrepreneurs as seed money, for start-up cost on grassroots projects, such as goat rearing, chicken and dairy farm, and for growing fruits and vegetables. Group ownership of the project makes decision-making more professional and efficient than if the project is owned by an individual. The risk of insolvency is reduced when the project involves pooling of resources and skills.

Experiences have shown that cases of bankruptcy in group projects are rare and re-investment of profits helps build-up the capital base that can be used to diversify into other production. The saved capital can also be used to develop a network of related businesses to reduce processing, transport, and trading costs.

Overall, a poverty-reduction scheme can be operated in several ways with different outcomes. Generally, consumption-focused schemes such as free or subsidised distribution of food items are found to be less effective than production-focused schemes. The attraction of the latter is that not only do the production-focused schemes help alleviate poverty but also that they add value to national production—GDP—which helps raise economic growth.

The other major benefit of production-based schemes is that it doesn’t cause distortions in the private market which the consumption-oriented-schemes operated through free distribution or subsidised sales of products or services tend to do.

Finally, distribution schemes are prone to abuse and can invite corruption. This may also be true about production-based schemes but the chances of abuse are much lower.

While a production-based scheme is likely to be a more effective tool of poverty reduction, consumption-based schemes seem to be more popular with government policy-makers.  It is quite hard to explain the reasons but a general view is that government officials are often more familiar with consumption-based schemes and that the schemes are easier to implement. Also, the distribution schemes produce quick results in providing the needed relief.

At the same time, distribution schemes are costly to the budget compared to production-based schemes designed to have a comparable result, the cost consideration is one major factor for the short-life span of consumption-based schemes whereas production-based schemes tend to be more permanent.

Shah is a faculty at the Northern Virginia Community College, USA, in the Department of Economics