By Morrison A. Muleri FCCA, PhD*
Poverty
could be mankind’s biggest modern-day problem. It casts an ugly shadow
across races, nations, ages and religions. It begets evils that mutate
and deprive us of dignity. I have worked on development in Africa, Asia,
Europe and America and I am surprised how complex we believe it is.
Yet, to tackle it we must understand its origin, its causes and the
critical links which will enable us to cripple it. I endeavor to
simplify it.
The World Bank defines absolute poverty as living on less than US$ 1.25 per day (say Kshs 3,000/month).
Using a simple equation: Wealth = Income – taxes – leakages – costs of living
Generating income
First, it is clear that the starting point is income and the most
common sources of income are employment, business, investment, and
welfare, with employment by far the most prominent. The quantity of
income dictates if one should barely survive, live a comfortable life or
combine a comfortable life with saving.
The most effective way therefore to tackle poverty is to create high
paying jobs and to equip people with skills to fill them. Creating jobs
without developing local skills pulls in expatriates. Conversely,
developing local skills but without the jobs could lead to mass
emigration as in Zimbabwe or innovation as in China or social unrest
like the Arab Spring.
If a government gives people skills, access to finance and a
conducive business climate, they tend to help themselves, others and the
government out of poverty. A good environment allows those with
resources to invest in equity/ shares, savings and deposit accounts or
bonds to derive dividend or interest income. Investments earn income and
give others the capital to produce more.
However, some will always be left behind be it due to vulnerabilities
arising from disability, discrimination, socio-cultural or even
economic causes. Responsible societies have an obligation to help those
left behind by providing welfare income.
People’s ability to earn an income, therefore, depends much on the
efforts of the government. Governments greatly influence the investment
climate, access to finance, quality of skills, employment, migration,
disposable incomes, and welfare programs. Also important is behavior of
individuals themselves and the international community.
Taxes
Second, tax represents mandatory direct deductions like PAYE or
withholding tax, governments imposes on incomes. Higher taxes may enrich
governments and impoverish citizens (socialism) while lower and more
progressive taxes may lift people out of poverty.
Leakages
Leakage presents a unique cost mainly to developing societies mired in insecurity, poor infrastructure and corruption. They are additional costs people incur say to establish and run businesses, secure and maintain jobs, protect themselves and obtain services. It is what corruption and wastage cost us.
However, individual preferences are vital. Some people are extravagant, others measured and yet others frugal. Personal preferences affect what you save and the productivity of your savings. We can squander, protect or invest savings. BRICS nations partly use frugality to overcome poverty, China has invested its savings into a fortune and Eastern Europe is squandering its wealth back into poverty. It is therefore clear that the best way to eradicate poverty is to develop jobs, skills and the investment climate so as to enhance incomes and at the same time minimize taxes, leakages and costs of living, while providing welfare to the most vulnerable. All these greatly depend on the actions of the government, and right there are the priority entry points for any responsible government to tackle poverty.
High leakages lead to higher costs and prices which escalate poverty. For SMEs, bribe have to be paid for permits, goods are stolen, staff are connected but less productive, power and security need back up, transport costs are higher etc. For citizens, bribes have to be paid to procure goods and service. In well managed societies such costs are minimal.
Leakages cannot be avoided and thus rank just below taxes in necessity. People would rather sacrifice savings or quality of life to pay for them. They eat into what would have been saved and re-invested. Governments greatly control leakages although the moral compass of society plays a role too
Costs of living
Fourth, costs of living are what we all easily identify like the cost of food, shelter, security, utilities, health services, and education.
The amount we pay for these is a function of many factors. For a start, public goods the government provides matters. If it provides good infrastructure, security and basic services, what the individuals have to
pay on top of taxes reduces. Simply put, eliminate corruption, give my mother good healthcare and my nieces good education and I will save and re-invest more.
It costs more to provide more and what smart governments do is to tax progressively and supplement direct taxes with investment income and indirect taxes like VAT, sales tax and tolls. These ‘pay-as-you-consume” taxes are voluntary in a way but their benefits spread to more people. Governments also use grants and cheaper borrowed funds from say the Bretton Woods Institutions and other development banks, friendly nations and organizations and partners up with the private sector to lower costs of basic services and develop infrastructure. The more government does here translate into savings by the citizens who have to pay the residual costs.
The hand of government in these costs is far reaching. If goods and services are imported, it determines the excise and custom duty, other levies and leakages, all of which are passed to consumers. For locally produced goods the incentives governments provide and the taxes they levy determine their final prices.
Governments can regulate prices or subsidize some goods and services. If costs of living are high, more people sink into poverty and if they are low, more people are lifted out of poverty. The government can raise a tide that lifts all boats (citizens).
Finally, savings or wealth is what remains from income after paying for all these. It is the future cushion against poverty. Ballpark figures show an average American can save 25% of income, a Briton 15% and a Kenyan 5%.
*The author is a chartered accountant and holds a PhD in development effectiveness besides other qualifications. He works for a leading development organization in Washington DC. The views expressed here are entirely his own. He can be reached at mmuleri@yahoo.com
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