Historically, poverty reduction has been largely a result of economic growth. The industrial revolution led to high economic growth and eliminated mass poverty in what is now considered the developed world. In 1820, 75% of humanity lived on less than a dollar a day, while in 2001, only about 20% did.As three quarters of the world's poor live in the country side, the World Bank cites helping small farmers as the heart of the fight against poverty. Economic growth in agriculture is, on average, at least twice as effective in benefiting the poorest half of a country's population as growth generated in non-agricultural sectors. However, aid is essential in providing better lives for those who are already poor and in sponsoring medical and scientific efforts such as the Green Revolution and the eradication of smallpox.
In The Protestant Ethic and the Spirit of Capitalism, Max Weber first suggested that cultural values could affect economic success, arguing that the Protestant Reformation led to values that drove people toward worldly achievements, a hard work ethic, and saving to accumulate wealth for investment.The new religions (in particular, Calvinism and other more austere Protestant sects) effectively forbade wastefully using hard earned money and identified the purchase of luxuries a sin.
Ian Vásquez, director of the Cato Institute's Project on Global Economic Liberty, wrote that extending property rights protection to the poor is one of the most important poverty reduction strategies a nation could take.Securing property rights to land, the largest asset for most societies, is vital to their economic freedom. The World Bank concludes increasing land rights is 'the key to reducing poverty' citing that land rights greatly increase poor people's wealth, in some cases doubling it. Peruvian economist Hernando de Soto has estimated that state recognition of the property of the poor would give them assets worth 40 times all the foreign aid since 1945. Although approaches varied, the World Bank said the key issues were security of tenure and ensuring land transactions were low cost.
In India, noted reductions in poverty in recent decades have occurred mostly as a result of the abandonment of collective farming in China and the cutting of government red tape in India. However, ending government sponsorship of social programs is sometimes advocated as a free market principle with tragic consequences. For example, the World Bank presses poor nations to eliminate subsidies for fertilizer even while many farmers cannot afford them at market prices. The reconfiguration of public financing in former Soviet states during their transition to a market economy called for reduced spending on health and education, sharply increasing poverty.
Trade liberalization increases the total surplus of trading nations. Remittances sent to poor countries, such as India, are sometimes larger than foreign direct investment and total remittances are more than double aid flows from OECD countries. Foreign investment and export industries helped fuel the economic expansion of fast growing Asian nations. However, trade rules are often unfair as they block access to richer nations' markets and ban poorer nations from supporting their industries.Processed products from poorer nations, in contrast to raw materials, get vastly higher tariffs at richer nations' ports.
Capital, infrastructure and technology
World GDP per capita
Investments in human capital, in the form of health, is needed for economic growth. Nations do not necessarily need wealth to gain health. For example, Sri Lanka had a maternal mortality rate of 2% in the 1930s, higher than any nation today. It reduced it to .5-.6% in the 1950s and to .06% today while spending less each year on maternal health because it learned what worked and what did not. Cheap water filters and promoting hand washing are some of the most cost effective health interventions and can cut deaths from diarrhea and pneumonia. Knowledge on the cost effectiveness of healthcare interventions can be elusive but educational measures to disseminate what works are available, such as the disease control priorities project.
Human capital, in the form of education, is an even more important determinant of economic growth than physical capital. Deworming children costs about 50 cents per child per year and reduces non-attendance from anemia, illness and malnutrition and is only a twenty-fifth as expensive to increase school attendance as by constructing schools.
UN economists argue that good infrastructure, such as roads and information networks, helps market reforms to work. China claims it is investing in railways, roads, ports and rural telephones in African countries as part of its formula for economic development. It was the technology of the steam engine that originally began the dramatic decreases in poverty levels. Cell phone technology brings the market to poor or rural sections. With necessary information, remote farmers can produce specific crops to sell to the buyers that brings the best price.
Such technology also makes financial services accessible to the poor. Those in poverty place overwhelming importance on having a safe place to save money, much more so than receiving loans. Also, a large part of microfinance loans are spent on products that would usually be paid by a checking or savings account. Mobile banking addresses the problem of the heavy regulation and costly maintenance of saving accounts. Mobile financial services in the developing world, ahead of the developed world in this respect, could be worth $5 billion by 2012. Safaricom's M-Pesa launched one of the first systems where a network of agents of mostly shopkeepers, instead of bank branches, would take deposits in cash and translate these onto a virtual account on customers' phones. Cash transfers can be done between phones and issued back in cash with a small commission, making remittances safer.
Aid in its simplest form is a basic income grant, a form of social security periodically providing citizens with money. In pilot projects in Namibia, where such a program pays just $13 a month, people were able to pay tuition fees, raising the proportion of children going to school by 92%, child malnutrition rates fell from 42% to 10% and economic activity grew by 10%. Researchers say it is more efficient to support the families and extended families that care for the vast majority of orphans with simple allocations of cash than supporting orphanages, who get most of the aid.
Some aid, such as Conditional Cash Transfers, can be rewarded based on desirable actions such as enrolling children in school or receiving vaccinations. In Mexico, for example, dropout rates of 16-19 year olds in rural area dropped by 20% and children gained half an inch in height. Initial fears that the program would encourage families to stay at home rather than work to collect benefits have proven to be unfounded. Instead, there is less excuse for neglectful behavior as, for example, children stopped begging on the streets instead of going to school because it could result in suspension from the program.
Another form of aid is microloans, made famous by the Grameen Bank, where small amounts of money are loaned to farmers or villages, mostly women, who can then obtain physical capital to increase their economic rewards. For example, the Thai government's People's Bank, makes loans of $100 to $300 to help farmers buy equipment or seeds, help street vendors acquire an inventory to sell, or help others set up small shops. While advancing the woman and her household's position economically, microloans empower women and enable them to voice their opinions in general household decisions.
Aid from non-governmental organizations may be more effective than governmental aid; this may be because it is better at reaching the poor and better controlled at the grassroots level. Critics argue that some of the foreign aid is stolen by corrupt governments and officials, and that higher aid levels erode the quality of governance. Policy becomes much more oriented toward what will get more aid money than it does towards meeting the needs of the people. Supporters of aid argue that these problems may be solved with better auditing of how the aid is used. Immunization campaigns for children, such as against polio, diphtheria and measles have save millions of lives.
A major proportion of aid from donor nations is tied, mandating that a receiving nation spend on products and expertise originating only from the donor country. For example, Eritrea is forced to spend aid money on foreign goods and services to build a network of railways even though it is cheaper to use local expertise and resources. US law requires food aid be spent on buying food at home, instead of where the hungry live, and, as a result, half of what is spent is used on transport.
One of the proposed ways to help poor countries has been debt relief. Many less developed nations have gotten themselves into extensive debt to banks and governments from the rich nations and interest payments on these debts are often more than a country can generate per year in profits from exports. If poor countries do not have to spend so much on debt payments, they can use the money instead for priorities which help reduce poverty such as basic health-care and education. For example, Zambia began offering services, such as free health care even while overwhelming the health care infrastructure, because of savings that resulted from the rounds of debt relief in 2005.
Efficient institutions that are not corrupt and obey the rule of law make and enforce good laws that provide security to property and businesses. Efficient and fair governments would work to invest in the long-term interests of the nation rather than plunder resources through corruption. Researchers at UC Berkeley developed what they called a "Weberianness scale" which measures aspects of bureaucracies and governments Max Weber described as most important for rational-legal and efficient government over 100 years ago. Comparative research has found that the scale is correlated with higher rates of economic development.
With their related concept of good governance World Bank researchers have found much the same: Data from 150 nations have shown several measures of good governance (such as accountability, effectiveness, rule of law, low corruption) to be related to higher rates of economic development. The United Nations Development Program published a report in April 2000 which focused on good governance in poor countries as a key to economic development and overcoming the selfish interests of wealthy elites often behind state actions in developing nations. The report concludes that "Without good governance, reliance on trickle-down economic development and a host of other strategies will not work."
Examples of good governance leading to economic development and poverty reduction include Thailand, Taiwan, Malaysia, South Korea, and Vietnam, which tend to have a strong government, called a hard state or development state. These "hard states" have the will and authority to create and maintain policies that lead to long-term development that helps all their citizens, not just the wealthy. Multinational corporations are regulated so that they follow reasonable standards for pay and labor conditions, pay reasonable taxes to help develop the country, and keep some of the profits in the country, reinvesting them to provide further development. In 1957 South Korea had a lower per capita GDP than Ghana, and by 2008 it was 17 times as high as Ghana's.
Funds from aid and natural resources are often diverted into private hands and then sent to banks overseas as a result of graft. If Western banks rejected stolen money, says a report by Global Witness, ordinary people would benefit "in a way that aid flows will never achieve". The report asked for more regulation of banks as they have proved capable of stanching the flow of funds linked to terrorism, money-laundering or tax evasion.
Good institutions are vital. When none exist or the only existing are hard to access, traditional systems that do not follow the rule of law flourish to provide law and order. These systems have much to do with honor, and often, lead to many ignoring or covering abuse to avoid shaming a family.
Empowering women has helped some countries increase and sustain economic development. When given more rights and opportunities women begin to receive more education, thus increasing the overall human capital of the country; when given more influence women seem to act more responsibly in helping people in the family or village; and when better educated and more in control of their lives, women are more successful in bringing down rapid population growth because they have more say in family planning.