The poverty trap

SHORT ESSAY

Topic: Getting households out of the poverty trap requires a greater focus on the “demand” side rather than the “supply” side.

Introduction

Despite the substantial amount of research undertaken to study the economic growth and development and analyse how it facilitates the poverty reduction, there has not been still one remedy discovered to make poor countries rich. Poverty continues to be the cause of suffering of millions of people around the globe, who are caught in a poverty trap. Azariadis and John Stachurski (2005) define the poverty trap as “any self-reinforcing mechanism which causespoverty to persist”. Those mechanisms causing poverty to persist can include, for instance, limited access to education, inadequate nutrition, lack of public health care, limited access to credit and capital markets, inefficient governance, social instability and poor infrastructure. We can use one of the listed mechanisms to illustrate the emergence of the poverty trap. Limited access to education leads to an increased level of illiteracy among the poor, which further determines the niche the poor can take in the labour market. Being uneducated, the poor is restricted to perform unskilled labour, which does not pay high wages and brings the poor’s income level down. Income deprivation subsequently leads to inadequate nutrition, limited access to education, etc. That is the trajectory poor households follow towards falling into the poverty trap.

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What are the ways to get households out of the poverty trap? There are two types of policies, “supply” and “demand” side policy interventions, which are applied to break the poverty trap. “Supply” side policies aim to directly provide services to the poor that may focus among other spheres of concern on education, health, or infrastructure, whereas the “demand” side policy proponents argue that first poor should demand these services, otherwise they are going to be ineffective. The author of this essay shares the latter point of view as well.

Evidence suggests that enabling poor people to participate in determining services they need, their quality and quantity is critical in ensuring policy intervention’s success. To guarantee sustainability of the results there should be social accountability in place, which allows poor people to hold the government accountable for the decisions and choices it makes for the poor. We also build our argument based on a country example from Bangladesh, where a “demand” side financing intervention has outperformed a “supply” side financing intervention in the healthcare sector. Hence, this essay aims to argue that getting households out of the poverty trap requires a greater focus on the “demand” side rather than the “supply” side.

Voices of the Poor

Mani et al (2013) argue that being preoccupied with pressing financial concerns the poor have fewer cognitive resources to guide their choice and action; therefore, they are unable to take informed decisions due to their poor mental capabilities. Thus, taking this fact into consideration “supply” side policies are designed to help the poor to get out of poverty without hearing their voices. It is believed that the government can decide better what is needed to get the poor out of the poverty trap on poor people’s behalf. However, according to the World Development Report (2004), “public services often fail people – in access, quantity, and quality”. The report emphasizes that the main reason of the failed efforts of the developing countries to make services work for the poor is the extent to which poor people themselves are engaged in determining the quality and the quantity of the services which they are entitled to. Services can work better if “poor people are put at the centre of service provision by enabling them to monitor and discipline services providers by strengthening their voice in policymaking and by reinforcing the incentives for providers to serve the poor” (World Development Report, 2004).

However, the “supply” side proponents will argue that a well-targeted strategy of the “supply” side performance incentives could on its own be enough to achieve the desired outcomes, for instance, drawing upon an example from Nicaragua where a conditional cash transfer program showed “significant improvements in immunizations, growth monitoring, and reductions in stunting” (Regalía, F. and Castro, L., 2009). Upon completion of the program an evaluation was conducted to identify the impact the combined “supply” and “demand” side intervention had. The evaluation showed that combining “supply” and “demand” side policies can significantly increase the use of health services among poor households and improve health outcomes. Furthermore, the evaluation aimed to assess the impact “demand” side incentives alone played in this intervention. For this purpose, an evaluation about ten months after “demand” side incentives had been stopped in certain areas was conducted, and it revealed that take-up rates for preventive health care services still remained high. The evaluation explained this result by the possibility that the program strategy dramatically improved provider outreach activities during the initial stage of implementation and thus the access of poor households to health services, reducing the costs of time and travel to reach healthcare service delivery points was also improved. It is possible, therefore, that a well-targeted strategy of “supply” side performance incentives could, on its own, be enough to achieve and maintain high levels of health care service use among poor rural populations in Nicaragua (Regalía, F. and Castro, L., 2009).

Although this example shows that “supply” side policies on their own can be efficient in helping the poor to get better access to health care services, we need to bear in mind that this is only one example and, therefore, it cannot be representative of all “supply” side policy interventions. It is also stressed by the evaluation that the success of the program might be because provider outreach activities were improved; thus, we question here that should “demand” side incentives, such as incentives for health providers to develop efficient plans to expand coverage rapidly in underserved areas, were not there from the beginning of the program the outcome of the program could have been less successful.

Sustainability and Social Accountability

Designing policy interventions based solely on the “supply” side approach ensures less sustainability. When the poor are not knowledgeable enough about the policy intervention and, therefore, less concerned about maintaining the results of the policy once it is completed, the intervention will have a short-term impact. This is one of the concerns often raised by aid agencies (International Labour Organization, 2001). A policy intervention is regarded as sustainable in case it carries on indeterminately with no further donor involvement or support, whether it be financial or otherwise. With a greater focus on the “demand” side, this concern is more likely to be addressed. In particularly, focusing policies on capacity building of the poor in terms of educating them about their rights, public services they are entitled to receive, the role they can play in improving their livelihood, providing more information about the stakeholders involved in policy design and implementation, etc., can be conducive to poverty reduction and, hence, to sustainable development. For instance, Economic Development Institute (1996) suggests that non-governmental organizations can assist the poor to identify their needs and identify their priorities. These measures will build poor people’s capacity to demand services they need and hold policymakers accountable for their actions and policy choices. In other words, this will strengthen social accountability that relies on civil engagement, i.e. in which “the poor can participate directly or indirectly in exacting accountability” (World Bank, 2004). This mechanism can function only through the demand side approach as it operates from the bottom-up (World Bank, 2004).

It can be though argued that poor people caught in the poverty trap will be less concerned about social accountability when, for instance, they lack basic access to nutrition and clean water in the first place. Therefore, it is inefficient to consider developing soft skills of the poor until they have basic infrastructure, which would allow them to sustain their living and only then they can take a next step to improving their capacity and benefiting from social accountability. Poor people need immediate help today. Building capacity of the poor will take longer time to show its results. Additionally, the “supply” side of governance already uses certain measures such as checks and balances, administrative rules and procedures, auditing requirements, and formal law enforcement mechanisms to tackle the challenge of accountability.

Indeed, “supply” side policies aim to address immediate needs of the poor. However, the intervention can be considered successful if it is sustainable. Relying on the present-bias, i.e. immediate provision of services “today” rather than investment in developing capacity of the poor for greater results in the longer term, does not guarantee sustainability in the long run. As a result, the poor can only temporary get out of the poverty trap and then again be trapped into poverty once the intervention is completed. Empowering the poor through social accountability enables sustainable development. While the supply based approach is an intervention that is limited to provision of services only and does not spread much beyond to improvement in governance, social accountability serves a multiple purpose and, therefore, has a long-lasting effect. As such, social accountability facilitates improvement in governance, ensures development effectiveness through a more-pro-poor policy design and, lastly, empowers poor people to demand goods and services they need most. As to the accountability measures used by the “supply” side of governance, evidences suggests that “these “top-down” accountability promoting mechanisms have met with only limited success in many countries, both developed and developing” (World Bank, 2004). As a result, social accountability measures described above are preferred.

“Demand” Side Financing

Furthermore, having analyzed a number of “supply” side interventions and behaviors of the poor we can restate that it’s crucial to focus more on the “demand” side interventions. One of the main sectors covered by the “supply” side polices is a healthcare sector. Studies show that despite considerable subsidies allocated towards the supply side the access to the health care systems among the poor remains low. To address this drawback new “demand” side financing mechanisms are introduced (Schmidt, J., Ensor, T., Hossain, A. and Khan, S., 2010). These mechanisms transfer purchasing power to the targeted groups for defined healthcare goods and services. This measure is aimed to increase poor households’ access to specified goods and services. In particularly, such mechanism was applied in Bangladesh, where a maternal voucher scheme was implemented. The scheme provided vouchers to poor women that entitled them to receive skilled care at home or a facility and also provided payments for transport and food (Schmidt, J., Ensor, T., Hossain, A. and Khan, S., 2010). The evaluation of the program suggests that the take-up of vouchers was more rapid when the scheme was implemented through the “demand” side financing than previously through the “supply” based financing. Authors of the report describe the earlier implemented scheme through the “supply” side financing as an “apparent failure”, when all resources were allocated to the supply side and it was assumed that those with need will be able to access services.

While “supply” side financing schemes can improve their outreach to the poor by constructing hospitals in the remote rural areas or providing funds for transport or transport itself to reach hospitals in cities, and improving service quality, so that people can have easier access to public healthcare services. However, as practice shows that is rather challenging. Gupta, I., Joe, W. and Rudra, S. (2010)state that policymakers in developing countries have come to realize that public health services have not been achieving desired outcomes due to “a significant lack of efficiency, fairness in service provision and its quality”.

Although, the “demand” side financing can be questioned with regards to the quality of healthcare services left to the providers’ discretion, the “demand” side interventions are implemented with an assumption that service providers are responsible for the service quality assurance, and if intervention beneficiaries are left to choose from a set of service providers, it is assumed that there is a considerable number of service providers to choose from. However, returning back to the example from Bangladesh we conclude that demand-side financing schemes are more effective based on the available data, which suggests that the rise in the voucher take-up appeared to be more rapid through the “demand” side financing scheme than through other non-demand side financing (“supply” side financing) areas.

Conclusion

In the course of this essay we aimed to emphasize that getting poor households out of the poverty trap requires a greater focus on the “demand” side interventions rather than the “supply” side interventions. In particularly, we highlighted the evidence proving this argument through examples of the assumed cognitive poverty of the poor, where practitioners on the contrary bring evidence that those interventions that involve the poor in determining the quantity and quality of services they need prove to be more efficient. We also brought up the idea of social accountability that is critical not only in ensuring effectiveness and efficiency of the poverty alleviation programs, but also in improving governance and maintaining sustainability of the policy outcomes. Finally, we dwelled into a particular example of a policy intervention from Bangladesh, which aimed to provide vouchers to poor women that entitled them to receive skilled care at home or a facility and also provided payments for transport and food. The evaluation of this intervention helped us to analyze the results of both “demand” side financing and “supply” side financing. We reconfirmed that evidence from Bangladesh also proves that “demand” side policies are more effective in reaching the poor and addressing their needs.

Bibliography:

1. Azariadis, C. and Stachurski, J. (2005). “Poverty Traps,”Handbook of Economic Growth.
2. World Bank, (2004).World Development Report 2004: Making Services Work for Poor People. Washington D.C.: World Bank.
3. Regalía, F. and Castro, L. (2009).Nicaragua: Combining Demand- and Supply-Side Incentives. Washington D.C.
4. Economic Development Institute (1996).The Design and Management of Poverty Reduction Programs and Projects in Anglophone Africa: Proceedings of a Seminar Sponsored Jointly by the Economic Management Institute. Washington D.C.
5. Mani, A. et al (2013). Poverty Impedes Cognitive Function. Science, 341(6149), p. 976-980.
6. International Labour Organization, (2001).Mainstreaming Poverty Alleviation Strategies through Sustainable Rural Infrastructure Development. p.14.
7. World Bank, (2004).Social Accountability: An Introduction to the Concept and Emerging Practice. Social Development Papers. Participation and Civic Engagement. Paper No. 76. Washington D.C.: World Bank.
8. Gupta, I., Joe, W. and Rudra, S. (2010).Demand Side Financing in Health: How far can it address the issue of low utilization in developing countries?. World Health Report. Background Paper, 27.

9. Schmidt, J., Ensor, T., Hossain, A. and Khan, S. (2010). Vouchers as demand side financing instruments for health care: A review of the Bangladesh maternal voucher scheme.Health Policy, [online] 96(2), pp.98-107. Available at: http://dx.doi.org/10.1016/j.healthpol.2010.01.008 [Accessed 1 Nov. 2014].