Breaking the Poverty Cycle

Last week, I expounded upon the difficulty facing the Grand Valley in the form of unmanageable housing prices. During that exposition, I decided it would be good to write an entry about the poverty cycle and the difficulty one can face in trying to break it. Developing economies have been dealing with this problem much more in recent years than developed economies. A developing economy, for those unversed in the jargon, is any nation that cannot sustain a decent standard of living according to the World Bank and the World Health Organization. People in these countries face extreme challenges when it comes to development and securing financing for any kind of activity, the importance of which was enumerated in my blog for the week of August 23rd. So not only do developing countries face credit default risk on an enormous scale compared to developed countries, but also ready to rear its ugly head at any moment is the risk of political instability because of deteriorating economic conditions. Since these economies are well familiarized with what it takes to break the poverty cycle, looking at them for clues is one of the best things to do for poverty in our country as well.

One of the things that development economists notice right away is the lack of profit incentive for many people in impoverished nations. In many cases, poverty comes from a lack of drive in the impoverished spirit to make a better life for oneself and for one's family. Another reason for the lack of profit incentive is usually massive amounts of government corruption so that any significant gains made by business for their profits is quickly eaten away by people who rationalize their bad behavior because of their own poverty-stricken circumstances. Combined with a populace that is indifferent and complacent in the face of such graft, businesspeople cannot help but feel like they need to engage in illegal behavior to make their business successful. Therefore, one of the first ways to get rid of poverty is to put in place and enforce a governance structure that creates incentive for people to produce things that build up society in some way, rather than tear it down. The easiest way to do that is to provide avenues for civic engagement that are not exclusive, but are inclusive. The more people get together with the purpose of solving the problem of poverty in an area, the more likely it is that they will be able to come together with common purpose to collectively solve their problems. Democratic exercises are very helpful for achieving this goal, but are not entirely necessary. In some cases, they can lead to witch hunts that demonize the rich for political ends and that is not very helpful for generating a wealthy society. But on the whole, democratic processes are much more successful at generating wealth in a way that is just and fair for everyone.

When looking at how developing countries break the poverty cycle there is a virtuous cycle consisting of three things that benefit the country as a whole and help people within that country break the poverty cycle. These three things are first foreign direct investment, second government fiscal conservatism, and third education and training. Once a country, or for the sake of argument a specific geographic area or people group, identify and acknowledge that they are indeed living in poverty and need to find a way out will soon realize that the quickest way out is to utilize these principles in achieving their goal. There is no quick way to building riches, whether it is for a country or for a person. The people who are in poverty often see others getting ahead while they lag behind. Rather than looking at their own situation and responding to that, there is a kind of keeping up with the Jones' mentality that takes hold where they feel pressure to consume more than they are able. This kind of mentality is quite destructive of the wealth-generating capacity of these individuals.

The first thing that most quickly breaks the poverty cycle is to get help from people and countries that have already done so. Think about it. The first thing that someone who wants to get out of poverty should do is ask for help. Certainly, they need to be shrewd about the people they ask, but for the most part people and nations that learn from others who have done well will be on the path to doing well themselves very soon. Likewise, those who do not learn from others but rather sit in isolation are going to find there is no way to go faster to the bottom of the economic food chain than to stick your head in the sand. Our world is constantly changing and in order to remain competitive, someone has to be open to the possibility that the way they live will not always be sustainable. For some people, taking on a loan is not really that much of a problem because they are so well versed in taking risk that they can handle it. Others may not be so eager to put themselves in that situation because their capacity to escape from it has not been developed yet. Either one is doing the right thing as long as they are making sure that they are going to be successful in their plans.

The next step to breaking the poverty cycle on an individual basis is to live within your means. There is nothing quite so difficult as living within your means in America. In this place where we are constantly barraged with messages to consume and consume, it is difficult and not very popular to create a situation where you want something that you can't have. Unfortunately, our society places a high value on consumption and not enough of an emphasis on production. This has led to many people being overwhelmed with the debt burdens that have been placed on them as a result of this mass encouragement to consume. As stated previously, consumer debt is one of the most frequently abused kinds of debt because there are few instances where it is likely to reap positive rewards. For a short time, the products one can buy with consumer debt are nice to have, but for the most part they cannot be considered assets that increase the bottom line of households. Instead, they create a drag on the income and cause things one buys to cost more than they really do.

The same way that governments take on massive amounts of debt in order to finance their operations, there is nothing that is sure to lead to a poverty-stricken country than to have the government take on more debt than they can chew. Government debt is very much a different animal because of certain institutions that we have in place, but for countries in Africa and Latin America, just ask them how the government debt has improved their lives and you will find that very little of it has in the long-term. Likewise with personal debt, the more one tries to carry the more of a load you have. Ask anyone who has declared bankruptcy how difficult it is to escape from the trap of debt and you will not have any reason to doubt the devastating effects it can have on one's life and reputation. Mesa County has been blessed with a government structure that is very fiscally conservative and allows us to enjoy a greater amount of prosperity than areas faced with mounting debt burdens. One of the reasons why Mesa County and the City of Grand Junction have a low debt load is because many of our civic leaders are also business leaders in the community. While this can be frustrating in some aspects, it is beneficial when trying to get a leader to understand how important keeping a low amount of debt can be. At times our public officials have faced ostracism for proposing projects that take on large amounts of debt, (the latest public building project is proof of that), and despite those factors governance mechanisms within Mesa County are still able to function.

So eventually if you follow all three of these rules, it is possible to break free from the cycle of poverty that grips a significant group of people in this country so famous for its opportunities. I hope this helps some of you out there. For next week's topic, I will be examining why fix & flip real estate strategies work or don't work. I am looking forward to a little research on this one so let me know if you have any good tips. Until then...