Poverty, inequality and unemployment

The late John F Kennedy, who was President of the United States of America (USA) from 1961 to 1963 said: “If a free society cannot assist the majority who are poor, it cannot save the few that are sick.”

The condition of the majority in countries such as Malawi is manifested through poverty, inequality and unemployment. Assisting the poor entails getting rid of these manifestations. Who is to eradicate these social handicaps?

The obvious answer is that it is the State. In developed countries, we hear of welfare States in which the government protects and assists the poor from the cradle to the grave. In developing countries, this is not easy. Even such a visionary leader as Kwame Nkrumah of Ghana was cautions about what the State could do for the poor. He said in one of his speeches:

“The welfare State is the climax of a highly developed industrialism. To assure its benefits in a less developed country is to promise merely a division of poverty. Undoubtedly, there must be an investment of proportion of the capital reserves in the establishment of minimum wage levels, to assure proper diet as well as minimum health and housing facilities.

“But poverty is progressively reduced as productivity progresses and part of its surplus can be made available in increased wages, better housing and generally improved social conditions.”

All those who glibly talk of the budget not being pro-poor should know that it takes effort to improve the position of the poor. To begin with, you must decide on priorities among the three evils: poverty, inequality and unemployment. They cannot be eradicated simultaneously. Here we must deal first with how to eradicate poverty. Where are the poor?

Studies show that people living in rural areas tend to be poorer that those in urban areas. This is the reason people usually migrate from villages to towns rather than from towns to villages. Priority should be given to rural people if we must improve the welfare of the majority.

There are two ways of reducing poverty among the poor. One is known as static. This involves transferring wealth from those who are rich to those who are poor. It is done mostly through taxation. This is not easy. Rich people do not want to be deprived of their wealth. They try to evade paying the full amount to the tax authority.

Some people under the static method of improving the position of the poor say it is either by reform or revolution. Where the rich are willing to pay high taxes or surrender some of their land, a lot can be done by reform. Where the rich are politically too powerful and refuse to give up what they own usually revolution is the only alternative. But we must talk of reforms, they cost less in the form of human suffering.

The main method of reforms is to impose a progressive tax on the wealth of the rich and then to spend the proceeds on education and health of the poor. But this works only where a country is industrialised. Where there are big companies and many people earn high incomes, companies pay corporation taxes on profits while those who earn high salaries pay income taxes.

In Malawi, the tax base is narrow because there are few companies and highly salaried people are not numerous. This is one problem. The other problem is that if progressive taxation is too high, it acts as a disincentive.

Owners of companies are unable to save enough from their profit and invest in new projects. Foreign direct investors do not go to a country where company taxation is too high. If income tax is too high, people stop working harder saying why should I earn more if the extra money will be taken away from me.

In developing countries, the main source of government revenue is indirect tax. This is tax on commodities and the money collected on imported goods is indirect tax so is the excise duty.

To ensure that these indirect taxes should not burden the poor, customs duties are collected mostly on luxury goods not items on which the poor spend their money such as food.

If the main reason most people are poor is because the country is highly undeveloped, the static method cannot succeed in eradicating poverty. You cannot distribute much where there is little wealth.

Another method under this static plan is cash transfer. Actual money is given to those who cannot do anything for themselves. These include sick and old people. But again, there must be wealth enough or else you are dividing only poverty and sharing out misery.

In each country, those in authority will be guided by what they regard as unacceptable levels of poverty. The other method of eradicating poverty is gradual but more durable. It has to be achieved through accelerating economic growth and enabling the poor to take part in development.