Economics of Poverty

This essay forms part of a series, discussing Urban Development.

Dharavi: I explore the Pros and Cons of Slum Living in Mumbai, India and come to an unexpected ultimate conclusion.

Is Development always good?: The motivations of development and exploring the line into overdevelopment.

The Pros and Cons of Globalisation: The impacts that Globalisation causes.


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In your opinion, has globalisation benefited the global economy?

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Globalisation, of course, has its flaws. Economic globalisation was invented by companies in order to save money, and so companies use it at its maximum money-saving potential. Unfortunately, this means workers in LEDCs and NICs get a rather worse deal than workers in MEDCs, usually in squalid conditions, working for very little and for very long hours. This is due to the fact, as previously mentioned, that their labour protection laws allow it and that, the cheaper they work for, the cheaper the TNCs can sell their products for, the more products the TNCs sell, and so the more money the TNCs make. This is often blamed on TNCs, quite wrongly. Companies exist to make money for their shareholders; it is unfair and illogical to expect them to do anything else. We should be thankful to these TNCs that they exist, that people have the motivation to make them work, rather than opting for easier jobs. Without TNCCs, we would be getting our products for a whole lot more, and a whole lot of people in poverty in LEDCs and NICs would not have a job. TNCs are a force for good, and if we ask too much of them, they will become uncompetitive with other companies, and go bust, and then those poor workers will suddenly not have a job at all, we will be without our cheap products, and all in all we will all be far worse off than we are now. Of course, it would be wonderful if they were a whole lot better. If TNCs could be certain that just as many people would buy their products, even if they had a significant increase in prices, rather than going to other companies, then they could assure their workers better pay, better hours, better conditions, better pensions, etc.. But they can’t; a good example of this is fair-trade, which is a group of companies that treats their workers more humanely; but, although fair-trade is morally better, it still takes up only a very small market share. The ideal would be if every company in the world signed an agreement not to pay their workers below a certain limit, or not to have them work more than an agreed amount of hours a day. But they would never agree to that; if just one company stayed out of it, it would have a monumental advantage over the other companies and the others of the same type would go bust within a few weeks. Even if not a single company stayed out, there would always be the fear that one would stay out, so they would never agree. Perhaps it would be better if governments forced all companies to accept these constraints. But, again, if just one country decided not to do this, its companies would have a monumental advantage over every other country’s companies. Any government might want to do this as it would give a boost to the economy, which is always good for attracting votes, and would also mean the government would raise more money with tax. And, again, even if not one country stayed out of the agreement, there would always be the fear that one would, or that one would break the agreement, so no countries would ever agree.

So, attacking companies is not the way to go about lifting workers in LEDCs and NICs out of poverty. What is? Lifting the minimum wage is the obvious solution, but it would be a very crude way of going about it. If companies were forced to pay workers in Indonesia too much than in Myanmar (only examples), they would immediately just move their production to Myanmar. That would only work if every country in the world agreed to have minimum wage set at the same level; and, as previously demonstrated, they would not.

A better way to go about it would be to increase education standards. With an education, children can go on to higher-skilled jobs, tenants of which are rarer, so are paid more and valued more, so are given better conditions to work in. However, the problem with this is that children in LEDCs are often so poor they have to work, or else their families would not have enough money to live on. So, increasing education standards is all very well, but education is unlikely to be used to its full potential, if it is improved. Also, doing this costs money, something LEDC governments are very short of, partly due to the debt crisis – in order to fuel development in their countries, many LEDC governments borrowed huge amounts from MEDC governments, which they are still struggling to pay back due to plans gone awry. It is also partly because they cannot collect as much tax from their deprived populations, partly because of poor economic management, and partly because they have simply not been around for so long (so have not had as much time to build up reserves). Lastly, it is also partly because of the process known as the ‘brain drain’: as soon as LEDCs have educated workers enough so that they can easily get a job with good wages, they often immediately move to an MEDC (for obvious reasons), and so the LEDC is really worse off than it was to begin with, having spent so much on educating the workers only to get nothing out of it.

There is a lot of work that can only be done by charity here. By ensuring that families receive basic rations of food, sanitary equipment, and similar, which would not cost a huge amount by our standards, they would be releasing these people to send their children to school, and so freeing them from the cycle of decline. It is dangerous to rely overly on charities, which after all survive on rich people’s good will, and whose success is hugely variable from month to month, but there is not much of any other option. It would also help immeasurably for MEDCs’ governments to cancel some of the debt owed to them by LEDCs; without this debt, LEDCs will be far better equipped to spend money on public services and to start handing out benefits to the poor.

It is perhaps good, in some ways, that there is no feasible instant solution, like increasing the minimum wage, or passing an international law to ensure good working conditions, for the simple reason that our Western society has now become accustomed to getting its things for low costs, and to get conditions up to our standards would mean a hugely significant price rise in just about everything we buy. Our economy is not ready for a huge shock such as this, especially just after a recession, and never will be. Just think: a shirt which had been worked on for an accumulated time of 10 hours over all the workers, for a rate of 30p an hour would cost £3, ignoring costs of materials, transporting, and the rest. Increase this rate to £7 an hour, our minimum wage, and suddenly your £3 shirt costs £70! And it would not just impact clothing; it would hit everything – the fact is, the cost of living would suddenly rise to such a level that current pay levels would not be enough. Companies supplying jobs in MEDCs would have to start paying their employees more or the employees would not have enough to survive on, and would have to search for another job. This salary rise in the Western world would lead to an inflationary spiral, which would wreak havoc on the world economy, and anyway mean that the workers in LEDCs and NICs would have gained nothing at all in real, relative terms (there is no point getting a £10 price rise if everything has increased in value by £10).

A good thing about this is that it will, eventually, sort itself out by itself. TNCs supply jobs to workers in LEDCs and NICs for more than they would get working in alternative situations, as they would have done if the TNCs hadn’t existed. They have to, or they do not attract the workers. This means that every person who works in a TNC has more money to spend than before. This is a good thing in itself, and it also means that people can more easily set up businesses of their own, which can supply more jobs. In fact, they can do this doubly easier, as they have the extra money, and also there is more of a market for everything as so many other TNC-employees have the extra money as well, so they can buy your goods. So, far from making it difficult for small, start-up companies to be founded, TNCs are making it easier. There is another point as well. As more and more TNCs look into basing themselves in LEDCs and NICs, more and more companies start competing for the same workers, so individual TNCs have to start paying their employees more, giving them more reasonable hours, and putting them in better conditions than the other TNCs offer to ensure that the best employees wan to come to them. As more people start to have more money, either because of the jobs TNCs offer, because of the jobs offered by local companies made possible by TNCs, or because of the increase in wages competition for workers induces, it will become easier for children to go to school. If children go to school, they will be able to earn the qualifications they need to go into a job of skilled labour, so they will have higher salaries as well. As all this happens to more and more people, the government can collect more money via tax, as there is more money exchange, and governments tax you every time this happens. This means governments can then pay off the debt quicker, and invest more money into schools, benefits, healthcare, transport, and everything else, improving everybody’s lives. TNCs have started off a virtuous circle. Of course, this circle does not solve the income disparity, which is of course the title of the essay. TNCs will always make sure they have the same amount of profit; so, as wages in LEDCs and NICs rise, the costs of things in MEDCs will rise. But it does boost wages in LEDCs and NICs, which can only be a good thing.

But, although we shouldn’t attack TNCs, there are things we can do. It would be counter-productive to stop buying products made in LEDCs and NICs; then, those workers would have no jobs at all. But we can encourage those which make an effort to be more humane, by buying fair-trade, or from companies with a specific code of conduct. If companies start to see that we prefer buying form humane companies, and that being seen in a morally good light is marketable, more will follow, and join these groups. We can also encourage MEDCs, which do not really need the money anyway, to drop the debt of these countries, so that LEDCs and NICs can easier invest into education.

So, to conclude, TNCs are a force for the good, and we should not attack them. They will, eventually, bring millions out of poverty by contributing to the global economy. But we can encourage them to be better. Also, there is little governments can do. But they will be able to do a little, in dropping debt and international aid, and we must also encourage this. LEDC and NIC governments can also increase minimum wage by small amounts. They must not do it too quickly, or they will lose all their country’s jobs – they must be following the trend, not leading it – but, there are many jobs where it would be impractical for employers to move to a country with a lower minimum wage, and there are also many jobs which rely on people who are desperate for a job quickly, no matter how high the wages, people who are isolated so cannot strike or demand higher wages, nor have the time to look elsewhere. A fact always hard to face: there is nobody to blame for this present situation to ourselves. It is all very well complaining to TNCs, but until we show them that we are truly committed to the cause, they are simply unable to do anything.

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Comments 2 comments

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psychicdog.net 4 years ago

Common sense hub - the reality in my experience is that business development leads to more development and a better economy for all - as you say if TNCs can supply jobs/are not restricted by over government - this has a flow on effect which creates more opportunity for people to be self-employed and create work for others -everyone is better off and less restricted. Also big business are often more morally advanced and do indeed provide a great deal of charity through donations to church and other groups - it is a misnomer to think they are not open to charity.


Rain 23 months ago

Haha, shouldn't you be charging for that kind of knoeledgw?!

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