MEDIA & SOCIETY Inflation and Poverty Posted by on May 29, 2008, 02:32

It would appear that people are often confused over the causes of inflation with that of the effect of inflation and unfortunately the dictionary is not of significant help. When goes through this piece, one would notice the modern definition of inflation. "A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money..."

In other words according to this definition inflation are ‘things getting more expensive’. In other words, the common usage of the word inflation is the effect that people observe on a daily basis. When they notice prices in their local stores going up they call it inflation.  But what is being inflated? Obviously prices are being inflated. So this is actually "price inflation". Despite the growing volume of literature on the subject of poverty, there continues to be no consensus on the definition of the phenomenon. Nor is there even an agreement as to whether poverty is an economic concept or a social concept. Poverty as an economic concept uses monetary measures to measure well-being. Coudouel, etal. (2003)¹ indicates that when measuring poverty using monetary measures, one may have a choice between using income or consumption as the indicator of well-being. The author however thought that, consumption appears to be a better indicator of poverty measurement than income, since for example actual consumption is more closely related to well-being-having enough to meet current basic needs. This means that poverty as an economic concept lays emphasis on what the individual has in terms of food, shelter, clothing, financial and other assets.

Poverty as a social concept uses non monetary measure of well-being. Poverty as a social concept has many dimensions; subjectively defined, influenced by culture, beliefs and traditions. As a social concept, poverty is associated not only with insufficient income or consumption, but also with  insufficient outcomes with respect to health, nutrition, and literacy, and with deficient social relations, insecurity, and low-self esteem and powerlessness (Coudouel, etal.,2003). This means that poverty as a social concept puts emphasizes on the state of condition of human being that is can’t afford a three-square meal per day, excluded from society, and dies very quickly from preventable and treatable diseases.

The problem with the definition of poverty is that, there is no single one that satisfies all situations. One way to overcome this is by focusing on the indicators of poverty. Thus, poverty becomes defined by the World Bank and UNDP in terms of mortality rates, levels of literacy, per capita income, access to basic amenities such as health, safe drinking water; life expectancy at birth and so on. This approach is most useful when comparing countries in the world.

v  The lack of consensus on the definition of poverty shows that poverty has many faces and changes from time to time and from place to place.

The only clear thing about poverty is that poverty is a situation that people would like to escape from. In Sierra Leone poverty has been defined on the basis of quantitative (economic or monetary measures) and qualitative (social measures). Quantitatively, poverty has been defined with respect to the poverty line-Food/Extreme and Full Poverty lines.  According to the PRSP (2005) document, the Food/Extreme Poverty Line was defined as the level of expenditures required to attain the minimum nutritional requirement of 2700 calories per equivalent adult. This translated into an expenditure amounts to Le1, 033 per day or $1 equivalent or Le377, 045 per year per equivalent adult, as at May 2004 national prices. This means that a person whose expenditure on food fell below this threshold was considered to be food poor. Also, the average non-food expenditure (say on health, education, housing etc.) per adult equivalent around the poverty line was estimated at Le393, 633 per year for basics such as health and education. Thus, the National Poverty Line corresponds to the full poverty line of Le770, 678 per year or Le2, 111 per day per person. That is, an individual whose expenditure on food and basic needs falls below this level is considered to be poor. Thus, according to this definition, about 26 percent of the population in Sierra Leone (1,248,000) is food poor-cannot even afford the basic human requirement of food. When other basic necessities such as safe drinking water and sanitation, shelter, good health, and basic education, the percentage increases to about 70 percent. This means that in 2003/2004, 70% of the population in Sierra Leone could not meet the basic human necessities of food, shelter, good health, basic education, and safe drinking water. The Poorest (Popolipo)-those who cannot meet immediate needs, such as food, shelter, clothing and madical services; and cannot invest for the future. The Poorer (Po-pas-po)-may have some ability to meet some basic needs but not always; they are unable to invest for the future through education and savings; their credit is limited, and this gets eroded with their inability to repay. They have no houses and thus live with other people. The poor (po) - They can meet some of their daily needs including a meal per day though may not be nutritious. They can barely afford to send their children to school and have no savings. They can hardly afford the cost of medical care. 

The Better off- They tend to see well-being in terms of their ability to provide the essentials of life for themselves and their families.  They can provide good food, shelter, education, clothes and medical facilities for their families; and are gainfully employed and physically fit.  Whatever the category of the poor, the underlying fact is that they have insufficient income to meet basic requiremnets of life such as food, shelter, clothing, health and education services. In such a scenerio, inflation is a very important cause of poverty, since it reduces the amount of goods and sevices available to the poor with the same level of income. This means that infaltion does not only cause poverty, but it can worsened it.

What Causes Inflation

Basically, when the government increases the money supply faster than the quantity of goods increases the consumer experiences inflation. Interestingly, as the supply of goods increase the money supply has to increase or else prices actually go down. Many people mistakenly believe that prices rise because businesses are "greedy". This is not the case in a free enterprise system. Because of competition the businesses that succeed are those that provide the highest quality goods for the lowest price. So a business can't just arbitrarily raise its prices anytime it wants to. If it does, before long all of its customers will be buying from someone else.  But if each Leone is worth less because the supply of Leones has increased, all businesses are forced to raise prices just to get the same value for their products.

To inquire into the causes that induce governments the world over to embark upon such monetary policies is to search for the monetary theories and doctrines that guide their policy makers. Ideas control the world, and monetary ideas shape monetary policies. Several distinct economic and monetary doctrines have combined their forces to make our age one of inflation. One doctrine in particular enjoys nearly universal acceptance: the doctrine that government needs to control the circulation of money.

Many of the champions of liberalization and free trade stop short at money. They are convinced that money cannot be left to the forces of the market, but must be controlled by government. Money must be supplied and regulated by government or its central bank. That money should be free is inconceivable to typical twentieth-century man. He depends on government to mint his coins, issue notes, define "legal tender," establish central banks, conduct monetary policy, and then stabilize the price level. In short, the man on the street wholly relies on government regulation of money. But this trust in monopolistic monetary authority operating through political processes inevitably gives rise to monetary destruction. In fact, money is inflated, depreciated, and ultimately destroyed wherever government holds monopolistic power over it.

Rising world commodity prices

This is basically an exogenous factor-outside the domestic economy. This in effect is referred to as “imported inflation” to emphasize the fact that the cause is from outside the country in question.

The Effects of Inflation

It is not money, as is sometimes perceived, but the depreciation of money - the cruel and crafty destruction of money - that is the root of many evils. This is because the depreciation of money destroys individual thrift and self-reliance as it gradually erodes personal savings in real terms. It benefits debtors at the expense of creditors as it silently transfers wealth and income from the latter to the former. It generates the business cycles, the stop-and-go boom-and-bust movements of business that inflict incalculable harm on millions of people. For money is not only the medium for all economic exchanges, but also the lifeblood of the economy. When money suffers depreciations and devaluations it invites government price and wage controls, compulsory distribution through official allocation and rationing, restrictive quotas on imports, rising tariffs and surcharges, prohibition of foreign travel and investment, and many other government restrictions on individual activities. Monetary destruction breeds not only poverty and chaos, but also government tyranny. Few policies are more calculated to destroy the existing basis of a free society than the debauching of its currency. And few tools, if any, are more important to the champion of freedom than a sound monetary system. This shows that the poor are the hardest hit in an inflationary economy, since they are on fixed low incomes

In the current circumstances, the government must take an active part in controlling inflation.  Fiscal measures such as introducing subsidies on basic commodities as well as salary increase will go a long way in mitigating the effects of this “imported inflation” especially on the poor.