(This essay was published in Hong Kong Economic Journal on 29 May 2013)

 

Last week, I indicated that poverty alleviation is a “hard problem” requiring the application of solutions that yield both short-term and long-term outcomes. In this essay I consider the nature of this “hard problem” and why poverty is difficult to tackle.

 

Tackling “hard problems” require both political support and the commitment of economic resources that can be sustained.

 

alleviation programs cannot yield lasting results by focusing on quick results. But politics is often too shortsighted. Politicians tend to throw a lot of money at a problem for the sake of getting immediate results they can parade at their next election. This leads usually to an inefficient use of resources and a failure to produce lasting results, and is often unsustainable both politically and economically.

 

Politicians who win short-term applause are typically displaced by another crop of politicians who get elected by focusing on other priorities. When this occurs, some, if not all, existing poverty alleviation programs are pushed down the priority list. Politicians seldom completely drop existing programs because this would generate political resistance. Instead they introduce new programs and allocate them priority funding in massive amounts to produce fast results, just like their predecessors.

 

Challenges of Tackling a Hard Problem

 

The idea of not dropping old problems is both a blessing and a curse – good programs are retained despite the change of politics, but bad programs continue to be funded and exert pressure on scarce resources. Numerous poverty alleviation programs go through political cycles from being the most to the least favored. These cycles are too short to make any real lasting impact on poverty alleviation. A lot of money is spent on quick solutions, but the poverty condition does not improve over the longer term. The proliferation of programs makes these initiatives a huge burden and eventually unsustainable economically.

 

Which mix of poverty alleviation policies can best withstand such a fate and make a real difference to those who are poor?  The negative income tax is a good place to start. It provides a baseline of support for all those who are poor, with the great virtue of being simple and transparent. Everybody knows how much each recipient receives and what criteria determine eligibility. This makes the economics and politics totally accountable and improves its long-term sustainability. It provides immediate relief and will be directly appreciated by the recipient. A necessary condition of course is to establish a good set of criteria for identifying who are the bona fide poor. (For a discussion of how to construct an appropriate poverty line see my three essays in HKEJ on 20 Feb, 27 Feb and 13 March 2013).

 

Some critics worry that income support may be misused by the poor on non-useful spending, for example, gambling, smoking, consuming unhealthy food, conspicuous consumption, and so on. But why should we dictate how poor people choose to spend their money? Should we not respect their liberty to decide what is best for them? It is not obvious that poor people act irresponsibly. The cost of acting irresponsibly is higher for the poor. Throughout human history the aristocrats were the ones who ran up huge debts, not poor peasants!

 

Of course one contentious issue is that the money given to the poor by the taxpayer is not an unconditional gift, but is contingent on them spending it on things the taxpayer finds acceptable. This argument is not entirely without merits, but it can be a slippery slope leading to state control over people’s lives.

 

Another method that can be used in conjunction with the negative income tax is to provide cash subsidies and vouchers for certain types of expenditure items which taxpayers are more willing to support. This would provide the poor with some income support targeted at certain types of expenditures and at the same time permit them to have some freedom to make their own choices. Examples used in Hong Kong include food stamps, transport subsidies, relief on electricity bills, kindergarten schooling vouchers, medical care vouchers for the elderly, and so on.

 

Income support, cash subsidies, and vouchers are not always used only for consumption purposes. Sometimes poor families invest in their members to increase their economic prospects. The additional income that becomes available can potentially help these families and their children to become more productive, to escape poverty, and to lead more purposeful lives.

 

But this does not always happen. For those with special circumstances like orphans, elderly individuals, the mentally and physically handicapped, dysfunctional families, or those who live in bad neighborhoods, providing cash support alone would not be enough. Individuals in poverty facing such conditions may require direct support in the form of counseling and other expert and specialized services.

 

Government Needs the Third Sector

 

Helping these poor people to come out of poverty is a “hard problem”. It requires multiple levels of interventions. First, the reasons why they are poor have to be tackled and dealt with. Second, the poor have to acquire the knowledge and skills to become productive and to lead a purposeful life. Third, they have to find opportunities to take up productive work. Fourth, they have to be accepted into a community in order to participate in and lead a meaningful life. The poor often require interventions at many, if not all, of these levels. This entails the use of many different kinds of specialized experts and social service organizations, including possibly social enterprises that help to provide them with productive work.

 

Implementing these interventions is a challenging task. Ask any counselor, social service worker, health care provider, teacher, and social entrepreneur and you will learn that it requires intensive application of time, effort and resources. Most importantly the final outcome is uncertain, including when and whether a case should be forsaken. Should government perform these tasks and tackle these problems? Since time immemorial governments have always been involved. But it is only in the last two centuries that it has become an accepted norm that only governments can do these tasks. Yet history and experience have demonstrated that governments are uniquely unsuitable to tackling such “hard problems”.

 

Why? Governments are already doing too many things. They cannot deal with so many things and still do them well, especially “hard problems” like tackling poverty. Moreover, governments are congenitally unsuited to the time dimension of social problems. Governments need immediate results for electoral victory. Social programs grow slowly with very little to show for years before they blossom, and only if they are successful. Most social programs are like risky creative innovation projects. This is mainly because their subjects are hard cases, often with unique individual attributes. Every case is a little different so while the textbook approach provides some initial guidelines, it does not always work. Very often the successful case officer is a deeply compassionate person who is willing to run the extra mile to make a small difference.

 

Moreover government is seldom willing to conduct experiments. Small-scale experimentation is an essential requirement for introducing successful social programs, which are often similar in many ways to R&D projects. And we know government is seldom good at undertaking R&D activities because it finds it difficult to start small. And once started, no matter what is the result, it finds it difficult to abandon a failed attempt. Such a work habit is almost a guarantee for failure in tackling “hard problems” like poverty.

 

Breaking Down a Hard Problem

 

The lessons from President Roosevelt’s New Deal programs provide an interesting illustration of what kinds of social programs worked and which did not. Practically all the successful New Deal programs had been previously “piloted” as small-scale experiments in states and cities over the preceding 20 years. The two New Deal programs that were total failures, the National Recovery Administration and the Work Progress Administration, were the only genuine creations adopted without any prior experimentation at the state or local level.

 

An equally important explanation for why government is unable to tackle the problem of poverty stems from the nature of “hard problems”, which involves so many different constituencies that it is difficult, if not impossible, to set specific goals and targets. Social problems have become harder over time. And they will become even harder in the future. Every aspect of the poverty problem has powerful constituencies with radically different, indeed mutually exclusive, goals and values, which practically guarantee that governments could not succeed in solving them. These different goals and values are sometimes tied into vested interests.

 

Poverty alleviation for those in poverty means that it is an opportunity to improve their life prospects. To the social worker it means helping his client to develop good work habits, enhance work skills, garner support from family members, solicit encouragement from peers, get job placement agencies to be sympathetic, and so on. To the labor unionist, it means higher minimum wages, collective bargaining rights, and trashing the capitalist employer. To the social reformer, poverty alleviation is about introducing income redistribution policies, regulating business, and launching more public entitlement programs. To the radical revolutionary, it means showing property is evil, capitalists are heartless, government is corrupt, and only a total restructuring of society will cleanse humanity of its crimes and sins so that the promise of an egalitarian society can be within reach.

 

To the government bureaucrat it is about implementing approved programs and defending them. To the politician it is about meeting the expectations of their constituencies and satisfying the demands of the most vocal voices among them. And to the intellectual who usually has no material stake in all this it is an expression of his own beliefs, idiosyncrasies, and, perhaps, guilt. Poverty alleviation has many constituents. It is no wonder it has been so difficult to tackle and almost impossible to resolve when political winds do not blow in the same direction.

 

Non-government institutions, whether businesses or institutions of the very large and growing non-profit “third sector,” can, however, direct themselves to a single objective. They can break down “hard problems” into several easy problems, each capable of solution or at least of alleviation. And because non-governmental institutions can and do compete with each other, they can develop alternative approaches. They can experiment.

 

The New Mixed Economy

 

The increasing inability of government to tackle effectively the social needs of contemporary developed society creates an opportunity for non-governmental institutions to step into the breach, especially the most flexible and most diverse of non-governmental institutions, business. Even countries organized on socialist principles will have to “re-privatize” – a term first coined by the management theorist Peter Drucker. Society will have to create conditions under which a task is outlined by government and the financing is provided by government or “third party payers”, but the task is carried out by non-governmental institutions, including businesses, and is done locally on a competitive basis. An example is the UK National Health Service which reimburses private health insurance companies that compete with each other for clients.

 

Another example is schooling, in which increasingly the task of educating young people in state-dominated systems, whose original purpose was to foster citizenship, is now carried out by a host of non-profit schools, church-affiliated schools, and proprietary-for-profit schools competing with each other and with government schools. Such “re-privatizing” is conducted in such a way that grounds the service itself in public policy and law, while leaving the performance of the task to competitive private businesses, social enterprises, and other non-governmental organizations.

 

This is likely to be the true “mixed economy” of the future. The rise of the “third sector” is driven by both economics and demographics. The ageing of the population has increased the demand for social, health and medical services; declining fertility rates have increased the demand for intensive human capital investments in the young; rising prosperity has increased our interest in helping the handicapped and the disabled; industrialization has increased our demand for environmental sustainability; and globalization and improvements in communication have increased our awareness of poverty and the demand for its alleviation.

 

This “mixed economy” will comprise a true “private sector” in which government limits itself to providing protection against fraud, unsafe work conditions and deprivation of civil rights; the concept of limited government and free enterprise would apply. There will also be a true “public sector” embracing defense and justice in which government will both specify the job and do it.  And there will be a “third sector” or the “mixed sector”, a primarily private competitive system whose income will be mostly public money that comes directly from the government via the tax system or through compulsory private contributions (such as provident funds, insurance plans, etc.). Some organizations in the “third sector” may be supported wholly or partly by private charities and corporate contributions.

 

The government’s role in this “third sector” will be partly analogous to that in the “private sector” and that is to be a referee, to enforce the rules of the game, to weed out fraud, and to maintain an open and level playing field for all non-government institutions engaged in the “third sector”.

 

The government would also provide funding. It would therefore assume responsibility for the political task of setting the policy agenda and determining society’s goals, deciding how much resources it would provide, and to whom it would entrust the funds to deliver the tasks. It would also monitor the activities of the institutions and ensure accountability in its role as a referee. Some of the reforms undertaken in the schooling sector under the Tung Administration can be seen as an attempt in this direction. The tertiary education sector under the University Grants Committee is a good example of how such a sector works and the role played by government in it.

 

Negative Income Tax and the Third Sector

 

In addition to the government’s role as referee and funding source in poverty alleviation, there is also the role we mentioned last week. And that is to recognize poverty is first and foremost a problem due to the lack of income. The negative income tax scheme is intended to tackle this problem head on as the first line of attack. Its effects are immediate and it makes a clear political statement on behalf of government. It is a low cost and efficient system to administer and has little risk of failure unless the poverty criterion is defined in an error-prone way.

 

However, a negative income tax alone does not address the causes that lead individuals and families to remain in poverty year after year and from one generation to the next. This task – the “hard problem” – has to be addressed through government support to organizations in the “third sector” and public encouragement for businesses in the “private sector” to be involved.

 

There is something more to consider. The “third sector”, unlike the “private sector”, does not operate in a realm where market choices made by client’s dollars automatically sort out the successes and failures. Organizations in the “third sector” obtain their funding from third-party sponsors rather than their clients. Assessments of success and failure therefore have to rely on “review committees” in government, corporations, and private charities. For these reviews to do a proper job the “third sector” organizations must be required to be open, competitive, transparent, and accountable through proper governance structures. Public access to information on the outcomes of these reviews would also help foster a more vibrant “third sector”.

 

Organizations that perform well in the “third sector” are those that are able to help their clients. These are likely to be specialized and possess the requisite expertise. Passion counts, but being professional matters, too. System and organizational attributes like transparency, open competition and good corporate governance would create a thriving “third sector” upon which social goals like long-term poverty alleviation will have a better chance of success.

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