Breaking The Vicious Cycle of Poverty
Poverty has been a subject of discussion for many centuries dating back to civilizations before Christ. Poverty has been described as the enemy of mankind. It strips people of their livelihood making them live through deprivation of life. Many nations especially developing countries have had to deal with poverty for many ages. Various reasons have been assigned to explain why people are poor in Africa.
Economists have long argued that people are poor because of low level of savings. Their argument is deeply rooted in the concept of vicious cycle of poverty. This concept holds that low productivity leads to low income, low income leads to low savings, and low savings leads to low investment and low investment to low productivity.
According to a World Bank report on Gender, Poverty and Environmental Indicators on Africa (2002-2003), the major causes of poverty vary across countries. The report stressed that the main factors behind chronic poverty in Africa is low levels of production technology, high illiteracy rates and under developed rural infrastructure. The concept of vicious cycle of poverty has dominated modern economic thinking. We believe the time has come for Africans to break away from the vicious cycle of poverty.
The irony of Africa’s problem is that, the continent is the richest continent in terms of resources in the world. According to African Kingdom Business Forum, Africa today is known from statistics to be the most resource rich continent on the face of the earth. Available statistics as at 1997 confirmed that Africa has 99% of the world’s chrome reserves, 85% of the world’s platinum reserves, 70% of the world’s tantalite reserves, 68% of the world’s cobalt reserves and 54% of the world’s gold reserves.
There is therefore no correlation between the richness of resources in Africa and the current state of poverty that pervades the continent. This situation has led civil society and social commentators to argue that it is politically wrong, economically unjustifiable, socially immoral and intellectually unacceptable for Africa in general and Ghana in particular to still wallow in the quagmire of poverty. It is in this light that Ghanaians are being called upon to embrace a new concept known as the virtuous cycle of wealth creation as a stepping stone for their economic development. This is a time-honored key to breaking away from the vicious cycle of poverty. The virtuous cycle of wealth creation draws its validation from the biblical maxim, wealth obtained by fraud dwindles but one who gathers by labor increases it- Proverbs 13:11.
The main thrust of this concept is that with a little bit of sacrifice and hard work on the part of the leadership and citizens of a nation, a low income economy can translate herself into a high savings economy over time. For an increase in savings is a prerequisite for a corresponding increase in investment.
Research has shown that there is a direct relationship between investment and productivity. With increase in investment, the productive sectors of the economy will pick up which will then translate into high income and high investment for the virtuous cycle of wealth creation to continue. The reason for this is that though a country is poor, putting a small amount of money aside as savings through the principle of compounding interest will enable such a country to be transformed from once a low-income country into a middle-income country over time.
Encouraging people to save no matter how little their income is a sine qua non for accelerating Ghana’s economic development. Experimental studies and empirical observation shows that most of the economic development that took place in the East, especially among the Asian tigers, can be attributed to a strong internal resource mobilization and a high level of savings. Just think about this. If 3 million Ghanaians decide to save and invest GH?50 a month, this is how much money we can mobilize, Month 1 =GH? 150,000,000
Assuming we invest this amount in a money market mutual fund at a rate of 20% per annum. Year 1 = GH? 180,000,000. At the current Exchange rate of ?3.94 to a dollar we should be expecting around US$45,685,279.19 in a year. We can channel this amount of money into developmental project .It is evident that we have been sitting on pure gold and crying about poverty. I believe it is more than possible for only 3 million Ghanaians out of over 27 million citizens to contribute a minimum of GH?50 every month.
On the family and individual level let see how a poor family was able to break away from the vicious cycle of poverty. A story is told of Ghanaian who hails from a poor village. His great grandparents were poor and had been wallowing in poverty for many years. Though his parents were very poor, they determined to put him through school. The first thing they did was to rationalize their expenses. They cut down on the amount of money they spent on funerals and sometimes they had to work long hours just to save enough to put their son through school. Though it was very difficult, through determination they managed to help their son complete his education. The young man is now a pharmacist and earns regular income through which he remits part to his parent back home. He has been able to support his younger sibling to complete college. From the little savings and sacrifice of his parents they have been able to break away from the vicious cycle of poverty. Poverty to them is now a vestige of the past. The time has come for Ghanaians to rise up to confront the problem of poverty.
In order to confront poverty, one needs to make a conscious effort to move out of poverty to wealth. Here are a few steps that can lead a person to wealth creation:
Increase Your Savings, Decrease Your Expenditure
Of course you might want to save more each month and you always will if you budget properly. You can make savings a category in your budget, just like water and electricity and after reviewing your previous uncontrolled spending habits, determine how much you could afford to save each month and open a savings account and start writing a cheque each month to that account.
You can also improve your savings and decrease your expenditure by practicing the following:
- Move away from poor spending habits: Make sure you spend meticulously, before you spend any amount of money ask yourself if it is really important to spend and whether the expenditure will be for an asset or a liability. An asset will usually bring more money back into your pocket while a liability will usually take more money out of your pocket. If you spend more of your earnings on creating assets you are surely on the pathway to riches.
Make a list before going for shopping, and stick to it. Avoid making any irrational decisions while making any purchases. Don't get lured by the deals and end up buying things that are not a necessity.
- Control miscellaneous spending: This turned out to be the easiest part of putting a budget together. After I saw on paper exactly how much I have been spending, I found it a simple task to divert some of that money to savings and debt reduction.
Reduce expenditures on phone calls and cut down expenditure on electricity. For instance don’t leave your lights on in the night; you may be paying electricity for eight hours while you are asleep meanwhile the light is not useful at that time. Make an attempt to reduce food been wasted in the house for example do not cook for eight people when you actually need to cook for three people, this will help prevent left overs which may end up in the dust bin.
- Postpone spending, not saving: The best way to make sure that we don't spend in excess is to transfer our money to savings during first few days of the month. This ensures that we know the exact amount we are left with to maintain our monthly expenses. Stick to the monthly saving routine. Postpone any major non-committed expenses, but not the monthly committed savings.
- Slow down on the upgrades: Do you really need to have the latest computer/MP3 player/cell phone/electronic device upgrade? How good is your existing item right now? If it's doing all that you need it to and it's running just fine, consider holding off until the upgraded version is much cheaper or just keep using what you have. If it's just about keeping up or status, then you don't need to waste the money.
- Stick to the monthly budget: Make a list of monthly expenses. Set the target amount to be saved. Distribute the remaining amount under different monthly expense heads. Stick to the plans being made. If one of the expenses exceeds the limit, make the provision by cutting down an expense. Don't accommodate additional expenses from the savings. Never fund an expense with the savings.
Breaking the vicious cycle of poverty comes with determination, commitment and discipline. There are also principles to wealth creation and the more knowledge a person has in creating wealth the easier it becomes to break the cycle of poverty.
Nevertheless each person must make a conscious effort to improve their finances and their wealth. Take a personal responsibility to be rich today!
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Omega Capital Limited is an Investment management, private equity and investment advisory firm. The Company is authorized and regulated by the Securities and Exchange Commission of Ghana.
Nana Kumapremereh Nketiah (JP)
Sophia Obeng- Aboagye
Omega Capital Research
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