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IGCSEEconomicsCambridge (CIE)Revision Notes5. Economic Development5.2 PovertyPolicies to Alleviate Poverty

Syllabus Edition

First teaching 2025

First exams 2027

Policies to Alleviate Poverty (Cambridge (CIE) IGCSE Economics): Revision Note

Exam code: 0455 & 0987

Last updated

Policies used to help reduce poverty

  • The poverty cycle diagram (below) was introduced in the previous subtopic and helps to explain the causes of poverty

  • Any policy that helps to break the poverty cycle at any point will help to improve the standards of living within a country 

  • Policies used to alleviate poverty include:

    • promoting economic growth

    • improving education

    • improved healthcare provision

    • providing more generous state benefits

    • progressive taxation

    • the establishment/increase of a national minimum wage 
       

      Diagram illustrating a poverty trap, with cycles of low investment, low saving, low economic growth, low productivity, low human capital, low education, and low wages.
      Policies which help to improve any factor in the diagram will help to alleviate poverty

How different policies reduce poverty

Policy

Explanation

Impact on poverty cycle

Promoting economic growth

  • Removing protectionism or engaging in expansionary demand and supply-side policies will promote growth

  • Data shows that economic growth has a very positive impact on economic development

  • In most cases growth precedes development

  • Often in less developed countries, economic growth is linked to one industry and generates many negative externalities of production possibly resulting in decreased living standards

  • Higher growth → higher wages → better education/healthcare → better human capital → better productivity → higher income

Improving education

  • Investing in this supply-side policy increases the potential output of the country (shifts the production possibility frontier outwards)

  • Higher education/skill levels → higher human capital → increased productivity → higher output → higher income

Improved healthcare provision

  • Investing in this supply-side policy increases the potential output of the country (shifts the production possibility frontier outwards)

  • Healthier workers → fewer sick days → higher productivity → more consistent output

More generous state benefits

  • State benefits are usually given to the poorest and most vulnerable people in society

  • State benefits include unemployment and disability payments, pension payments, heating discounts, public transport subsidies etc

  • More benefits → higher wages → better education/healthcare → better human capital → better productivity → higher wages

Progressive taxation

  • A progressive tax system redistributes from those with higher income to those with lower income and reduces income inequality

  • Redistribution often starts with the provision of free education and healthcare

  • Sometimes the benefits of a good progressive tax system are eradicated by the penalties imposed through multiple regressive (indirect) taxes

  • Higher redistribution → better education/healthcare → better human capital → better productivity → higher income

Establishment/increase of national minimum wage

  • Minimum wages are set above the free market rate

  • Firms are not allowed to pay anyone less than the legal rate

  • Higher wages → better education/healthcare → better human capital → better productivity → higher wages

Examiner Tips and Tricks

The best policy to reduce poverty depends on the country’s situation. For example, in a low-income country, improving access to education, healthcare or clean water may be more effective than introducing new tax credits.

In contrast, a high-income country might focus on welfare payments, progressive taxes, or minimum wage laws to support those on low incomes. Always think about the country’s level of development and main causes of poverty when recommending a policy

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