Intergenerational poverty has become a key issue in developing nations where poor people are stuck in a cycle of poverty. According to World Vision, 9.2% of the world’s population survives on less than $2 a day according to a research. When basic needs cannot be afforded, opportunities to achieve financial success are more likely to be withheld as the impoverished are deprived of resources that can help them with upward mobility. The inability to access resources such as adequate and nutritious food, employment, equality, safe infrastructure, and support from the government further reinforces the multi-generational effects of poverty. Professors Rahnuma Siddika and Sibbir Ahmad from the University of Illinois posit that lack of education is the biggest cause in facilitating the intergenerational transmission of poverty in developing countries. Their argument has been echoed by many governments including Malawi which declared that an educated population is integral in lifting the nation’s poverty cycle. Although domestic and foreign aid pushes for the democratization of education and the alleviation of poverty, a deeper review of the literature shows that these approaches have ultimately failed in creating effective change. This essay will prove that Foreign Direct Investment, or FDI, is the most effective solution to breaking the cycle of intergenerational poverty because money from foreign aid often goes towards corrupt governments, and domestic aid has only increased education rates in primary education but has little effect in higher education.
To begin, domestic aid fails to alleviate the impacts of intergenerational poverty because the approach from domestic governments have solely increased the education rates in primary schools. Siddika and Ahmad from the University of Illinois confirm this phenomena as they argue in their essay “Intergenerational Poverty in Developing Countries: A Critical Review followed by a Two-Stage Firoza Model”, the reason governments have been ineffective at solving intergenerational poverty is because their approaches have had little effect in providing post-primary education. The United Nations Millennium Development Goals (MDG) focuses on increasing education rates as a solution to solving intergenerational poverty (Ahmad and Siddika). The organization found that global initiatives on increasing education translated to nearly 100% primary enrollment rates worldwide (Ahmad and Siddika, 2022). Despite this, developing countries are still suffering from low secondary level enrollment. This is crucial to note because solely improving primary education rates is not enough to solve the root cause of intergenerational poverty (Ahmad and Siddika, 2022). In the 2020 report titled “Poverty and Shared Prosperity 2020: Reversals of Fortune’,’ the World Bank emphasized that primary school educated people can only realistically pursue low income, manual jobs, which keeps them stuck in the cycle of intergenerational poverty (Ahmad and Siddika, 2022). The article uses Bangladesh as a case study where, despite improvements in the rates of primary education due to the actions taken by the SDG, Bangladeshi citizens still suffered from the long lasting cycle of intergenerational poverty with 13% of its population struggling to maintain subsidence (Ahmad and Siddika). Clearly, higher education is necessary for effective change.
Secondly, foreign aid fails as instead of lifting people out of intergenerational poverty, foreign aid from governments usually only goes towards corrupt, totalitarian governments. Deaton, an economist at Princeton University said, “By trying to help poor people in developing countries, the rich world may actually be corrupting those nations’ governments and slowing their growth.” Deaton further revealed that in 2014, a shocking $135 billion of foreign aid meant for absolving poverty was not properly allocated to those in need. Author, Emmanuel Rincon of the Foundation for Economic Education, adds that foreign aid sent to developing countries will not be put into production meaning that people will never be able to overcome intergenerational poverty. The article continues by evaluating a case study in Africa which showed that although billions of dollars in development aid have been transferred to Africa; the per capita income today is lower than it was in the 1970’s. Additionally, more than 50% of Africa’s population is still stuck in intergenerational poverty, a figure that has doubled in the last two decades. It is clear from the literature written by Deaton, Swanson and Rincon that foreign aid fails to make effective changes in mitigating intergenerational poverty as there is never a guarantee that the money allocated will be spent ethically by corrupt governments.
Despite the failures of domestic and foreign aid, FDI offers tangible solutions. According to The Corporate Finance Institute, FDI involves a business decision whereby a significant stake is acquired in a foreign business. Generally, organizations undertake FDI to expand operations to a foreign location to reap benefits from lower labor costs and cheap land fees. Saul Estrin, a Professor of Managerial Economics and Strategy from the London school of Economics, reveals that increased FDI inflows provide host economies with supplies of investment that do not have to be matched by domestic savings. It increases GDP and has positive effects on employment by reducing unemployment. Examining the direct impact of FDI on wages, the OECD (Organisation for Economic Co-operation and Development) in the article, “The Impact of Foreign Direct Investment On Wages and Working Conditions” states that foreign-owned firms pay higher wages than their local competitors in developing countries. It further provides an empirical study in Mexico, the US and Venezuela, and compares average wages between domestic and foreign-owned firms. The results show that average wages in foreign-owned plants tend to be 30% higher than in domestic plants. As a result, Margarita Topalli in the article “The Impact of Foreign Direct Investments on Poverty Reduction in the Western Balkans” from De Gruyter Academic Publishing, examined the effect of inward FDI flows to countries that have comparative advantages in labor-intensive sectors. The results showed that FDI flows tend to give rise to employment by increasing jobs and median incomes which reduces poverty rates. Lastly, FDI triggers technology spillovers, assists human capital formation, contributes to international trade integration, helps to create more competitive business environments and enhances enterprise (OECD, 2002). The OECD finished their findings by saying “all of these contribute to higher economic growth, which is the most potent tool for alleviating poverty in developing countries.”(OECD, 2002) It is clear that FDI picks up where domestic and foreign aid fails.
However, Dr. Thakol Nunthirapakorn from the NIDA Business Journal in the article, “Effects of Foreign Direct Investment on the Host Country” takes a different approach. He argues that FDI faces many challenges including the use of sweatshops, child labour, sub-human working conditions, and no minimum wage which are serious issues. While it is true that no system is perfect, Morans from the Brookings Institution Press in the article “Beyond Sweatshops: Foreign Direct Investment and Globalization in Developing Countries” writes that “Although instances of harsh labor conditions can be found, senior management officials will correct them once they (and the public) become aware of them.” Although this is reactionary and not preventative, as media coverage builds so will better working conditions. From the available literature, it can be concluded that both domestic and foreign aid have failed in tackling intergenerational poverty. Not only have they been ineffective, but in some cases it has even become exploitative. Efforts in domestic aid have only increased the education rates in primary education but have had negligible effects in increasing education rates for secondary or university education. Unfortunately, primary education is not enough to break the cycle of intergenerational poverty. Moreover, instead of lifting people out of intergenerational poverty, foreign aid has been abused by corrupt, totalitarian governments as can be seen in the African case study. In the future, governments should prioritize FDI which drives more industry and provides equitable jobs to citizens of developing nations.