Poverty, Inequality and Unemployment in Pakistan

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3 Background Paper for the IDB Group MCPS Document for Pakistan Poverty, Inequality and Unemployment in Pakistan Dr. Ghulam Muhammad Arif Joint Director Pakistan Institute of Development Economics Islamabad, Pakistan and Dr. Shujaat Farooq Research Fellow Pakistan Institute of Development Economics Islamabad, Pakistan This paper is prepared by the authors as a background study for the IDB Group Member Country Partnership Strategy (MCPS) Document for Pakistan. The abridged version of this paper has been included in the MCPS document. The views expressed in this paper are those of the authors and do not necessarily represent the views of the Islamic Development Bank Group or its Board of Governors or Executive Directors or its member countries or the Pakistan Institute of Development Economics (PIDE). Dul-Qa dah 1432H (October 2011)

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5 Contents Executive Summary vii 1. Introduction 1 2. Data Sources 1 3. Overview of Poverty and Income Inequality Situation during An Overview of Poverty Situation in Pakistan Poverty Across the Provinces Trends in Inequality A Comparison of Poverty and Inequality in Pakistan with Selected 7 Asian Countries 3.5 Comparison of Inequality Status of Achieving Poverty-Related MDG Targets in Pakistan Poverty-Inequality Nexus Growth-Poverty-Inequality Nexus Government Policies/Initiatives for Reducing Poverty and Inequality Government Past Policies Diagnostic Analysis of Binding Constraints to Reducing Poverty and 16 Inequality 4.3 Government Medium-Term Policies and Plans Main Challenges/Issues/Risks to Medium-Term Outlook Role of Donors in Poverty and Inequality Reduction Efforts Policy Recommendations for Fixing Binding Constraints Identification of Focused Areas for MDBs Interventions in Reducing Poverty and Inequality over the Medium-term 5.1 Identification of Vulnerable and Poor Regions Identification of Vulnerable and Poor Groups Islamic Microfinance for Poverty Reduction Employment Situation in Pakistan An Overview of Employment Situation in Pakistan Comparison of Unemployment Rate in Pakistan with Selected Asian 36 Countries 6.3 Status of Achieving Employment Related MDGs Growth-Employment-Poverty-Inequality Nexus Government Policies/Initiatives for Increasing Employment iii

6 7.1 Government Past Policies and Programmes Diagnostic Analysis of Binding Constraints to Reducing 46 Unemployment 7.3 Government Medium-Term Policies and Plans Related to 48 Employment 7.4 Main Challenges/Issues//Risks to Medium-Term Outlook Regarding 49 Employment 7.5 Role of Donors in Increasing Employment Policy Recommendations for Fixing Binding Constraints Identification of Focused Areas for MDBs Interventions in Employment Generation Over the Medium-Term Possibilities of Poverty Reduction Through SMEs Development by 53 Employment Creation 8.2 Vocational Training Islamic Microfinance for Employment Generation 55 References 57 iv

7 List of Tables Table 3.1: Table 3.2: Table 3.3: Table 3.4: Table 3.5: Table 3.6: Table 3.7: Table 3.8: Table 3.9: Table 4.1: Table 4.2: Table 4.3: Table 4.4: Table 4.5: Table 4.6: Table 4.7: Table 4.8: Table 4.9: Table 4.10: Table 4.11: Table 4.12: Table 6.1: Table 6.2: Table 6.3: Table 6.4: Table 6.5: Table 6.6: Table 6.7: Table 6.8: Trends in Poverty: Headcount Ratios Poverty Incidence Across Provinces Gini-Coefficient and Consumption Shares by Quintiles Ratio of Highest Quintile to Lowest Quintile Rates of Economic Growth and Inflation in Selected Countries Headcount Poverty Rates in Selected Asian Countries Gini-Coefficient, Inequality in Income or Expenditure in Selected Asian Countries Millennium Development Goal Related to Poverty Gini-Coefficient by Regions and Overall Direct Transfers and Beneficiaries Governance Indicators Infrastructure by Provinces Macroeconomic Targets (PRSP-II) Projected PRSP Budgetary Expenditures Macroeconomic Indicators Proposed PRSP Allocations, MDG Costing Estimates and Resource Gap Cost of War on Terror to Pakistan Committed and Disbursed Foreign Assistance Source and Donor-Wise Disbursements Sector-Wise Disbursements of Project Aid Pakistan s External Debt Servicing Labour Force Participation Rates and Unemployment Rates for Adult and Youth Share of Employed Labour Force in Various Sectors Employment-to-Population Ratio Among Adults and Youth in Pakistan Unemployment Rates and Employment-Population Ratio of Selected Countries Ranking of Labour Market Efficiency in Selected Countries Demographic Trends and Decent Work Issues in Selected Countries MDG Indicator of Women Share in Non-Agriculture Employment Vulnerable Employment in Adults and Youth v

8 Table 6.9: Table 6.10: Table 6.11: Table 7.1: Table 7.1: Working Poor Estimates Labour Productivity Per Hour Worked by Sector Growth, Employment, and Poverty in Pakistan Active Borrowers, Active Savers and Active Policy Holders by Peer Group Share of Employment in the Informal Sector of the Economy List of Figures Figure 3.1: Figure 3.2: Figure 6.1: Relationship Between Inequality, Poverty and Growth Real GDP Growth Rates Segmentation of Informal Employment vi

9 Executive Summary This study has reviewed the poverty and inequality situation in Pakistan. It has examined the employment situation and explored the growth-employment-poverty-inequality nexus. The relationship between growth, poverty and inequality is complex in Pakistan. During the high growth decades (1960s) and low growth decades (1970s), both poverty and inequality moved in opposite direction. The high economic growth during the 1980s contributed to a sharp decline in poverty, but accompanied by a mild increase in inequality. The fall in economic growth during the 1990s resulted in a rise in poverty while inequality decreased modestly. During the first half of the last decade, the economy witnessed a high growth and poverty declined from 34.5 percent in 2000/01 to 22.3 percent in 2005/06, while inequality increased sharply. Unemployment rate, despite high growth, did not drop sharply. Although, after 2006, no official statistics on poverty is available; however, according to unofficial sources, poverty has gone back to the early 2000s level with rising unemployment. Poverty in Pakistan is mainly a rural phenomenon. Across the provinces, poverty is highly fluctuated in rural Sindh and southern Punjab. Historically, Pakistan has not witnessed a secular decline in poverty; it has fluctuated considerably. During , the country witnessed a sharp decline in poverty and later, because of both the high inflation and slow economic growth, poverty levels are likely to have reversed and could be as high in 2010 as was in The country was on the track to achieve MDG poverty-related targets up to 2006, however, at present, the ground realities reveal that it will be unlikely to reduce poverty to 13 percent by The labour force participation rates have witnessed an increase of 2.1 percentage points during the last decade ( ). The stable unemployment rates during this period suggest that the labour force participation grew faster than the new job opportunities. Though the female participation has gradually increased; however, it is still very low. Both the youth and female are disadvantageous in the labour market with high unemployment rates and access to modest earning opportunities even during the high economic growth period ( ). While comparing with five Asian countries: China, India, Malaysia, Indonesia and Thailand; Pakistan has relatively high fluctuations in growth and inflation during period. One common characteristic among the selected countries and Pakistan is that the poverty is largely a rural phenomenon. The five selected countries have witnessed a decline in poverty over the last two decades, while in Pakistan; it has been fluctuated since The other selected countries noticed a decline in poverty in both urban and rural areas; whereas in Pakistan, it declined mainly in urban areas. Gini-coefficients show that both India and Indonesia witnessed a higher inequality, while it declined in other countries (China, Malaysia and Thailand) including Pakistan. The share of bottom 10 percent population in total income or consumption has improved in China, Malaysia, Pakistan and Thailand; whereas it declined for India and Indonesia. Regarding employment, most economies have employment-to-population ratios in the range of 55 to 75 percent; however this ratio is comparatively low (52 percent) in Pakistan. The Government of Pakistan has initiated Social Action Program during 1990s, which did not bring the desired change in social indicators. To counter the rising poverty and unemployment, the government launched Poverty Reduction Strategy Paper (PRSP) in 2003 by addressing different aspects of poverty: high economic growth; governance; investing in human capital; and bringing the poor, vulnerable and backward regions into mainstream of development. PRSP-I ( ) remained successful by achieving its pro-poor targets, while high inflation, poor economic performance and law vii

10 and order situation has counter-cycled the positive effects of PRSP-II ( ). Though the government has some narrowly targeted social safety nets programs; however, the extent of benefits to the poor from these targeted programs has not been up to the desired level. The binding constraints to achieve high growth with low levels of poverty, inequality and unemployment are political instability, poor governance, lower government investment on knowledge and skills, infrastructural bottlenecks and social and economic exclusion of poor in decision-making. One important aspect that has severely affected the development is the role of Pakistan in the War on Terror. Though a number of donors are assisting the government to improve the welfare of the poor; however, the coverage of these interventions is too limited to meet the challenges. A major proportion of foreign assistance is going to overcome the budget and current account deficits, as a result, the government is facing rising public debt especially the external debt and debt services. To ensure equal distribution of resources, there is a need to include the poor in the development stream by providing economic, social and political freedom. Agriculture is the key sector of Pakistan s economy and there is a need of intervention in the areas of horticulture and livestock to diversify the farmer s resources. In addition, a special development in terms of physical and social infrastructure is required to develop the rural non-farm sector. Rural to urban migration could be a way out of poverty toward the self-help. City is an opportunity for the poor. History has shown that poverty is eliminated in merchant cities. The ongoing demographic transition in Pakistan should also be viewed for the policy purpose as it presents the economy with a demographic gift in the form of a surge in the relative size of the working-age population. Rather than universally targeted, the narrowly targeted interventions are required especially in the rural areas of Pakistan. The households who have no land, headed by females or Zakat recipients are among the poorest of the poor households. The southern districts of Punjab and all rural areas of Sindh, Baluchistan and KPK are the poorest regions of the country with poor physical infrastructure and access to education and health services. Much effort from the government side is required to eliminate the issues related to poor governance including corruption, and nepotism. Stable macroeconomic system is prerequisite to generate sufficient employment opportunities especially for the poor. Supportive physical and social infrastructure is necessary to develop better rural-urban linkages and better integration across the regions. Micro financing can be helpful in poverty reduction and making the economy self-reliance. There are 1,613 branches of the credit services to the poor and the active borrowers are around two million. However, their outreach is not adequate as out of more than 45 million poor households, only 2 million have access to it. More importantly, microcredit services generally exclude the poorest of the poor because they lack assets necessary to have access to these services. Islamic banking can also make a positive contribution in poverty reduction by fulfilling the socioeconomic objectives of Islamic society inscribed in the objectives of Shariah. By 2007, six licensed Islamic banks and 12 conventional banks with more than 330 branches were operating compared with one bank with 10 branches in However, the Islamic banks in Pakistan are not providing microfinance services. Some non-bank Islamic institutions are providing the micro-credit services; however, their outreach is very limited in the country. For employment generation in Pakistan, it is critical to link Islamic microfinance services with the vocational training institutes by providing their graduates these services. It is suggested to form an Islamic Fund to provide microinsurance against unforeseen risks and uncertainties resulting in loss of livelihood. viii

11 Poverty, Inequality and Unemployment in Pakistan 1. Introduction The concept of inclusive growth demands for widespread expansion of opportunities so that all segments of the society can benefit from economic expansion (Osmani, 2008). The idea of inclusive growth has been commonly explained through the employment, poverty and inequality nexus. Pakistan is an interesting case to study this nexus. As Osmani (2008) has observed, since 1980 Pakistan has experienced three distinct phases regarding the relationship between growth, poverty and inequality. The high economic growth during the 1980s contributed to a sharp decline in poverty, but accompanied by a mild increase in inequality. The fall in economic growth during the 1990s resulted in a rise in poverty while inequality decreased modestly. The high economic growth during the first half of 2000s ( ) was different from the earlier episode; inequality increased sharply with rapid decline in poverty. Unemployment rate, despite high growth, did not drop sharply. By focusing on the last decade ( ), this study has first reviewed the poverty and inequality situation in Pakistan, and then it has examined the employment situation to explore the growth-employment-poverty-inequality nexus. During this period, the Government of Pakistan has developed Poverty Reduction Strategy Paper (PRSP) and the Medium-Term Development Framework. In these policy documents, high sustained economic growth is considered necessary condition for poverty reduction. However, in view of the possibility that benefits of growth do not transfer equally to all segments of the society, the poverty reduction strategy has given importance to transfer income programmes including Zakat, microfinance and more recently Benazir Income Support Programme (BISP). This study has reviewed these policies in particular to see the possible role of Islamic microfinance in employment generation and poverty reduction. 2. Data Sources This is a review study, which has drawn the data related to growth, poverty, inequality and employment from secondary sources. For poverty and inequality, the study has primarily relied on the estimates based on the income and expenditure household surveys. 1 The last such survey, known as the Pakistan Socio-economic Living Standard Measurement Survey (PSLM), was carried out in 2007/08. However, its poverty related data could not be made public. Thus, the latest available data for poverty and inequality is for the period. However, because of both the high inflation and slow economic growth since 2008, several sources have attempted to estimate poverty for the more recent years 2008 and Poverty data from these sources have 1 Pakistan has a long history of conducting Household Income Expenditure Surveys (HIES), started in These surveys were renamed as Pakistan Integrated Household Survey (PIHS) in the mid-1990s. The latest series of such surveys is known as the Pakistan Socio-economic Living Standard Measurement Survey (PSLM). However, income and expenditure module of all these surveys remained same, thus providing data for consistent poverty series. 1

12 also been included in the analysis. However, for these recent years data are not available for rural and urban areas separately. This study has used the poverty estimates based on the official poverty line methodology. It is worth noting that in 2003, the Planning Commission announced the official poverty line based on the threshold level of 2,350 calories per adult per day plus a minimum expenditure required for non-food needs. A number of developing countries follow the consumption and calories intakes where the poverty line ranges between 1,970 and 2,350 calories. 2 Poverty estimates based on the official poverty line are available for the period. Recent estimates of poverty for 2008 and 2009, as noted earlier, are not strictly comparable with the earlier estimates. Data on income distribution is also available only for the period. This study has used the Gini-coefficients as the measure of inequality, based on the consumption expenditure data. Regarding the employment analysis, Labour Force Surveys (LFS) are the main data source, available for the period. For employment (unemployment as well), the LFS uses the oneweek reference concept. Unpaid family helpers are also part of the labour force. For country-wise comparison, this report has relied on information as given in the World Development Report, UNDP, and SAARC reports. The poverty data in these reports are based on the $1.25 a day concept which is altogether different from the official poverty line methodology. 3. Overview of Poverty and Income Inequality Situation during An Overview of Poverty Situation in Pakistan For the situation analysis of poverty and inequality, this study has focused on the period. However, the decade of 1990s has also included in the analysis to put the current poverty and inequality trends in a longer perspective. Data presented in Table 3.1 show that the 1990s has witnessed a gradual increase in poverty levels, from 26.8 percent in 1992/93 to 30.6 percent in This rise in poverty was because of a six percentage points increase in rural poverty while urban poverty declined during this period. The rising trends in overall poverty continued until 2000/01 period, but this time the increase was both in rural as well as urban areas. In addition to fall in economic growth, several factors are responsible for the rise in poverty in the 1990s including political uncertainty, economic instability, and persistence of wide fiscal and current account deficits. The inflows of foreign remittances, which are believed to be one of the major factors for reducing poverty during the 1980s, also declined markedly during the 1990s. Bad weather conditions and severe droughts lowered the agriculture growth, and led to an increase in rural poverty. Urban population was to some extent successful in protecting its wellbeing level during the 1990s. Table 3.1 shows a sharp decline in poverty during the first half of the last decade, from 34.5 percent in 2000/01 to 22.3 percent in 2005/06 - a decline of more than 12 percentage points in 2 Bangladesh has 2,112 per capita; China 2,150; Indonesia 2,100; Philippine 2,000; Sri Lanka 2,250 per adult equivalent, and Thailand 1,970 (GoP, 2006). 2

13 only five years 3.The percentage of population living below the poverty line in rural areas has declined from 39.3 percent in 2000/01 to 27 percent in 2005/06 while the corresponding decline in urban areas was from 22.7 percent to 13.1 percent, suggesting that sharp decline in rural areas could not narrow the rural-urban gap; rural poverty in 2005/06 was more than double the urban poverty. Poverty estimates may vary considerably when a different methodology is applied. For instance, the data presented in Table 3.1 is based on the official poverty line methodology that uses the Consumer Price Index (CPI) for price adjustment. Using CPI for price adjustment, World Bank (2006a) shows a smaller decline in poverty from 34.4 percent in 2000/01 to 29.2 percent in 2004/05 at the national level and from 39.1 percent to 34 percent for rural households. The fall in overall poverty levels was only 5 percentage points between 2001 and 2005 according to the World Bank estimates. Table 3.1. Pakistan: Trends in Poverty: Headcount Ratios Urban Rural Overall a b b c Source: Economic Survey, Government of Pakistan, a: Interim Report (October 2008), Economic Stabilization with a Human Face, Panel of Economists constituted by the Planning Commission, Government of Pakistan. b: Task Force on Food Security (World Bank) cited in Economic Survey (p.197). c: Independent Estimates cited in Economic Survey (p.197). One of the main reasons of poverty reduction during was the high economic growth recorded by most sectors. In addition to high growth, other factors that are likely to have contributed to poverty reduction include the increased public spending especially on education, health and infrastructure (rural electrification, roads, and irrigation improvements). Overall propoor expenditures increased from 3.8 percent of GDP in 2001/02 to 4.8 percent in 2004/05 (GoP, 2005). The inflow of foreign remittances has mounted over $19 billion during 2001/02 and 2005/06 period, being an average of 4.1 percent of GDP. The contribution of remittances in economic growth and poverty reduction in developing countries including Pakistan is well documented (Iqbal and Sattar, 2005; Arif, 2009). The economy also found a large fiscal space after 9/11, when much of Pakistan s debt was written either off or rescheduled, allowing debt repayments to be used on development projects. 3 It is important to note that the official poverty estimates for 2000/01 period have been revised upward from 32.1 percent to 34.5 percent, because of some flaws in earlier estimates (GoP, 2006). 3

14 After 2006, no official statistics on poverty are available. The last HIES or PSLM was carried out in 2007/08, but poverty estimates have not been made public. The economy of Pakistan has been facing severe challenges since 2007/08 with a declining rate of economic growth, double-digit inflation particularly the food inflation, power shortage, soaring oil prices and poor law and order situation. The war on terror has also resulted to divert public expenditure from development to security. The present socio-economic situation is likely to have adversely affected the efforts for poverty reduction. The government sources consider that poverty is likely to have increased from 22.3 percent in 2005/06 to percent in 2008/09 (GoP, 2008). In 2008, the Planning Commission s constituted Panel of Economists has reported in its Interim Report that poverty may have increased by 6 percentage points from 23.9 percent in 2004/05 to 29.9 percent in 2008/09. 4 Similarly, the Task Force on Food Security (World Bank) estimated that poverty head count ratio is likely to have increased from 29.2 percent in 2004/05 to 33.8 percent in 2007/08 and 36.1 percent in 2008/09 when about 62 million people were below the poverty line (GoP, 2008). In 2008, the Report of a UN Inter Agency Assessment Mission found that food security in Pakistan in 2007/08 had significantly worsened because of food price hike. The total number of households falling into this category was estimated to be seven million households or about 45 million people in Based on the information, poverty level in 2009 appears to be in the range of percent. Poverty estimates for 2010 period are not available, but there is no real change in economic situation. Rather the severe flood in 2010 has pushed many non-poor households into poverty and numerous poor households are likely to have been pushed into an extreme poverty condition. It has disproportionately affected the poorest regions of Pakistan, southern Punjab and rural Sindh where deprivation levels are high and the infrastructure is poor. The majority of the population in these regions is highly dependent on crop income with less diversification in their sources of incomes (Arif et al., 2010). Thus, it is likely that the recent rise in poverty, as started in 2008, has continued to Historically Pakistan has not witnessed a secular decline in poverty. Rather, the poverty levels have fluctuated considerably. This has also been the case for the last decade when first the country witnessed a decline in poverty between 2000 and 2006 period. Later, because of both the high inflation and slow economic growth, poverty levels are likely to have reversed and the poverty headcount ratio in 2010 could be as high as in Poverty Across the Provinces Although, the Household Income Expenditure Surveys are claimed to be representative at the province level, the official agencies have generally avoided the estimation of poverty at the province level probably because of political reasons. The poor provinces or regions may demand more resources to arrest poverty in their regions. Moreover, explanation of large variations in poverty levels across provinces over a short period remains a challenge. The province-level poverty estimates from independent sources are available until the 2004/05 period and are reported in Table 3.2, which shows that poverty declined in all four provinces between 2000/01 4 Economic Stabilization with a Human Face, October

15 and 2004/05. However, there is a great deal of variation across the provinces in terms of percentage decline. Rural Sindh has shown a huge reduction in poverty, from 48.3 percent in 2000/01 to 28.9 percent in 2004/05, a decline of about 20 percentage points. This substantial decline in poverty in rural Sindh reversed the ranking across provinces. Sindh rural was the poorest region in 2000/01, which is turned out to be the least poor region across the country in 2004/05. World Bank (2004) attributes the highest volatility for Sindh to the severe drought in 2000/01 and exceptionally high agriculture growth in 2004/05. However, Anwar (2006) links this variation in rural Sindh over a short period with the data problems at the province level. The decline in rural poverty in Punjab was marginal, while in other two provinces, KPK and Baluchistan, it was quite small. In urban Sindh, poverty declined from 20.7 percent in 2000/01 to 13.8 percent in 2004/05. Urban poverty also declined in other provinces but the rate of decline was lower than the decline in Sindh (Table 3.2). Table 3.2: Poverty Incidence Across the Provinces, 1998/99, 2000/01 and 2004/05 Overall Urban areas Rural areas Province 1998/ / / / / / / / /05 World Bank (2006) Punjab Sindh NWFP Baluchistan Anwar (2006) Punjab Sindh NWFP Baluchistan It appears from the province level estimates that the national level decline in poverty between the 2000/01 and 2004/05 period was primarily due to substantial decline in Sindh and Baluchistan provinces. It is important to note that the highest and persistent levels of poverty are registered for KPK. Based on the official methodology, Cheema (2005) has estimated province-wise poverty levels for the 1992/ /01 period and found the cyclical nature of poverty in Sindh than in other provinces. It also suggests vulnerability of rural Sindh population. 3.3 Trends in Inequality Two measures are commonly used to examine levels and trends in inequality: Gini-coefficient and income or consumption share by quintiles e.g. the bottom 20 percent. Table 3.3 shows the Gini-coefficients and consumption quintiles for the 2000/2006 period based on three nationally representative household survey datasets (PIHS, HIES and PSLM). The inequality data after the 5

16 Table 3.3: Pakistan: Gini-Coefficient and Consumption Shares by Quintiles PIHS 2000/01 HIES 2004/05 PSLM 2005/06 Urban Rural Overall Urban Rural Overall Urban Rural Overall Gini-coefficient Consumption Share by Quintiles Quintile Quintile Quintile Quintile Quintile Ratio of Highest to Lowest Source: Economic Survey, Government of Pakistan, /06 period are not available. The Gini values show an overall increase in consumption inequality between 2000/01 and 2004/05 while during the next period of 2004/ /06 the Gini coefficients did not change. This pattern has been witnessed in urban as well as rural areas. The last row of Table 3.3 also reveals a similar trend where the ratio of richest group (quintile 5) to the poorest group (quintile 1) shows a rising gap during the 2000/ /06 period. However, the gap between the rich and poor increased in urban areas, while it declined in the rural areas. Overall, it appears from the inequality information that during the period when poverty declined Table 3.4: Pakistan: Ratio of Highest Quintile to Lowest Quintile PIHS 2000/01 PSLM 2004/05 Overall % Selected Indicators change Urban Rural Overall Urban Rural Overall in disparity 1 Literacy (Age 10 & above) Adult Literacy (Age 15 & above) Gross Enrollment Rates Primary Level Middle Level Matric Level Net Enrolment Rates Primary Level Middle Level Matric Level Immunization (Children months) Women using Pre-natal Care Women Receiving Post-natal care Source: Economic Survey, Government of Pakistan, 2007/08 6

17 overall as well as in rural and urban areas the gap between rich and poor widened. It indicates that the benefits of growth during the high growth period ( ) were relatively higher for the rich than for the poor. Inequality has many dimensions i.e. inequality in educational opportunities, inequality in health and other amenities of life. Table 3.4 shows a comparative picture on seven social indicators of bottom 20 percent population to top 20 percent population at the national as well as regional level for the period. Unlike the Gini-coefficient and consumption quintiles, the non-income inequality in terms of access to various social services has been improved faster for the poor (bottom 20 percent) in urban as well as rural areas during 2000/01 and 2004/05. As shown by the last column, the gap between rich and poor has been narrowed appreciable at the national level in the net enrollment rate in matriculation level, use of pre-natal care by women and child immunization rate. However, overall the Pakistani society is marked by high both income (or consumption) inequality and non-income inequality. 3.4 A Comparison of Poverty and Inequality in Pakistan with Selected Asian Countries The past 20 years have seen substantial progress in many aspects of human development in East and Southeast Asian countries. There has been progress not only in improving health and education indicators and raising income, but also in expanding people s power to select leaders, influence public decisions and sharing knowledge. However, these years have also seen increasing inequality both within and across countries. Countries with less human development tend to have greater inequality in more dimensions and thus larger losses in human development (HDR, 2010). For comparison of poverty and inequality, in addition to Pakistan, five Asian countries have been selected: China, India, Malaysia, Indonesia and Thailand. To give the comparison a proper context, data on GDP growth and inflation are also presented in Table 3.5. All the selected Table 3.5: Rates of Economic Growth and Inflation in Selected Asian Countries, Real GDP Growth (%) India China Indonesia Malaysia Pakistan Thailand Inflation (%) (Based on Consumer Price Index) India China Indonesia Malaysia Pakistan Thailand Source: World Development Indicator,

18 countries have witnessed a fast economic growth in terms of real GDP during the last decade; however, there are relatively larger swings in Pakistan GDP growth than the other countries except Thailand. The last four years have been challenging for all the economies across the world in terms of global financial crises, and hike in food and oil prices. However, India, China and Indonesia have maintained a moderate growth in all recent years. The second important indicator shows high inflation in Pakistan, India and Indonesia, especially after the mid-2000s. In Pakistan inflation hovered at more than 20 percent in 2008/09 and it is still in double digit. The other three economies (China, Malaysia and Thailand) have experienced relatively low inflation rates. With regard to poverty, a direct comparison of Pakistan with the selected Asian countries (China, India, Malaysia, Indonesia and Thailand) is not easy as the official poverty methodologies of all these countries are not consistent to each other. The estimates of poverty are highly sensitive to the choice of poverty line, its underlying methodology, the threshold level of calorific requirements, the determinants of the scale of household, spatial and regional prices or consumption patterns. There is no recent statistics available over these countries; however, the Economic and Social Survey of Asia and Pacific (ESCAP), 2010 has provided the statistics of poverty and inequality for all the selected countries including Pakistan except Malaysia. 5 For Malaysia, the data from Economic Planning Unit are used. As shown in Table 3.6, all the selected five Asian countries (China, India, Malaysia, Indonesia and Thailand) and Pakistan have made significant progress in reducing their headcount poverty rates. The median average poverty rates in the all six countries declined from 47.5 percent in 1990 to 18.7 percent in the mid-2000s. The decline in poverty rate was sharpest in China, Indonesia, Malaysia and Thailand (Table 3.6). The official statistics of these countries also have revealed the similar trends of poverty during the current decade. For example, both China and India have succeeded to reduce their headcount poverty rates in both urban and rural areas since 1980s. 6 A similar trend can be seen in Malaysia where around half of the country s households were living below the national poverty line up to Table 3.6: Headcount Poverty Rates in Selected Asian Countries, Country Period Initial Final China (rural) China (Urban) India (rural) India (urban) Indonesia (rural) Indonesia (urban) Malaysia* Malaysia (Urban)* Malaysia (Rural)* Pakistan Thailand Average (median) Source: UN Economic and Social Survey of Asia and Pacific (ESCAP), 2010 *Source: Economic Planning Unit, Malaysia 5 According to ESCAP, a poor is defined as individuals consuming less than $1.25 (adjusted by PPP) per day. 6 For China, see National Bureau of Statistics, China, September, For India, see SAARC Report, 2007/08. 8

19 1970. In the following three and a half decades, rapid economic growth and structural changes have transformed Malaysia into a prosperous, urban, and industrialized economy. By the end of the century, Malaysia s poverty rate had fallen below 10 percent and in 2007 to less than 5 per cent (UNDP, 2008). 7 Indonesia s poverty fell significantly during In 1998, the poverty incidence shot up due to the 1997 Asian financial crisis. The poverty incidence increased from 16.7 percent in 2005 to about 17.8 percent in 2006 due to the surge in rice prices (World Bank, 2006b). The incidence resumed a downward trend when the rice prices subsidized and the safety nets were put in place. In 2008, the poverty incidence was counted as 15.4 percent, which is still far from the ambitious target of 8.2 percent set for 2009 in Indonesia's Mid-Term National Development Plan (Heriawan, 2008). One common characteristic among the selected countries and Pakistan is that the poverty is largely a rural phenomenon. Urban poverty is almost non-existence in China and Malaysia. For India, Indonesia and Pakistan, higher rural poverty persists but relatively with less gap than the former two s. However, no uni-directional movement of headcount ratio has been observed in Pakistan while comparing it with the other selected countries. The five selected countries have witnessed a decline in poverty over last two decades, while in Pakistan, poverty based on the official line has been fluctuated since The other selected countries noticed a decline in poverty in both urban and rural areas; whereas in Pakistan, it declined mainly in urban areas, the rural poverty remained at the high level. 3.5 Comparison of Inequality All selected Asian countries have enjoyed respectable growth during the last quarter century; however, inequality remains an issue. Table 3.7 shows the Gini-coefficient and the ratio of the consumption or income share of the top 10 percent to the bottom 10 percent of the population among the selected six East and South Asian countries. Gini-coefficients show that both India and Indonesia witnessed a higher inequality, while it declined in other countries (China, Malaysia and Thailand) including Pakistan. There is more reduction in the value of Gini-coefficient in Malaysia as compared to the other countries. Across the region, there is higher inequality in rural areas of China, while India and Indonesia have more inequality in urban areas. As discussed earlier, Pakistan also has more inequality in its urban areas. The ESCAP report (2010) shows that inequality rose in both rural and urban areas of China, India and Indonesia. The ratio of the bottom 10 percent to top 10 percent also indicates the presence of inequality in all the selected countries. Since the household surveys differ in method and type of data collection across the countries, the cross-country comparisons should be made with caution. A crosscomparison in Table 3.7 shows that during the selected period (initial and final), the share of bottom 10 percent population in total income or consumption has improved in China, Malaysia, Pakistan and Thailand; whereas it declined for India and Indonesia. In India, the overall inequality appears to be static since the mid-1980s; both poverty and inequality declined in urban and rural areas during the pre-reform period ( ). After the post reform period ( ), the country has had a faster growth; however, this faster growth could not be translated into faster 7 UNDP, 2008, Malaysia, Measuring Poverty and Inequality. 9

20 Indicators Initial Period Table 3.7: Gini-Coefficient, Inequality in Income or Expenditure in Selected Countries China India Indonesia Malaysia Pakistan Thailand Poorest 10% Richest 10% Ratio of Richest 18.4 a 7 b 7.8 b 22.1 a 7.6 b 13.4 b Gini Index (overall) Final Period Poorest 10% Richest 10% Ratio of Richest 13.2 b 8.6 b 10.8 b 11 a 6.7 b 13.1 b Gini Index (overall) a. income shares by percentiles of population, ranked by per capita income. b.expenditure shares by percentiles of population, ranked by per capita expenditure. Note: The value of Human Development Index (HDI) have been calculated from life expectancy at birth, mean years of schooling, expected years of schooling, gross national income (GNI) per capita Source: Human Development Reports, various editions, UNDP. reduction in poverty, suggesting that the overall distribution has worsened at the lower tail (Osmani, 2008). There is rising disparity across the households and regions in terms of consumption, income, asset holding as well. The social hierarchy system (Hindu Varna system) is the root cause of this social and economic inequality (Hirashima, 2009). 3.6 Status of Achieving Poverty-Related MDG Targets in Pakistan The Government of Pakistan has endorsed the Millennium Development Goals (MDGs) and has set the target of halving poverty from its 1990/91 level of 26.1 percent to 13 percent by This commitment of government has been fully reflected in its MTDF ( ), PRSP-II ( ) and Vision MTDF and PRSP targets have been aligned with the MDGs. The poverty related goal has been measured in Pakistan by three indicators: reduction in headcount ratio, reduction in the proportion of underweight children of age 5 and reduction in the proportion of population below minimum level of dietary energy consumption (Table 3.8). Table 3.8 : Pakistan: Millennium Development Goal related to Poverty MTDF MDG Indicators 1990/ /06 Target Target /10 Proportion of population below the caloric based food plus non-food poverty line Prevalence of underweight children under 5 years of age Proportion of population below minimum level of dietary energy consumption Source: GoP, <20 25 n/a Current Status ( ) Lag (Worsened since 2006) Lag (Worsened since 2006) Lag (Worsened since 2006) 10

21 The country was on the track to achieve MDG poverty related targets up to 2006 when a sharp reduction in poverty was witnessed during the period in both rural and urban areas. However, at present, the ground realities and official estimates reveal that it is difficult to achieve the goals of PRSP and MTDF by 2010 and MDGs targets by First, in 1990/91, the base year for the MDGs, the incidence of poverty was 26 percent, which, because of low growth episodes, increased to 34.5 percent in 2000/01. The sharp increase in poverty of about 9 percentage points occurred between 1996/97 and 2000/01 period. The reduction in poverty by more than 11 percentage points between the 2000/01 and 2005/06 period has only offset the earlier rise in poverty. Second, though no recent poverty numbers are available, as discussed earlier, the economy has lost its growth momentum since 2008 and poverty is likely to have increased. Furthermore, the most recent catastrophic floods led to huge financial and life losses by affecting about 20 million population directly and much larger number of population indirectly. The MDG 1 also deals with the prevalence of underweight children and the population below the minimum dietary energy consumption levels. Both these indicators are also linked to the overall poverty situation. Pakistan is also lagging in these indicators (Table 3.8); therefore, it is most likely that the MTDF and MDG target for the Goal 1 (reduction in hunger and poverty) will not be met. High sustained economic growth is required for achieving the target of reduction in poverty, according to the MDG Report 2010 (GoP, 2010). 3.7 Poverty-Inequality Nexus All the East and Southeast Asian economies have succeeded in reducing poverty, but inequality remains an issue in all these countries except Malaysia. A similar paradoxical situation is present in Pakistan where it is hard to find out a relationship between poverty and inequality. During the first half of last decade ( ), both the consumption and income inequality moved in a direction opposite to changes in overall poverty inequality increased when poverty declined during the period. Gini-coefficient shows a rise in inequality in both urban and rural areas, while the headcount ratio shows a decline in poverty in both urban and rural areas. However, the consumption share of top 20 percent and bottom 20 percent population, which measure the gap between rich and poor, shows that overall inequality increased primarily due to its rise in urban areas while it declined in rural areas. It indicates an uneven growth in consumption by quintile. In other words, consumption increased faster for top 20 percent of the population (richest) as compared to the growth rate of bottom 20 percent (poorest). A similar situation was found during the 1990s, when overall consumption inequality increased between 1992/93 and 1998/99(FBS, 2001; World Bank, 2002 and Anwar, 2005). During this period, the urban inequality rose while the poverty in urban areas remained almost the same; the rural inequality declined while poverty rose in rural areas. Between 1998/99 and 2001/02, the inequality has a negative association with poverty as poverty rose in this period in both urban and rural areas, while inequality declined in terms of Gini-coefficient and the ratio of top 20 percent to bottom 20 percent (Table 3.9). 11

22 Table 3.9. Pakistan: Gini-Coefficient by Regions and Overall, 1992/ /06 Year FBS (2001) World Bank (2002) Anwar (2005) Overall * * Rural areas * * Urban areas * * *Based on Economic Survey of Pakistan 3.8 Growth-Poverty-Inequality Nexus The rise in inequality weakens the poverty reduction effect of economic growth. Income inequality and poverty affect each other directly and indirectly through their link with economic growth. 8 As shown in Figure 3.1, some of these links can be explored separately, but often one s influence causes an indirect effect on the other. For instance, inequality can indirectly influence poverty as inequality affects growth and growth in turn influences poverty. Small changes in income distribution can have a large effect on poverty (Jamal, 2006). The cross-country studies have shown that stable inequality within country over time is not sufficient to make a significant difference in poverty reduction (Deininger and Squire, 1998). Moreover, greater initial income inequality reduces future growth even after controlling for initial levels of GDP and human capital (Bridsall, et al. 1995). Thus, low inequality can benefit the poor in two ways: by increasing overall growth and average incomes and by letting them more share in that growth (Knowles, 2001). The relationship between growth, poverty and inequality is complex and multi-dimensional, and this complexity holds in Pakistan as well as other developing countries of the region. The recent and past trends of growth, poverty and inequality in Pakistan show that the average growth rate during the 1960s was 6.8 percent per annum (Figure 3.2); however, both poverty and income disparities rose during this period as this growth was mainly due to easy access to foreign aid, 8 Knowledge about the links between non-income inequality and poverty remains very limited. The studies that do exist generally focus on the effect of non-income inequality on income rather than other dimensions of poverty and suggest that income inequality also acts as a proxy for asset inequality. 12

23 Figure 3.1: Relationship between Inequality, Poverty and Growth Inequality a b Poverty Growth Source: Naschold (2002). exchange rate was kept overvalued and this growth promoted industrial rent-seeking elite only. The decade of 1970s witnessed a sharp decline in economic growth, recoded as only 4.8 percent per annum; however, urban poverty and inequality declined during this period. Again, the high growth performance was observed during the 1980s (6.5 percent on average). Although, growth in the agriculture sector remained sluggish (around 3.6 percent), the industrial sector posted a healthy average annual growth of more than 8 percent. The services sector also grew strongly in the 1980s, led by ownership of dwellings, transportation, storage and communication and wholesale and retail trade. The inflow of foreign remittances increased sharply during the 1980s (GoP, 2009). Both the rural and urban poverty declined from 30.6 percent in 1980 (25.9 percent in urban and 32.5 percent in rural areas) to 22.1 percent in 1988 (18.6 percent in urban and 24.6 percent in rural areas). However, inequality did not decrease rather it witnessed a mild increase. c Figure 3.2: Pakistan: Real GDP Growth, (%, average) s 1970s 1980s 1990s The growth performance of Pakistan during the 1990s was not encouraging; rather it is shown as the lost decade. Beside political instability, many other factors contributed in the low economic performance, including deteriorating law and order, economic sanctions in the wake of nuclear testing, persistent drought conditions, and infrastructure bottlenecks such as inadequate power supply with frequent power outages in the industrial areas, and lack of public facilities at optimal levels (Haq et al., 2007). The persistence of large fiscal and current account deficits and the 13