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

24 associated buildup of public and external debt emerged as the major source of macroeconomic imbalances during the 1990s (Din, 2007). As discussed earlier, that both poverty and inequality increased during 1990/91 and 1998/99 period, while inequality moved to opposite direction of poverty during when poverty rose and inequality declined. During the first six years of 2000s when the Government of Pakistan launched its PRSP programme, the growth performance was impressive, about 6.2 percent per annum on average, matching the growth of 1980s. Fiscal deficit was reduced and debt ratios witnessed an improvement with stable exchange rate and rising foreign reserves. As discussed earlier, the poverty declined by 12 percentage points in five years (2000/01 and 2005/06). However, Pakistan could not succeed in reducing inequality during the fast growth periods when poverty reduced sharply. It suggests that growth may take much longer period to trickle down to the poorest of the poor. 4. Government Policies/Initiatives for Reducing Poverty and Inequality 4.1 Government Past Policies Pakistan has a long history of poverty reduction policies including the Social Action Program of the 1990s, which did not bring about the desired change in social indicators. The government took a serious view of the rise in poverty during the 1990s, and launched the Interim Poverty Reduction Strategy Paper (IPRSP) in November 2001 focusing attention on the primary objective of reducing poverty and restoring economic stability. The full PRSP that was launched in December 2003 for three years outlined a well-structured strategy for poverty reduction, with four pillars addressing different aspects of poverty: high economic growth; governance and consolidating devolution; investing in human capital; and bringing the poor, vulnerable and backward regions into mainstream of development, and to make marked progress in reducing existing inequalities. To ensure the availability of resources, the government was under obligation to protect PRSP expenditures at around 4 percent of the GDP. For the revival of economic growth, the PRSP-I ( ) identified five major areas, namely, agriculture, small and medium enterprises (SMEs), housing and construction, information technology and telecommunication and exports. It is well established that poverty is highly conditioned by the governance factors. To improve the governance, several steps were initiated in the PRSP-I including the devolution of power to the grass roots level and decentralization of administrative and financial authority. The PRSP-1 also focused on education, health, nutrition, population programs, water supply and sanitation, employment and gender related reforms. To transfer income to the poor, several targeted programmes including Zakat, Bait-ul-Mal and microcredit were also part of the PRSP-I. The PRSP-I envisages that all these measures will help revive economic growth and will reduce poverty in the medium-term. Results point to the right direction. The reforms led to improved economic indicators, moving real GDP growth from 3.1 percent in 2001/02 to 9.0 percent in 2004/05 surpassing PRSP targets for the said years and maintaining a striking average growth rate 14

25 of 7.0 percent over the four years period (2003/ /07). As reported earlier, poverty reduced sharply during the PRSP-I period. After the completion of PRSP-I, PRSP-II was launched for the period of The Strategy is built upon nine pillars: (i) Macroeconomic Stability and Real Sector Growth; (ii) Protecting the Poor and the Vulnerable; (iii) Increasing Productivity and Value Addition in Agriculture; (iv) Integrated Energy Development Programme; (v) Making Industry Internationally Competitive; (vi) Human Development for the 21 st Century; (vii) Removing Infrastructure Bottlenecks through Public Private Partnerships; (viii) Capital and Finance for Development; and (ix) Governance for a Just and Fair System. Targeting the poor and vulnerable, which has been integral component of both PRSP-I and PRSP- II, includes some narrowly targeted interventions of the government to transfer benefits directly to the poor. However, the extent of benefits to the poor from targeted programs has always been in some doubt. Few programs have been reviewed here. The amounts transferred under these programmes and their beneficiaries are given in Table 4.1. Social Protection Budgetary Transfers Benazir Income Support Programme (BISP) With a view to cushion the sharp rise in oil and food prices, the BISP was launched in 2008 to provide cash assistance to the identified vulnerable and enabling them to exit the vicious cycle of poverty in the shape of the cash grant of Rs. 1,000 per month. This strategy also includes imparting training to one member of each vulnerable family to sustain it. This programme has aimed to cover almost 15 percent of the total population or 40 percent of the poor (GoP, 2010). Punjab Food Support Scheme (PFSS) Table 4.1: Pakistan: Direct Transfers and Beneficiaries Expenditures (Rs. million) 2008/ /10 Beneficiaries Expenditures (000) (Rs. million) Beneficiaries (000) BISP 15,800 1,760 32,000 2,290 PBM (all Programmes) 3,432 1,159 2,261 2,110 Punjab Sasti Roti 1,900-8,000 - Non-Budgetary Transfers Zakat (all Programmes) 2,877 1,085 2,874 1,289 EOBI 5, , WWF 2, , Microfinance 28,669 1,939,050 (loans) 33,775 Total (excluding microfinance) Source: PRSP, Annual Progress Report, 2010, Finance Division 1,966,457 (loans) 31,880 4,357 54,010 6,070 Like BISP, PFSS was initiated by the Government of Punjab in 2008 to provide food stamps for the poorest households with a cash grant of Rs. 1,000 per month per household. This programme 15

26 aims to target those households that do not have a bread earner such as widows, orphans and destitute, chronically sick and disabled persons, elderly persons who have been abandoned by their family and the poorest of the poor segment of the society. So far, about Rs billion have been disbursed among the 1.8 million families residing in Punjab province (GoP, 2010a). Pakistan Bait-ul-Mal (PBM) Pakistan Bait ul Mal (PBM) disburses more to the destitute, needy, widows, orphans, invalids and infirm irrespective of their gender, caste, creed or race. PBM provides assistance under different programmes and schemes such as Food Support Programme (FSP), Individual Financial Assistance (IFA), Institutional Rehabilitation through Civil Society Wing (CSW), National Center for Rehabilitation of Child Labour (NCRCL), Vocational Training Institutes/ Dastkari Schools (VTIs) and many others. PBM disbursed relatively less amount in 2009/10 as compared to 2008/09 with a decline in number of beneficiaries by 22.8 percent (Table 4.1). The decline in disbursements and number of beneficiaries is caused by the merger of Food Support Scheme, a major component of Pakistan Bait-ul Mal into Benazir Income Support Programme since Zakat Zakat provides financial assistance such as Guzara Allowance, Educational Stipends, Health Care, Social Welfare/ Rehabilitation, Eid Grants, and Marriage Assistance through Regular Zakat Programme and other Zakat Programmes and National Level Schemes. A slight decrease in Zakat disbursements and a significant increase in beneficiaries were noticed in 2009/10 compared to 2008/09 (Table 4.1). Microfinance Microfinance is one of the major targeted interventions to address poverty by enabling the poor to become self-employed. Microfinance comprises microcredit, micro savings and micro insurance. Loan portfolios of the institutions like National Bank of Pakistan, first Microfinance Bank, Khushhali Bank, First Women Bank, Pakistan Poverty Alleviation Fund, NRSP and Provincial RSPs play an important role in augmenting government s strive for poverty alleviation (GoP, 2010a). Poverty targeting is intrinsic in these programs because it is commonly argued that the affluent would not find the smaller sized loans befitting to their social standing. Only poor will opt for becoming its members because microcredit programs are designed to cater only their needs. The small loans are also better suited to the repayment capacities of the poor. Progress of the microfinance sector in Pakistan as given in Table 4.1 for 2008/09 and 2009/10 shows an upward trend both in terms of active borrowers as well as disbursed amount. 4.2 Diagnostic Analysis of Binding Constraints to Reducing Poverty and Inequality Pakistan has not experienced a secular decline in poverty for a longer period, it has rather fluctuated overtime. The growth, poverty and inequality nexus in the past could not work in right direction to achieve high growth with a reduction in both poverty and inequality. The rise in inequality has weakened the relationship between growth and poverty in Pakistan. The poor and vulnerable population has generally been at disadvantage to reap the benefit of high economic growth. In addition to the current economic crunches of inflation and unsustainable current 16

27 account and fiscal deficits, the following are the major barriers for sustained growth and poverty and inequality reduction Law & Order and Governance The rising militancy during the last few years has adversely affected every Pakistani by creating an overall uncertainly which led to capital flight, lower investment, and decline in FDI. It has also limited the government capacity to spend on pro-poor expenditures due to a massive spending on anti-terrorism campaign during the last four years. The institutional dimensions of governance uncover a negative and significant association between rule of law and poverty (Haq et al., 2007). At present, the state of governance in Pakistan is a serious impediment in the way of growth and poverty reduction efforts. Global Competitiveness Index (GCI) is a comprehensive measure of a nation s competitiveness based on 12 indicators: Pakistan s overall ranking deteriorated in last few years; it was 91 out of 125 countries in 2004/05 and it went up to 123 out of 139 countries in 2010/11. As shown in Table 4.2, the problematic factors for doing business in Pakistan are corruption, government instability/coups, policy instability, inflation, inefficient government bureaucracy, and crime and theft. However, Pakistan has significantly improved in judicial independence. Corruption has been adversely influencing the economic activities and resource management. The latest transparency survey (2009) assigns Pakistan a score of 2.4 out of 10 and ranks it 139 th out of 180 countries. Indicators Table 4.2: Pakistan: Governance Indicators, 2010 Index Judicial independence 74/139 Irregular payments and bribes 117/139 Property rights 107/139 Favoritism in decisions of government officials 87/139 Business cost of terrorism 138/139 Organized crime 127/139 Source: Global Competitiveness Report: Education, Technology and Health At the macro level, the share of high technology intensity product in Pakistan is small. As per Global Competitiveness Report 2010/11, Pakistan ranks 76 th on the innovation index out of 139 countries, reflecting a poor level of innovation. Pakistan is hardly spending its 2 percent of GDP on education (World Economic Forum, 2010). At the micro level, the incidences of poverty are highly linked with the literacy and educational attainment of household heads. In the Pakistan Poverty Assessment (PPA), education was found to be the most significant factor distinguishing the poor from the non-poor. These educational differences also explain the poverty gaps between the rural and urban areas, consistent with the idea that literacy is likely to have higher returns in urban areas (Jafri, 1999 and World Bank 17

28 2002). Education and skill levels are directly related to employment. The poor usually have low levels of skill and can only find employment in low-paid jobs. Health has commonly been related to the incidences of poverty and change in poverty status (Hussain, 2003). Unfortunately, the Government of Pakistan has not been successful in allocating sufficient resources for the health sector, as it is stagnant on only 0.6 percent of GDP. Most of the poor households suffer from ill health and are forced to bear the high cost of medical treatment. Illness is often a catalyst in pushing households deeper into poverty and, thus, ill health and poverty are linked in a vicious cycle Landlessness, Farm Assets and Tenure Patterns The ownership of land is highly unequal in Pakistan, which is one of the major barriers to poverty and inequality reduction in rural areas. Less than half of all rural households own any agricultural land, while the top 2.5 percent of households account for over 40 percent of all land owned (Gazdar 2004; World Bank 2002). Within the rural areas, Malik (2005) found relatively higher land inequality in poor districts located in the cotton-wheat belts of southern Punjab and Sindh. Land is often sold to cover urgent consumption needs, marriage expenditure, and health expenditure. This depletion of productive assets has an adverse impact on the poor in terms of their future stream of income, and reduces their probability of escaping poverty (Hussain, 2003). Gazdar (2004) also observed the unequal distribution of farm asset ownership (other than of land) among cultivating households. Even though the incidence of sharecropping has declined over time, there are still many rural households that cultivate land as share-tenants and poverty is higher among them (Anwar, et. al. 2005; SPDC 2004; and World Bank, 2002) Power Structures in Rural Areas The civil and military bureaucracy, political and religious forces, landed rural elites, and caste, biraderi (clan), and ethnicity are among the most important pillars of the prevailing power structure in Pakistan (Hooper and Hamid, 2003). The highest and persistent levels of poverty occur in those rural areas of Pakistan which are traditionally considered feudal, such as rural Sindh, southern Punjab, and the tribal areas of Khyber Pakthunkhawa (KPK) and Balochistan. In rural areas, landed elites have a decisive influence not only on the social and economic life of residents, but also on local, as well as central and provincial decision-making power. Size of landholding is regarded as directly proportionate to power, and the landed elites in Pakistan enjoy more power than its Indian counterpart. The dependency of the poor on local power structures takes a variety of forms. Distortions in the input and output markets functioning against the poor tend to generate poverty in rural areas (Hussain, 2003). Tenants as well as small farmers who cultivate their own land, generally have to pay relatively high prices for inputs while receiving relatively low prices for outputs as compared to large farmers. At the same time, the lack of access to formal credit markets often forces poor tenants to borrow from their landlord. This generates a form of bonded labor and tenants are sometime obliged to work on their landlord s farm at less than market wage rates or even without wages (Arif, 2004; and Hussain, 2003). Landlords may also exert control over watercourses, which influences their relationship with their 18

29 tenants because it provides the former with absolute control over cultivation (Hooper and Hamid, 2003) Doing Business in Pakistan The World Bank report of Doing Business 2011 shows that doing business in Pakistan is quite difficult, the rank of Pakistan for ease of doing business is 83 out of 183 (World Bank, 2011). 9 The cost of starting business is significantly above those observed in South East and East Asian countries with a rank of 85 th out of 183 countries. Similarly, in case of Enforcing Contract cost is also very high in Pakistan. It also ranked lower in terms of registering property in Getting credit has also become more difficult in Pakistan; if the government does not introduce reforms particularly in employing worker, paying taxes, and enforcing contract, then it would not attract investment, which is necessary for high growth and poverty reduction Poor Infrastructure Qayyum et al. (2007) consider that quality of infrastructure in Pakistan is not a binding constraint as indicated by Global Competitiveness report 2006/07 that is 3.4 and is equivalent to that of China (a high growth performer), and is better than that of Indonesia and India. 10 However, the recent Pakistan score declined to 2.8 as compared to India with 3.5, Indonesia with 3.6 and China with Regional Inequality in Public Provision and Infrastructure Public provision of social services plays important role in the capabilities development and leads to decline in income poverty. Similarly, social overhead capital is a necessary input in the structure of production and poverty reduction (Hirschman, 1958). If inequality between provinces and districts rises above a certain threshold, it can trigger a violent conflict which, in turn, can lead to decades of reduced growth and rising poverty (World Bank, 2006c). As shown in Table 4.3, there is higher inequality across the provinces in terms of physical and social infrastructure. The Punjab province has better ranking, while the two provinces, KPK and Baluchistan are poor by all infrastructure indicators. Even within Punjab and Sindh, the rural Table 4.3: Pakistan: Infrastructure by Provinces Physical Infrastructure Soft Infrastructure Province Distance to Metal road<1 Electricity Soling street Drain Piped water Educatio n Ins. Health Ins. Overall Punjab Overall Sindh Overall KPK Overall Baluchistan Source: MOUZA statistics, There are 183 countries included in Doing Business Report (2011), and if best rank in doing business is one and worst rank is 183 th. So 83 th shows that Pakistan lies in the middle of the world in doing business. 10 General Infrastructure (1= underdeveloped, 7=as extensive and efficient as the world s best) Score for other countries: Indonesia (2.5), India (3.3), China (3.4), Thailand (5.0), Korea (5.1), Taiwan (5.4), Malaysia (5.7), and Hong Kong (6.4). 19

30 Sindh and southern Punjab have poor level of access to physical and social infrastructure as compared to the northern and central Punjab. These infrastructural differences across the regions explain the poverty and inequality differences as the regions with poor level of infrastructure have comparatively less social and economic integration in terms of diversified resources, human capital, and access to jobs in armed forces (Arif et al., 2011). The recent flood has also affected the poorest regions of Pakistan, southern Punjab and rural Sindh and has pushed many non-poor households into poor category and many poor stuck into long-term poverty (Arif et al., 2010) Limitations in Social Protection and Social Safety Net Programmes The Government of Pakistan has been allocating a fair amount for social safety net programmes. All these programmes directly intervene to transfer resources to the marginalized segment of the society so that they can stand on their own two feet and become economically self-sufficient. However, the efficient utilization of these funds by targeting the poor and vulnerable is a debated topic in Pakistan. Moreover, the transfer programmes are not sufficient to meet the demand of the poor Government Medium-Term Policies and Plans The Medium-Term Development Framework ( ) and PRSP-II ( ) have given the medium-term policies and plans in the light of long-term development framework of Vision Both the MTDF and PRSP advance the agenda for pro-poor economic growth by allocating adequate resources for sustainable human development where the targets have been aligned in the line of MDGs. To fulfill this commitment, the government has settled the issue of distribution of resources among the provinces by freeing the resources toward provinces in It will enable the provinces to meet their obligations by raising spending on both social and economic sectors and creating opportunities for the deprived and vulnerable peoples. A summary of the macroeconomic targets is given in Table 4.4. The economy is projected to grow between 7.2 percent and 7.5 percent by 2010/11, supported by strong growth in agriculture, Table 4.4: Pakistan: Macroeconomic Indicators/ Targets (PRSP-II) Macroeconomic Indicators (Base case Scenario) Items 2005/ / / / / /11 Real GDP Growth (%) Agriculture Manufacturing Inflation (CPI based) Investment (% of GDP) National Saving (% of GDP) Trend in Public Finance Fiscal Deficit (Rs. billion) Public Debt ( % of GDP) Trend in Balance of Payments Worker Remittances (S million) 4,600 5,500 6,200 6,400 6,700 6,950 Current Account ( % of GDP) External Debt ( % of GDP Export Growth (%) Import Growth (%) Source: Poverty Reduction Strategy Paper-II,

31 manufacturing and services sectors. In order to achieve these growth targets, the overall projected investment is 21 percent to 22.8 percent of the GDP. National saving is targeted as 17 percent to 19.4 percent of GDP for the same period and current account deficit is in the range of 3.4 percent to 4 percent of GDP. Fiscal development is considered the key element of obtaining the stability. The overall budget deficit is targeted to be reduced from current level of 4.2 percent of GDP to 3.3 percent of GDP by 2010/11. On the external side, the projected trade gap is in the range of $9-11 billion and current account deficit in the range of $ 6-7 billion. The PRSP has a rolling strategy, which identifies the required resources in according to national objectives and in the context of fast changing global economic developments. Table 4.5 shows the projected government expenditure on 17 budgetary pro-poor sectors under 5 broad headings for 2010/ /13 period. According to the Fiscal Responsibility and Debt Limitation Act (FRDLA), 2005, the social and poverty related expenditures are not to be reduced below 4.5 Table 4.5: Pakistan: Projected PRSP Budgetary Expenditures (2010/ /13) 2010/ / /13 Expenditure Rs million % of GDP Rs million % of GDP Rs million % of GDP Development 347, , , Current 701, , ,060, Total 1,048, ,295, ,614, Market Access and Community Services Roads, Highways & Bridges 75, , , Water Supply & Sanitation 13, , , Human Development Education 348, , , Health 88, , , Population Planning 5, , , Rural Development Agriculture 132, , , Land Reclamation 3, , , Rural Development 13, , , Rural Electrification 19, , ,454 (People Works 0.13 Programme-II) Safety Nets Subsidies 178, , , Social Security & Welfare 93, , , Benazir Income 59, , ,957 Support Programme 0.38 Others* 33, , , Governance Administration of Justice 7, , , Law & Order (Current & Development) 41, , , Total PRSP 1,048, ,295, ,614, *This includes (i) Labour Welfare Measures; (ii) Social Welfare Measures; (iii) Welfare of Pakistanis Abroad; (iv) Population Welfare Measures; (v) Others (Distribution of Winter clothes); (vi) BISP; (vii) PPAF; and (viii) Pakistan Bait-ul-Mal (other than Food Support). Source: PRSP-II, Finance, Division 21

32 percent of GDP in any given year. Further, budgetary allocations for health and education will be doubled as a percentage of GDP during the next ten years ending in June 2013, hence further endorsing the significance of tracking social sectors. In accordance with PRSP s MTEF, pro-poor expenditure projections for water supply and sanitation will also increase during the PRSP-II period from 0.07 percent of GDP in 2008/09 to 0.08 percent in 2010/11 and 0.10 in 2011/ Main Challenges/Issues/Risks to Medium-Term Outlook During the last four years, the international and domestic economic scenario has significantly threatened the current and future macroeconomic stability. The fiscal year 2007/08 has caused turmoil for Pakistan s economy with several political and economic events, both on domestic and external fronts, occurring unexpectedly. The country suffered a series of shocks since the eruption of the judicial crisis in March The then government went into policy inaction, delaying important decisions that were needed to face these challenges. Root causes of macroeconomic instability included delay in passing the effect of the oil price hike to the consumers, resulting in a very high budget deficit, which was financed by excessive borrowing from the central bank. A critic analysis of the macro targets as reported in Table 4.4 shows that the country remained off the track during the first four years of MTDF. The country Report of MDG, 2010 has also declared that the economy is not able to achieve the MTDF, PRSP-II and MDG goals. The government is facing the following challenges that may further bind the government capacity to achieve the MTDF and MDG targets: Pakistan s macroeconomic environment does not appear stable since This is one of the major binding constraints to the future growth of Pakistan. The economy achieved a growth rate of 6.8 percent, close to the target of 7.1 percent for the first three years of the MTDF. However, a poor growth performance has been observed in the manufacturing and agriculture sectors during the last four years, which was the focus of the MTDF growth strategy (GoP, 2010). As shown in Table 4.6, the country is among the four worst countries of the world in terms of macroeconomic environment and inflation, the most important indicators for poverty and inequality eradication. The high double-digit inflation has limited the ability of poor households to improve their well-being with limited resources (or income). The recent energy and water crises have also badly affected the overall macro atmosphere. Table 4.6: Pakistan: Macroeconomic Indicators, 2010 Overall Macro Environment Index 133/139 Inflation 137/139 Country Credit Rating 125/139 Quality of Electricity Supply 128/139 Source: Global Competitiveness Report: The last decade also show a rising gap between investment and saving. After rising from 16.5 percent of GDP in 2000/01 to 21 percent in 2002/03, national saving rates have declined since 2003/04. In 2009/10, national saving remained only13.8 of the GDP, which shows the saving rate is not sustainable. Similarly, investment rate is also low (16.6 percent for 2009/10) as compared to the other countries in the region. Since 2004/05, the fiscal deficit 22

33 and current account deficit are also rising. Another misfortune is the stagnant development expenditures which, on average, are low (3.5 percent of GDP) during the current decade compared to the 1980s and 1990s. After launching the MTDF and PRSP-II, the proportion of development expenditure, by and large, declined, meanwhile the current expenditure rose. The UNDP and Ministry of Finance have prepared a joint report for the Millennium Development Goals (MDGs) Costing in (2007) 11 for three social sectors education, health and water and sanitation to achieve the MDGs. 12 The gaps for each activity have been reported for the entire country. As shown in Table 4.7, the allocation of resources under PRSP is not sufficient to meet the MDG targets. The government is already facing the financial constraints as the PRSP data show that relatively fewer amounts have been spent than the projected. Table 4.7: Pakistan: Proposed PRSP Allocations, MDG Costing Estimates and Resource Gap ( ) Sector PRSP Allocations (Rs million) MDG Costing Estimates (Rs million) Resource Gap (Rs million) Education 804, ,261-75,311 Health 194, , ,464 Water supply &sanitation 33, , ,784 Total 1,032,729 1,358, ,559 Source: Estimating the Cost to achieve MDGs in Pakistan, UNDP & Finance Division, Islamabad (2007) & PRSP Secretariat, Finance Division, Government of Pakistan. The government is facing severe issues of revenue generation and is highly dependent on borrowing from the central bank and from external resources including the IMF. The intense borrowing from the central bank may force a reversal in current tight monetary policy stance of the central bank with adverse implications for inflation, particularly the food inflation, which has eroded the purchasing power of poor. Similarly, the government has to remove a number of subsidies under the IMF Standby Agreement (SBA) at the wrong time. The external financial flows also exhibit instability by worsening the trade balances due to weak export base with higher imports. Pakistan's exports are dominated by textiles and clothing and the rising input costs in recent years has eroded Pakistan's competitiveness. Global competitive pressure is posing major challenges for developing countries, for which our main exporting sectors such as textiles and clothing are not fully prepared. The rising international oil prices have also threatened the balance of payments position with depreciation in exchange rate. A comprehensive approach is required to improve export competitiveness. One important aspect that has severely affected the development is the role of Pakistan in the War on Terror. It has sustained immense socio-economic costs by diverting resources from 11 Estimating the Cost to achieve MDGs in Pakistan UNDP & Finance Division, Islamabad (2007). 12 The initial costing parameters were determined through a consultative process during December 2005 to August However, assumptions, including the financial prices, made over two years remain valid. Expenditure incurred in 2007/08 has been updated with current GDP at market cost as a result of which future projections have been readjusted. 23

34 public development to law enforcement. Besides massive human losses resettlement suffering; it has contributed to capital flight, and limited the FDI and other investment opportunities particularly in FATA and KPK. The estimated cost of the War on Terror to Pakistan was around Rs. 678 billion in 2008/09 which has led to massive unemployment especially in the affected regions (Table 4.8). Table 4.8: Cost of War on Terror to Pakistan (Rs. billion) 2004/ / / / /09 Direct Cost Indirect Cost* Total * On account of loss of exports, foreign investment, privatization, industrial output, tax collection, etc. Source: Finance Division, Government of Pakistan, September, Role of Donors in Poverty and Inequality Reduction Efforts As discussed earlier, Pakistan has witnessed healthy economic growth during the periods when foreign inflows were higher i.e. 1960s, 1980s and during the first decade of current century. During the last 6 years, Pakistan has faced two biggest disasters of the world in terms of the population affected, areas, human losses and infrastructure losses: earthquake in 2005 and floods in July-August In both the disasters, the foreign donors including international community, international institutions and NGOs actively participated in affected areas by financially and materially. With the assistance of local community and government, these donors developed several clusters in various fields i.e. agriculture under FAO, camp coordination/management, protection, emergency shelter under UNHCR, community restoration under UNDP, education under UNICEF/Save the children, health under WHO, food, information management, logistic under WFP and nutrition water, sanitation and hygienic under UNICEF. Some donors participated only in the emergency relief; however, several are still performing to restore the livelihood of these poor including: on-farm livelihoods, shelter, community restoration, education, health, restoration of infrastructure and public utilities. According to the Constitution of Pakistan, the government is responsible to improve the standard of living of its people. However, the magnitude of available resources is too limited to achieve the national and MDG targets. At present, the government is catching the foreign assistance to overcome the saving-investment gap, balance of payment constraints and to overcome the structural weakness of the economy i.e. poor skills, shortage of capital, power crisis and poverty (GoP, 2009). As detailed in Section 3, the government of Pakistan has launched a comprehensive strategy, the PRSP and MTDF to reduce poverty and inequality by targeting the poor especially in rural areas. The central voyage of PRSP is based on investing on those activities and programs, which directly and indirectly benefit the poor population. Therefore, a number of donors including World Bank, Asian Development Bank, Department for International Development (DFID), 24

35 INGAD, UNDP, UNFPA, ILO, UNICEF, WHO, JICA, CIDA, USAID, EU, GTZ, NORAD are actively the part of PRSP in policy designing, implementation, and evaluation (GoP, 2003). Several donors are chairing and co-chairing various sectors to improve the welfare of the poor i.e. Water and Sanitation Sector Donor Coordination Group (WSDCG) co-chaired by DFID and UNICEF. As shown in Table 4.9, the commitments of foreign economic assistance (excluding Bonds and IMF) amounted to $39,786 million from to Grants were 21 percent and loans were 79 percent of the total commitments. Over this period, the bilateral commitments consituted about 38 percent of the total commitments with the highest commitments were from USA, China, Japan, Saudi Arabia and UK, while the rest 62 percent were multilateral commitments with highest commitments were from AsDB, World Bank and, and the Islamic Development Bank (IDB). The non-project aid commitment was about $20,812 million, which mainly has been stretched from IDB, IDP s and Tokyo Pledges for Afghan Refugees Relief Assistance, Commodity Aid, Food Aid, Programme Loans/Budgetary Support, and Short-Term Credits. The rest project aid includes commitments for the Earthquake Rehabilitation & Reconstruction. The disbursements of foreign economic assistance, excluding Bonds and IMF, amounted to $31,368 million with 20 percent share of grants and 80 percent share of loans during the corresponding period (GoP, 2009a). Table 4.9. Pakistan: Committed and Disbursed Foreign Assistance ($ million) Commitments of Foreign Assistance Disbursement of Foreign Aid Year Grant Loan Total Grant Loan Total , , ,458 1, , , ,882 2, , , ,002 1,753 2, , , ,520 1, , , ,046 1, , , ,216 2, , , , ,068 2,291 3, , , ,700 3, , , ,085 3, , , ,113 4, , , , ,019 3,667 Total 8, , , ,285 25,083 31,368 Source: EAD, Year Book (2009) Donor-Wise Disbursements Table 4.10 shows that during the last two years, July 2008 to June 2010 period, the total disbursed amount from multilateral sources was higher than the bilateral sources with 70 percent share of multilateral and 30 percent share of bilateral sources, respectively. Out of the total bilateral amount, 43.7 were grants and the rest 53.6 percent were loans. In the bilateral group, major disbursements were from China ($782.1 million), USA ($614 million), Saudi Arabia ($479.2 million), UK ($286 million) and Japan ($214.5 million). Multilateral agencies disbursing over $100 million were ADB, IDA, World Bank and IDB. 25

36 Table 4.10: Pakistan: Source and Donor-Wise Disbursements During ($ million) Financing Source Donor Grant Loan Total USA Saudi Arabia China U.K Japan Germany Bilateral Canada Kuwait Norway Korea Switzerland France Turkey Australia Bilateral Total 1, , , ADB , , IDA , , Term] IDB [Short 1, , IDB Multilateral IBRD IFAD W.F.P EU U.N.H.C.R UNDP OPEC Multilateral Total , , Grand Total 1, , , Source: EAD, Year Book, 2008 and Sector-Wise Disbursements of Project aid During the past two years, the sectoral-wise project aid shows that an amount of $2,056 million was disbursed in 15 different sectors with grants amounting to $465.3 million and loans amounting to $1,591 million (Table 4.11). Sectors claiming more than $50 million were power, Table Pakistan: Sector Wise Disbursements of Project Aid during ($ million) Sector Grant Loan Total Power Transport & Communication Rural Development & Poverty Reduction Governance, Research & Statistics Health & Nutrition Water Agriculture Physical Planning & Housing Education & Training Science & Technology Social Welfare Environment Population welfare Women Development Industry & Production Grand Total , , Source: EAD, Year Book, 2008 and

37 transport & communication, rural development & poverty reduction, governance, research and statistics, health and nutrition, water, agriculture, physical planning and housing, education and training and population welfare. The majority of these sectors are directly and indirectly related to poverty reduction efforts. The economy of Pakistan has witnessed higher capital inflows in the shape of grants and loans during the current decade. As of June 30, 2010, the total public debt stood at Rs. 8,894 billion with a growth rate of 16.6 percent and 60.6 percent of GDP. The rising public debt especially the external debt is limiting the government capacity to carry on its development expenditures when the government has to repay a sufficient amount in the form of principal and interest rate. As shown in Table 4.12, the debt servicing of external loans increased during 2005/ /10 period. It also reveals the inability of the government to repay the debt as the rolling amount has also risen during this period Policy Recommendations for Fixing Binding Constraints To ensure equal distribution of resources, Sen s formulation of inclusive growth needs to be brought into the mainstream in the sense of human, economic, social and political freedom. Economic growth is necessary to support the economic development (Osmani, 2008). Besides generating economic opportunities, inclusive growth ensures equal access of opportunities among the various segments of a society (Ali and Zhuang, 2007). Hence, a development strategy based on the inclusive growth concept has two major pillars: one is to create and expand economic opportunities through high and sustained growth; and the other is to broaden access to opportunities for all members of a society. Three ingredients should be met to achieve these two pillars of inclusive growth, which include; maximize economic opportunities, ensure sustained economic growth to create jobs and opportunities, and ensure equal access to economic opportunities (ADB, 2010). The following necessary initiatives are required to overcome the binding constraints related to poverty and inequality: Table Pakistan's External Debt Servicing ($ million) Years Actual Amount Total Amount Paid Rolled ,894 1,300 4, ,869 1,300 4, ,134 1,200 4, ,728 1,600 6, ,641 1,723 7, * 1, ,169 *July September 2010 Source: State Bank of Pakistan A major barrier to reduce poverty and inequality is the lack of effective participation of poor in public development programs. There is a need to include the poor in all the development projects by social mobilization and community developments (Hirashima, 2009). It will not 27

38 only balance the power structure especially in the rural areas but also will ensure the participation of poor. Sound macroeconomic system with stable inflation is prerequisite to eradicate poverty and inequality. For this purpose, fiscal policy and monetary policy play important role. Through fiscal policy, fiscal deficit and debt burden can be reduced, and the level and quality of public investment programmes can be increased. Appendix Table 1 looks at the kind of economic activities that are pro-poor. One of the major reasons of ongoing inflation is the lack of governance. A strong monitoring and evaluation mechanism is prerequisite to protect the rule of law so that the government should efficiently spend its limited resources on pro-poor sectors. Agriculture sector employs almost half of the labor force, supports nearly two-thirds of merchandise exports, and serves as an important source of employment and income in rural areas where majority of the poor live. However, over the last three decades, it is highly dependent on major crops and weather conditions. More research, development and resources are required to improve the irrigation system, agriculture productivity and diversified crops. There is a need of much intervention in the areas of horticulture and livestock to diversify the farmer s resources. Productivity gains in the livestock sector are especially important for propoor rural income growth since the distribution of livestock in rural Pakistan is more equitable than the distribution of land (World Bank, 2006a). The majority of the poor are in the rural non-farm sector, which requires many targeted policies to improve this sector s productivity. A special development in terms of physical and social infrastructure is required, especially in those areas, which are comparatively deprived i.e. rural Sindh and Southern Punjab. Other important appraises to remove poverty in nonfarm rural areas include improving market linkages and developing SMEs. The capacity of local government should be enhanced at priority basis for better planning, efficient use of resources, sound monitoring and evaluation, include the people in non-farm enterprises by public private partnerships (PPP) and sustainable rural and social development. Public provision of social service plays important role in achieving the goal of human development and poverty reduction. Both health and education have a close association with poverty level and poverty dynamics. These two sectors require strong efforts to improve to reap the ongoing demographic dividends. The Government of Pakistan has recently introduced a transfer income scheme to benefit the poor. As part of this scheme, health insurance for the poor may be introduced. The high quality education in rural areas, particularly the technical education is necessary in this regard (Birthal et al., 2010; and Kurosaki, 2006). The majority of the poverty related studies in Pakistan has focused on the policies related to land, employment and social safety net programs. Well said by Haq et al., 2007 that the dependency of the poor on any form of assistance e.g. social safety nets can lead to their social as well as economic exclusion. However, for the self-help to happen there must be an opportunity. Rural to urban migration could be a way out of poverty toward the self-help. 28

39 City is an opportunity for the poor. History has shown that poverty is eliminated in merchant cities (Haque and Nayab, 2006). These merchant cities provide opportunities to the poor from the rural hinterland when the land is unable to support those (Haq et al., 2007). Finally, the demographic factors i.e. household size and dependency ratio should also be viewed for the policy purpose in the context of on-going demographic transition, which refers to the change from a situation of high fertility and high mortality to one of low fertility and low mortality. This transition brings about sizeable changes in the age distribution of the population; the proportion of children declines, that of the elderly cohort increases modestly and, most importantly, that of adults of working-age increases sharply. Thus, the demographic transition presents the economy with a demographic gift in the form of a surge in the relative size of the working-age population. There is convincing evidence that Pakistan has entered in the demographic bonus phase; fertility decline since the late 1980s has led to declining trend in child dependency and rising trend in working age population. This is right time for Pakistan to pursue the small family norm, particularly in rural areas. It will lead to low dependency ratio, more household savings and reduction in poverty (Arif et al., 2011). 5. Identification of Focused Areas for MDBs Interventions in Reducing Poverty and Inequality Over the Medium-Term 5.1 Identification of Vulnerable and Poor Regions It has been discussed earlier that poverty in Pakistan is concentrated in rural areas. For poverty alleviation initiatives, these areas deserve to be targeted. However, the rural population, which constitutes approximately two-thirds of the total population, is widely spread and there are certain regions and zones within rural areas where poverty levels have consistently been higher than levels in other regions. The main aim of this section is to identify these regions or areas for the Group interventions of the MDBs. Several studies have attempted to identify the poor and vulnerable regions. These studies can be grouped into three categories in terms of methods used for the identification. Firstly, the rural areas have been classified into nine regions or zones by Pickney (1989) based on Kharif crops because wheat is the predominant crop in Rabi season virtually in all areas of the country. These zones are named as rice/wheat Punjab, mixed Punjab, cotton/wheat Punjab, barani Punjab, lowintensity Punjab, cotton/wheat Sindh, rice/other Sindh, NWFP except D.I. Khan, Baluchistan except Nasirabad. Several studies have so far been conducted to estimate poverty at these zones or region levels (Malik 1992; Qureshi and Arif, 1999; Irfan, 2005; Amjad et al., 2007). The common feature of these studies is that they are based on micro (or household level) datasets, carried out during the last two decades. 13 The major similarity in the findings of all these studies is the lowest levels of poverty for barani Punjab, consisting of currently five northern districts of the province namely Rawalpindi, Jhelum, Chakwal, Attock and Islamabad. The identified poor regions in Punjab are cotton/wheat and low intensity zones consisting of seven districts namely 13 These data sets may not be representative at the agro-climatic zone level. 29

40 Rajanpur, D.G. Khan, Muzaffargarh, Rahim Yar Khan, Bahawalpur, Bahawalnagar, Lodhran, Vehari, Layya, and Bhkkar. Most of these districts are situated in south and west south Punjab. In Sindh, the cotton/wheat zone has commonly been identified as the poor region. Rural areas of the remaining two provinces, KPK and Baluchistan, are considered two separate zones and are among the poor regions as well. Under this regional/zonal classification of rural areas South and West Punjab, cotton/wheat belt of Sindh and rural areas of KPK and Baluchistan are among the poor and vulnerable regions. Secondly, Cheema (2010) has used poverty mapping technique to rank districts, and recently, Azhar (2011) has applied this technique to rank tehsils, the administrative units lower than districts. The findings are not different from the findings based on the zonal/regional classification. In Punjab, districts located in its southern part are identified as the poorest districts including Lodhran, Vehari, Bahawalpur, Rajanpur, Rahim Yar Khan and Muzaffargarh. In Sindh province, Badin, Shikarpur, Thatta, Dadu and Larkana are identified as the poorest districts. In KPK province, Malakand, Batgram, Kohistan, Bonair, Upper Dir and Shangla are the poorest districts while identified poorest districts in Baluchistan province are Lasbella, Sibbi, Pishin, Jhal Magsi and Chagi. Thirdly, Jamal, et al. (2003) and Haq et al. (2010) have, respectively, applied the quality of life and socio-economic criteria to rank districts and their findings are similar to the studies that have ranked them according to their poverty status. Based on this brief review of the regional work on poverty, it is concluded that all rural areas of Pakistan need to be targeted for poverty reduction programs. However, for region specific interventions, the southern districts of Punjab, cotton/wheat and wheat/rice belts and all rural areas of Sindh, Baluchistan and KPK are identified as the poorest regions of the country. These areas are also poor in physical infrastructure and access to education and health services. Moreover, they are not well integrated with the urban setting, as is the case in relatively better-off regions such as barani Punjab. 5.2 Identification of Vulnerable and Poor Groups Two types of programs are common for poverty reduction interventions: universally targeted programs and narrowly targeted programmes. The benefits of universally targeted programs such as provision of education and health services reach to both the poor and non-poor population. Under the narrowly targeted programs, efforts are made to transfer the benefits to the poor only. All income transfer programs designed for the poor come under the narrowly targeted category. The poverty situation of rural population demands for a universally targeted approach to improve the wellbeing of households. However, it is also true that not all rural inhabitants are poor. For targeted interventions, there is a need to identify the poor. A considerable literature exists in Pakistan that has identified the poor segment of the population, based on both quantitative and qualitative research. This literature has identified the following groups as the poorest: Landless households: Poverty incidence is considerably higher among the landless households than among the landowners. Within the landowner category, the poverty incidence gradually declines with an increase in the size of land ownership. However, even small landowners seem to be better off than the landless rural households. Since the poverty is high among the landless 30

41 households and almost half of the rural households are in this category, rural poverty concentrates in these households. Sharecroppers and small landowners: Cultivation on sharecropping is not uncommon in rural Pakistan. Sharecroppers cultivate the land of others and get their specified share in a crop. Generally, they do cultivation on a small piece of land, which is not sufficient for their livelihood. Hence they are vulnerable and among the poorest in rural areas. Although, small farmers (or landowners) are usually economically better off than the landless households or sharecroppers, the incidence of poverty is also high among the small landowners who cultivate some land on sharecropping as well. Agriculture workers: Agriculture workers have been identified as the poorest group in rural areas. They work in the farms of other households usually as daily wage earners. Their wages are low and they do not get work in all four seasons. Construction workers: These workers are engaged in rural construction industry, where again wages are low and work is not available for the whole year. Their work does not provide sources sufficient to escape poverty. Female-headed households: Around 6-8 percent of households in Pakistan are headed by women. The incidence of poverty in these households has not been found higher than the incidence among male-headed households. One likely reason is that male heads of some of these households are employed outside their place of residence within the country or abroad. Their earnings are sufficient for their livelihood. However, widows who head their households are usually among the poorest. This is one of the preferred groups in Pakistan for zakat distribution. Large households: Household size increases the risk of remaining in poverty. High dependency ratio is also associated with long-term poverty. Households having high dependency ratios deserve for targeted interventions. It is likely that these households are among the landless households, agriculture workers or construction workers, as discussed above. Zakat recipients: Although, the empirical evidence suggests a leakage of zakat funds to the non-poor, there is emerging census that majority of the zakat receivers are among the poorest of the poor. It is not difficult to identify these persons or households in rural areas. 5.3 Islamic Microfinance for Poverty Reduction The thrust of economic policy, as outlined in PRSP-II and MTDF, has been to transform the slow growth and financially constrained economy to a higher growth and relatively self-reliant economy. However, the Government of Pakistan continues to fund measures to target the poor directly and to provide a social safety net to protect against adverse shocks. Micro financing is one of these measures. It seems appropriate here to outline the functioning of microfinance in Pakistan. The PRSP-II has provided the following information: The Microfinance Ordinance 2001 defines a microfinance institution (MFI) as a company that accepts deposits from the public for providing microfinance services. MFIs in Pakistan include Microfinance Banks (MFBs) regulated by the State Bank of Pakistan, in addition to some NGOs, Rural Support Programs (RSPs) and Commercial Financial Institutions (CFIs). The NGOs operate as microfinance 31

42 institutions as well as those running microfinance operations as part of their multi-dimensional program. Specially, Kashf, Sindh Agriculture and Forestry Workers Coordination Organization (SAFWCO), Akhuwat, Orangi Pilot Project, and Asasah are operating as MFIs. Damen and Taraqee Foundation and Sungi are also providing microfinance services as a part of their overall integrated development services. Pakistan Poverty Alleviation Fund (PPAF) is an apex organization and operates through RSPs and NGOs. RSPs are running microfinance operations as part of their multi-dimensional rural development programmes. The CFIs are financial institutions in the mainstream financial sector, providing microfinance services as a separate function within the broader organizational context. Like in other parts of the developing world, microfinance in Pakistan provides microcredit, micro savings and micro insurance. This type of capital and financial support to the poor help them in expanding their choices and mitigating potential risks of poverty and social exclusions. Microcredit in Pakistan has seen growth in terms of all indicators and in all directions particularly in terms of outreach of the credit program. There are 1,613 branches of the credit services to the poor and the active borrowers are around two million. However, the two major issues with the microcredit in Pakistan are that their outreach is not adequate. Among 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. These services meet the credit need of population around the poverty line and charge interest rate much higher than the normal banking rates. A considerable proportion of the needy person may not approach MFIs for credit because of the riba or interest in such loans. This is the point where Islamic banking can contribute in Pakistan in poverty reduction. Islamic banking system is concerned with much more than just refraining from charging interest (Dusuki, 2008). It is a system that aims at making a positive contribution to the fulfillment of the socioeconomic objectives of Islamic society inscribed in the objectives of Shariah. As business entity established within the ambit of Shariah, Islamic banks are expected to be guided by an Islamic economic objectives, among others, to ensure that wealth is fairly circulated among as many hands as possible without causing any harm to those who acquired it lawfully. Hence, the issue of financing the poor via microfinance initiative is not alien to Islamic banking; instead, it is a natural outlook that should transpire in the operation of Islamic institutions, especially those claiming to be based on the principles of Shariah (Dusuki, 2008). Islamic banking system exists in Pakistan. A separate Islamic Banking Department was established in the State Bank of Pakistan in 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 Islamic banking services are available in 50 cities in all four provinces. Pakistan can increasingly share the advantages of international best practices in adopting Islamic finance and capture a large share of the market because of Shariah compliance. The main aim of Islamic banking initiative in Pakistan is its promotion as a parallel banking system, comparable to and compatible with the conventional banking system. However, the Islamic banks in Pakistan are not providing microfinance services. A review of the literature indicates that the notable Islamic microfinance institutions in Pakistan are Akhuwat and 32

43 Islamic Relief. According to the report of Allen & Overy (2009), Akhuwat provides small interest-free charitable loans (Qard al-hasan) with an administration fee of 5 percent in the spirit of Islamic brotherhood. All activities revolve around the mosques and involve close interaction with the community. Islamic Relief disburses Murabaha based financing to individuals based on combination of personal guarantors, group savings accounts, co-signers and community recommendations to ensure repayment. Repayment levels are in the range of percent. Islamic Relief has made arrangements to deliver the Murabaha financing to borrowers business ventures. It has a plan of expansion of its existing programs. The outreach of these two Islamic microfinance service providers is very limited in Pakistan. The MDBs can take lead in Pakistan by providing these services to the poor. Like in other parts of the developing world, the poorest and destitute are usually excluded for providing them the microfinance services. They are left for the transfer income programs such as zakat. The MDBs can establish a model Islamic Microfinance Institution (IsMFI), where in addition to conventional beneficiaries; the poorest and destitute are given the opportunity to improve their well-being. Obaidullah (2008) has prepared a composite model of Islamic Finance. He has described 11 activities in the model. Through these activities, an IsMFI Program identifies carefully both the poorest of the poor and destitute that are economically inactive and economically active. It directs a part of funds towards meeting the basic needs of the economically inactive (or destitute) and provides them necessary training. After training, financing can be provided by using a combination of for-profit debt-based modes such as Bai-Muajjal, Ijara, Salam or Istisna or equity-based modes such as Mudaraba or Mmusharaka or declining Musharaka. These types of financing can help promote entrepreneurship amongst the poor and subsequently alleviate poverty. 6. Employment Situation in Pakistan 6.1. An Overview of Employment Situation in Pakistan Pakistan is the sixth most populous country in the world with an estimated population of 180 million and an annual growth rate of 2.05 percent. Pakistan is the 10 th largest country in the world according to the size of the labour force. The latest official statistics based on the Labour Force Survey of Pakistan (2008/09) shows that the total labour force volume is million with an annual growth rate of 3.7 percent. Rural areas have almost more than double share in the total employment, which is primarily due to the absorption of employment in the agriculture sector (GoP, 2009). This section presents an overview of employment situation, measured by four indicators: labour force participation rates, unemployment rates, sectoral share in employment and employment to population ratio. The particular focus is on rural/urban differentials and gender dimension of employment. The labour force participation rates have witnessed an increase of 2.1 percentage points during the last decade. Female participation in the labour market has gradually increased. However, it is still very low, around 22 percent. Overall, the youth have a lower participation rate than the adult population, but their participation especially of the young women has gradually increased (Table 6.1). 33

44 Table 6.1. Pakistan: Labour Force Participation Rates and Unemployment Rates for Adult and Youth (%) Change b/w 2000/ / / / / / / & final (percentage point) Labour Force Participation Rate (overall) Overall Male Female Labour Force Participation Rate for Youth (15-24) Overall Male Female Unemployment Rates (%) Overall Male Female Rural Urban Unemployment Rate for Youth (15-24) Overall Male Female Urban Rural Source: GOP, 2009; PET, 2008; 2009 The overall unemployment rate increased from 6 percent in 2000/01 to 8.3 percent in 2003/04. However, it declined during the next four years to 5.2 percent. During this period, the economy witnessed comparatively high growth and poverty reduced sharply. In 2008/09, the unemployment level remained unchanged, 5.2 percent (Table 6.1). However, the estimates based on CIA fact book shows the rising trends in unemployment rates during last three years. Table 6.1 shows that the unemployment rates dropped considerably among females and in urban areas compared to the male and rural areas, respectively. Youth unemployment levels are higher than the overall unemployment rate. Among the youth, female and rural inhabitants have faced the unemployment level higher than their counterparts. Overall, the youth unemployment rate has dropped sharply from 13.3 percent in 2000/01 to 7.5 percent in 2006/07. This drop in unemployment level is especially high for females, 20.4 percentage points (Table 6.1) Table 6.2 breakdowns the total employed labour force in three sectors, which are agriculture, industry (manufacturing and construction) and services. Agriculture is the largest sector in terms of employment provision. However, its share in total employment declined by 2.7 percentage points during the last decade, with more decline among the males (6.1 percentage points), probably due to changes in the agrarian structure including a decline in sharecropping and increased mechanization in the agriculture sector. The services sector has the second largest share in employment (35 percent), followed by the industrial sector with about 20 percent share. These both sectors have witnessed a modest increase in their share in total employment. Table 6.2 shows that a shift of labour from agriculture to either industry or services sector. This shift is 34

45 Table 6.2. Pakistan: Share of Employed Labour Force in Various Sectors (15+) Change 2000 to 2000/ / / / / / / (percentage point) Share of Agriculture in Total Employment Overall Male Female Share of Industry in Total Employment Overall Male Female Share of Services in Total Employment Overall Male female Source: PET, 2008; GoP, 2009 primarily among the male workers. It is worth noting that a large proportion of female employed labour force work as unpaid helpers. The employment-population ratio, which expresses the number of people in employment as a percentage of the population, is a good indicator to analyze the ability of an economy to absorb its labour with the passage of time. 14 Table 6.3 shows this ratio as 49.8 percent in 2007/08. The Table 6.3: Employment-to-Population Ratio among Adults and Youth in Pakistan 2000/ / / / / /08 Employment-to-Population Ratio in Pakistan for Adult Change 2000 and 2008 (percentage points) Overall Male Female Employment-to-Population Ratio in South Asia for Adult Overall Male Female Youth Employment-to-Population Ratio Overall Male Female Youth Employment-to-Population Ratio in South Asia Overall Male Female Source: PET, 2008, ILO, It should be emphasized that there is no single correct employment-to-population ratio for adults or for youth, and a fuller assessment of the level and development of these ratios should be made in conjunction with other labour market indicators (ILO, 2009). 35

46 employment-to-population ratio among females is very low, only 20 percent, as compared to male ratio, around 79 percent. The male ratio is similar or even higher to the ratio for South Asia. However, the female ratio is much lower than the South Asian average of 19.4 percent. It is encouraging that employment-to-population ratio among women has improved by more than six percentage points and the gap between male and female ratios has reduced. For youth, the employment-to-population ratio increased by almost 5.8 percentage points during the last decade, and has almost converged with the average ratio of South Asia (Table 6.3). This convergence is primarily driven by the change in participation of youth women in the labour market as the female youth employment-population ratio increased from the very low level of 7.3 percent in 2000/01 to 16.8 per cent in 2006/ Comparison of Unemployment Rate in Pakistan with Selected Asian countries The recent global financial crisis soared the global unemployment rates with severe labour market distress: falling employment-population ratios, increases in vulnerable forms of employment, stagnant labour productivity growth, and rising discouragement particularly among youth. The ILO Global Employment Trend Report, 2011 shows that across the regions, East Asian (China, Korea) economies rebounded strong come back after the financial crisis with an estimated 9.8 percent growth rate the highest rate of growth among the world s regions. It led to a decline in unemployment rate to 4.1 percent in 2010 from 4.4 percent in However, the youth unemployment remains a challenge in this region. The South-East Asia and the Pacific region was heavily affected by the crisis, as it is highly dependent on foreign trade and investment. The region grew by a mere 1.5 percent in However, Malaysia s economy grew by 6.7 percent in 2010 compared to -1.7 percent in 2009 and Thailand s economy grew by 7.5 percent compared to -2.2 percent in Despite the strong recovery, only a small decline of unemployment rate has been observed in this region; from 5.2 percent in 2009 to 5.1 percent in Young women and men in the region continue to face significant challenges in securing decent and productive jobs. The south Asian region was less affected by the crisis due to its less reliance on exports, and this region has resumed rapid economic growth in 2010 except Maldives, Nepal and Pakistan. The region s unemployment rate has been fairly stable; 4.3 to 4.5 percent during period. Across the region as a whole, young people are 3.5 times more likely than adults to be unemployed, with a youth unemployment rate of 9.5 per cent in 2010 (ILO, 2011). Table 6.4 gives a comparative picture of unemployment rates and employment-population ratios of Pakistan and other five selected countries, China, Indonesia, Malaysia, Thailand, and India. Both Pakistan and India have almost closer unemployment rates during the last decade with a mean of percent per annum on average. In both countries, a similar trend in unemployment rates has also prevailed; it declined during the first half of the decade and started to increase during the last 2-3 years. At the beginning of the last decade, unemployment rate was high in China and Indonesia compared to Malaysia and Thailand. However, all these four economies succeeded to reduce their unemployment rates; highest decline was observed in China with 5.8 percentage points, followed by Indonesia with 3 percentage points decline, Thailand with 1.7 percentage points decline and Malaysia with 0.3 percentage point declined (Table 6.4). Youth 36

47 unemployment rates are lower in Pakistan than the other South Asian countries and slightly higher than the East Asia (PET, 2008). Most economies have employment-to-population ratios in the range of 55 to 75 percent. Both China and Malaysia have comparatively better employment-population ratio compared to the other economies (Table 6.4). In Pakistan, the ratio is comparatively low (52 percent). However, Pakistan has observed a 4.5 percentage points rise in employment-population ratio during the last decade while it declined in China and India. One primary concern throughout the South Asia is the less participation of women in the labour market. Table 6.4 shows that both India and Pakistan have comparatively less employmentpopulation ratio than the other four countries (China, Indonesia, Malaysia and Thailand) Table 6.4: Unemployment Rates and Employment-Population Ratio of Selective Asian Countries Pakistan Unemploym Employment-population Rate ratio, 15+ (%) Female Male Total China Unemploym Employment-population Rate ratio, 15+ (%) Female Male Total India Unemploym Employment-population Rate ratio, 15+ (%) Female Male Total Indonesia Unemploym Employment-population Rate ratio, 15+ (%) Female Male Total Malaysia Unemploym Employment-population Rate ratio, 15+ (%) Female Male Total Thailand Unemploym Employment-population Rate ratio, 15+ (%) Female Male Total Source: CIA World Fact Book (various issues) 37

48 throughout the decade; it remains very low in Pakistan compared to India and other selected countries. Labour markets must have the flexibility to shift workers from one economic activity to another rapidly and at low cost, and to allow for wage fluctuations without much social disruption. Efficient labour markets must also ensure a clear relationship between worker incentives and their efforts, as well as equity in the business environment between women and men (GCI, 2010). As shown in Table 6.5, as compared to the five selected economies, Pakistan is behind in various labour market efficiency indicators except the hiring and firing practices. It suggests that Pakistan still requires many policies and programmes to ensure efficiency, promote equal opportunities for men and women and to obtain decent and productive work in conditions of freedom, equity, security, and human dignity. An efficient and flexible labour market is prerequisite to extract the maximum gains from the economy. Table 6.5: Ranking of Labour Market Efficiency in Selected Asian Countries in 2010 (out of 139 countries) Efficiency Indicators Pakistan China India Indonesia Malaysia Thailand Cooperation in labor-employer relations Flexibility of wage determination Rigidity of employment Hiring and firing practices Pay and productivity Brain drain Female participation in labor force Secondary education enrollment rate Source: Global Competitive Index Report, 2010 Table 6.6 shows that Pakistan has succeeded in reducing the dependency ratio over the last two decades; however, it is still high as compared to other selected countries, almost double to the China. Another downside of Pakistan s labour market is the high share of the informal sector, which almost absorbs two-third of the total employed labour force. Compared to Indonesia, Malaysia and Thailand, Pakistan has a very low absorption of females in the formal sector employment. Table 6.6 shows that the proportion of vulnerable employment is higher in both Pakistan and Indonesia than in other countries. Country Table 6.6: Demographic Trends and Decent Work Issues in Selected Asian Countries Dependency Ratio Formal Employment (per 100 people ( ) ages 15 64) (% of total Employment) Ratio of female to male rates Vulnerable Employment ( ) (% of total employment) Ratio of female to male rates Pakistan China India Indonesia Malaysia Thailand Source: Human Development Report,

49 6.3. Status of Achieving Employment Related MDGs Regarding the labour market development, the initial MDGs only covered the gender equality in the labour market under its Goal 3. However, recognizing the importance of decent and productive work for all to address poverty and hunger, the UN revised the MDGs in 2007 and the employment efficiency has been included for all countries. The New MDG target (1B) is Achieve full and productive employment and decent work for all, including women and young people. This target contains the following four indicators specifically and directly relating to employment issues; Growth rate of labour productivity (GDP per person employed); Employment-to-population ratio; Proportion of employed people living below the poverty line; and Proportion of own-account and contributing family workers in total employment (vulnerable employment rate). As mentioned in ILO report (2009), these employment indicators are designed to: a. Provide relevant and robust measures of progress towards the new target of MDGs; b. Be clear and straightforward to interpret and provide a basis for international comparison; c. Be relevant and link to national-level country monitoring systems; d. Be based on ILO international standards, recommendations and best practice in labour statistics, information and analysis; and e. Be constructed from well-established data sources, which enable consistent measurement over time. The Pakistan MDG country report 2010 enfolds the old MDG target, which is to promote gender equality and women empowerment by ensuring employment in the non-agriculture sector. Table 6.7 shows that women s share in non-agriculture employment has increased from 8 percent in 1990 to 10.6 percent in However, this share in 2008 is much below the targets of both MTDF (12 percent) and MDG (14 percent). The progress to achieve this target for MTDF and for MDG is very slow and it is likely that it would not be achieved by 2015 (GoP, 2010). Table 6.7: Pakistan: MDG Indicator of Women Share in Non-Agriculture Employment Indicator MTDF Target 2009/10 MDG Target 2015 Share of women in wage employment in the nonagricultural sector Source: GoP, 2010 Regarding the new four targets set by the UN in 2007, the first target, which is related to employment-population ratio, has already been discussed. This ratio has steadily increased over the period, especially for females. It reflects the generation of more employment opportunities in the country, although gender gap exists. 39

50 The second revised MDG indicator is about the vulnerable employment. The indicator of vulnerable employment is based on the status of employment indicator that distinguishes between three broad categories of employment. These are: (a) wage and salaried workers also known as employees); (b) self-employed workers that include self-employed workers with employees (employers), self-employed workers without employees (own-account workers) and members of producers cooperatives; and (c) contributing family workers (also known as unpaid family workers). As shown in Table 6.8, the share of vulnerable employment decreased by 2.5 and 1.9 Table 6.8: Vulnerable Employment in Adults and Youth Change to (percentage point) Adult (15+) Both Sexes Males Females Youth (15-24) Both Sexes Males Females Source: PET, 2008 percentage points in adults and in youth during period. At the same time, vulnerable employment of adult females and youth females increased by 7.9 and 12 percentage points, suggesting more vulnerability among the female labour force. The third revised MDG indicator is about the working poor who can be estimated for Pakistan by combining the statistical information on employment and poverty, collected from the same households. A big challenge to calculate the working poor is the requirement of the nationally representative datasets. The two nationally representative datasets; Labour Force Survey (LFS) 2005/2006 and Household Integrated Economic Survey (HIES) 2005/2006 were conducted in the same years, but differ over the employment-population ratios. In the absence of sound micro data, the ILO has calculated the share of working poor, based on assumptions on the correlation between poverty and employment. As shown in Table 6.9, Pakistan has a lower percentage of working poor compared to overall south Asia in 1996 and Overall, working poverty declined in both Pakistan and South Asia. Pakistan Table 6.9: Pakistan: Working Poor Estimates (%) US$ 1 day US$ 1 day South Asia US$ 1 day US$ 1 day Source: ILO, Working Poverty Model, October 2007, Geneva 40

51 The fourth revised indicator is about the labour productivity, which is measured as the annual change in gross domestic product (GDP) per person employed. Overall, Pakistan has improved its per hour labour productivity during the period. A sectoral view in Table 6.10 shows a positive trend of labour productivity in agriculture, manufacturing and social services sectors, while a declining productivity trend has been observed in the mining, electricity, gas and water, construction, wholesales and retailer, transport and communication and finance related sectors. Table Pakistan: Labour Productivity Per Hour Worked, by Sectors (constant factor cost in PRs.) (15+) National Agriculture Mining Manufacturing Electricity, gas and water Construction Wholesale and retail trade Transport and communication Finance Social Services Source: PET, 2008 Overall, all the four revised MDG indicators show positive developments in Pakistan, but also highlight some challenges. A considerable proportion of the employed labour force is in vulnerable employment, and one out of eight of the employed belongs to the working poor. This situation calls for policies to increase the creation of decent employment, and to translate economic growth into better labour market outcomes. Productivity is the key, and investments need to be made to sustain healthy productivity growth rates (ILO, 2009) Growth-Employment-Poverty-Inequality Nexus The poor people mostly derive their income from work whether they are subsistence farmers, salaried workers, or self-employed. There is a broad consensus in the literature that economic growth would be only effective to reduce poverty if it improves the quality of jobs and the access to modest earning opportunities for the poor (Hull, 2009). Studies have shown that the sectoral pattern of growth is more effective for poverty reduction and employment opportunities: Loayza and Raddatz (2006) found that growth in unskilled intensive sectors contributes to poverty reduction; Satchi and Temple (2006) found that growth in agriculture may increase poverty while growth in the urban sectors may cause it to fall. The study of World Bank (2005a) on 14 countries, which experienced the pro-poor growth in 1990s, shows that the access to non-farm rural employment and informal urban employment emerged, as important factors to reduce poverty in some, but not all, while Coxhead and Warr (1995) found that an increase in agricultural productivity would reduce poverty. Labour markets in middle and low income countries are highly segmented, with wage differential and employment conditions across the sectors. In contrast to basic neoclassical models of equalization of wages, these markets have limited mobility from less productive to more 41

52 productive jobs and weak bargaining power of the workers. 15 Lewis (1954) took it as a dual labour market in which workers who were unable to obtain jobs in the formal sector took up work in unregulated informal sector. As shown in Figure 6.1, women are more likely to be in the less productive jobs, mainly concentrated in the informal sector in many developing countries (Chen et al., 2005). A variety of barriers including institutional barriers, legal barriers (weak enforcement of property rights), geographical barriers (poor infrastructure connecting urban and rural areas) or barriers due to discrimination based on ethnicity, race or gender, make it difficult, particularly for the poor to participate in the productive jobs sectors (Leonardi, 1998). Figure 6.1: Segmentation of Informal Employment High Average Earning Employers Mainly men Regular Wage Workers Own Account Workers Women and men Casual Wage Workers Industrial and agricultural outworkers/home workers Mostly Women Low Source: Modified the Model of Chen et al. (2005) It has been shown earlier that during period, the high economic growth in Pakistan not only mounted the labour force participation rates but also created employment opportunities, especially for women. The growth in labour force participation and employment rates rose at a constant pace with 2.6 percent per annum on average during period. The unemployment increased during the first half of the decade and then it started to decline. However, unemployment on average remained high in the range of percent (Table 6.11). 15 Dickens and Lang,1986; Knight and Yueh, 2004;Avirgan et al., 2005; Fields,

53 Table 6.11: Growth, Employment, and Poverty in Pakistan Indicator * GDP growth rate Labor force growth rate Employment growth rate Unemployment rate Poverty Incidence Source: Extended the study of Kemal, (2004) *The numbers from the last column has been taken from GoP (2009), PET (2008) Several questions come out especially when the labour market outcome indicators such as labour force participation, employment participation and unemployment rates in Pakistan are viewed in the context of economic growth and poverty trends. Has the economic growth not benefited the poor by raising their mobility and productivity across the sectors? Is employment-intensive or productivity-intensive growth more important for poverty reduction? Has this growth not improved the quality of jobs and access to modest earning opportunities for the poor? An attempt has been made here to link this unemployment dilemma with poverty and growth. First, although poverty declined during the high growth period ( ), the proportion of vulnerable population remained constant one-fifth of the total population. Meanwhile, inequality also rose significantly. The bottom 20 percent were not much benefited from the high growth. Second, the fast growth during was mainly capital intensive in which the capital accumulation and labor expansion are the steady sources of growth (World Bank, 2006; and Din, 2006). However, the expansion of labour is not sufficient without viewing the sectoral patterns of growth and quality of jobs. About half of the total employed labour force is engaged in the agriculture sector; but the growth in the agriculture sector remained low (3.88 percent per annum on average) than the overall growth (Table 6.11) and this agriculture growth witnessed high fluctuations during period. The industrial and services sectors grew by 9.9 percent and 6.2 percent per annum on average, respectively, during this period. However, the employment growth in manufacturing was lower than its overall growth. It is not considered as pro-poor growth (Haider, 2010). Poverty in Pakistan is mainly a rural phenomenon. The poor are less educated and low skilled (Haq 2005). They have comparatively less benefited from the capitalintensive growth (Kemal, 2004). Third, the LFS 2008/09 shows that about half of the Pakistan s labor force is illiterate and is dependent on the informal economy. A brief detail in forthcoming Section shows that the share of informal sector employment is rising: it accounts for 72 percent of adult employment and 79 percent of youth employment. This increase in informal sector employment reflects the general slackening of the labour market (Amjad, 2005). Fourth, the distribution of employed labour force in various sectors also reveals the segmentation of the labour market with limited mobility from the lower wage jobs (agriculture sector) to the 43

54 high wage jobs (industrial and services sectors) especially in females. It suggests the inability of the poor to obtain jobs in the formal sector due to a number of barriers including institutional barriers, educational barriers, infrastructural barriers, regional barriers and violence and exploitation barriers as highlighted by a number of studies. 16 Fifth, the recent demographic dividend shows the rising share of female and youth in the total population. Female population was estimated at 78 million out of the total 161 million in 2008 and youth constituted 20 percent of the total population. The SBP (2004) shows that the employment generation in Pakistan has not kept pace with the increase in population. Another recent study shows the rising job-mismatch phenomenon among young graduates and wage penalties due to rising demand and supply gaps (Farooq, 2011). Sixth, productive and remunerative employment is the most effective means of reducing poverty (Pasha and Palanivel, 2003). However, in view of the concentration of workers in the low-paid informal sector as discussed above, employment alone may not provide a guaranteed means of escaping poverty. Malik (2005) shows that real wages have declined for regular/agricultural workers and increased marginally for casual workers. Finally, the quality of jobs and the access to modest earning opportunities for the poor is prerequisite to reduce poverty. However, as detailed earlier, the various indicators related to decent work highlight some important challenges to Pakistani labour market in recent years including the rising vulnerability for female and youth, rising vulnerability in the agriculture sector, decline in labor productivity and the prevalence of bonded labour, primarily in the informal sectors (ILO, 2008). Based on above discussion, it can be argued that the growth alone is not sufficient until the quality of jobs is improved and the access to modest earning opportunities for the poor are enhanced. Growth that results in increased employment opportunities in less productive jobs sector may not be enough to alleviate poverty. To achieve the desired targets, there is a need of policy and programmes, which enhance the agricultural productivity and enhance mobility of the poor across sectors by removing the barriers to movement of more productive jobs. The recent rising trends in poverty can only be arrested if enough productive and remunerative jobs are created, and this is possible only if investment levels are increased. 7. Government Policies/Initiatives for Increasing Employment 7.1. Government Past Policies and Programmes Pakistan has so far launched six labour polices in 1955, 1959, 1969, 1972, 2002 and All these policies laid-down the parameters for the growth of trade unionism, the protection of workers rights, the settlement of industrial disputes and redressal of workers grievances. The basic aim of all plans and policies was to accelerate pro-poor economic growth by creating new job opportunities and skill development of the poorest of the poor. The poor and vulnerable have also been directly targeted by social safety net programmes. During period, around Jafri, 2004; Amjad, 2005; Amjad, et al., 2008; and Hull,

55 80 percent of the PRSP budget has been spent on only three sectors: human development, rural development and social safety nets. As poverty is a rural phenomenon, the PRSP strategy revolves around the promotion of rural development by community development, raising agricultural productivity as well as the rural non-farm economy. All these policies and programs were designed for poverty reduction but through employment creation. The 2010 Labour Policy raised the minimum wage from PRs. 6,000 to PRs. 7,000 per month. The microfinance is one of the major targeted interventions to address poverty and unemployment by enabling the poor to become self-employed. Perhaps, at present there is no other large scale development in Pakistan, which would provide capital and financial support to the poor by expanding their choices and mitigating potential risks of poverty and social exclusion. Microfinance provides micro credit, micro savings, and micro insurance (Table 7.1). The SME bank was established to provide financial assistance for SMEs. Up to December 2009, it has financed 8,299 SMEs with an amount of Rs. 9,510 million to 40,891 beneficiaries. The Khushali Bank is also providing loans up to Rs. 30,000 to unemployed people to set up their business. Up to December 2009, it has disbursed loans amounting to Rs. 22,481 million to over 2 million beneficiaries. Under the President s Rozgar scheme, the National Bank is also providing loan up to Rs. 100,000 for five years maturity. Details Table 7.1: Active Borrowers, Active Savers and Active Policy Holders by Peer Group Active Borrowers Micro-credit Micro-Saving Micro-Insurance Value (Rs. million) Active Savers Value (Rs. million) Policy Holders Sum insured (Rs. million) 2008/09 (July 1- June 30) 1,782,239 20,319 2,153,538 6,893 2,085,395 29, /10 (July 1- June 30) 1,975,820 25,082 2,834,916 9,566 3,813,594 53,704 Increase/decrease (%) Source: Pakistan Microfinance Network (PMN), Islamabad Beside the previous briefed policies, the salient features of some government policies are as follow: National Tripartite Forum on Employment and Skills was jointly organized by the Labour and Manpower Division of the Ministry of Labour, Manpower and Overseas Pakistanis (MLMOP) and the ILO in April, 2006 to provide a platform to examine the employment and labour market challenges as well as the formulation and implementation of polices to ensure an efficient labour market and generate decent work for all (PET, 2007). With the collaboration of UNDP and ILO, Labour Market Information and Analysis (LMIA) Unit was established in 2006 to provide up-to-date and timely information to ensure decent employment formulation. LMIA is a necessary input for monitoring these polices, as well as 45

56 for the envisaged reforms of the technical and vocational education and training (TVET) system. TVET is the central pillar of human resource development policies to overcome the low education and skill levels. For this purpose, the National Vocational and Technical Education Commission (NAVTEC) have been established in 2006 to strengthen the vocational and technical education. NAVTEC is giving Rs. 2,000 per month to each trainee during the training period. At present, about 1,522 technical institutes with an enrollment of 314,188 are working in the country. It has the plan to produce one million skilled labour per year. National Internship Program (NIP) was launched in 2007 to provide internship to educated youth who have completed 16 years of education. Besides providing them the opportunity to have practical experience or working in government institutions and corporation of one year, this program is providing stipend of Rs. 10,000 per month to more than 20,000 young graduates per annum on average. The information technology has vast potential to deal with educated unemployment. The development of IT and telecom sector has created thousands of employment opportunities for the educated youth. An allocation of Rs. 3.3 billion has been retained for this sector in 2009/10. In order to develop skilled labour force, the government has established five Skill Development Councils (SDCs) one each at Islamabad, Lahore, Karachi, Peshawar and Quetta. The SDCs provides the skill development training as according the geographic market demands. So far, it has provided training to 46,674 workers. Pakistan has adopted an active strategy to promote overseas employment. A separate overseas Pakistani Division has been developed to facilitate overseas workers and boosting the overseas employment in the Gulf countries and gradually expanding the flows to the nontraditional destinations. In recent years, the government has signed the MOUs with the Korea, UAE and Libya to export manpower Diagnostic Analysis of Binding Constraints to Reducing Unemployment As poverty and employment are highly correlated, a number of binding constraints are also linked with the labour market concerns. A number of constraints have also been discussed earlier. By avoiding the repetition, a summary of few binding constraints related to the labour market has been discussed in this section. The growth in the real sector is not stable in Pakistan. The high economic growth spells have mainly been influenced by the foreign shocks, and when these shocks disappeared, the growth started to decline. It happened during 1960s, 1980s and during the first decade of this millennium. The high growth during period was largely capital-intensive growth; it expanded the employment opportunities but with fewer opportunities. Without strengthening the real sector growth, it would be impossible to reduce unemployment and poverty. Pakistan witnessed a higher and rising level of investment during the first half of the last decade. However, the deteriorated law and order situation and rising crime rates during the 46

57 recent years have created an overall uncertainty, which has badly affected the confidence of local and foreign investors. The high corruption, controversial property issues and other business related matters have made it costly to do business in Pakistan (World Economic Forum, 2011). Despite the recent economic developments, the share of rural labour force more or less remained the same. Majority of them are mainly connected with the agriculture sector. Having low levels of education and skills, this majority is unable to get adjustment in the formal sector. Without developing the non-farm rural economy, it would be difficult to overcome the unemployment issues. The regional differences over social and physical infrastructure are also responsible to increase inequality and wage penalties. The high poverty regions i.e. the rural areas of southern Punjab and Sindh have comparatively less social and infrastructural services, access to industrial and services sectors and overseas employment. With poor rural-urban linkages, they are facing a number of barriers to move to urban areas for better future. The share of employment in the informal sector of the economy accounts for more than twothird of the total adult and more than three-fourth of the youth (Table 7.2). It suggests the limited creation of decent jobs when the labour force is growing rapidly and might becoming problematic especially for those peoples who lack the necessary skills or social networks to find a proper job. This group is increasingly becoming the part of informal economy. Table 7.2: Pakistan: Share of Employment in the Informal Sector of the Economy 1999/ / / / / /08 Change between 1999/00 and 2007/08 (percentage points) Age 15+ Overall Male Female Youth (15-24) Overall Male Female Source: PET, 2009 The recent demographic transition with the rising share of youth presents the economy with a demographic gift in the form of a surge in the relative size of the working age population. However, the rising unemployment rates among the youth highlights the rising gap between the demand and supply with limited absorptive capacity of the labour market. The recent official statistics also highlights the severe challenges and disadvantages to youth in the labour market with rising waiting periods, long working hours, inadequate work and wage penalties. It would be a great threat if appropriate measures are not taken to absorb this massive influx. 47

58 Another challenge is over-regulation of labour market in terms of weak government and trade union polices. It has led to high risk of firing the workers and the rising trend to employ workers on contractual basis. Pakistan ranks at 78 th position on the difficulty of hiring index, which is lower than the OECD and South Asia. Only 15 percent of the Pakistani firms have sponsored On-the-Job Training (OJT) to their employees (World Bank, 2006c). On the other hand, the informal sector is completely unregulated where even the minimum wage is not always applied. Knowledge and skills are the driving forces of economic growth and social development. However, at present one-third of the youth are illiterate. Another meager picture is the declining number of young women and men in the labour force with formal vocational training. It seems that Pakistan has been trapped in vicious circle where education is not providing the right skills as demanded by the labour market. As briefed earlier, the educational system is facing a lot of heterogeneity over course curriculum, research, teaching and infrastructure quality across the regions and across the universities. The return to education has a declining trend in Pakistan, which implies that the country has failed to produce high demand for education that resulted in low rate of return to education (Hausman et. al and Qayyum et. al. 2007). Moreover, there is no mechanism to provide the complete assessment of the labour market in terms of required skill. Another imperfection is the control of politicians, feudals, industrialists, bureaucracy and influentials over the job opportunities. A capable educated person with distinction but without any sfarish 17 may not be successful in finding decent work in the labour market Government Medium-Term Policies and Plans Related to Employment A major focus of both the MTDF ( ) and PRSP is to enhance the efficiency of rural and urban areas with a view of improving the quality of social and living standards, especially in rural areas. The MTDF ( ) has aimed to generate new job opportunities of 6.97 million over the framework period by focusing on: stimulating growth of employment-intensive sectors particularly agriculture, livestock, SMEs, telecommunications and IT services, housing and construction, and natural resources; direct interventions for employment generation especially for the young; capturing the growing international market for overseas migration; and an integrated approach to meets the skill needs of the country and overseas markets (GoP, 2008a). The Government of Pakistan has taken a number of following policy initiatives related to labour market, which include; Pakistan has completed the ratification of all Fundamental Human Rights Conventions in Further, the 2006 Labour Inspection Policy, 2006 Labour Protection Policy and the draft Employment and Services Conditions Act have also been launched. To get the feedback from the labour market, the Labour Market Information and Analysis (LMIA) was launched in 2006 with the collaboration of UNDP and ILO. It is a medium- and 17 Sfarish, a local language word which means that an individual get job on the basis of some political or bureaucracy influence or he/she pay bribe also to get the job. 48

59 long-term policy in which the progress has been made to establish the LMIA units at the provincial level. LMIA will help to address the further labour and employment challenges. A second phase of LMIA has been developed into a comprehensive five year UNDP program, the MDG-driven Poverty Policy Package (MP3). It will produce quality information and analysis by enhancing the capacity of LMIA and Federal Bureau of Statistics, which would further informs pro-poor, decent work and skills development policies. The collaboration bodies are FBS and skill bodies at the national and sectoral level i.e. National Vocational & Technical Education Commission (NAVTEC), Technical Education and Vocational Training Authority (TVETA), and Skill Development Council (SDCs) (PET, 2007). NAVTEC has recently released a vision on skills called: Skilling Pakistan: A Vision for the National Skills Strategy, This document highlights the strategies to address the skill shortages in Pakistan. Like LMIA, the efforts are ongoing to develop similar type institutions at the provincial level. At present, TVETA is working in two provinces, Punjab and Sindh. Regarding the export of manpower, the National Migration Policy, 2008 and Labour Policy, 2010 aim to provide incentives to overseas employment promoters by improving their performance. Pakistan Embassies abroad will be asked to extend necessary co-operation to the delegations of Overseas Employment Promotors (OEPs) when they visit the labour importing countries for procurement of manpower demands so that they may be able to procure maximum demands for Pakistani labour. In August 2007, the government has released the Vision 2030, a comprehensive strategy to create employment through rapid and sustainable development in a resource constrained economy by developing knowledge inputs Main Challenges/Issues//Risks to Medium-Term Outlook Regarding Employment In the context of the ongoing demographic transition and the past fast growth spell, it can be argued that the macroeconomic growth during period was uneven in Pakistan as this growth has been witnessed despite the poor human development indicators. However, it has created employment opportunities but concerns of poor and illiterate labour force remained the same to get modest earning opportunities. It also seems that the labour market is not keeping pace with the growing population as the new job seekers are facing more issues to obtain a job with rising job search periods, more job mismatch issues and getting inferior jobs. The followings are some key challenges to ensure sufficient job opportunities and solve the decent work related issues: A major challenge in medium-term government programs is the poor projection of targets. Theoretically, all the policies and programmers have highlighted pleasant policies and strategies to meet the challenges. However, in practice, the country has been lagging to all the medium- and long-term key targets as set by MTDF, PRSP and MDGs. As claimed by the GoP (2008a) the MTDF envisaged the creation of 6.97 million employment opportunities over the Framework period, against a total addition to the labour force of 5.55 million. Therefore, the labour demand will be greater than the supply and the unemployment rate will be reduced to 3.27 percent in 2009/10. Contrary to this projection, the official statistics 49

60 shows that during the MTDF framework, the labour force has witnessed an addition of 9.94 million and 9.45 million new jobs have been created. Since 2008, the economy has faced severe macroeconomic challenges with rising inflation, poor growth especially in the real sector, rising unemployment, unstable current account deficit and rising debt burdens. At present, the government is facing severe hurdles to sustain the ongoing pro-poor development expenditures due to growing fiscal deficits. Without macroeconomic stability especially the growth in the agriculture and manufacturing sectors, it would be just a daydream to ensure sufficient employment generation for the job seekers. The MTDF has targeted to lower the unemployment to 4 percent during 2009/10. However, the unemployment level in 2008/09 period was 5.2 percent. Independent sources put the unemployment in double digit. The worsening law and order situation, rising political uncertainty and corruption have made it costly to do business in Pakistan. As discussed earlier, out of 139 countries, Pakistan is among the worst 7 countries where the overall macroeconomic environment is sluggish. The severe power and electricity shortages have badly affected all the sectors of the economy. A decline in investment and saving rates has been witnessed during the recent period. In 2006/07, national saving and investment rates were 17.4 and 22.5 percent of the GDP, which declined to 16.6 percent and 13.8 percent in 2009/10, respectively. The double-digit inflation since 2008 has also badly affected the saving rates. The high oil prices combing with the commodity inflation is generating the stagflation. All the government policies and programmes aim to generate employment opportunities in rural areas by promoting rural farm and non-farm economy, social and physical infrastructure and better education facilities. However, there are higher and rising inequalities across the regions where the government development spending is also negatively skewed to the deprived regions. These poor regions are still deprived in terms of social and physical infrastructure and industrial setup and overseas employment opportunities. In the absence of rural-urban linkages and diversified resources, they have no option except to adopt the low paying jobs. Another issue is the capacity of the labour market to generate sufficient employment opportunities. Both the females and youth are still facing high unemployment rates. Though the recent statistics show the rising female s share in the labour market; it is mainly in the form of unpaid family helper mainly female (GoP, 2008a). Pakistan has witnessed an increase in the placement of its workers abroad for employment. Middle East is the favourite destination for majority of the poor and middle class Pakistanis. However, these labour markets are crowded at present with a massive flow from other South Asian and East Asian countries. Serious efforts are required to keep a reasonable share in the Middle East labour market and find new avenues for employment Role of Donors in Increasing Employment As outlined earlier, a number of international agencies, countries and NGOs are assisting the Government of Pakistan in its medium- and long-term development programs i.e. PRSP and 50

61 MTDF to eradicate poverty by ensuring equal opportunities for the various segments of the society. In the line of ILO s country Decent Work Program (DWCP), 2005, the MTDF has addressed issues related to employment creation (Labour and Employment Policies), poverty reduction (Poverty Reduction Strategy Papers) and human resource development (Skilling Pakistan). As reported earlier, a National Tripartite Forum on Employment and Skills was jointly organised by the Labour and Manpower Division of the Ministry of Labour, Manpower and Overseas Pakistanis (MLMOP) and the ILO in 2006 to examine the labour market challenges and policy formulation. Both the ILO and UNDP have assisted the Government of Pakistan to establish the Labour Market Information System (LMIS) to provide update and timely information about the labour market. At present, the LMIA is working and serving as an input to formulate the monitoring of labour and employment policies to ensure the decent work. Recent initiatives are as follows: During the 2010 floods, the ILO had launched the cash for work programme to provide quick employment opportunities in various flood-affected areas. During the relief period, the youth was involved to clean and sterilize the camps, establish sanitation facilities in the camps and clear debris from market places, roads and local infrastructure 18. Both the ILO and Canadian International Development Agency (CIDA) have launched Promoting Gender Equality for Decent Employment (GE4DE), a five year project from 2010 to 2015 with three distinct but integrated components: 19 strengthening national mechanisms to promote equal employment opportunities for women by enhancing their knowledge and skill; enhancing skills and employability of 6,300 poor women in rural and urban areas of selected districts using the ILO s Training for Rural Economic Empowerment (TREE) methodology; and strengthening the capacity of media to raise awareness on issues related to working women. Under the One-UN Programme, Expanded Funding Window (EFW) has been launched by UN (January 2010-December 2010) to promote the principles of social justice and decent work agenda in the following three main areas; agriculture, rural development and poverty reduction, environment and education. 20 A joint project Towards Gender Parity in Pakistan Project (TGP) is ongoing (July December 2011) with the collaboration of ILO and 14 other UN agencies. This project aims to ensure equal access to decent work and productive employment for women and men to move them out of poverty. A five year plan over the period of April April 2013 has been launched by European Community (EC) contributing to the Government of Pakistan s efforts to eliminate child labour, including its worst forms (WFCL). It will contribute to the execution of the

62 Government s National Policy and Plan of Action to Combat Child Labour, mainly the National Time Bound Programme ( ) - its medium-term plan for combating the worst forms of child labour. 21 The Government of Netherlands had initiated a three year project (March April 2010) to promote the elimination of bonded labour in Pakistan. 22 Under the Women Employment Concerns and Working Conditions (WEC-PK) project ( ), the Canadian International Development Agency (CIDA) has been assisting the government to attain the MDG goal by promoting gender equality and empowerment and the reduction of poverty in the country. 23 With the assistance of European Commission, the four UN agencies including ILO, FAO, UNDP and UNIDO have assisted the Government of Pakistan to promote community-based livelihoods over the period Under this initiative, 9,100 men and women were trained in construction and other non-farm skills; and 147 kilometers of rural link roads rehabilitated through labour-based technologies. 24 During , ILO implemented its flagship Project of Support to the National Timebound Programme on the Elimination of Worst Forms of Child Labour (TBP Project). It was a major project that made both policy level and community level interventions to build capacity of ILO s tri-partite constituents on the issue of Worst Forms of Child Labour (WFCL). 25 The US Department of Labour (USDoL) has provided the training in Mardan, Malakand and Attock in NWFP and Punjab under the Training for Rural Economic Empowerment (TREE) approach during September September Policy Recommendations for Fixing Binding Constraints Pakistan is a vibrant society and has been blessed with enormous natural and human resources. Unfortunately, it remained vulnerable to efficiently utilize its resources. The following necessary initiatives are required to enhance the employment generation opportunities in the country; Much effort from the government side is required to eliminate the issues related to bad governance including corruption, tax theft by the elite class, favouritism decisions by government officials etc. A stable macroeconomic system is prerequisite to generate sufficient employment opportunities especially for the poor. Through fiscal policy, the government should raise its capacity to generate enough resources to pursue its development programmes. The monetary

63 policy can be used to stabilize the prices and real interest rate, so that saving is encouraged (World Bank, 2006). As Hull (2009) suggested, there is a need to identify the sectoral behaviour of growth for poverty reduction and employment generation by identifying the more productive and less productive sectors. The more productive sectors should be followed by employmentintensive growth policies while the less productive sectors should be targeted by productivityintensive growth policies. In parallel, there is a need of policies, which enhance the mobility of the poor toward the productive sectors by cutting off the geographic, infrastructural, educational and cultural barriers. The pro-poor policies and macroeconomic stability is insufficient without the micro-level reforms by including the private sector. In this way, the government should act as a facilitator rather than regulator. The SMEs development especially in the rural areas will create employment opportunities. Supportive physical and social infrastructure is necessary to develop better rural-urban linkages and better integration across the regions. A special effort is required to overcome the regional inequalities by investing more on infrastructure, development of SMEs and establishing industrial zones in the deprived regions i.e. rural Sindh, southern Punjab etc. Agriculture has been playing and can play a significant role in employment generation and economic growth of Pakistan. A better farm technology and productivity gains in the livestock sector are highly important for pro-poor rural income growth and employment generation (World Bank, 2006). The human development is the crucial constituent for employment generation and poverty reduction. The history of Pakistan suggests that a major failure to achieve the economic targets is the lack of a sound educational system. At present, the educational system is not matching with the labour market requirements as it is providing education in those disciplines, which are relatively less demanded in the labour market. A sound occupationalspecific education would ensure the matching jobs, self-employment opportunities and employment activation polices i.e. microfinance, rural development, promotion of SMEs etc. There is a need to increase access to overseas employment by bringing the poor regions under the official recruitment network. Credit facilities to finance overseas migration may also be given to poor households in poor regions (Amjad et al., 2008). 8. Identification of Focused Areas for MDBs Interventions in Employment Generation Over the Medium-Term ( ) 8.1 Possibilities of Poverty Reduction Through SMEs Development by Employment Creation Micro enterprises serve as one of the primary vehicles for income generation and poverty reduction particularly in developing countries where the very poor are more constrained in their economic choices by the market environment, lack of infrastructure, and insufficient sources of 53

64 affordable credit (Menon and Rodgers, 2011). Policy measures targeting these constraints can make self-employment more productive, thus facilitating the move toward poverty reduction. The expansion of non-farm employment, including self-employment, is directly associated with a decline in rural poverty. The expansion of non-farm employment is pro-poor, and it puts upward pressure on agriculture wages, which further facilitates rural poverty reduction (Menon and Rodgers, 2011). In Pakistan, SMEs account for about 95 percent of all 3.2 million business enterprises. They contribute 30 percent to the GDP, account for around one-fourth of export earnings, and provide about 80 percent of the nation s jobs. One more structural fact, however, is that the SMEs in Pakistan are in general less efficient than larger firms. There is a need to remove the main constraints that restrict the growth of SMEs so that these enterprises can expand and reap the benefits of economies of scale. In Pakistan, banks provide only 7-8 percent of the total funding requirements of SMEs. Access to finance is the single most important impediments to its growth. Thus, a key area of policy intervention is the provision of small-scale loans through microfinance and rural banks. Poor households can improve their ability through greater access to credit to withstand shocks to consumption and production. In developing countries, opportunities in the paid labour market for women are scarce. Financing self-employment opportunities with sources of credit can be especially important for women. Access to credit through micro financing has aided in poverty reduction in India and Bangladesh by providing a diverse range of financial services to the poor and the disenfranchised (Menon and Rodgers, 2011). In Pakistan, poverty is concentrated in rural areas among the landless, small farmers, sharecroppers, agriculture workers and construction workers. There are limited job opportunities in the rural non-farm sector. The rural poor have no choice but continue working with low wages in poor conditions. A gradual shift of labour from agriculture to services and manufacturing sectors has been observed. This shifting can hardly help them improve their well-being because of low human capital and lack of resources to become self-employed. The financial assistance of the rural poor to start their small businesses in rural areas or in small towns can go a long way to generate employment and reduce poverty in Pakistan. The MDBs needs to work with the Government of Pakistan for the SMEs development because all recent development plans and poverty reduction strategies have included the SME as a priority sector to create job opportunities and reduce poverty Vocational Training The terms technical and vocational training are sometimes used synonymously. However, as per present practice, the term technical education refers to post-secondary courses of study and practical training aimed at preparation of technicians to work as supervisory staff. The term vocational training refers to lower level education and training for the preparation of skilled or semi-skilled workers in various trades and it does not enhance their level with respect to general education. 54

65 The National Vocational and Technical Education Commission (NAVTEC) was established in It is a regulatory and coordinating body for skill development and establishment of skill standard. The NAVTEC has prepared a strategy for the period. At present, technical education and vocational training programs are administered by a number of federal, provincial and private agencies. Thus government vocational institutes are administered by the provincial education department, technical training centres; vocational training centres and apprenticeship training centres are administered by the provincial labour departments; apprenticeship training under the apprenticeship training ordinance is administered by the provincial directorates of manpower and training in establishments employing 50 or more workers. Finally, On-the-Job Training within industries and training is also impacted by the small industries departments/corporations and private technical and vocational institutions. A Technical Education and Vocational Training Authority (TEVTA) has been established in Punjab and all the departments dealing with technical and vocational training have been placed under it. The Ministry of Labour and Manpower has established five Skill Development Councils (SDCs) one each at Islamabad, Karachi, Lahore, Peshawar and Quetta. The SDCs assess the training needs of their geographical areas, prioritize them based on market demand and facilitate training of workers through training provision in the public and private sectors. The provincial directorates of manpower and training and the National Training Bureau in the Ministry of Labour and the Federal Ministry of Education through its directorates of technical education are running colleges of technologies, polytechnics, mono-technics and commerce colleges offering vocational and commercial training. The Ministry of Science and Technology, through the National Institute of Science and Technical Education (NISTE), also imparts science and technical education including training of teachers, curriculum development, research and development and coordination of science and technical activities at national and international levels. The present enrolment in TEVT institutions is 105,000, which corresponds to only 1.4 percent of numbers in age group years, with another 115,000 engaged in tertiary level diploma and certificate programs, compared with over 326,000 enrolled in programs for bachelor and above. The present capacity of the government departments and agencies is insufficient to impart the vocational training. The first constraint is financial, because it affects the quality of education and hands-on skill imparted to trainees. Collaboration with the private sector remains a major option for the government, if the nature of the relationship with business and industry is properly tuned; otherwise there is a danger of alternating between bureaucrat-industry relationships, which are either too stand-offish or could lead to conflicts of interest. MDBs can play a role by supporting financially the private sector for establishment and operation of vocational education and training institutions. However, standards and quality benchmarks will need to be regulated irrespective of who runs the institutions. The priority should be to establish new institutes to increase enrolment opportunities for youth Islamic Microfinance for Employment Generation Several models for SME development through Islamic microfinance have recently been proposed (Hassan, 2008; and FARZ, 2011). For employment generation in Pakistan, it makes sense to link 55

66 Islamic microfinance services with the vocational training institutes by providing their graduates these services. Graduates from one particular area can organize themselves into groups with mutual guarantee. IsMFIs can provide them finances using a combination of different modes including Bai-Muajjal, Ijaraor equity based modes such as Mudaraba or Musharaka. Group members can be encouraged to save under appropriate micro saving schemes. Group members can also be encouraged to form an Islamic Fund to provide micro-insurance against unforeseen risks and uncertainties resulting in loss of livelihood. Thus, the linking vocational training institutes with the IsMFIs can be an effective way to promote self-employment among the youth and reduce poverty. FARZ foundation, an IsMFI, has given the concept of SME village to produce, pack and export different products like dairy, vegetable, leather, embroidery, fruit, poultry, garments, jewelry etc. to the local, national and international markets. This model SME village would consist of a minimum 500 skilled and productive households. It will be a SME community. For employment generation and poverty reduction, MDBs can start in Pakistan a pilot project to develop SME villages using the Islamic microfinance services. Activity Agriculture Historically the largest employer but over the independence period and in the foreseeable future Industry Appendix Table 1: Pro-Poor Economic Activities Employment Entrepreneurship Current State in Opportunities Opportunities Pakistan Given land consolidation Low productivity given possibilities, limited government regulation, opportunities for poor property rights and land entrepreneurship tenure arrangements. will lose jobs. Cannot look to agriculture for employment. As technology improves, capital labor ratios are increasing. The era of vast armies of labor working on assembly lines is over. Retail Large employment opportunities. Construction Large employment opportunities for poor if substantial large scale construction of a modern kind is allowed Leisure Large employment opportunities. Hotels and entertainment centers can No opportunity for the poor. If small scale opportunities are allowed that can offer substantial opportunities for the poor. The most pampered sector in Pakistan. Continued recipient of subsidies and protection. Hence a means of transfer from the rich to the poor. Retail is totally penalized by policy. Limited entrepreneurship Archaic zoning laws prohibit serious construction Yes. Small restaurants and shops can be supported by this be large employers. industry. Community Considerable Limited Policy not favorable Source: Haq et al., 2007 Zoning laws and fundamentalism prohibit this. 56

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