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ECONOMY

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CAN ECONOMIC GROWTH LEAD TOPOVERTY REDUCTION?

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MANSOOR M. DHANANI(feedback@pgeconomist.com)

The biggest tragedy of the mankind inthe present world is poverty. Enormousprogress has been made by mankind inevery aspects of life. At one end mankindis spending billion of dollar to travel outerspace for the search oniving planet and onthe other end almost halfthe world popu-lation live on less than $2.50 a day earning(World Bank Indicator 2008).

Every year some 10 million children diefrom easily preventive illness. Around 1.2billion of the world's population live with-out safe water and 2.4 billion not haveaccess to improved sanitation. Three quar-ter of world income belongs to 20 per centof rich countries. Every year developedcountries are spending billion of dollar onthe weapons but if the little percent of thiscan be invested, every child on the earthcan be able to attend school.

Poverty is widespread in many parts ofthe developing world and becomes a pre-dominant subject for academics, institu-tions and policy makers. Before 1970s,poverty was not a central issue in the de-velopment studies. In 1970s, the WorldBank shifted its focus from growth to pov-erty reduction. Similarly, InternationalLabour Organization ([LO) initiated a ba-sic need approach of poverty to develop-ment approach of poverty. In 1980s, twodifferent thoughts of concepts were pre-sented by Foster, Greer and Thorbecke(FGT) about the measure of poverty inci-dence. Similarly, Amartya Sen presentedthe definition of poverty in the light ofentitlements and capabilities in late 1990and early 2000. In October 2000, 180 coun-tries signed the Millennium Declaration,pledged to meet the Millennium Develop-ment Goals (MDGs) by 2015 and the firstand most important MDG is to reducepoverty by half by 2015.

In the decades of 1960s and 1970s, thedefinitions of poverty has been defined asrelating to either lack of financial incomeor lower social status to fulfil the basicneeds. In the last two decades, differentconcepts have been presented with regardsto poverty. The well knows economistAmartya Sen defines no-poverty as "Tomeet nutritional requirements, to escapeavoidable disease, to be sheltered, to beclothed, to be able to travel, and to be edu-cated". Similar definition was presentedby World Bank (2005) with little addition

Pakistan & Gulf Economist, April 11 - 17, 2011

that povertyis deprivationinwell-being.Itincludes low income, inability to acquirethe basic goodsand servicesnecessary forsurvival with dignity. In additional,low rev-elsof health and education, pooraccesstoclean water and sanitation, inadequatephysical security, lackofvoice,and insuf-ficient capacity and opportunity to betterone's life are also described as poverty.The' more elaborate definition about pov-erty has been presented by United Nations.According to UN(June 1998), "Fundamen-tally, poverty is a denial of choices andopportunities, a violation of human dig-nity. It means lack of basic capacity toparticipate effectively in the society. Itmeans not having enough to feed and clotha family, not having a school or clinic to goto, not having the land on which to growone's food or a job to earn one's living, nothaving access to credit. It means insecu-rity, powerlessness and exclusion of indi-viduals, households and communities. Itmeans susceptibility to violence, and itoften implies living on marginal or fragileenvironments, without access to cleanwater or sanitation". All these definitionsare summarizing one important aspect thatevery human on earth should have capa-bilities to acquire basic things to enablethem to live with dignity and pridc.

Economic growth is an increase in thecapacity of an economy to produce moregoods and services. [n other words, eco-nomic growth is the continuous increasein the productive capacity of the economy.Economic growth occurs whenever peopletake resourcesand rearrange them inwaysthat are more valuable. Take the exampleof e-ticket in the airline industry. The in-vention of e-ticket in the.airline industryproduced many benefits to industry andcustomers, likes cost savings, efHcientpas-senger proce1jsing, real time access to fi-nancial results and provides effective andprompt service to passengers. E-ticket isthe simple example, millions of such ac-tivities/inventions are required to doublethe average income oHhe nation. Economicgrowth is usually driven by private sector,private firms, and farms. They are respon-sible for most of an economy's production.Free and competitive market provides in-centive to private sector to produce goodsas efficiently as they can, to innovate, andto fulfil market demand. Economic growthcan be measured in nominal terms, whichinclude inl1ation, or in real terms, whichare adjusted for inl1ation. For comparing

one country's economic growth to another.GDP or GNP per capita should be used asthese take into account population differ-ences between countries.

There is an inverse relationship betweeneconomic growth and poverty reduction,and mostly implied that more growth wouldreduce poverty. More and more empiricalevidence suggests a close relationshipbetween rapid growth and poverty reduc-tion. Let's take the example ofsomecoun-tries to evaluate whether economic growthcan reduce poverty.

According to research article ofAgrawal.Pradeep (2008, p.90-115), Kazakhstan isoneof the most successful country amongpost soviet states in Ccntral Asian forachieving high economic growth and sig-nificant poverty reduction. After the col-lapseofSovietUnionin 1990,Kazakhstan'seconomy has gone through the stagesofdecline, stagnation, and high economicgrowth. In the early 1990s, the govern-ment of Kazakhstan faced the challengingtask to restore the economy of the coun-try. In decade, Kazakh government hascreated a new constitu tion and legal frame-work, restructured industrial and agricul-ture sector, created a new privatized bank-ing system etc. Indeed, this achievementhas made Kazakhstan the most success-ful economyof the Central Asia.The initialseven years (1990 to 1997) after indepen-dencewas the periodof negativeeconomicgrowth or zero growth (1990-1998). From1999, Kazakhstan entered the phase ofpositive and sustained growth. Over theperiod of 1999-2007, the average GDPgrowth was nine per cent. Overthe period1998- 2007, the poverty gap in Kazakhstandeclined significantly from 39 percent in1998 to 13.8 percent in 2007. In addition,the Kazakhstan economy received a bigboost in beginning of 2003 from the dis-covery of large reserves of crude oil andgas. These have not only generated sub-stantial revenue for government throughexport of crudc oil. but have also gencr-ated growth in many other related sectorsof the economy such as construction.transportation, etc.. which in turn havegenerated much employmcnt. The oil rcv-enue has also allowed the government 10expand the social security system in a bi~way. All this has helped Kazakhstan toreduce poverty.

Another great exam pie of poverty red uc-tion through economic growth is China,economy of which has been constantly

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growingsince 1978. According to the WorldBankdata, the average annual GDPgrowthofChina has been around 10 per cent overtheperiod of 1978-2009 (31-year) which isthe longest lasting period with the highestgrowthrateofGDP per capita and no doubt.thepeople of China largely benefit from it.This statistics correspond that the GDPper capita is doubling every 8.6 years.Accordingto the estimation made by theWorldBank. it took Britain 58 years todoubleits per capita income (1780-1838),America47 years (1839-1886). Japan 34years(1885-1919), South Korea 11 years(I966-1977).

According to the international povertyline,cost of living per capita per day isbelow$1. The World Bank estimates thatChinais poverty gap has dropped from39.25per centin 1981 to 3.95 per centin2005,showing a decrease of35.3 per cent.Chinais achievements in poverty redllc-tionmake hllgecontriblltions to the causeofpovertyreduction of the world. In Asia,China, India, Pakistan, Indonesia, andBangladesh are the most condensed pov-ertypopulation countries. According to theinternational poverty line, Chinais cur-rent proportion of poverty population isthe lowest among all five countries. Theabovestatistics demonstrate that in lasttwodecades, China has made tremen-dous contribution in human history toreduce poverty by a largest margin andreversed the trend of increasing povertyin the past few decades in the worldhistory.

Inthe course of strong economic growth,Kazakhstan and China are able to reducepovertysignificantly. Similarly in EastAsiaand South-East Asia countries (Taiwan,Indonesia, Philippines, Malaysia), rapideconomicgrowth has helped greatly toreduce poverty. In East Asia, where theproportionof people living in extreme pov-ertyfellfrom 33 per cent in 1990 to 9.9 percent in 2004, and in South-East Asia,wherethe proportion fell from 41 per centto29.5per cent over the same period. Thesuccess enjoyed by these coulllries par-ticularlyChina has driven global povertydown.However, economic development inmanydeveloping countries, particularlyleastdeveloped countries, has not trans-latedinto poverty reduction.

Brazil saw rapid growth in 1970s butthenits economy was stagnated or under-wentlowgrowth. therefore the country wasnotableto reduce poverty significantly butreduced poverty up to certain extentthrough social interventions. In 1970s,Brazil'seconomy had rapid growth but in1980sthe economy became stagnate. Thelverage annual growth rate of GDP percapitaover the period of 1985 to 1992 wasnegative0.54 per cent. The per capita GDPregainedfrom 1992 and the average an-nualgrowth over the period of 1992-2005

was 1.25 per cent. During the period of1985 to 2004, the rate of poverty fell onlyfour percent. from 33 per cent to 29 percent of the population comparing with thedeveloping world where poverty fell from33 per cent to 18 per cent in the sameperiod. Brazil's result was unsatisfactoryin poverty reduction due to low economicgrowth. However, Brazil was able to re-duce poverty up to some extent throughsocial intervention. In 1990s, Brazil hasmade substantial expansion in the socialsecurity and social assistance systems,driven both by increases in coverage andin the average benefits level. As a result,the total monthly benefit bill in Brazil'srural areas rose from USS 180 million in1991 to US$750 million in 1998. Coveragealmost doubled. and the average monthlybenefit rose from US$44 to US$109.9.Since most minimum pensions are set atthe level of the official minimum wage,benefit levels (in both urban and ruralareas) also rose with the real value of thatwage, which increased sharply in 1994.There is evidence that this increase in socialspending helped reduce poverty and in-equality.

In the case of Brazil, only 4 per centpoverty fell over the period of 1985 Ii.2004and this reduction mainly because of so-cial intervention by government. Similarly,in sub-Saharan Africa, the rate of povertyfell only 6 per cent from 47 per cent in1990 to 41 per cent in 2004 due to sloweconomic growth.

From the above mentioned examples, itis obvious that the countries which wereable to achieve strong economic growthwere able to reduce poverty significantly.It is hard to find any country which wasable to attain major poverty reduction inthe absence of high economic growth. Thesecret to sustaining growth is basicallygetting the institutions and policies right.The role of government is very importantto create the right conditions for growth.The key ingrediellls of economic growthare political stability, property rights, awell-regulated financial sector, competi-tive market conditions, e.g. by limiting stateownership of enterprises. High level ofpublic investment is also required for eco-nomic development. Government alsoneeds to tackle market failures, for ex-ample, by developing informational infra-stmcture such as asset registries and creditbureau, and appropriately regulating in-dustries with natural monopoly charac-teristics such as electricity and water.Successful integration into the globalmarket is also key to economic growth. Itis hard to find example of any countrywhich achieved high growth without in-volving country's economy into the globaleconomy. Access to international marketsis important because it is providing a majorsource of new market and source of in-

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vestment capital and enabling business LOacquire new technologies and other inno-vations, and a way to stimulate competi-tion, all of which contribute to productiv-ity growth. Will developing countries beever able to achieve the high economicgrowth? It is apparent that high economicgrowth would be difficult for majority ofdeveloping countries due to economic cri-sis, corruption, civil war etc.

Developing countries must adopt theeconomic reform strategies which shouldbe only poverty focus. Dani Rodrik theProfessor of International Economy at theJohn F. Kennedy School of Government,Harvard University has presented in hisarticle "Growth Versus Poverty Reduction"the three main elements of poverty focuseconomic reform strategies. First is socialwelfare intervention. Apolicy that increasesthe income of the poor by one ru pee can beworthwhile at the margin, even if it coststhe rest of the society more than a mpee.From this perspective, it may be entirelyrational and proper for a government con-sidering two competing growth strategiesto choose the one that has a greater poten-tial payoff for the poor, even if its impact onoverall growth is less assured. Brazil ex-ample is good to present social welfare bygovernment intervention. Brazil was ableto reduce poverty up to some extentthrough social security and social assis-tance system. Second, even if the welfareof the poor does not receive extra' weigh t.interventions aimed at helping the poormay still be the most effective way to raiseaverage incomes. Poverty is naturally as-sociated with market imperfections andincompleteness. The poor remain poorbecause they cannot borrow against fu-ture earnings to invest in education, skills.new crops, and entrepreneurial activities.They are cut off from economic activitybecause they are deprived of many collec-tive goods such as property rights, publicsafety, and infrastructure and equal mar-ket opportunities. It is a standard tenet ofeconomic theory that raising real averageincomes requires interventions designedto close gaps between private and socialcosts. Third, focusing on poverty is alsowarranted from the perspective of abroader, capabilities-oriented approach todevelopment. An exclusive focus on con-sumption or income levels constitutes toonarrow an approach to development. NobelLaureate Amartya Sen has emphasized,the overarching goal of d~velopment is tomaximize people's ability to lead the kindof life they value. The poor face the great-est hurdles in this area and are thereforethe most deserving of urgent policy atten-tion. On the other hand, developed worldparticularly the G8 countries are requiredto provide foreign assistance to developingcountries to invest in those projects, whichare productive and can reduce poverty

Pakistan & Gulf Economist, April 11 -17,2011

ECONOMY 22 E

through building infrastructure. givingeducation. capacity building for macroeco-nomic management. and introducingmarket reforms and regulations.

Economic growth is crucial for povertyreduction. Countries likes Kazakhstan.China. East Asia and South-East Asiacountries (Taiwan. Indonesia. Philippines.Malaysia) were able to reduc.e poverty sig-

nifidmtly due to high economic growth.Conversely. Brazil. sub-Saharan Africa.and many developing countries experi-enced the slow economic growth and thusrate of poverty fell marginally.

The secret to sustaining growth is basi-cally getting the institutions and policiesright. Therefore. it is prime responsibilityofthe government of developing ,~ountries

to execute poverty focus economic reforlll~to achieve economic growth. Simulta-neously, developed countries have thegreatresponsibility to provide all necessaryassistances to developing countries forreducing poverty from this world. "Giveaman a fish; you have fed him for today,Teach a man to fish; and you have fedhimfor a lifetime" .

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NEEDTOBROADENTHETAXNETcrushed by force or other tactics.

Independent economists ofworldre-pute have been advising the economicmanagers of Pakistan that they. in-stead of increasing the tax rates,should focus on revamping tax collec-tion systems and making it more ef-fective by closing all loopholes in thesystem in order to increase the rev-enue collection, The rising size ofblackeconomy. tax evasion. and corruptionin the tax collection machinery shouldbe effectively controlled. The onlynewtax. which needs to be imposed with-out loss of any further time. is thetaxon income from agriculture at thenormal rates of taxation as applicableto the salaried class.

In a good taxation system, thereismarc focus on direct taxes than theindirect taxes as is in case ofPakistanwhich puts more burdens on thepoorclass than the rich. What is moreshame-ful is the fact that only about threemil.lion out of over 180 million pay anytaxand this is perhaps the biggest scandalof our revenue generation systemthatafl1ictscountry's economy. Issuesofcor.ruption, graft and kickbacks pale intoinsignificance compared to tax evasionspecially by the Pakistani rich. Are.cent report revealed that the primeminister and more than 25 membersof his cabinet had not paid any in-come tax for the last 5 years,

The size of black economy is con-stantly on the rise as the system pro-vides many avenues for parking theillegal money. The vehicle for whiten'ing such money is also available inthe system. Anyone desiring to gethisillegal money legalized can simplygoto a money changer and arrange re'mittances from abroad. This tendencyhas facilitated many large businesshouses, smugglers, hoarders andcor-rupts to openly display wealth with-~t-any fear of being probed. .

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SHAM 1M RIZVI

(feedback@pgeconomist.com)

The governor of State Bank of Paki-stan, Shahid Kardar, has emphasizedthe need to broaden the tax net bybringing the untaxed sectors such asagriculture into the net. "Pakistan'seconomy has shown some signs ofimprovement but quick steps areneeded to broaden the tax base to ben-efit from the growth in untaxed sec-tors. Kardar said adding that he wasworried by a structural shift of incometowards the untaxed sectors. With thisshift of income from the tax payingsectors to nontax paying sectors thetax-to-GDP ratio is structurally des-tined hovering around lowest levels."He told Reuters in an interview thatPakistan has one of the lowest tax-to-GDP ratio in the world which is cur-rently less than lOper-cent.'- The statement of incumbent chief oftbe1central bank of the country hascolineas a pleasant surprise. It is whatthe independent economists ofthe coun-tlF~tlaRd,itsiw~ll-wishersare demandingsiht~)ldtigi\!il!itlt:hepowerful landed aris-Wcra'cyjhti~omehow managed to keeptliffiMa:bd.II:H!tE!Ifti'cd/iie out of the tax net.

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the wrath of the feudais.The federal budget 2010-11 sowing

a whopping deficit of Rs685 billion be-tween projected revenues and expendi-ture was passed by the National Assem-bly without touching the income fromagriculture, Accordingto the experts, thetrend of the rising budget deficit willcontinue rising until the governmenttakes serious measures to improve thetax-to-GDP ratio to 18 to 20 percent,which would still be in the lower rangeaccording to world standard,

Unfortunately. in Pakistan this ra-tio is falling instead of rising and hascome down to a dismally low level ofabout 9,5 percent from about 13 per-cent about 5\6 years back. This lowlevel is the root cause of our economicills, We must improve it to at least 15percent to generate revenues enoughto meet our normal expenses. The taxtreatment of income must be uniformand non-discriminatory without regardof its origin. There should be no exemp-tion in taxes on income and consump-tion except forincome ofcharitable trustor consumption of foodstuff. All othertype of income including income fromagriculture should be equitably taxedbesides dealing with an iron hand withall types of tax evaders,

Imposition of tax on agriculture sec-tor or farm income has been an issuesince inception of Pakistan, but group-ing amongst the feudal lords. civil andm

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