Pakistan Economy Lahore School of Economics Pakistan Economy Lahore School of Economics Solving...

Pakistan Economy

Lahore School of Economics

Pakistan Economy


Solving Pakistan’s Poverty Puzzle: Whom should we

believe? What should we do?Rashid Amjad

Pakistan Economy


Introduction

• Pakistan generated impressive gr rates in the 60’s and 80’s with low levels of saving, investment and very poor human development indicators.

• Pakistan’s growth performance has been among the top ten in the world during the period 1960 – 90.

Pakistan Economy


Pakistan is a puzzle, a miracle of levitation. With one of the lowest domestic savings rate in Asia, its

economy has performed quite creditably. Since we do not believe

in miracles, we have to wonder whether the capital inflows that

have sustained this growth will last.Professor Richard Eckaus

Pakistan Economy


Introduction

• Understanding the wide fluctuations in its poverty level are even more difficult to explain– 60’s: high economic growth but increasing

poverty levels– 70’s; low economic growth accompanied by

reduction in poverty levels– 80’s: high economic growth leading to decline

in poverty– 90’s: low growth and high poverty

Pakistan Economy


Poverty Trends in Pakistan (1960 – 2001)

• Impressive no. of studies on the assessment of poverty in Pakistan, sparked by the MD’s and PRSP.

• Official publications and independent studies by research institutions

• Indicator used: minimum caloric intake• Recognize that poverty levels can significantly

be affected by changes in income distribution and also by the choice of indicator used

Pakistan Economy



• 1960 – 1987:– Poverty levels increased in the 1960’s and fell in the

1970’s and 80’s although the extent of the decline in the 70’s is disputed

• Post 1987:– Significant difference between the result of studies

done by the World Bank and those done by other institutions.

– The WB study shows that poverty declined till 1996 and increased after it, leaving overall poverty stagnant during the 90’s.

Pakistan Economy



• Anwar and Qureshi (2002):– The headcount measure of poverty has

increased from 17.2 in 1990 to 30.4% in 1998 and further to 35.6% in 2001.

– Doubt the WB study and conclude that the stagnation in poverty estimates are due to the overestimation of poverty in earlier years by the World Bank

Pakistan Economy



• Why this controversy?– No established ‘official poverty line’– 2002: an official poverty line defined by the Planning

Commission as being 2350 calories per day per adult as an average requirement for all individuals

– Based on the official poverty line, overall poverty level declined from 29.1% in 1986 to 26.1% in 1990, but then increased to 32.1% by 2000.

– Major increase in poverty was witnessed in the rural areas; poverty in urban areas actually declined

Pakistan Economy


Whom should we believe?

• Two important facts:– Both the levels and trends in poverty are very

sensitive to the choice of the poverty line– A significant portion of the population is

clustered around the poverty line. The transitory vulnerable and the transitory poor can move above or below the poverty line even if there is a marginal change in the economic conditions.

Pakistan Economy



• The lack of agreement on poverty trends may be the reason why significant importance was not given to poverty and unemployment issues by successive regimes during the 90’s.

• 1994: first higher level recognition of poverty as an important issue.– The Economic Coordination Committee asked the

Federal Bureau of Statistics to submit a report on income dist and poverty in the country

– The report, which concluded that poverty had increased in the country b/w 88 – 91, was never submitted to the ECC.

Pakistan Economy



• Why this neglect of poverty?– Pakistan had embarked on a structural

adjustment reform program by the end of the 80’s

– What is important is that the issue of poverty should have been at the centre stage even when the reforms were being implemented.

Pakistan Economy



• The dominant view that has now emerged is that poverty levels did increase during the 90’s, with the rural areas showing the more significant amount of increase.

• This view is agreed upon by:– The Jamali govt.– Human Development Outlook, 2003– PIDE– ADB– ILO– UNDP

Pakistan Economy


Cross-country Comparisons.

• How does Pakistan compare with other countries, especially over the 1990’s

• The choice of countries is explained by the fact that the structural and economic features of these countries are broadly similar to that of Pakistan.

• Countries examined: Indian, Bangladesh, Indonesia, Philippines, Thailand and Egypt.

Pakistan Economy


Cross-country Comparisons: India

• High poverty levels of around 55% during the 70’s, but have shown a steady decline during the 80’s and 90’s.

• Overall trends mask regional differences; states bordering Pakistan have also shown a decline in poverty

• Reasons:– Higher econ gr, especially in the agri sector (3.4%)– Real wages increased during the 80’s and 90’s

Pakistan Economy


Cross-country Comparisons: India

• Points to note:– Although agri gr rate (3.4%) was high in India,

it was lower than that of Pakistan (4%)– Continuing rise in real wages during the 90’s– Subsidies and current transfers for the poor

decreased from 43 to 41% in India, whereas they were halved in Pakistan from 20% to 11% during 1990 – 2000.

Pakistan Economy


Cross-country Comparisons: Bangladesh

• Fluctuations in its level of poverty.• Reasons:

– Low economic and agricultural growth– Low investment rates– Public development expenditure in agriculture

was reduced drastically, without introducing any alternative incentives.

– Real rates of interest increased sharply.

Pakistan Economy


Cross-country Comparisons

• Comparing the three South Asian countries:– 13.4% of the pop lived below the poverty line

in Pakistan in 1998– India: 34.7% in 1999 – 2000.– Bangladesh: 36% in 2000.

Pakistan Economy


Cross-country Comparisons: Indonesia

• Poverty has decreased steadily since 1976.• Witnessed an increase after the East Asian

crises, but has subsequently decreased.• Reasons:

– High rate of labor intensive manufactured export goods

– High levels of foreign direct investment– Sustained increase in agricultural production

• Relationship between growth and poverty has varied over time: poverty kept going down even when growth was slow.

Pakistan Economy


Cross-country Comparisons: Indonesia

• Lessons to be learnt from the Indonesian experience:– Employment did not decrease when growth

slowed down because reduction in public expenditure was concentrated in capital-intensive sectors.

– Grants to public enterprises were reduced– Since poverty goes up if food prices increase,

the govt. followed a policy of stable rice prices; Also achieved self-sufficiency in rice.

Pakistan Economy


Cross-country Comparisons: Philippines

• Why a comparison is useful:– Both countries have a significant proportion of

their labor force working abroad.– Both were cited as the two potential Asia

tigers based on their growth rates during the 60’s; their subsequent performance did not live up to the earlier expectations.

– Large inflow of remittances in both the countries

Pakistan Economy


Cross-country Comparisons: Philippines

• Despite the inflow of remittances, Philippines was unable to reduce poverty as Pakistan and during the 70’s and 80’s.

• Reason:– Inability to sustain growth in contrast to its

South-East Asian neighbors. – Overall growth was just 1% during the 80’s.– Badly affected by the E.Asian crisis.

Pakistan Economy


Cross-country Comparisons: Thailand

• Poverty levels declined steadily since the 70’s, but went up during the East Asian crisis.

• Main engine of poverty reduction:– Sustained economic growth– Sustained agricultural growth– Impressive growth of labor-intensive

manufactured exports.

Pakistan Economy


Cross-country Comparisons: Egypt

• Poverty decreased during the second half of the 90’s. Reasons:– Rapid economic growth during this time– Significant improvement in its human development

indicators– Rapid growth in jobs, incomes and productivity– Safety nets:

• Food subsidy programme (bread, sugar, cooking oil etc.)• Social Fund for Development targeted towards new

graduates, unemployed youth and female headed households. It supports HRD through training and skill development.

Pakistan Economy


Cross-country Comparisons: Broad Conclusions

1. The performance of the agricultural sector has a very important impact on poverty in these countries, because a significant proportion of their population works and lives on this sector

• India: agri growth translated into a rise in real wages and a decrease in poverty.

• Pakistan: high agri growth was not able to reduce poverty during the 90’s.

Pakistan Economy



2. The impact of economic growth on poverty is most strongly transmitted through the labor market, i.e. it should be employment generating and enhancing labor productivity

• Bangladesh during the 90’s• Pakistan in the 70’s as opposed to the 60’s• Indonesia and Thailand’s success in

reducing poverty by labor-intensive exports

Pakistan Economy



3. Incomes of the poor are not only a function of economic growth and better job opportunities, but also of what happens to prices of basic food items and other necessities => govt. subsidies

4. Micro interventions in the form of public work programs and wage guarantee schemes can help reduce unemployment and hence poverty.

Pakistan Economy


Economic Management in the 90’s

• The economic managers during the 90’s faced a difficult situation

• 80’s: a decade of missed opportunities– Large fiscal deficit due to large govt.

expenditure– Debt burden on the economy

Pakistan Economy


Economic Management in the 90’s

• Major reasons for the rise in poverty:– Slowing down of economic growth– Large fluctuations and decline in cotton production

(pest attacks)– Continuing slowing down of remittances– Bad weather conditions, which affected agri– Economic sanctions– Economic uncertainty due to frequent changes in

govt.– Lack of continuity in economic decision making– Interim govt’s entered into agreements with MFI’s.

Pakistan Economy


Seven Shortcomings of Economic Decision Making in

the 90’s1. Sequencing and pace of implementation

of the economic reform program• Financial sector reform program: the fiscal

deficit should have been reduced prior to the financial sector reforms.

• Regressive taxation structure, which increased the burden of taxes on the poor and increased income inequality.

Pakistan Economy


Seven Shortcomings of Economic Decision Making in the 90’s

2. Failure to effectively protect real incomes of the poor and vulnerable segments of the pop against rise in prices of essential items.

• Removal/phasing out of poverty related subsidies on food

• Poverty related federal subsidies went down from 90% to 4% during the second half of the 90’s

• Average caloric consumption decreased from 2503 Kcal to 2196 Kcal.

• Increase in energy prices: consumers lost out while the producers gained.

Pakistan Economy



3. Targeted lowering of the fiscal deficit, as part of the IMF stand by loan agreements.

• Seriously constrained the Public Sector Development Program

• Pvt. Investment also decreased during this time => adverse effect on poverty and employment

• With inflation falling in the second half of the 90’s, the govt. could have increased public spending and carry a larger fiscal deficit because pvt inv was already low.

Pakistan Economy



4. Insufficient efforts were made to counteract the rising level of unemployment, which more than doubled in the 90’s compared to the 80’s.

• The special public work programs were not well targeted

• No protection of workers from the falling real wages and deteriorating employment conditions.

• Weak bargaining position of workers: Industrial Relations Ordinance (2002) curbed workers’ rights for collective bargaining and provided leeway to convert permanent workers to contractual workers.

Pakistan Economy



5. Disappointing efforts were made to improve the country’s low human development indicators.

• The Social Action Plan to improve human development during the 90’s was not successful

6. Safety nets for the vulnerable and poor were grossly inadequate to deal with the deteriorating conditions.

Pakistan Economy



7. Freezing of the foreign exchange accounts in May 1999, after the nuclear explosion.

• Adversely affected deposit holders• Shattered business confidence• Was there any alternative in the wake of

economic sanctions?

Pakistan Economy


Pakistan Economy


What should we do?

Pakistan Economy


Pakistan Economy


Land reforms

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