IN AN assessment report prepared prior to September 11, the Asian Bank had warned that poverty has emerged as the central challenge for development for the government of Pakistan.

The global recession and the war against Talibans are imparting utmost urgency to an effective poverty reduction strategy to check increasing social exclusion and a possible social explosion.

In their wake, wars bring human misery and poverty and foster radicalism and militancy that can only be mitigated by a massive programme of poverty reduction. In this critical stage of US war against terrorism focused in the neighbourhood, whose fallout is so evident, there is no doubt that poverty has been thrown up as the core issue in Pakistan’s struggle to build a thriving economy with broad based prosperity. And Islamabad has to look for policy choices in a volatile world.

In a 68-page draft on Interim Poverty Reduction Strategy Paper (IPRSP) submitted to the IMF to qualify for PRGF, jointly prepared by Poverty Reduction Cell, Planning Commission Policy Wing and Finance Division, the authors have observed that “poverty is on the increase “ and “the challenge, to say the least, is daunting.”

The report says that Pakistan’s progress on almost every social sector indicator e.g. education, health and nutrition compares poorly with that of other developing countries, illustrative of a weak adult literacy profile, a low life expectancy and a high maternal mortality rate. Access to clean drinking water and sanitation is limited. The situation is worse if gender and regional disparities are taken into account. Social indicators are substantially worse for women and children living in rural areas.

Similarly, unemployment has been rising and is presently put at 10 per cent. About 50,000 persons, almost 40 per cent of all entrants into the labour force, are added to the ranks of the unemployed each year.

The situation is being worsened by redundancies declared by both local and foreign banks and corporations. The head offices located in city are being shifted to factory premises to cut costs. Whether it is a product or, a department in business activity that does not add to value, it is closed down. Corporates cannot afford to provide an umbrella for their employees.

In agriculture, the situation is worse. To quote the Asian Development Bank report “The highly skewed land tenure pattern and related inequality giving rise to feudal relations are among the major contributing factors to rural poverty particularly in Sindh landless sharecroppers constitute the majority households in the province.

In short, the developments in real economy, with growth having slowed down, does not hold much of a promise that rise in poverty would be checked. The IPRS points out that Pakistan needs rapid economic growth which is equitable in nature and broad based in its reach, coupled with great access to social services.

The most significant observation in the IPRS is: “While reducing poverty helps growth, by enabling the poor to participate productively in the economy, yet, growth by itself is not sufficient for poverty reduction. For growth to reduce poverty, it must emanate from sectors that have greater employment generation capacity. The paper identifies four areas for rapid growth, agriculture, small and medium industry and IT sectors. The growth strategy has a positive labour using bias and export oriented. In a labour surplus and capital-scarce country, labour-intensive strategy is practical. In the global recession and shrinking world trade, export growth appears remote.

The ADB study says that generally economic growth has a direct relationship with poverty trends. But Pakistan’s experience provides a dissonance between the two. The high economic growth during Ayub Khan’s development decade of 1960s resulted in the decline of poverty only in urban areas. In rural areas the poverty situation had worsened.

In the next decade, during the first government under 1973 Constitution, led by Bhutto, GDP growth was lower but the level of poverty was reduced. In 1990s, the poverty levels rose as growth slowed whereas in the 1980s, there was the expected relationship between growth rate and poverty.

In 1990s the slippage of the economy into debt trap put a halt to past practice of large public sector development expenditure (PSDP). The PSDP declined from 7.6 per cent of the GDP in 1991-92 to 2.8 per cent in 1999-2000. In the poverty reduction strategy paper, the government has informed the IMF that “the prime instrument would be a substantial increase in the level of public sector expenditure.” During 2001-2004, the government plans to raise the poverty related development spending from Rs 37.5 billion 2001-2002 to Rs 62.3 billion in 2003-2004 whereas public sector current spending would be doubled from Rs79.5 billion to Rs 136.4 billion over the same period.

Since the early 1980s, the development budget has been slashed over time while the current expenditures have remained high at around 18 per cent of the GDP. Defence and administrative spending has been frozen at last’s year level but debt servicing poses a daunting challenge. The strategy papers points out that 73 per cent of the total revenues and 40 per cent of the foreign exchange earnings were consumed by foreign debt servicing payments during 1998-99.

Prior to September 11, the Committee on Debt Reduction and Management had recommended that the government should obtain six billion dollars in exceptional finance and four billion dollars in additional debt rescheduling from Paris Club for restoring debt equilibrium and protecting critical social sector expenditures over the next four years.

Indications are that the government would deviate from the current year’s budget deficit target, set at 4.9 per cent of the GDP and revert back to the actual level of 5.3 per cent achieved last year to find fiscal space required to increase spending on poverty reduction, health education and social sector.

The national economy has come under pressure on three counts: mountains of debts, leaving very little money for social and physical infrastructure, war that has halted domestic and foreign investment (that could provide employment) and global recession, hitting growth in export. The government is working on a five -point agenda that focuses on liberal financial assistance from coalition partners to withstand the impact of these exogenous factors. In times of economic crisis, it may be prudent to bring big government back in business when the markets cannot deliver.

With the world trade shrinking, it may be advisable for the policy makers to turn the focus on domestic economy. The size of the informal economy is as large as the formal economy—about $60 billion. Quite a substantial portion of the money and assets in the informal sector can be converted into capital and ploughed for boosting production.

In his book” Mystery of Capital “ eminent economist Hernando de Soto calls for an end to “apartheid of formal law”. The assets of majority of the people in the cities have remained dead capital stock in extralegal sector. There are people with undercapitalized sector incapable of leveraging their assets. What is needed to globalize capital within countries.

Hernando Do Soto says that assets governed by the informal social contract and informal law should be brought into formal law, ( based on property rights that spring from the social recognition of a claim’s legitimacy) so that these assets can be turned or used as capital for realization of the economic potentials. Dead capital thus turns into live capital;. The asset is put into productive use.

And he stresses that the only organized way to integrate these social contracts into a financial property system is by building a legal and political structure, a bridge well anchored in the peoples’ own extra-legal arrangements that they would gradually walk across it to enter into the new all-encompassing formal social contract. Since their independence, the extra-legal sectors account for 50-70 per cent of all working people and are responsible for 20 - 66 per cent of the economic output of the third world. The informal sector functions efficiently. The cost in observing the formal law outweighs the benefits held together by a social contract supported by the community as a whole. The only disadvantage is that they are not connected to the financial and investment circuit. There is German saying that “ the law must come from the mouth of the people.”

And the eminent economist reminds the policy makers that they forget that people are the fundamental agents of change and they forget to focus on the poor.