THE recent release of provisional poverty estimates showing a reduction in the incidence of nation- wide poverty from 32.1 per cent in 2001 to 25.4 per cent in 2005 has evoked mixed reactions. In the government’s view, the recent numbers strongly suggest that its economic policies are working, growth momentum is being sustained, and prosperity is being shared.
But at least a part of the general public and media remain sceptical of progress in this area, citing continued unemployment and under employment and increased inflationary pressures, especially the rise in the price of food and energy, which especially hurt the poor and the middle classes. As often, the reality is more complex.
In my view, the reported reduction in poverty incidence of about 20 per cent over 2001-05, after a worsening of poverty in the 1990s, is not at all surprising. While a definitive analysis of poverty trends would have to await the release of household income and expenditure data and the methodologies applied, the reported decline in poverty incidence appears quite plausible.
At the same time, there is no reason for joy or complacency because the reported numbers do not provide much comfort that the widespread problem of poverty, which is a part of the more general problem of growing economic inequities in the society, is on the way of being resolved quickly and effectively. The elaboration of these points and the examination of some policy implications is the focus of this piece.
Why is the recent reported reduction in poverty incidence not surprising? Three factors must be noted.
First and perhaps foremost, the overall average annual growth rate of the economy over the four years 2001-05 was nearly six per cent compared to only 3.3 per cent annually during the preceding four years. Economic growth may not always be a sufficient condition for poverty reduction but it certainly is a necessary one.
Second, the exceptional growth rate of agriculture of 7.6 per cent during 2004-05 helped create incomes in the rural areas where poverty is particularly widespread.
Good wheat harvest and wheat import liberalization have also helped during the last year to reverse at least partly the rise in real wheat prices witnessed in the previous years. The real price of food remains an important determinant of poverty levels in low- income countries like Pakistan.
Third, there has been a large increase in public spending especially development related spending since the trough of FY 2000. Between FY 2001 and FY 2005, fiscal space, defined as non-interest and non-defence spending, increased by 50 per cent in real terms thus providing an exceptional boost to social and development spending. There has been a notable increase in spending on education and health and infrastructure including rural electrification, roads, and irrigation improvements.
The rural electrification and education programmes especially in the Punjab and NWFP have targeted the poor more effectively than before. All this is in sharp contrast to the 1990s when real public spending on social and economic development stagnated for a long period because of the very heavy burden of debt payments and seriously hampered job and income creation.
Considering the above factors, the real question is why did poverty incidence not decline more sharply. Obviously, greater progress in poverty alleviation would have been possible but for the inherently inequalities promoted by existing power and asset structures, a tax system that does not generate sufficient revenue to fund poverty programmes adequately and a labour market which is far from buoyant and does not yet exploit the fully the opportunities offered by labour intensive exports. These remain fundamental challenges for economic and social policy in Pakistan as the country continues to witness a widening of disparities in income and wealth.
More specifically, the moderate reduction in reported poverty must be placed in perspective. As noted above, this reduction comes after a decade in which the long-term trend towards poverty reduction was halted or reversed.
Furthermore, the recent reduction in poverty is from the base of 2001—- a very poor agricultural year showing a negative agricultural growth of 2.2 per cent. If allowance is made for cyclical factors, that made 2000-01 a bad crop year and 2004-05 an exceptionally good crop year, a good part of the reported reduction in rural poverty from 39 percent to 31.8 per cent over 2001-05 might evaporate.
Thus while the reported poverty numbers appear to make sense, the challenges of poverty alleviation remain as huge as ever. The problem is especially acute in rural areas.
Nearly 32 per cent rural poverty incidence in a bumper crop year can hardly be the basis of self-satisfaction. While credit must be given for successful government efforts to raise the overall growth rate and improve rural infrastructure and access of the rural poor especially females to education and health, much more remains to be done to reinforce poverty reduction efforts especially in the rural areas.
To start with, there is the need to share the more detailed household income and expenditure data with the public, media, and the analysts. As commented in the press, the release of just a few headline numbers does not help government’s credibility. Serious efforts are needed by all concerned to understand the dynamics of poverty. This would also lead to a better understanding of which government policies for direct poverty reduction are working and which are not.
Beyond greater transparency and more shared analysis, there is a fundamental need for the government to concern itself with not only sustaining high growth but also with the distribution of growth benefits. There are several factors that suggest that the current high growth is deepening inequalities more dramatically than was the case in the earlier high growth periods of 1960s and 1980s.
First, the growth of incomes of the relatively well to do is being fuelled greatly by extraordinary booms in the real estate and stock market and there is not even a modest capture of the windfall profits because of a total absence of capital gains taxation. USA, even after the tax cuts of recent years, has a 15 per cent capital gains tax rate.
Second, unlike 1960s and 1980s, the periods that witnessed at least a moderate growth in the ratio of taxes to GDP, the taxation effort currently appears stalled with tax to GDP ratio stagnating at the rather low level of around 10 per cent. There are of course limits to what fiscal policy can contribute to redistribution of income in favour of the poor.
But at current levels of resource mobilization, it is unlikely that the recent momentum of growth in poverty reduction expenditures from 3.8 per cent of GDP in FY02 to 4.8 per cent in FY 05 can be maintained.
While the need is to expand poverty focused expenditures further to say 6-7 per cent of GDP, there is growing competition both from long term infrastructure needs and earthquake rehabilitation and reconstruction requirements.
Third, unlike the earlier periods rural poverty is now much more deeply grounded among the landless poor and non-farm households. These are groups that are hard to reach because they do not benefit significantly from even robust agricultural growth. For them the creation of additional employment opportunities in the manufacturing and service sectors hold the only real promise of escape from poverty.
Finally, the deterioration in the delivery of public services especially education and health over time has hurt mainly the poor because others have largely opted out of the public systems. Some improvement is visible but clearly there is a long way to go to remedy the harm caused over decades. Again adequate funding, as well as capacity, remains an important issue to make devolution to the district level a success.
To conclude, while several elements of the current poverty reduction strategy make sense, there is need for both (a) a more comprehensive approach which will place poverty reduction in the perspective of containing if not narrowing income disparities and (b) a special focus on the deep rural poverty issues. The preparation of a new poverty reduction strategy later this year by the Planning Commission provides a good opportunity to deal with these issues.
Two additional points deserve attention.
Poverty reduction strategy should place more emphasis on population issues. A typical poor household has a larger number of dependents. While demographic transition in Pakistan has begun, it needs to be supported more strongly by government policies especially in the rural areas. It is interesting to note that fertility rate, average number of children born to women of child bearing age, is much higher in the rural areas of Pakistan (4.83) than in urban areas (3.26). Spread of female education in rural areas will help but so would the better availability of contraceptive services.
Finally, close monitoring of poverty trends is of crucial importance. Reliance on periodic household expenditure surveys is not enough. Since tightening of the labour market and the growth in real wages are by far the best indicators of declining poverty levels, more effort and resources should be directed towards monitoring of nominal and real wage data and labour market trends.
(The author is a former chief economist of the World Bank. His Email address is phasan@aol.com
THE recent release of provisional poverty estimates showing a reduction in the incidence of nation- wide poverty from 32.1 per cent in 2001 to 25.4 per cent in 2005 has evoked mixed reactions. In the government’s view, the recent numbers strongly suggest that its economic policies are working, growth momentum is being sustained, and prosperity is being shared.
