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What pushed up our per capita income

July 26, 2004


Pakistan's per capita income has been reported as $410 only (as of year 2002) in the World Development Report, 2004. Even in the Economic Survey, 2002-03, the country's per capita income was reported as $419 for 2001-02 and 2002-03 have been shown as $503 and $582 respectively, while per capita income for 2003-04 has gone up further to $652.

What had led to this big jump in the per capita income, from $410 for year 2002 (as reported in the World Development Report, 2004) to $652 for 2003-04 (as reported in the Economic Survey, 2003-04) - an increase of 59 per cent in just two years? It may be interesting to analyse the factors that led to the extra-ordinary increase and see whether it is real.

The main reason for the big increase in our per capita income was, of course, the change in the base year from 1980-81 to 1999-2000. Pakistan had not changed its base year for two decades, while national accounts are generally re-based every 5 or 10 years.

For instance, in our own region, Bangladesh, Hong Kong, China, India, Nepal, Philippines, Sri Lanka and Thailand undertake this exercise every 10 years, while in Malaysia, Republic of Korea and Singapore, the national accounts are re-based after every five years.

If a country delays the re-basing of its national accounts (as done by Pakistan), many structural changes on the production and consumption side of the economy may not be captured in the country's national accounts.

Thus, in case of Pakistan, the national accounts estimates based on the benchmark of 1980-81 could not capture the structural changes that took place during the last 20 years.

Thus, many economic areas remained either uncovered or under-reported, as a result of which the size of the national income was, as a matter of fact, under-estimated. The change of our base year from 1980-81 to 1999-2000 had resulted in taking into account a new range of products, enterprises and economic activities such as courier services, travel agencies and mobile phones, etc.

The coverage of manufacturing items had increased form 91 to 128. As a result of rebasing of the national accounts, the size of the overall GDP in 1999-2000 had increased by 19.5 per cent, agriculture by 18.5 percent, industries by 18 percent and services by 20.8 per cent.

Per capita income in terms of US dollar had, also, accordingly gone up to $526 for 1999-2000 compared to $441 according to the old base. In the same way, fixed investment had shown an improvement of 34.3 percent in 1999-2000, mainly due to better coverage resulting from the re-basing of national accounts.

Despite an improvement in the coverage, resulting from re-basing of the national accounts, there were reportedly still many activities (especially IT related) which were to be covered in the national accounts. With the passage of time, modern technology had changed the nature of things and changes in the economy were taking place at a breathtaking speed.

The National Accounts Committee (NAC) had, therefore, decided to regularly re-base national accounts, in future, after every five years. Timely re-basing, it is hoped, will make our national accounts more representative and will show real picture of the economy.

As regards the credibility of the rebasing exercise, all possible efforts had been made and precautions were taken to make the national accounts estimates as representative and as real as possible.

A Technical Committee on National Accounts (TCNA) was constituted in the Federal Bureau of Statistics (FBS) for the improvement and rebasing of the national accounts in Pakistan. The committee suggested an action plan to bring national accounts estimates in line with the United Nations System of National accounts (SNA 1993).

The FBS accordingly launched a research and case studies (RCS) project to undertake 23 studies covering various sectors of the economy, for changing the base year from 1980-81 to 1999-2000.

As soon as the studies were finalised and approved by the technical committee, the same were presented to the NAC, which advised that the data used and methodology developed in the above-mentioned studies be verified and authenticated.

Accordingly, statistics experts from the IMF and economists from the PIDE had vetted these studies, after which the NAC had approved the rebasing exercise and the national accounts were rebased form 1980-81 to 1999-2000.

Net factor income from abroad: Another factor that had significantly attributed towards improvement in our per capita income was the net factor income from abroad, which had turned favourable during the last three years.

In 1999-2000 and 2000-01, the net factor income from abroad had been unfavourable to the extent of Rs. 48 billion and Rs54.5 billion respectively. However, the net factor income from abroad had become favourable during the 2001-02 to 2003-04 period.

In 2002-03, it was favourable to the extent of as much as Rs. 152 billion, but in 2003-04 the same had come down to Rs 118 billion inter-alia due to fall in the income from workers remittances. (Table 1.5, page 13 of statistical appendix, Economic Survey, 2003-04).

A surplus in the net factor income from abroad in the recent years had played an important part in taking Pakistan's per capita income to the present level.

Higher GDP growth rates: Yet another factor, which had been of great help in raising the country's per capita income to the present level, was the acceleration in the GDP growth rate during the last two years.

In 2002-03 and 2003-04, the GDP growth rate had stood at 5.1 and 6.4 per cent respectively, as compared to 1.8 and 3.9 per cent between 1999-2000 and 2001-02. Higher GDP growth had played an important part in taking the per capita income to a respectable level.

If the government succeeds in boosting the GDP growth rate further to 7-8 per cent in the coming years, Pakistan may be able to move to the club of lower middle income countries (LMC), within the next two years.

Exchange rate stability: Last but not the least, the exchange rate stability had, also, enabled the country to improve the level of its per capita income in terms of US dollars. During the last four years (2000-01 to 2003-04), the exchange rate of Pak rupee vis-a-vis US dollar had remained stable at Rs57.5 to Rs61.4 to a US dollar.

As compared to this, the Pak rupee had continued to lose its value on year to year basis in the 1990's (from Rs22.4 in 1990-91 to Rs51.8 to a US dollar in 1999-2000).

One may ask if the current rate of growth in the per capita income is sustainable. Pakistan had gained significantly in terms of its per capita income, from changing its base year from 1980-81 to 1999-2000, as we have seen in the preceding paragraphs.

However, any subsequent rebasing of national accounts may now lead only to marginal gains, since most of the emerging areas of the economy had been covered while changing the base year to 1999-2000.

Sustainability of growth of the country's per capita income in the coming years would depend, firstly, on our ability to maintain the GDP growth rate at the current level of 6 percent and more.

Secondly, to maintain the present trend of a favourable 'net factor income from abroad' would also be helpful in giving a boost to the per capita income. Last but not the least, exchange rate stability would be of crucial importance in sustaining the growth of per capita income in terms of US dollar in the coming years, keeping our past trends in view.

All possible efforts need to be made to contain the growing trade deficit, which has been putting tremendous pressure on the exchange rate, at present. In conclusion, it can be said that with the improvement in our per capita income much greater attention needs to be paid to poverty alleviation, employment generation and human resource development. Higher per capita income would have no meaning for the common man, if he is unable to enjoy a better standard of living.