Is poverty rising in Pakistan?

Published October 11, 2004

The answer is no. All the circumstantial evidence shows that it must not be rising any more and even perhaps falling. It is widely believed that economic growth measured in terms of GDP growth is directly related to poverty reduction.

In other words, higher growth of GDP, more often than not, helps to lessen poverty. GDP growth, therefore, has in general a strong relationship with poverty level in any country.

However, in case of Pakistan, if we look at its economic history, GDP growth is neither necessary nor sufficient condition to combat poverty. We will turn to this point later in the discussion in more detail.

A quick look at the studies conducted in the recent past on the level and pattern of poverty in Pakistan carried out by the government, its development partners, or by independent research institutes and individuals indicates that there is a general consensus on one point and that is that poverty has risen between 1998/99 and 2001/02.

The main reason cited for this rise in poverty is the falling GDP growth rates during this period. The driving factor behind declining GDP growth was the negative growth in the agriculture sector in 2000-01.

Agriculture accounts for a third of the economy, the fall in agriculture sector growth in turn was caused mainly by severe droughts in the country during that period. Now if the GDP growth rate is following a rising trend ever since 2000-01 and it has crossed 6 percentage points in 2003-04 from 2.2 percent in 2000-01 then it is quite likely that the poverty must have gone down following the argument that GDP growth has direct bearing on poverty reduction.

Economic development in Pakistan, though external assistance driven, had a promising start right from the early 1950s. Pakistan was among the world's largest recipients of official development assistance from the very early years (1950s).

The growth in per capita income was slightly over 2 percent on average, which tripled per capita income between 1950 and 1999, thereby causing substantial decline in poverty.

Compared to many similar economies this was quite an achievement but compared to many other countries such as those in South East Asia, which were at the same level of development as Pakistan was in 1950s, it is much below than what they have achieved. More importantly, it is much below the actual potential of the country.

A number of things went the way they shouldn't have gone. More seriously perhaps, pervasive and deep problems of governance, growing public spending on defense and other unproductive programmes, and insufficient focus on human development eroded the country's institutions, weakened economic management and created an increasingly unfavourable investment climate.

Continuous interventions by the political governments in the military rule also hampered the achievement of full potential of the country in economic development.

In the 1990s high degree of political uncertainty, external shocks and exogenous factors compounded these problems. However, the level of poverty in the country did not appreciably changed in the ten years preceding 1999, despite having fallen in the previous ten years.

If we compare the living standard of some sections of our society with their counterparts in countries at similar level of development we find that the educated and well off urban population of Pakistan lives not so differently from their counterparts in other countries of similar income range.

In fact in many cases they are better off and look more affluent. Poverty, therefore, is predominantly a rural issue in Pakistan. The rural poor are left behind. Internal differences in poverty and human development have not only persisted over time, but have widened among regions, between rural and urban areas and between men and woman.

This is shown by many social indicators, since bulk of the population in Pakistan (about 70 percent) lives is rural areas and is associated with agriculture sector. Unless these indicators are sharply improved Pakistan will fall further below other countries.

Pakistan's social indicators are ranked among the lowest in the world, be it infant mortality, life expectancy, female primary and secondary enrollment, or access to clean drinking water and sanitation etc.

A major effort to address these issues was initiated in the 1990s and attention was paid to improve public sector social service provision through a long-term (eight years) Social Action Program (the SAP). But this programme miserably failed and was not able to achieve its targets on a number of focus areas mainly due to bad governance, poor monitoring, and no or very little evaluation.

During the last 4-5 years, the government embarked upon a wide-ranging structural reforms programme to spur economic growth, which has brought about macroeconomic stability.

Arguably, the most important example of restructuring is the devolution initiative, which, if and when successfully implemented, holds promise for improved access to critical public services for the poor.

In addition the Poverty Reduction Strategy Paper (PRSP) prepared by the government highlights needed improvements in education, health, and water sources.

The other welcome steps taken by the government include two major initiatives - Khushal Pakistan, a comprehensive poverty intervention, and Khushali Bank (a micro credit bank) - as nation wide efforts to address poverty and vulnerability. Social inclusion and ownership of the efforts to combat poverty can play a very vital role in eradicating poverty from the country.

These reforms have helped in transforming the Pakistani economy from highly regulated to a more open, market oriented economy. This has created an energetic private sector which had expended its role to finance, power sector, social sector, and to improve the country's macroeconomic fundamentals.

Despite a series of domestic and external shocks such as unprecedented drought, the events of 9/11, regional tension etc. these efforts have yielded impressive results. The economy of the country has taken a strategic turn around and the real GDP after hovering around 3 percent for quite some time grew by 5.1 percent in 2002-03 and by more than 6 percent in 2003-04.

This high growth in GDP is not dependent on only one or two sector's better performance but it is based on wide ranging and diversified corrective measures taken by the government during this period.

As shown in the table, industrial production grew by almost 9 percent as against an average of 3 percent in the 1990s; agriculture sector grew by 4.1 percent against around 2 percent in the same period; inflation was 3.1 percent against more than 10 percent on average during the 1990s; etc. (see table).

More importantly, external debt as percentage of foreign exchange earnings has declined sharply from as high as 335 percent in 1998-99 to 170 percent in 2002-03. In the absence of any comprehensive household survey, like the PIHS, for recent years it is difficult to ascertain whether the poverty has risen or not during the last 3-4 years. However, all the macroeconomic factors that can be used as a proxy, indicate that poverty situation must have improved during this period.

Although, we have examples of periods in the economic history of Pakistan when internationally believed phenomenon that GDP growth has direct bearing on poverty reduction did not hold.

For example in the 1960s even with higher GDP growth rates the poverty was on the rise. On the other hand in the 1970s when the country was facing devastating floods year after the year and the resultant growth in the GDP was very low the poverty index witnessed a declining trend.

This was made possible by more focused and better distribution of limited resources and more importantly by creating more employment. The experience of these two decades clearly points to the fact that by looking just at the GDP growth rates it is difficult to conclude which way the poverty may go, in case of Pakistan.

One has to go beyond the GDP growth rates and analyze the composition and distribution of incremental resources, whether they are concentrated in few hands, like in the 1960s or they are widely spread across various sections of the society.

One thing which, however, is clear is that the political will plays an important role in addressing the issue of poverty. It could be both necessary as well as sufficient condition to address poverty problem.

If the political will is there then even with the poor economic growth and natural calamity, just with mere better distribution of available resources and more focused approach, the menace of poverty can be successfully challenged and reduced. Political will, however, is inversely related to the size of the government and the cabinet as governance becomes the overriding factor.

Indicator \ Year 1990s
(Average)
2002-03
GDP growth 3.0 6.0
Industrial production 3.0 8.8
Agriculture sector 2.8 4.1
Inflation 3.1 10.0
National savings as % gdp 13.0 20.0
Fiscal deficit 7.0 4.5
Debt as % of gdp 110.0 90.5
Exports 7.0 21.0
External debt as % of
foreign exchange
335* 179

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