THE rate of economic growth is a significant determinant of the rate at which poverty declines. But the impact of overall growth on poverty reduction varies from country to country. It is not the rate of economic growth alone but the nature of economic growth, its quality and pattern which is perhaps more important.
In a study on the subject of Asian experiences, it was revealed that Taipei’s (China) industrialisation, was labour-intensive, involving a high proportion of rural based small scale and medium size enterprises with an export bias. It was a pattern of growth that reduced poverty more effectively than India’s import-substitution-based strategy and industrial development emanating from capital-intensive urban based large-scale enterprises.
The widely held view that the benefits of economic growth automatically diffuse across all segments of society is no more valid. This view based on the trickle down theory has lost its authenticity since 1970s. Growth and poverty reduction are co-related and go hand in hand. Initially, growth generates income inequalities which slows down the process of poverty reduction.
It is, therefore, essential that pro-poor growth strategy be adopted for the rapid reduction in poverty. Not only growth but the pattern of growth is perhaps more important. Based on this criterion, we will examine the growth-poverty linkage in case of Pakistan.
In its “Economic 0utlook 2006”, the government has admitted that despite achieving extraordinary success in the face of exogenous shocks, Pakistan still faces many challenges like job creation, poverty reduction, improvement in social indicators and physical infra-structure needed to sustain on-going growth momentum.
The observation clearly points that the gains of higher sustained economic growth have yet to reach the common man who continues to suffer from inflation, paucity of social services and almost collapsed civic facilities. .
According to Economic Survey, the percentage of population living below the poverty line has fallen from 34.46 in 2001 to 23.9 per cent in 2004-05. Meanwhile, the proportion of people living in extreme poverty on global level fell from 28 in 1990 to 21 per cent (on the basis of $1 a day) in 2001. The reduction was mainly witnessed in China. This refers to extreme poverty or absolute poverty. The Human Development report 1997 observed that “in the past 50 years poverty has fallen more than what was witnessed in the previous 500 years”. It was a period of unprecedented increases in the prosperity, as reflected in the growth of national per capita income.
Despite manifold increases in revenue on the back of rapid economic growth, there has not been commensurate rise in social spending. The expenditure on education, which is considered paramount for bringing poverty down, is a low 2.1 per cent of the GDP.
Investment in human capital has always been much lower than what is required for a fast-expanding population. Pakistan spends 2.1 per cent of its GDP on education as compared to 4.1 per cent in India, 2.4 per cent for Bangladesh and 3.4 per cent for Nepal. The total expenditure on health despite some recent increases comes to 0.51 per cent of GDP.
Another indicator to poverty is the level of employment. The rate of unemployment is officially placed at 6.5 per cent. The depressed state of employment can be attributed to a variety of factors. Privatisation of banks and big public-owned enterprises was carried out after their restructuring, rendering thousands of employees out of job. The shrinking public sector is also responsible for the reduced employment. Cutting costs in private companies has also created redundancies.
The government has now adopted a policy of public-private sector partnership in health, education as well as infrastructure, which has both advantages and disadvantages. Textile has made an investment of almost $6 billion, which is generally in the form of balancing, modernisation and replacement(BMR) and does not create new job opportunities.
In the last few years, additional investment has been made in capital intensive large-scale and high-tech industries. The large industrial sector recorded a growth rate of 8.6 per cent last year but the performance of the small and medium enterprises, which are labour-intensive and provide 78 per cent industrial employment, has not yet announced. Their share in value-addition is about 28 per cent and in manufacturing export 25 per cent. But the SME Policy 2006 prepared by SMEDA after two and half year has yet to be formally announced and introduced.
The growth of SMEs as a dependable source of employment-generation is restricted due to a variety of factors: uniform policies both for large scale and SME enterprises, which do not meet the specific needs of SME. The small scale enterprises set up in the informal sector are starved of bank credit.
Despite the special prudential regulations, the problem of collateral and high mark-up continues to persist. The setting up of a SME support Fund and lowering income tax rate in the event of their conversions indeed have proved helpful.
Another sector which has been marked for employment-generation and resultant poverty-reduction is agriculture which is the mainstay of our economy. Nearly 22 per cent of total output and 44.8 per cent of total employment is generated in agriculture. During the last five years, agriculture growth has not been impressive mainly because of crippling drought and withdrawal of subsidies and incentives.
In the last fiscal year 2005-06, growth was estimated at 2.5 per cent as compared to 6.7 per cent in 2004-05. The policy of one-industry-one-village has yet to be implemented.
Globalisation or global capitalism has its own vices and virtues. The movement of labour has been subjected to a host of restrictions. Since no even-playing field has been provided to developing countries in the world trade and economic order, the rich-poor gap is widening. Every developing/poor country is exposed to the spectre of poverty.
Despite higher growth within the vicinity of 6/7 per cent per annum and huge foreign aid and investment, the plight of low income group has not improved. The objective must not be the reduction of one-dollar based absolute poverty level, but the overall poverty level.
The country has been experiencing six to seven percentage inflation. Last year, it was 9.5 per cent. Inflation disproportionately hurts the poor and the fixed income group. Incidence of inflation, combined with the difficulty in the easy access to social services, health, education, drinking water, adds to the miseries of the low income group. The role of government must, therefore, be enlarged in social and infrastructure sectors.
The poverty-reduction policy must not only concentrate on providing jobs or raising income, but easy access to health, education and drinking water etc. It must be a composite anti-poverty policy.
Rapid economic growth and reforms also generate income inequalities and widen the rich-poor gap and regional imbalances which can be specially corrected through the public expenditure.
A World Bank study says that 56 per cent people in Pakistan run the risk of falling into a trap of poverty. It is essential that the government should evolve an effective distribution policy which should be a mix of growth maximisation and pro-poor economic policy.