pakistan mcps background

8/10/2019 Pakistan MCPS Background

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Background Paper for the IDB Group MCPS Document for Pakistan

Poverty, Inequality and Unemployment in Pakistan

Dr. Ghulam Muhammad ArifJoint Director

Pakistan Institute of Development Economics

Islamabad, Pakistan

and

Dr. Shujaat Farooq

Research Fellow

Pakistan Institute of Development Economics

Islamabad, Pakistan

Dul-Qadah 1432H (October 2011)

This paper is prepared by the authors as a background study forthe IDB Group Member Country Partnership Strategy (MCPS)

Document for Pakistan. The abridged version of this paper hasbeen included in the MCPS document.

The views expressed in this paper are those of the authors and

do not necessarily represent the views of the IslamicDevelopment Bank Group or its Board of Governors or

Executive Directors or its member countries or the Pakistan

Institute of Development Economics (PIDE).


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Contents

Executive Summary vii

1. Introduction 1

2. Data Sources 1

3. Overview of Poverty and Income Inequality Situation during 2000-2010 2

3.1 An Overview of Poverty Situation in Pakistan 2

3.2 Poverty Across the Provinces 4

3.3 Trends in Inequality 53.4 A Comparison of Poverty and Inequality in Pakistan with Selected

Asian Countries7

3.5 Comparison of Inequality 93.6 Status of Achieving Poverty-Related MDG Targets in Pakistan 103.7 Poverty-Inequality Nexus 113.8 Growth-Poverty-Inequality Nexus 12

4. Government Policies/Initiatives for Reducing Poverty and Inequality 14

4.1 Government Past Policies 144.2 Diagnostic Analysis of Binding Constraints to Reducing Poverty and

Inequality16

4.3 Government Medium-Term Policies and Plans 204.4 Main Challenges/Issues/Risks to Medium-Term Outlook 22

4.5 Role of Donors in Poverty and Inequality Reduction Efforts 244.6 Policy Recommendations for Fixing Binding Constraints 27

5. Identification of Focused Areas for MDBs Interventions in Reducing

Poverty and Inequality over the Medium-term

29

5.1 Identification of Vulnerable and Poor Regions 29

5.2 Identification of Vulnerable and Poor Groups 30

5.3 Islamic Microfinance for Poverty Reduction 31

6. Employment Situation in Pakistan 33

6.1 An Overview of Employment Situation in Pakistan 33

6.2 Comparison of Unemployment Rate in Pakistan with Selected AsianCountries

36

6.3 Status of Achieving Employment Related MDGs 396.4 Growth-Employment-Poverty-Inequality Nexus 41

7. Government Policies/Initiatives for Increasing Employment 44


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7.1 Government Past Policies and Programmes 44

7.2 Diagnostic Analysis of Binding Constraints to ReducingUnemployment

46

7.3 Government Medium-Term Policies and Plans Related to

Employment

48

7.4 Main Challenges/Issues//Risks to Medium-Term Outlook RegardingEmployment

49

7.5 Role of Donors in Increasing Employment 50

7.6 Policy Recommendations for Fixing Binding Constraints 52

8. Identification of Focused Areas for MDBs Interventions in Employment

Generation Over the Medium-Term

53

8.1 Possibilities of Poverty Reduction Through SMEs Development byEmployment Creation

53

8.2 Vocational Training 548.3 Islamic Microfinance for Employment Generation 55

References 57


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List of Tables

Table 3.1: Trends in Poverty: Headcount Ratios

Table 3.2: Poverty Incidence Across Provinces

Table 3.3: Gini-Coefficient and Consumption Shares by Quintiles

Table 3.4: Ratio of Highest Quintile to Lowest Quintile

Table 3.5: Rates of Economic Growth and Inflation in Selected Countries

Table 3.6: Headcount Poverty Rates in Selected Asian Countries

Table 3.7: Gini-Coefficient, Inequality in Income or Expenditure in Selected AsianCountries

Table 3.8: Millennium Development Goal Related to Poverty

Table 3.9: Gini-Coefficient by Regions and Overall

Table 4.1: Direct Transfers and Beneficiaries

Table 4.2: Governance Indicators

Table 4.3: Infrastructure by Provinces

Table 4.4: Macroeconomic Targets (PRSP-II)

Table 4.5: Projected PRSP Budgetary Expenditures

Table 4.6: Macroeconomic Indicators

Table 4.7: Proposed PRSP Allocations, MDG Costing Estimates and Resource Gap

Table 4.8: Cost of War on Terror to Pakistan

Table 4.9: Committed and Disbursed Foreign Assistance

Table 4.10: Source and Donor-Wise Disbursements

Table 4.11: Sector-Wise Disbursements of Project Aid

Table 4.12: Pakistans External Debt Servicing

Table 6.1: Labour Force Participation Rates and Unemployment Rates for Adult andYouth

Table 6.2: Share of Employed Labour Force in Various Sectors

Table 6.3: Employment-to-Population Ratio Among Adults and Youth in Pakistan

Table 6.4: Unemployment Rates and Employment-Population Ratio of Selected

Countries

Table 6.5: Ranking of Labour Market Efficiency in Selected Countries

Table 6.6: Demographic Trends and Decent Work Issues in Selected Countries

Table 6.7: MDG Indicator of Women Share in Non-Agriculture Employment

Table 6.8: Vulnerable Employment in Adults and Youth


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Table 6.9: Working Poor Estimates

Table 6.10: Labour Productivity Per Hour Workedby Sector

Table 6.11: Growth, Employment, and Poverty in Pakistan

Table 7.1: Active Borrowers, Active Savers and Active Policy Holders by Peer Group

Table 7.1: Share of Employment in the Informal Sector of the Economy

List of Figures

Figure 3.1: Relationship Between Inequality, Poverty and Growth

Figure 3.2: Real GDP Growth Rates

Figure 6.1: Segmentation of Informal Employment


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Executive Summary

This study has reviewed the poverty and inequality situation in Pakistan. It has examined the

employment situation and explored the growth-employment-poverty-inequality nexus. The

relationship between growth, poverty and inequality is complex in Pakistan. During the high growth

decades (1960s) and low growth decades (1970s), both poverty and inequality moved in opposite

direction. The high economic growth during the 1980s contributed to a sharp decline in poverty, but

accompanied by a mild increase in inequality. The fall in economic growth during the 1990s resulted

in a rise in poverty while inequality decreased modestly. During the first half of the last decade, the

economy witnessed a high growth and poverty declined from 34.5 percent in 2000/01 to 22.3 percent

in 2005/06, while inequality increased sharply. Unemployment rate, despite high growth, did not drop

sharply. Although, after 2006, no official statistics on poverty is available; however, according to

unofficial sources, poverty has gone back to the early 2000s level with rising unemployment.

Poverty in Pakistan is mainly a rural phenomenon. Across the provinces, poverty is highly fluctuated

in rural Sindh and southern Punjab. Historically, Pakistan has not witnessed a secular decline in

poverty; it has fluctuated considerably. During 2000-2006, the country witnessed a sharp decline in

poverty and later, because of both the high inflation and slow economic growth, poverty levels are

likely to have reversed and could be as high in 2010 as was in 2001. The country was on the track to

achieve MDG poverty-related targets up to 2006, however, at present, the ground realities reveal that

it will be unlikely to reduce poverty to 13 percent by 2015.

The labour force participation rates have witnessed an increase of 2.1 percentage points during the last

decade (2001-10). The stable unemployment rates during this period suggest that the labour force

participation grew faster than the new job opportunities. Though the female participation has

gradually increased; however, it is still very low. Both the youth and female are disadvantageous in

the labour market with high unemployment rates and access to modest earning opportunities even

during the high economic growth period (2002-07).

While comparing with five Asian countries: China, India, Malaysia, Indonesia and Thailand; Pakistanhas relatively high fluctuations in growth and inflation during 2000-10 period. One common

characteristic among the selected countries and Pakistan is that the poverty is largely a rural

phenomenon. The five selected countries have witnessed a decline in poverty over the last two

decades, while in Pakistan; it has been fluctuated since 1990. The other selected countries noticed a

decline in poverty in both urban and rural areas; whereas in Pakistan, it declined mainly in urban

areas. Gini-coefficients show that both India and Indonesia witnessed a higher inequality, while it

declined in other countries (China, Malaysia and Thailand) including Pakistan. The share of bottom 10

percent population in total income or consumption has improved in China, Malaysia, Pakistan and

Thailand; whereas it declined for India and Indonesia. Regarding employment, most economies have

employment-to-population ratios in the range of 55 to 75 percent; however this ratio is comparatively

low (52 percent) in Pakistan.The Government of Pakistan has initiated Social Action Program during 1990s, which did not bring

the desired change in social indicators. To counter the rising poverty and unemployment, the

government launched Poverty Reduction Strategy Paper (PRSP) in 2003 by addressing different

aspects of poverty: high economic growth; governance; investing in human capital; and bringing the

poor, vulnerable and backward regions into mainstream of development. PRSP-I (2003-06) remained

successful by achieving its pro-poor targets, while high inflation, poor economic performance and law


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and order situation has counter-cycled the positive effects of PRSP-II (2008-12). Though the

government has some narrowly targeted social safety nets programs; however, the extent of benefits to

the poor from these targeted programs has not been up to the desired level.

The binding constraints to achieve high growth with low levels of poverty, inequality and

unemployment are political instability, poor governance, lower government investment on knowledgeand skills, infrastructural bottlenecks and social and economic exclusion of poor in decision-making.

One important aspect that has severely affected the development is the role of Pakistan in the War on

Terror. Though a number of donors are assisting the government to improve the welfare of the poor;

however, the coverage of these interventions is too limited to meet the challenges. A major proportion

of foreign assistance is going to overcome the budget and current account deficits, as a result, the

government is facing rising public debt especially the external debt and debt services.

To ensure equal distribution of resources, there is a need to include the poor in the development

stream by providing economic, social and political freedom. Agriculture is the key sector of Pakistans

economy and there is a need of intervention in the areas of horticulture and livestock to diversify the

farmers resources. In addition, a special development in terms of physical and social infrastructure is

required to develop the rural non-farm sector. Rural to urban migration could be a way out of poverty

toward the self-help. City is an opportunity for the poor. History has shown that poverty is eliminated

in merchant cities. The ongoing demographic transition in Pakistan should also be viewed for the

policy purpose as it presents the economy with a demographic gift in the form of a surge in the

relative size of the working-age population.

Rather than universally targeted, the narrowly targeted interventions are required especially in the

rural areas of Pakistan. The households who have no land, headed by females or Zakat recipients are

among the poorest of the poor households. The southern districts of Punjab and all rural areas of

Sindh, Baluchistan and KPK are the poorest regions of the country with poor physical infrastructure

and access to education and health services. Much effort from the government side is required to

eliminate the issues related to poor governance including corruption, and nepotism. Stable

macroeconomic system is prerequisite to generate sufficient employment opportunities especially for

the poor. Supportive physical and social infrastructure is necessary to develop better rural-urban

linkages and better integration across the regions.

Micro financing can be helpful in poverty reduction and making the economy self-reliance. There are

1,613 branches of the credit services to the poor and the active borrowers are around two million.

However, their outreach is not adequate as out of more than 45 million poor households, only 2

million have access to it. More importantly, microcredit services generally exclude the poorest of the

poor because they lack assets necessary to have access to these services.

Islamic banking can also make a positive contribution in poverty reduction by fulfilling the

socioeconomic objectives of Islamic society inscribed in the objectives of Shariah. By 2007, six

licensed Islamic banks and 12 conventional banks with more than 330 branches were operatingcompared with one bank with 10 branches in 2003. However, the Islamic banks in Pakistan are not

providing microfinance services. Some non-bank Islamic institutions are providing the micro-credit

services; however, their outreach is very limited in the country. For employment generation in

Pakistan, it is critical to link Islamic microfinance services with the vocational training institutes by

providing their graduates these services. It is suggested to form an Islamic Fund to provide micro-

insurance against unforeseen risks and uncertainties resulting in loss of livelihood.


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Poverty, Inequality and Unemployment in Pakistan

1. Introduction

The concept of inclusive growth demands for widespread expansion of opportunities so that all

segments of the society can benefit from economic expansion (Osmani, 2008). The idea of

inclusive growth has been commonly explained through the employment, poverty and inequality

nexus. Pakistan is an interesting case to study this nexus. As Osmani (2008) has observed, since

1980 Pakistan has experienced three distinct phases regarding the relationship between growth,

poverty and inequality. The high economic growth during the 1980s contributed to a sharp

decline in poverty, but accompanied by a mild increase in inequality. The fall in economic growth

during the 1990s resulted in a rise in poverty while inequality decreased modestly. The high

economic growth during the first half of 2000s (2003-06) was different from the earlier episode;inequality increased sharply with rapid decline in poverty. Unemployment rate, despite high

growth, did not drop sharply.

By focusing on the last decade (2000-2010), this study has first reviewed the poverty and

inequality situation in Pakistan, and then it has examined the employment situation to explore the

growth-employment-poverty-inequality nexus. During this period, the Government of Pakistan

has developed Poverty Reduction Strategy Paper (PRSP) and the Medium-Term Development

Framework. In these policy documents, high sustained economic growth is considered necessary

condition for poverty reduction. However, in view of the possibility that benefits of growth do not

transfer equally to all segments of the society, the poverty reduction strategy has given

importance to transfer income programmes including Zakat, microfinance and more recently

Benazir Income Support Programme (BISP). This study has reviewed these policies in particular

to see the possible role of Islamic microfinance in employment generation and poverty reduction.

2. Data Sources

This is a review study, which has drawn the data related to growth, poverty, inequality and

employment from secondary sources. For poverty and inequality, the study has primarily relied

on the estimates based on the income and expenditure household surveys. 1The last such survey,

known as the Pakistan Socio-economic Living Standard Measurement Survey (PSLM), was

carried out in 2007/08. However, its poverty related data could not be made public. Thus, the

latest available data for poverty and inequality is for the 2005-06 period. However, because of

both the high inflation and slow economic growth since 2008, several sources have attempted to

estimate poverty for the more recent years 2008 and 2009. Poverty data from these sources have

1Pakistan has a long history of conducting Household Income Expenditure Surveys (HIES), started in 1963. Thesesurveys were renamed as Pakistan Integrated Household Survey (PIHS) in the mid-1990s. The latest series of suchsurveys is known as the Pakistan Socio-economic Living Standard Measurement Survey (PSLM). However, incomeand expenditure module of all these surveys remained same, thus providing data for consistent poverty series.


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also been included in the analysis. However, for these recent years data are not available for rural

and urban areas separately.

This study has used the poverty estimates based on the official poverty line methodology. It is

worth noting that in 2003, the Planning Commission announced the official poverty line based on

the threshold level of 2,350 calories per adult per day plus a minimum expenditure required for

non-food needs. A number of developing countries follow the consumption and calories intakes

where the poverty line ranges between 1,970 and 2,350 calories.2

Poverty estimates based on the official poverty line are available for the 2000-06 period. Recent

estimates of poverty for 2008 and 2009, as noted earlier, are not strictly comparable with the

earlier estimates. Data on income distribution is also available only for the 2000-06 period. This

study has used the Gini-coefficients as the measure of inequality, based on the consumption

expenditure data.

Regarding the employment analysis, Labour Force Surveys (LFS) are the main data source,

available for the 2000-09 period. For employment (unemployment as well), the LFS uses the one-

week reference concept. Unpaid family helpers are also part of the labour force. For country-wise

comparison, this report has relied on information as given in the World Development Report,

UNDP, and SAARC reports. The poverty data in these reports are based on the $1.25 a day

concept which is altogether different from the official poverty line methodology.

3. Overview of Poverty and Income Inequality Situation during 2000-2010

3.1. An Overview of Poverty Situation in Pakistan

For the situation analysis of poverty and inequality, this study has focused on the 2000-10 period.

However, the decade of 1990s has also included in the analysis to put the current poverty and

inequality trends in a longer perspective. Data presented in Table 3.1 show that the 1990s haswitnessed a gradual increase in poverty levels, from 26.8 percent in 1992/93 to 30.6 percent in

1998-99. This rise in poverty was because of a six percentage points increase in rural poverty

while urban poverty declined during this period. The rising trends in overall poverty continued

until 2000/01 period, but this time the increase was both in rural as well as urban areas. In

addition to fall in economic growth, several factors are responsible for the rise in poverty in the

1990s including political uncertainty, economic instability, and persistence of wide fiscal and

current account deficits. The inflows of foreign remittances, which are believed to be one of the

major factors for reducing poverty during the 1980s, also declined markedly during the 1990s.

Bad weather conditions and severe droughts lowered the agriculture growth, and led to an

increase in rural poverty. Urban population was to some extent successful in protecting its well-

being level during the 1990s.

Table 3.1 shows a sharp decline in poverty during the first half of the last decade, from 34.5

percent in 2000/01 to 22.3 percent in 2005/06 - a decline of more than 12 percentage points in

2 Bangladesh has 2,112 per capita; China 2,150; Indonesia 2,100; Philippine 2,000; Sri Lanka 2,250 per adultequivalent, and Thailand 1,970 (GoP, 2006).


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only five years3.The percentage of population living below the poverty line in rural areas has

declined from 39.3 percent in 2000/01 to 27 percent in 2005/06 while the corresponding decline

in urban areas was from 22.7 percent to 13.1 percent, suggesting that sharp decline in rural areas

could not narrow the rural-urban gap; rural poverty in 2005/06 was more than double the urban

poverty.

Poverty estimates may vary considerably when a different methodology is applied. For instance,

the data presented in Table 3.1 is based on the official poverty line methodology that uses the

Consumer Price Index (CPI) for price adjustment. Using CPI for price adjustment, World Bank

(2006a) shows a smaller decline in poverty from 34.4 percent in 2000/01 to 29.2 percent in

2004/05 at the national level and from 39.1 percent to 34 percent for rural households. The fall in

overall poverty levels was only 5 percentage points between 2001 and 2005 according to the

World Bank estimates.

One of the main reasons of poverty reduction during 2000-06 was the high economic growth

recorded by most sectors. In addition to high growth, other factors that are likely to have

contributed to poverty reduction include the increased public spending especially on education,

health and infrastructure (rural electrification, roads, and irrigation improvements). Overall pro-

poor expenditures increased from 3.8 percent of GDP in 2001/02 to 4.8 percent in 2004/05 (GoP,

2005). The inflow of foreign remittances has mounted over $19 billion during 2001/02 and

2005/06 period, being an average of 4.1 percent of GDP. The contribution of remittances in

economic growth and poverty reduction in developing countries including Pakistan is well

documented (Iqbal and Sattar, 2005; Arif, 2009). The economy also found a large fiscal space

after 9/11, when much of Pakistans debt was written either off or rescheduled, allowing debt

repayments to be used on development projects.

3 It is important to note that the official poverty estimates for 2000/01 period have been revised upward from 32.1

percent to 34.5 percent, because of some flaws in earlier estimates (GoP, 2006).

Table 3.1. Pakistan: Trends in Poverty: Headcount Ratios

Urban Rural Overall

1992-93 24.6 28.3 26.8

1996-97 22.6 33.1 29.8

1998-99 20.9 34.7 30.6

2000-01 22.7 39.3 34.5

2004-05 14.9 28.1 23.9

2005-06 13.1 27.0 22.3

2007-08 - - 29.9a

2008-09 - - 33.8b

2008-09 - - 36.1b

2008-09 - - 30-35c

Source: Economic Survey, Government of Pakistan, 2008-09.

a: Interim Report (October 2008), Economic Stabilization with a Human Face, Panel of Economists

constituted by the Planning Commission, Government of Pakistan.b: Task Force on Food Security (World Bank) cited in Economic Survey 2008-09 (p.197).c: Independent Estimates cited in Economic Survey 2008-09 (p.197).


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After 2006, no official statistics on poverty are available. The last HIES or PSLM was carried out

in 2007/08, but poverty estimates have not been made public. The economy of Pakistan has been

facing severe challenges since 2007/08 with a declining rate of economic growth, double-digit

inflation particularly the food inflation, power shortage, soaring oil prices and poor law and order

situation. The war on terror has also resulted to divert public expenditure from development tosecurity. The present socio-economic situation is likely to have adversely affected the efforts for

poverty reduction. The government sources consider that poverty is likely to have increased from

22.3 percent in 2005/06 to 30-35 percent in 2008/09 (GoP, 2008). In 2008, the Planning

Commissions constituted Panel of Economists has reported in its Interim Report that poverty

may have increased by 6 percentage points from 23.9 percent in 2004/05 to 29.9 percent in

2008/09.4Similarly, the Task Force on Food Security (World Bank) estimated that poverty head

count ratio is likely to have increased from 29.2 percent in 2004/05 to 33.8 percent in 2007/08

and 36.1 percent in 2008/09 when about 62 million people were below the poverty line (GoP,

2008).

In 2008, the Report of a UN Inter Agency Assessment Mission found that food security inPakistan in 2007/08 had significantly worsened because of food price hike. The total number of

households falling into this category was estimated to be seven million households or about 45

million people in 2008. Based on the information, poverty level in 2009 appears to be in the range

of 3035 percent. Poverty estimates for 2010 period are not available, but there is no real change

in economic situation. Rather the severe flood in 2010 has pushed many non-poor households

into poverty and numerous poor households are likely to have been pushed into an extreme

poverty condition. It has disproportionately affected the poorest regions of Pakistan, southern

Punjab and rural Sindh where deprivation levels are high and the infrastructure is poor. The

majority of the population in these regions is highly dependent on crop income with less

diversification in their sources of incomes (Arif et al., 2010). Thus, it is likely that the recent rise

in poverty, as started in 2008, has continued to 2010.

Historically Pakistan has not witnessed a secular decline in poverty. Rather, the poverty levels

have fluctuated considerably. This has also been the case for the last decade when first the

country witnessed a decline in poverty between 2000 and 2006 period. Later, because of both the

high inflation and slow economic growth, poverty levels are likely to have reversed and the

poverty headcount ratio in 2010 could be as high as in 2001.

3.2. Poverty Across the Provinces

Although, the Household Income Expenditure Surveys are claimed to be representative at the

province level, the official agencies have generally avoided the estimation of poverty at the

province level probably because of political reasons. The poor provinces or regions may demand

more resources to arrest poverty in their regions. Moreover, explanation of large variations in

poverty levels across provinces over a short period remains a challenge. The province-level

poverty estimates from independent sources are available until the 2004/05 period and are

reported in Table 3.2, which shows that poverty declined in all four provinces between 2000/01

4Economic Stabilization with a Human Face, October 2008.


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and 2004/05. However, there is a great deal of variation across the provinces in terms of

percentage decline. Rural Sindh has shown a huge reduction in poverty, from 48.3 percent in

2000/01 to 28.9 percent in 2004/05, a decline of about 20 percentage points. This substantial

decline in poverty in rural Sindh reversed the ranking across provinces. Sindh rural was the

poorest region in 2000/01, which is turned out to be the least poor region across the country in2004/05. World Bank (2004) attributes the highest volatility for Sindh to the severe drought in

2000/01 and exceptionally high agriculture growth in 2004/05. However, Anwar (2006) links this

variation in rural Sindh over a short period with the data problems at the province level. The

decline in rural poverty in Punjab was marginal, while in other two provinces, KPK and

Baluchistan, it was quite small. In urban Sindh, poverty declined from 20.7 percent in 2000/01 to

13.8 percent in 2004/05. Urban poverty also declined in other provinces but the rate of decline

was lower than the decline in Sindh (Table 3.2).

It appears from the province level estimates that the national level decline in poverty between the

2000/01 and 2004/05 period was primarily due to substantial decline in Sindh and Baluchistan

provinces. It is important to note that the highest and persistent levels of poverty are registered for

KPK. Based on the official methodology, Cheema (2005) has estimated province-wise poverty

levels for the 1992/932000/01 period and found the cyclical nature of poverty in Sindh than in

other provinces. It also suggests vulnerability of rural Sindh population.

3.3 Trends in Inequality

Two measures are commonly used to examine levels and trends in inequality: Gini-coefficient

and income or consumption share by quintiles e.g. the bottom 20 percent. Table 3.3 shows the

Gini-coefficients and consumption quintiles for the 2000/2006 period based on three nationally

representative household survey datasets (PIHS, HIES and PSLM). The inequality data after the

Table 3.2: Poverty Incidence Across the Provinces, 1998/99, 2000/01 and 2004/05

Province

Overall Urban areas Rural areas

1998/99 2000/01 2004/05 1998/99 2000/01 2004/05 1998/99 2000/01 2004/05

World Bank (2006)

Punjab 29.8 30.7 29.5 23.7 23.0 21.2 32.2 33.8 33.4

Sindh 26.2 37.5 22.4 15.3 20.7 13.8 34.5 48.3 28.9

NWFP 40.8 42.3 39.3 26.1 30.0 26.1 43.3 44.4 41.9

Baluchistan 22.1 37.2 32.9 25.2 27.4 21.5 21.6 39.3 35.8

Anwar (2006)

Punjab 31.6 32.2 29.7 24.2 23.2 20.6 34.6 35.8 33.9

Sindh 26.0 35.3 22.4 15.6 20.1 14.3 34.0 45.0 28.4

NWFP 41.3 41.3 38.9 27.1 29.0 26.5 43.7 43.4 41.4

Baluchistan 21.6 35.5 33.1 22.9 26.2 22.4 21.3 37.5 35.9


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2005/06 period are not available. The Gini values show an overall increase in consumptioninequality between 2000/01 and 2004/05 while during the next period of 2004/05-2005/06 the

Gini coefficients did not change. This pattern has been witnessed in urban as well as rural areas.

The last row of Table 3.3 also reveals a similar trend where the ratio of richest group (quintile 5)

to the poorest group (quintile 1) shows a rising gap during the 2000/01-2005/06 period. However,

the gap between the rich and poor increased in urban areas, while it declined in the rural areas.

Overall, it appears from the inequality information that during the period when poverty declined

Table 3.3: Pakistan: Gini-Coefficient and Consumption Shares by Quintiles

PIHS 2000/01 HIES 2004/05 PSLM 2005/06

Urban Rural Overall Urban Rural Overall Urban Rural Overall

Gini-coefficient 0.32 0.24 0.28 0.34 0.25 0.30 0.35 0.25 0.30

Consumption Share by Quintiles

Quintile 1 5.3 12.8 10.1 4.8 12.6 9.5 4.5 13.5 9.6

Quintile 2 8.1 16.9 13.7 7.6 17.1 13.2 8.2 16.8 13.1

Quintile 3 12.1 19.5 16.8 11.6 19.7 16.4 11.1 20.1 16.2

Quintile 4 19.4 22.4 21.3 18.3 23 21.4 17.8 23 20.8

Quintile 5 55.1 28.4 38 57.7 27.6 39.4 58.4 26.6 40.3

Ratio of Highestto Lowest

10.4 2.22 3.76 12.02 2.19 4.15 12.98 1.97 4.2

Source: Economic Survey, Government of Pakistan, 2007-08

Table 3.4: Pakistan: Ratio of Highest Quintile to Lowest Quintile

Selected Indicators

PIHS 2000/01 PSLM 2004/05 Overall

%

change

indisparity

Urban Rural Overall Urban Rural Overall

1 Literacy (Age 10 & above) 2.08 2.17 2.41 1.69 1.76 1.95 -0.19

2 Adult Literacy (Age 15 & above) 2.11 2.23 2.52 1.89 1.93 2.22 -0.12

3 Gross Enrollment Rates

Primary Level 1.77 1.98 2 1.55 1.52 1.65 -0.17

Middle Level 2.84 3.47 3.6 2.28 2.91 3.04 -0.16

Matric Level 3.96 6.36 5.8 2.5 5.33 4.33 -0.25

4 Net Enrolment Rates

Primary Level 2.15 2.04 2.25 1.62 1.56 1.73 -0.23

Middle Level 4.4 3.67 4.57 2.35 3.56 3.27 -0.28

Matric Level 6 8.5 7.67 2.5 6.67 5 -0.35

5Immunization (Children 12-23months)

1.58 1.53 1.76 1.25 1.19 1.25 -0.29

6 Women using Pre-natal Care 2.36 2.44 2.95 1.87 1.73 2 -0.32

7 Women Receiving Post-natal care 4 3.75 4.2 3.05 2.18 3.42 -0.19

Source: Economic Survey, Government of Pakistan, 2007/08


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overall as well as in rural and urban areas the gap between rich and poor widened. It indicates that

the benefits of growth during the high growth period (2000-06) were relatively higher for the rich

than for the poor.

Inequality has many dimensions i.e. inequality in educational opportunities, inequality in health

and other amenities of life. Table 3.4 shows a comparative picture on seven social indicators of

bottom 20 percent population to top 20 percent population at the national as well as regional level

for the 2000-05 period. Unlike the Gini-coefficient and consumption quintiles, the non-income

inequality in terms of access to various social services has been improved faster for the poor

(bottom 20 percent) in urban as well as rural areas during 2000/01 and 2004/05. As shown by the

last column, the gap between rich and poor has been narrowed appreciable at the national level in

the net enrollment rate in matriculation level, use of pre-natal care by women and child

immunization rate. However, overall the Pakistani society is marked by high both income (or

consumption) inequality and non-income inequality.

3.4 A Comparison of Poverty and Inequality in Pakistan with Selected Asian Countries

The past 20 years have seen substantial progress in many aspects of human development in East

and Southeast Asian countries. There has been progress not only in improving health and

education indicators and raising income, but also in expanding peoples power to select leaders,

influence public decisions and sharing knowledge. However, these years have also seen

increasing inequalityboth within and across countries. Countries with less human development

tend to have greater inequality in more dimensionsand thus larger losses in human

development (HDR, 2010).

For comparison of poverty and inequality, in addition to Pakistan, five Asian countries have been

selected: China, India, Malaysia, Indonesia and Thailand. To give the comparison a proper

context, data on GDP growth and inflation are also presented in Table 3.5. All the selected

Table 3.5: Rates of Economic Growth and Inflation in Selected Asian Countries, 2001-2009

2001 2002 2003 2004 2005 2006 2007 2008 2009

Real GDP Growth (%)

India 5.2 3.8 8.4 8.3 9.3 9.4 9.6 5.1 7.7

China 8.3 9.1 10 10.1 11.3 12.7 14.2 9.6 9.1

Indonesia 3.6 4.5 4.8 5 5.7 5.5 6.3 6 4.5

Malaysia 0.5 5.4 5.8 6.8 5.3 5.8 6.5 4.7 -1.7

Pakistan 2 2 4.8 7.4 7.7 6.2 5.7 1.6 3.6

Thailand 2.2 5.3 7.1 6.3 4.6 5.1 4.9 2.5 -2.2

Inflation (%) (Based on Consumer Price Index)

India 3.7 4.4 3.8 3.8 4.2 5.8 6.4 8.4 10.9

China 0.7 -0.8 1.2 3.9 1.8 1.5 4.8 5.9 -0.7

Indonesia 11.5 11.9 6.6 6.2 10.5 13.1 6.3 10.1 6.4

Malaysia 1.4 1.8 1.0 1.5 3.0 3.6 2.0 5.4 0.6

Pakistan 3.1 3.3 2.9 7.4 9.1 7.9 7.6 20.3 13.6

Thailand 1.6 0.7 1.8 2.8 4.5 4.6 2.2 5.5 -0.8

Source: World Development Indicator, 2011


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countries have witnessed a fast economic growth in terms of real GDP during the last decade;

however, there are relatively larger swings in Pakistan GDP growth than the other countries

except Thailand. The last four years have been challenging for all the economies across the world

in terms of global financial crises, and hike in food and oil prices. However, India, China and

Indonesia have maintained a moderate growth in all recent years. The second important indicatorshows high inflation in Pakistan, India and Indonesia, especially after the mid-2000s. In Pakistan

inflation hovered at more than 20 percent in 2008/09 and it is still in double digit. The other three

economies (China, Malaysia and Thailand) have experienced relatively low inflation rates.

With regard to poverty, a direct comparison of Pakistan with the selected Asian countries (China,

India, Malaysia, Indonesia and Thailand) is not easy as the official poverty methodologies of all

these countries are not consistent to each other. The estimates of poverty are highly sensitive to

the choice of poverty line, its underlying methodology, the threshold level of calorific

requirements, the determinants of the scale of household, spatial and regional prices or

consumption patterns. There is no recent statistics available over these countries; however, the

Economic and Social Survey of Asia and Pacific (ESCAP), 2010 has provided the statistics ofpoverty and inequality for all the selected countries including Pakistan except Malaysia.5 For

Malaysia, the data from Economic Planning Unit are used. As shown in Table 3.6, all the selected

five Asian countries (China, India, Malaysia, Indonesia and Thailand) and Pakistan have made

significant progress in reducing their headcount poverty rates. The median average poverty rates

in the all six countries declined from 47.5 percent in 1990 to 18.7 percent in the mid-2000s. The

decline in poverty rate was sharpest in China, Indonesia, Malaysia and Thailand (Table 3.6). The

official statistics of these countries also have revealed the similar trends of poverty during the

current decade. For example, both China and India have succeeded to reduce their headcount

poverty rates in both urban and rural areas since 1980s.6A similar trend can be seen in Malaysia

where around half of the countrys households were living below the national poverty line up to

5According to ESCAP, a poor is defined as individuals consuming less than $1.25 (adjusted by PPP) per day.6For China, see National Bureau of Statistics, China, September, 2004. For India, see SAARC Report, 2007/08.

Table 3.6: Headcount Poverty Rates in Selected Asian Countries, 1990-2005

Country Period Initial Final

China (rural) 1990-2005 74.1 26.1

China (Urban) 1990-2005 23.4 1.7

India (rural) 1990-2005 55.6 43.8

India (urban) 1990-2005 47.5 36.2

Indonesia (rural) 1990-2005 70.5 24.0

Indonesia (urban) 1990-2005 62 18.7

Malaysia* 1990-2007 17.1 3.6

Malaysia (Urban)* 1990-2007 7.5 2.0

Malaysia (Rural)* 1990-2007 21.8 7.1

Pakistan 1990-2005 64.7 22.6

Thailand 1990-2005 17.2 0.4

Average (median) 47.5 18.7

Source: UN Economic and Social Survey of Asia and Pacific (ESCAP), 2010*Source: Economic Planning Unit, Malaysia


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1970. In the following three and a half decades, rapid economic growth and structural changes

have transformed Malaysia into a prosperous, urban, and industrialized economy. By the end of

the century, Malaysias poverty rate had fallen below 10 percent and in 2007 to less than 5 per

cent (UNDP, 2008).7Indonesias poverty fell significantly during 197696. In 1998, the poverty

incidence shot up due to the 1997 Asian financial crisis. The poverty incidence increased from16.7 percent in 2005 to about 17.8 percent in 2006 due to the surge in rice prices (World Bank,

2006b). The incidence resumed a downward trend when the rice prices subsidized and the safety

nets were put in place. In 2008, the poverty incidence was counted as 15.4 percent, which is still

far from the ambitious target of 8.2 percent set for 2009 in Indonesia's Mid-Term National

Development Plan 20042009 (Heriawan, 2008).

One common characteristic among the selected countries and Pakistan is that the poverty is

largely a rural phenomenon. Urban poverty is almost non-existence in China and Malaysia. For

India, Indonesia and Pakistan, higher rural poverty persists but relatively with less gap than the

former twos. However, no uni-directional movement of headcount ratio has been observed in

Pakistan while comparing it with the other selected countries. The five selected countries havewitnessed a decline in poverty over last two decades, while in Pakistan, poverty based on the

official line has been fluctuated since 1990. The other selected countries noticed a decline in

poverty in both urban and rural areas; whereas in Pakistan, it declined mainly in urban areas, the

rural poverty remained at the high level.

3.5 Comparison of Inequality

All selected Asian countries have enjoyed respectable growth during the last quarter century;

however, inequality remains an issue. Table 3.7 shows the Gini-coefficient and the ratio of the

consumption or income share of the top 10 percent to the bottom 10 percent of the population

among the selected six East and South Asian countries. Gini-coefficients show that both India and

Indonesia witnessed a higher inequality, while it declined in other countries (China, Malaysia andThailand) including Pakistan. There is more reduction in the value of Gini-coefficient in Malaysia

as compared to the other countries. Across the region, there is higher inequality in rural areas of

China, while India and Indonesia have more inequality in urban areas. As discussed earlier,

Pakistan also has more inequality in its urban areas. The ESCAP report (2010) shows that

inequality rose in both rural and urban areas of China, India and Indonesia.

The ratio of the bottom 10 percent to top 10 percent also indicates the presence of inequality in all

the selected countries. Since the household surveys differ in method and type of data collection

across the countries, the cross-country comparisons should be made with caution. A cross-

comparison in Table 3.7 shows that during the selected period (initial and final), the share of

bottom 10 percent population in total income or consumption has improved in China, Malaysia,

Pakistan and Thailand; whereas it declined for India and Indonesia. In India, the overall

inequality appears to be static since the mid-1980s; both poverty and inequality declined in urban

and rural areas during the pre-reform period (1983-94). After the post reform period (1993-2005),

the country has had a faster growth; however, this faster growth could not be translated into faster

7UNDP, 2008, Malaysia, Measuring Poverty and Inequality.


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reduction in poverty, suggesting that the overall distribution has worsened at the lower tail

(Osmani, 2008). There is rising disparity across the households and regions in terms of

consumption, income, asset holding as well. The social hierarchy system (Hindu Varna system) is

the root cause of this social and economic inequality (Hirashima, 2009).

3.6 Status of Achieving Poverty-Related MDG Targets in Pakistan

The Government of Pakistan has endorsed the Millennium Development Goals (MDGs) and has

set the target of halving poverty from its 1990/91 level of 26.1 percent to 13 percent by 2015.

This commitment of government has been fully reflected in its MTDF (2005-10), PRSP-II (2009-

10) and Vision 2030. MTDF and PRSP targets have been aligned with the MDGs. The poverty

related goal has been measured in Pakistan by three indicators: reduction in headcount ratio,

reduction in the proportion of underweight children of age 5 and reduction in the proportion of

population below minimum level of dietary energy consumption (Table 3.8).

Table 3.7: Gini-Coefficient, Inequality in Income or Expenditure in Selected Countries

Indicators

China India Indonesia Malaysia Pakistan Thailand

2001-07 1999-07 2002-07 1997-07 1998-07 2000-07

Initial PeriodPoorest 10% 1.8 3.9 3.6 1.7 3.7 2.5

Richest 10% 33.1 27.4 28.5 38.4 28.3 33.8

Ratio of Richest 18.4a 7b 7.8b 22.1a 7.6b 13.4b

Gini Index (overall) 44.7 32.5 34.3 49.2 33 43.2

Final Period

Poorest 10% 2.4 3.6 3 2.6 3.9 2.6

Richest 10% 31.4 31.1 32.3 28.5 26.5 33.7

Ratio of Richest 13.2b 8.6b 10.8 b 11 a 6.7b 13.1b

Gini Index (overall) 41.5 36.8 39.4 37.9 31.2 42.5

a. income shares by percentiles of population, ranked by per capita income.b .expenditure shares by percentiles of population, ranked by per capita expenditure.Note:The value of Human Development Index (HDI) have been calculated from life expectancy at birth, meanyears of schooling, expected years of schooling, gross national income (GNI) per capita Source: Human Development Reports, various editions, UNDP.

Table 3.8 : Pakistan: Millennium Development Goal related to Poverty

Indicators 1990/91 2005/06

MTDF

Target

2009/10

MDG

Target2015

Current Status

(2008-09)

Proportion of population below thecaloric based food plus non-food

poverty line

26.1 23.3 21 13Lag (Worsened

since 2006)

Prevalence of underweight childrenunder 5 years of age

40 38 28


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The country was on the track to achieve MDG poverty related targets up to 2006 when a sharp

reduction in poverty was witnessed during the 2000-2006 period in both rural and urban areas.

However, at present, the ground realities and official estimates reveal that it is difficult to achieve

the goals of PRSP and MTDF by 2010 and MDGs targets by 2015. First, in 1990/91, the base

year for the MDGs, the incidence of poverty was 26 percent, which, because of low growthepisodes, increased to 34.5 percent in 2000/01. The sharp increase in poverty of about 9

percentage points occurred between 1996/97 and 2000/01 period. The reduction in poverty by

more than 11 percentage points between the 2000/01 and 2005/06 period has only offset the

earlier rise in poverty.

Second, though no recent poverty numbers are available, as discussed earlier, the economy has

lost its growth momentum since 2008 and poverty is likely to have increased. Furthermore, the

most recent catastrophic floods led to huge financial and life losses by affecting about 20 million

population directly and much larger number of population indirectly.

The MDG 1 also deals with the prevalence of underweight children and the population below the

minimum dietary energy consumption levels. Both these indicators are also linked to the overallpoverty situation. Pakistan is also lagging in these indicators (Table 3.8); therefore, it is most

likely that the MTDF and MDG target for the Goal 1 (reduction in hunger and poverty) will not

be met. High sustained economic growth is required for achieving the target of reduction in

poverty, according to the MDG Report 2010 (GoP, 2010).

3.7 Poverty-Inequality Nexus

All the East and Southeast Asian economies have succeeded in reducing poverty, but inequality

remains an issue in all these countries except Malaysia. A similar paradoxical situation is present

in Pakistan where it is hard to find out a relationship between poverty and inequality. During the

first half of last decade (2000-2005), both the consumption and income inequality moved in a

direction opposite to changes in overall poverty inequality increased when poverty declinedduring the 2000-2005 period. Gini-coefficient shows a rise in inequality in both urban and rural

areas, while the headcount ratio shows a decline in poverty in both urban and rural areas.

However, the consumption share of top 20 percent and bottom 20 percent population, which

measure the gap between rich and poor, shows that overall inequality increased primarily due to

its rise in urban areas while it declined in rural areas. It indicates an uneven growth in

consumption by quintile. In other words, consumption increased faster for top 20 percent of the

population (richest) as compared to the growth rate of bottom 20 percent (poorest).

A similar situation was found during the 1990s, when overall consumption inequality increased

between 1992/93 and 1998/99(FBS, 2001; World Bank, 2002 and Anwar, 2005). During this

period, the urban inequality rose while the poverty in urban areas remained almost the same; therural inequality declined while poverty rose in rural areas. Between 1998/99 and 2001/02, the

inequality has a negative association with poverty as poverty rose in this period in both urban and

rural areas, while inequality declined in terms of Gini-coefficient and the ratio of top 20 percent

to bottom 20 percent (Table 3.9).


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3.8 Growth-Poverty-Inequality Nexus

The rise in inequality weakens the poverty reduction effect of economic growth. Income

inequality and poverty affect each other directly and indirectly through their link with economic

growth.8As shown in Figure 3.1, some of these links can be explored separately, but often ones

influence causes an indirect effect on the other. For instance, inequality can indirectly influencepoverty as inequality affects growth and growth in turn influences poverty. Small changes in

income distribution can have a large effect on poverty (Jamal, 2006). The cross-country studies

have shown that stable inequality within country over time is not sufficient to make a significant

difference in poverty reduction (Deininger and Squire, 1998). Moreover, greater initial income

inequality reduces future growth even after controlling for initial levels of GDP and human

capital (Bridsall, et al. 1995). Thus, low inequality can benefit the poor in two ways: by

increasing overall growth and average incomes and by letting them more share in that growth

(Knowles, 2001).

The relationship between growth, poverty and inequality is complex and multi-dimensional, and

this complexity holds in Pakistan as well as other developing countries of the region. The recent

and past trends of growth, poverty and inequality in Pakistan show that the average growth rate

during the 1960s was 6.8 percent per annum (Figure 3.2); however, both poverty and income

disparities rose during this period as this growth was mainly due to easy access to foreign aid,

8Knowledge about the links between non-income inequality and poverty remains very limited. The studies that do existgenerally focus on the effect of non-income inequality on income rather than other dimensions of poverty and suggestthat income inequality also acts as a proxy for asset inequality.

Table 3.9. Pakistan: Gini-Coefficient by Regions and Overall, 1992/93 - 2005/06

Year FBS (2001) World Bank (2002) Anwar (2005)

Overall

1992-93 0.2680 0.276 0.3937

1993-94 0.2709 0.276 0.3864

1998-99 0.3019 0.296 0.4187

2001-02* 0.2752 - 0.4129

2005-06* 0.3018 - -

Rural areas

1992-93 0.2389 0.252 0.3668

1993-94 0.2345 0.246 0.3647

1998-99 0.2521 0.251 0.3796

2001-02* 0.2367 - 0.3762

2005-06* 0.2462 - -

Urban areas

1992-93 0.3170 0.316 0.39701993-94 0.3070 0.302 0.3685

1998-99 0.3596 0.353 0.4510

2001-02* 0.3227 - 0.4615

2005-06* 0.3490 - -

*Based on Economic Survey of Pakistan


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Figure 3.1: Relationship between Inequality, Poverty and Growth

Source:Naschold (2002).

exchange rate was kept overvalued and this growth promoted industrial rent-seeking elite only.

The decade of 1970s witnessed a sharp decline in economic growth, recoded as only 4.8 percent

per annum; however, urban poverty and inequality declined during this period. Again, the high

growth performance was observed during the 1980s (6.5 percent on average). Although, growth

in the agriculture sector remained sluggish (around 3.6 percent), the industrial sector posted a

healthy average annual growth of more than 8 percent. The services sector also grew strongly in

the 1980s, led by ownership of dwellings, transportation, storage and communication and

wholesale and retail trade. The inflow of foreign remittances increased sharply during the 1980s

(GoP, 2009). Both the rural and urban poverty declined from 30.6 percent in 1980 (25.9 percent

in urban and 32.5 percent in rural areas) to 22.1 percent in 1988 (18.6 percent in urban and 24.6

percent in rural areas). However, inequality did not decrease rather it witnessed a mild increase.

The growth performance of Pakistan during the 1990s was not encouraging; rather it is shown as

the lost decade. Beside political instability, many other factors contributed in the low economic

performance, including deteriorating law and order, economic sanctions in the wake of nuclear

testing, persistent drought conditions, and infrastructure bottlenecks such as inadequate power

supply with frequent power outages in the industrial areas, and lack of public facilities at optimal

levels (Haq et al., 2007). The persistence of large fiscal and current account deficits and the

Inequality

Poverty Growth

a b

c

6.8

4.8 6.5

4.6

6.2

3

0

2

4

6

8

1960s 1970s 1980s 1990s 2001-06 2007-10

Figure 3.2: Pakistan: Real GDP Growth, 1960-2010

(%, average)


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associated buildup of public and external debt emerged as the major source of macroeconomic

imbalances during the 1990s (Din, 2007). As discussed earlier, that both poverty and inequality

increased during 1990/91 and 1998/99 period, while inequality moved to opposite direction of

poverty during 1998-2001 when poverty rose and inequality declined.

During the first six years of 2000s when the Government of Pakistan launched its PRSP

programme, the growth performance was impressive, about 6.2 percent per annum on average,

matching the growth of 1980s. Fiscal deficit was reduced and debt ratios witnessed an

improvement with stable exchange rate and rising foreign reserves. As discussed earlier, the

poverty declined by 12 percentage points in five years (2000/01 and 2005/06). However, Pakistan

could not succeed in reducing inequality during the fast growth periods when poverty reduced

sharply. It suggests that growth may take much longer period to trickle down to the poorest of the

poor.

4. Government Policies/Initiatives for Reducing Poverty and Inequality

4.1 Government Past Policies

Pakistan has a long history of poverty reduction policies including the Social Action Program of

the 1990s, which did not bring about the desired change in social indicators. The government

took a serious view of the rise in poverty during the 1990s, and launched the Interim Poverty

Reduction Strategy Paper (IPRSP) in November 2001 focusing attention on the primary objective

of reducing poverty and restoring economic stability. The full PRSP that was launched in

December 2003 for three years outlined a well-structured strategy for poverty reduction, with four

pillars addressing different aspects of poverty: high economic growth; governance and

consolidating devolution; investing in human capital; and bringing the poor, vulnerable and

backward regions into mainstream of development, and to make marked progress in reducing

existing inequalities. To ensure the availability of resources, the government was under obligationto protect PRSP expenditures at around 4 percent of the GDP.

For the revival of economic growth, the PRSP-I (2003-06) identified five major areas, namely,

agriculture, small and medium enterprises (SMEs), housing and construction, information

technology and telecommunication and exports. It is well established that poverty is highly

conditioned by the governance factors. To improve the governance, several steps were initiated in

the PRSP-I including the devolution of power to the grass roots level and decentralization of

administrative and financial authority. The PRSP-1 also focused on education, health, nutrition,

population programs, water supply and sanitation, employment and gender related reforms. To

transfer income to the poor, several targeted programmes including Zakat, Bait-ul-Mal and

microcredit were also part of the PRSP-I.The PRSP-I envisages that all these measures will help revive economic growth and will reduce

poverty in the medium-term. Results point to the right direction. The reforms led to improved

economic indicators, moving real GDP growth from 3.1 percent in 2001/02 to 9.0 percent in

2004/05 surpassing PRSP targets for the said years and maintaining a striking average growth rate


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of 7.0 percent over the four years period (2003/04 2006/07). As reported earlier, poverty

reduced sharply during the PRSP-I period.

After the completion of PRSP-I, PRSP-II was launched for the period of 2008-12.The Strategy is

built upon nine pillars: (i) Macroeconomic Stability and Real Sector Growth; (ii) Protecting the

Poor and the Vulnerable; (iii) Increasing Productivity and Value Addition in Agriculture; (iv)

Integrated Energy Development Programme; (v) Making Industry Internationally Competitive;

(vi) Human Development for the 21stCentury; (vii) Removing Infrastructure Bottlenecks through

Public Private Partnerships; (viii) Capital and Finance for Development; and (ix) Governance for

a Just and Fair System.

Targeting the poor and vulnerable, which has been integral component of both PRSP-I and PRSP-

II, includes some narrowly targeted interventions of the government to transfer benefits directly

to the poor. However, the extent of benefits to the poor from targeted programs has always been

in some doubt. Few programs have been reviewed here. The amounts transferred under these

programmes and their beneficiaries are given in Table 4.1.

Benazir I ncome Support Programme (BI SP)

With a view to cushion the sharp rise in oil and food prices, the BISP was launched in 2008 to

provide cash assistance to the identified vulnerable and enabling them to exit the vicious cycle of

poverty in the shape of the cash grant of Rs. 1,000 per month. This strategy also includesimparting training to one member of each vulnerable family to sustain it. This programme has

aimed to cover almost 15 percent of the total population or 40 percent of the poor (GoP, 2010).

Punjab Food Support Scheme (PFSS)

Like BISP, PFSS was initiated by the Government of Punjab in 2008 to provide food stamps for

the poorest households with a cash grant of Rs. 1,000 per month per household. This programme

Table 4.1: Pakistan: Direct Transfers and Beneficiaries

Social Protection2008/09 2009/10

Expenditures

(Rs. million)

Beneficiaries

(000)

Expenditures

(Rs. million)

Beneficiaries

(000)

Budgetary Transfers

BISP 15,800 1,760 32,000 2,290

PBM (all Programmes) 3,432 1,159 2,261 2,110

Punjab Sasti Roti 1,900 - 8,000 -

Non-Budgetary Transfers

Zakat (all Programmes) 2,877 1,085 2,874 1,289

EOBI 5,787 290 6,442 310

WWF 2,087 63 2,432 70

Microfinance 28,6691,939,050

(loans)33,775

1,966,457(loans)

Total(excluding microfinance)

31,880 4,357 54,010 6,070

Source: PRSP, Annual Progress Report, 2010, Finance Division


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account and fiscal deficits, the following are the major barriers for sustained growth and poverty

and inequality reduction.

4.2.1. Law & Order and Governance

The rising militancy during the last few years has adversely affected every Pakistani by creatingan overall uncertainly which led to capital flight, lower investment, and decline in FDI. It has also

limited the government capacity to spend on pro-poor expenditures due to a massive spending on

anti-terrorism campaign during the last four years. The institutional dimensions of governance

uncover a negative and significant association between rule of law and poverty (Haq et al., 2007).

At present, the state of governance in Pakistan is a serious impediment in the way of growth and

poverty reduction efforts. Global Competitiveness Index (GCI) is a comprehensive measure of a

nations competitiveness based on 12 indicators: Pakistans overall ranking deteriorated in last

few years; it was 91 out of 125 countries in 2004/05 and it went up to 123 out of 139 countries in

2010/11. As shown in Table 4.2, the problematic factors for doing business in Pakistan are

corruption, government instability/coups, policy instability, inflation, inefficient government

bureaucracy, and crime and theft. However, Pakistan has significantly improved in judicialindependence. Corruption has been adversely influencing the economic activities and resource

management. The latest transparency survey (2009) assigns Pakistan a score of 2.4 out of 10 and

ranks it 139thout of 180 countries.

4.2.2. Education, Technology and Health

At the macro level, the share of high technology intensity product in Pakistan is small. As per

Global Competitiveness Report 2010/11, Pakistan ranks 76 th on the innovation index out of 139

countries, reflecting a poor level of innovation. Pakistan is hardly spending its 2 percent of GDP

on education (World Economic Forum, 2010).

At the micro level, the incidences of poverty are highly linked with the literacy and educational

attainment of household heads. In the Pakistan Poverty Assessment (PPA), education was found

to be the most significant factor distinguishing the poor from the non-poor. These educational

differences also explain the poverty gaps between the rural and urban areas, consistent with the

idea that literacy is likely to have higher returns in urban areas (Jafri, 1999 and World Bank

Table 4.2: Pakistan: Governance Indicators, 2010

Indicators Index

Judicial independence 74/139

Irregular payments and bribes 117/139

Property rights 107/139

Favoritism in decisions of government officials 87/139

Business cost of terrorism 138/139

Organized crime 127/139

Source: Global Competitiveness Report: 2010-11


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2002). Education and skill levels are directly related to employment. The poor usually have low

levels of skill and can only find employment in low-paid jobs.

Health has commonly been related to the incidences of poverty and change in poverty status

(Hussain, 2003). Unfortunately, the Government of Pakistan has not been successful in allocating

sufficient resources for the health sector, as it is stagnant on only 0.6 percent of GDP. Most of the

poor households suffer from ill health and are forced to bear the high cost of medical treatment.

Illness is often a catalyst in pushing households deeper into poverty and, thus, ill health and

poverty are linked in a vicious cycle.

4.2.3. Landlessness, Farm Assets and Tenure Patterns

The ownership of land is highly unequal in Pakistan, which is one of the major barriers to poverty

and inequality reduction in rural areas. Less than half of all rural households own any agricultural

land, while the top 2.5 percent of households account for over 40 percent of all land owned

(Gazdar 2004; World Bank 2002). Within the rural areas, Malik (2005) found relatively higher

land inequality in poor districts located in the cotton-wheat belts of southern Punjab and Sindh.

Land is often sold to cover urgent consumption needs, marriage expenditure, and health

expenditure. This depletion of productive assets has an adverse impact on the poor in terms of

their future stream of income, and reduces their probability of escaping poverty (Hussain, 2003).

Gazdar (2004) also observed the unequal distribution of farm asset ownership (other than of land)

among cultivating households. Even though the incidence of sharecropping has declined over

time, there are still many rural households that cultivate land as share-tenants and poverty is

higher among them (Anwar, et. al. 2005; SPDC 2004; and World Bank, 2002).

4.2.4. Power Structures in Rural Areas

The civil and military bureaucracy, political and religious forces, landed rural elites, and caste,

biraderi (clan), and ethnicity are among the most important pillars of the prevailing powerstructure in Pakistan (Hooper and Hamid, 2003). The highest and persistent levels of poverty

occur in those rural areas of Pakistan which are traditionally considered feudal, such as rural

Sindh, southern Punjab, and the tribal areas of Khyber Pakthunkhawa (KPK) and Balochistan. In

rural areas, landed elites have a decisive influence not only on the social and economic life of

residents, but also on local, as well as central and provincial decision-making power. Size of

landholding is regarded as directly proportionate to power, and the landed elites in Pakistan enjoy

more power than its Indian counterpart. The dependency of the poor on local power structures

takes a variety of forms. Distortions in the input and output markets functioning against the poor

tend to generate poverty in rural areas (Hussain, 2003). Tenants as well as small farmers who

cultivate their own land, generally have to pay relatively high prices for inputs while receiving

relatively low prices for outputs as compared to large farmers. At the same time, the lack of

access to formal credit markets often forces poor tenants to borrow from their landlord. This

generates a form of bonded labor and tenants are sometime obliged to work on their landlords

farm at less than market wage rates or even without wages (Arif, 2004; and Hussain, 2003).

Landlords may also exert control over watercourses, which influences their relationship with their


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tenants because it provides the former with absolute control over cultivation (Hooper and Hamid,

2003).

4.2.5. Doing Business in Pakistan

The World Bank report of Doing Business 2011 shows that doing business in Pakistan is quitedifficult, the rank of Pakistan for ease of doing business is 83 out of 183 (World Bank, 2011).9

The cost of starting business is significantly above those observed in South East and East Asian

countries with a rank of 85thout of 183 countries. Similarly, in case of Enforcing Contract cost

is also very high in Pakistan. It also ranked lower in terms of registering property in 2011. Getting

credit has also become more difficult in Pakistan; if the government does not introduce reforms

particularly in employing worker, paying taxes, and enforcing contract, thenit would not

attract investment, which is necessary for high growth and poverty reduction.

4.2.6. Poor Infrastructure

Qayyum et al. (2007) consider that quality of infrastructure in Pakistan is not a binding constraint

as indicated by Global Competitiveness report 2006/07 that is 3.4 and is equivalent to that ofChina (a high growth performer), and is better than that of Indonesia and India.10However, the

recent Pakistan score declined to 2.8 as compared to India with 3.5, Indonesia with 3.6 and China

with 4.4.

4.2.7. Regional Inequality in Public Provision and Infrastructure

Public provision of social services plays important role in the capabilities development and leads

to decline in income poverty. Similarly, social overhead capital is a necessary input in the

structure of production and poverty reduction (Hirschman, 1958). If inequality between provinces

and districts rises above a certain threshold, it can trigger a violent conflict which, in turn, can

lead to decades of reduced growth and rising poverty (World Bank, 2006c).

As shown in Table 4.3, there is higher inequality across the provinces in terms of physical and

social infrastructure. The Punjab province has better ranking, while the two provinces, KPK and

Baluchistan are poor by all infrastructure indicators. Even within Punjab and Sindh, the rural

9There are 183 countries included in Doing Business Report (2011), and if best rank in doing business is one and worstrank is 183th. So 83thshows that Pakistan lies in the middle of the world in doing business.10General Infrastructure (1= underdeveloped, 7=as extensive and efficient as the worlds best) Score for other countries:

Indonesia (2.5), India (3.3), China (3.4), Thailand (5.0), Korea (5.1), Taiwan (5.4), Malaysia (5.7), and Hong Kong(6.4).

Table 4.3: Pakistan: Infrastructure by Provinces

Province

Physical Infrastructure Soft Infrastructure

Distance to

Metal road


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Sindh and southern Punjab have poor level of access to physical and social infrastructure as

compared to the northern and central Punjab. These infrastructural differences across the regions

explain the poverty and inequality differences as the regions with poor level of infrastructure have

comparatively less social and economic integration in terms of diversified resources, human

capital, and access to jobs in armed forces (Arif et al., 2011). The recent flood has also affectedthe poorest regions of Pakistan, southern Punjab and rural Sindh and has pushed many non-poor

households into poor category and many poor stuck into long-term poverty (Arif et al., 2010).

4.2.8. Limitations in Social Protection and Social Safety Net Programmes

The Government of Pakistan has been allocating a fair amount for social safety net programmes.

All these programmes directly intervene to transfer resources to the marginalized segment of the

society so that they can stand on their own two feet and become economically self-sufficient.

However, the efficient utilization of these funds by targeting the poor and vulnerable is a debated

topic in Pakistan. Moreover, the transfer programmes are not sufficient to meet the demand of the

poor.

4.3. Government Medium-Term Policies and Plans

The Medium-Term Development Framework (2005-10) and PRSP-II (+2008-11) have given the

medium-term policies and plans in the light of long-term development framework of Vision 2030.

Both the MTDF and PRSP advance the agenda for pro-poor economic growth by allocating

adequate resources for sustainable human development where the targets have been aligned in the

line of MDGs. To fulfill this commitment, the government has settled the issue of distribution of

resources among the provinces by freeing the resources toward provinces in 2010. It will enable

the provinces to meet their obligations by raising spending on both social and economic sectors

and creating opportunities for the deprived and vulnerable peoples.

A summary of the macroeconomic targets is given in Table 4.4. The economy is projected to

grow between 7.2 percent and 7.5 percent by 2010/11, supported by strong growth in agriculture,

Table 4.4: Pakistan: Macroeconomic Indicators/ Targets (PRSP-II)

Macroeconomic Indicators (Base case Scenario)

Items 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11

Real GDP Growth (%) 6.6 7 7.2 7.1 7.3 7.5

Agriculture 2.5 4.5 4.4 4.5 4.3 4.4

Manufacturing 8.6 10.5 11.2 11.8 11.7 12.1

Inflation (CPI based) 7.9 6.5 5.5 5 5 5

Investment (% of GDP) 20 20.5 21 21.7 22.2 22.8

National Saving (% of GDP) 15.6 16.1 17 17.9 18.6 19.4

Trend in Public Finance

Fiscal Deficit (Rs. billion) -45.6 36.5 80 140.5 209.4 -

Public Debt ( % of GDP) 56 50.6 46.4 43.3 40.1 -

Trend in Balance of Payments

Worker Remittances (S million) 4,600 5,500 6,200 6,400 6,700 6,950

Current Account ( % of GDP) -4.4 -4.4 -4 -3.8 -3.6 -3.4

External Debt ( % of GDP 28.9 27 25.5 24.3 23.1 21.9

Export Growth (%) 13.8 10 12 13 14 15

Import Growth (%) 31.4 11 10 10.5 11 11

Source: Poverty Reduction Strategy Paper-II, 2008-12


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manufacturing and services sectors. In order to achieve these growth targets, the overall projected

investment is 21 percent to 22.8 percent of the GDP. National saving is targeted as 17 percent to

19.4 percent of GDP for the same period and current account deficit is in the range of 3.4 percent

to 4 percent of GDP. Fiscal development is considered the key element of obtaining the stability.

The overall budget deficit is targeted to be reduced from current level of 4.2 percent of GDP to3.3 percent of GDP by 2010/11. On the external side, the projected trade gap is in the range of $9-

11 billion and current account deficit in the range of $ 6-7 billion.

The PRSP has a rolling strategy, which identifies the required resources in according to national

objectives and in the context of fast changing global economic developments. Table 4.5 shows

the projected government expenditure on 17 budgetary pro-poor sectors under 5 broad headings

for 2010/11 2012/13 period. According to the Fiscal Responsibility and Debt Limitation Act

(FRDLA), 2005, the social and poverty related expenditures are not to be reduced below 4.5

Table 4.5: Pakistan: Projected PRSP Budgetary Expenditures (2010/11 - 2012/13)

2010/11

2011/12

2012/13

Expenditure Rs million % of GDP Rs million % of GDP Rs million % of GDPDevelopment 347,649 2.20 436,049 2.46 554,165 2.78

Current 701,039 4.43 859,482 4.85 1,060,813 5.33

Total 1,048,688 6.62 1,295,531 7.31 1,614,978 8.12

Market Access and Community Services

Roads, Highways &Bridges

75,426 0.48 97,003 0.55 125,341 0.63

Water Supply &Sanitation

13,407 0.08 16,492 0.09 20,384 0.10

Human Development

Education 348,782 2.20 471,338 2.66 639,956 3.22

Health 88,244 0.56 126,563 0.71 182,378 0.92

Population Planning 5,087 0.03 5,746 0.03 6,521 0.03

Rural Development

Agriculture 132,360 0.84 161,343 0.91 197,599 0.99Land Reclamation 3,869 0.02 4,759 0.03 5,882 0.03

Rural Development 13,356 0.08 15,982 0.09 19,215 0.10

Rural Electrification(People Works

19,096 0.12 22,423 0.13 26,4540.13

Safety Nets

Subsidies 178,343 1.13 178,343 1.01 178,343 0.90

Social Security &Welfare

93,197 0.59 104,225 0.59 117,106 0.59

Benazir IncomeSupport Programme

59,654 0.38 66,713 0.38 74,9570.38

Others* 33,542 0.21 37,512 0.21 42,148 0.21

Governance

Administration of

Justice7,930 0.05 9,312 0.05 10,986 0.06

Law & Order (Current& Development)

41,116 0.26 39,084 0.22 37,327 0.19

Total PRSP 1,048,688 6.62 1,295,531 7.31 1,614,978 8.12

*This includes (i) Labour Welfare Measures; (ii) Social Welfare Measures; (iii) Welfare of Pakistanis Abroad;(iv) Population Welfare Measures; (v) Others (Distribution of Winter clothes); (vi) BISP; (vii) PPAF; and (viii)Pakistan Bait-ul-Mal (other than Food Support).


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and current account deficit are also rising. Another misfortune is the stagnant development

expenditures which, on average, are low (3.5 percent of GDP) during the current decade

compared to the 1980s and 1990s. After launching the MTDF and PRSP-II, the proportion of

development expenditure, by and large, declined, meanwhile the current expenditure rose.

The UNDP and Ministry of Finance have prepared a joint report for the Millennium

Development Goals (MDGs) Costing in (2007)11for three social sectors education, health

and water and sanitation to achieve the MDGs.12 The gaps for each activity have been

reported for the entire country. As shown in Table 4.7, the allocation of resources under

PRSP is not sufficient to meet the MDG targets. The government is already facing the

financial constraints as the PRSP data show that relatively fewer amounts have been spent

than the projected.

The government is facing severe issues of revenue generation and is highly dependent on

borrowing from the central bank and from external resources including the IMF. The intense

borrowing from the central bank may force a reversal in current tight monetary policy stance

of the central bank with adverse implications for inflation, particularly the food inflation,

which has eroded the purchasing power of poor. Similarly, the government has to remove a

number of subsidies under the IMF Standby Agreement (SBA) at the wrong time.

The external financial flows also exhibit instability by worsening the trade balances due to

weak export base with higher imports. Pakistan's exports are dominated by textiles and

clothing and the rising input costs in recent years has eroded Pakistan's competitiveness.

Global competitive pressure is posing major challenges for developing countries, for which

our main exporting sectors such as textiles and clothing are not fully prepared. The rising

international oil prices have also threatened the balance of payments position with

depreciation in exchange rate. A comprehensive approach is required to improve export

competitiveness.

One important aspect that has severely affected the development is the role of Pakistan in the

Waron Terror. It has sustained immense socio-economic costs by diverting resources from

11Estimating the Cost to achieve MDGs in Pakistan UNDP & Finance Division, Islamabad (2007).12The initial costing parameters were determined through a consultative process during December 2005 to August2006. However, assumptions, including the financial prices, made over two years remain valid. Expenditure incurred in2007/08 has been updated with current GDP at market cost as a result of which future projections have been readjusted.

Table 4.7: Pakistan: Proposed PRSP Allocations, MDG Costing Estimates and Resource Gap

(2009-11)

SectorPRSP Allocations

(Rs million)

MDG Costing Estimates

(Rs million)

Resource Gap

(Rs million)

Education 804,950 880,261 -75,311

Health 194,295 305,759 -111,464

Water supply &sanitation 33,484 172,268 -138,784

Total 1,032,729 1,358,288 -325,559

Source: Estimating the Cost to achieve MDGs in Pakistan, UNDP & Finance Division, Islamabad (2007)& PRSP Secretariat, Finance Division, Government of Pakistan.


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public development to law enforcement. Besides massive human losses resettlement

suffering; it has contributed to capital flight, and limited the FDI and other investment

opportunities particularly in FATA and KPK. The estimated cost of the War on Terror to

Pakistan was around Rs. 678 billion in 2008/09 which has led to massive unemployment

especially in the affected regions (Table 4.8).

4.5. Role of Donors in Poverty and Inequality Reduction Efforts

As discussed earlier, Pakistan has witnessed healthy economic growth during the periods when

foreign inflows were higher i.e. 1960s, 1980s and during the first decade of current century.

During the last 6 years, Pakistan has faced two biggest disasters of the world in terms of the

population affected, areas, human losses and infrastructure losses: earthquake in 2005 and floods

in July-August 2010. In both the disasters, the foreign donors including international community,

international institutions and NGOs actively participated in affected areas by financially and

materially. With the assistance of local community and government, these donors developed

several clusters in various fields i.e. agriculture under FAO, camp coordination/management,

protection, emergency shelter under UNHCR, community restoration under UNDP, educationunder UNICEF/Save the children, health under WHO, food, information management, logistic

under WFP and nutrition water, sanitation and hygienic under UNICEF. Some donors

participated only in the emergency relief; however, several are still performing to restore the

livelihood of these poor including: on-farm livelihoods, shelter, community restoration,

education, health, restoration of infrastructure and public utilities.

According to the Constitution of Pakistan, the government is responsible to improve the standard

of living of its people. However, the magnitude of available resources is too limited to achieve the

national and MDG targets. At present, the government is catching the foreign assistance to

overcome the saving-investment gap, balance of payment constraints and to overcome the

structural weakness of the economy i.e. poor skills, shortage of capital, power crisis and poverty

(GoP, 2009).

As detailed in Section 3, the government of Pakistan has launched a comprehensive strategy, the

PRSP and MTDF to reduce poverty and inequality by targeting the poor especially in rural areas.

The central voyage of PRSP is based on investing on those activities and programs, which

directly and indirectly benefit the poor population. Therefore, a number of donors including

World Bank, Asian Development Bank, Department for International Development (DFID),

Table 4.8: Cost of War on Terror to Pakistan (Rs. billion)

2004/05 2005/06 2006/07 2007/08 2008/09

Direct Cost 67.1 78.1 82.5 108.5 114.0

Indirect Cost* 192.0 222.7 278.4 375.8 563.8

Total 259.1 300.8 360.9 484.4 677.8

* On account of loss of exports, foreign investment, privatization, industrial output, tax collection, etc.Source: Finance Division, Government of Pakistan, September, 2008.


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INGAD, UNDP, UNFPA, ILO, UNICEF, WHO, JICA, CIDA, USAID, EU, GTZ, NORAD are

actively the part of PRSP in policy designing, implementation, and evaluation (GoP, 2003).

Several donors are chairing and co-chairing various sectors to improve the welfare of the poor i.e.

Water and Sanitation Sector Donor Coordination Group (WSDCG) co-chaired by DFID and

UNICEF.

As shown in Table 4.9, the commitments of foreign economic assistance (excluding Bonds and

IMF) amounted to $39,786 million from 1999-00 to 2009-10. Grants were 21 percent and loans

were 79 percent of the total commitments. Over this period, the bilateral commitments consituted

about 38 percent of the total commitments with the highest commitments were from USA, China,

Japan, Saudi Arabia and UK, while the rest 62 percent were multilateral commitments with

highest commitments were from AsDB, World Bank and, and the Islamic Development Bank

(IDB). The non-project aid commitment was about $20,812 million, which mainly has been

stretched from IDB, IDPs and Tokyo Pledges for Afghan Refugees Relief Assistance,

Commodity Aid, Food Aid, Programme Loans/Budgetary Support, and Short-Term Credits. The

rest project aid includes commitments for the Earthquake Rehabilitation & Reconstruction. Thedisbursements of foreign economic assistance, excluding Bonds and IMF, amounted to $31,368

million with 20 percent share of grants and 80 percent share of loans during the corresponding

period (GoP, 2009a).

4.5.1. Donor-Wise Disbursements

Table 4.10 shows that during the last two years, July 2008 to June 2010 period, the total disbursedamount from multilateral sources was higher than the bilateral sources with 70 percent share of

multilateral and 30 percent share of bilateral sources, respectively. Out of the total bilateral

amount, 43.7 were grants and the rest 53.6 percent were loans. In the bilateral group, major

disbursements were from China ($782.1 million), USA ($614 million), Saudi Arabia ($479.2

million), UK ($286 million) and Japan ($214.5 million). Multilateral agencies disbursing over

$100 million were ADB, IDA, World Bank and IDB.

Table 4.9. Pakistan: Committed and Disbursed Foreign Assistance ($ million)

Commitments of Foreign Assistance Disbursement of Foreign Aid

Year Grant Loan Total Grant Loan Total

1999-00 371.8 1,008.5 1,380.3 292 1,458 1,750

2000-01 247.7 1,388.7 1,636.4 203 1,882 2,085

2001-02 922.3 2,677.7 3,599.9 1,002 1,753 2,755

2002-03 441.3 1,352.6 1,794.0 401 1,520 1,921

2003-04 405 2,070.0 2,475.0 335 1,046 1,381

2004-05 945.7 2,282.2 3,227.9 506 2,216 2,722

2005-06 1,426.7 3,079.8 4,506.5 1,068 2,291 3,359

2006-07 635.3 3,648.4 4,283.7 681 2,700 3,381

2007-08 576.1 3,174.9 3,751.0 574 3,085 3,659

2008-09 609.9 5,778.3 6,388.1 575 4,113 4,688

2009-10 1,606.4 5,137.0 6,743.5 648 3,019 3,667

Total 8,188.2 31,598.0 39,786.3 6,285 25,083 31,368

Source: EAD, Year Book (2009)


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4.5.2. Sector-Wise Disbursements of Project aid

During the past two years, the sectoral-wise project aid shows that an amount of $2,056 million

was disbursed in 15 different sectors with grants amounting to $465.3 million and loans

amounting to $1,591 million (Table 4.11). Sectors claiming more than $50 million were power,

Table 4.11. Pakistan: SectorWise Disbursements of Project Aid during 2008-10 ($ million)

Sector Grant Loan Total

Power 3.3 498.37 501.57

Transport & Communication 26.7 524.97 551.57

Rural Development & Poverty Reduction 21.31 159.38 180.69

Governance, Research & Statistics 127.93 91.01 218.94

Health & Nutrition 42.06 69.39 111.45

Water 52.69 83.19

pakistan mcps background

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