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Economic Survey 2006-07

Exaggerated claims on poverty reduction

By Izzud-Din Pal

08/07/2007

Dawn

THIS year’s Economic Survey in its discussion of poverty and income distribution offers the following introductory remarks on the subject: “As Pakistan’s economy entered the fourth year (200-6-07) of above 7.0 per cent growth, its poverty headcount had fallen from one-third to less than one-fourth of the population. The confluence of growth accelerating government policies, nature’s blessings, and annual growth of 21 per cent in pro-poor expenditures during the period contributed to approximately 13 million people moving out of poverty.”

The above quote underlines the official claim that reduction in poverty in the country is mainly due to the so-called “trickle-down” effect as a result of the growth of the economy (“a necessary condition” for job creation). The basic assumption behind this approach is that the first priority in the country is to focus on the rate of growth, and not on promoting equality of incomes and that this process would in due course reduce poverty.

This issue needs to be carefully examined. For this purpose it is necessary to make a distinction between the poverty gap and the headcount ratio. The former refers to the depth of poverty in relation to a sustainable minimum level of human needs – the index of the poor living below a defined poverty line. For measurement of this poverty a consumption standard for food is used such as 2,350 calories a day plus the expenditure required for non-food items. As the majority of the population lives in the rural areas, the proportion of people living in the agricultural sector, then, becomes a matter of major importance for the national outlook in this regard.

The poverty gap may be indirectly affected by growth, but there are other factors which directly impinge on it. These factors include government policies with regard to irrigation water, availability of fertilizers, credit facilities, and security and conditions regarding tenure. They would also include remittances from family members living abroad, government transfer payments as well as disbursement of zakat funds. Behind all these factors are a complex set of phenomena which affect absolute poverty.

The headcount ratio is a different matter and is directly related to the ``trickle-down`` effect. Under this approach job creation is an automatic result of growth and, therefore, what is needed is to count the number of unemployed periodically to monitor the process. This methodology has been recently selected for an econometric test for India by Santonu Basu and Sushanta Mallick (Economic Growth: New Directions in Theory and Policy, Edward Edgar Publishing, 2007), and throws some light on the effectiveness of this phenomenon.

They have come to the conclusion that there is no evidence that “trickle-down” effect has occurred in India. Their focus is on finding a direct and systematic relation between growth and growth of employment, by discounting all other job-creating factors such as effects of green revolution and state-sponsored policies to help the poor. There are many other similar studies which have been made on the subject and which indicate that growth with a consideration for equity requires deliberate effort to help the poor in order for them to experience its benefits.The Economic Survey in discussing the issue freely moves between the headcount and poverty gap, not clearly identifying what factors have contributed to approximately 13 million people moving out of poverty, as it claims. This does not make it easy to identify targets for the best policy options in order to cope with the challenge, be that headcount or poverty gap.

Also, the data about employment are sketchy, and whatever fragmented information they provide on the matter, it does not clearly identify the trend of employment in the country, especially in the rural sector. The argument is linked with the claim about the real growth for 2006-07 at 7.0 per cent seems to be exaggerated because the purchasing power index does not seem to support it. And it is even more heroic on the part of the Survey to extrapolate growth over the last five years without taking account of the discounted value of the currency.

There is a further problem concerning the real engine of growth. According to the theoretical requirement this must constitute a net increase in fixed investment (such as new machinery and equipment) in the country. The data on domestic fixed investment indicate a rather modest increase in it. The figures for changes in foreign investment are impressive, though they offer no breakdown for net versus gross investment.

In any case, it is concentrated in communication and telecommunication sector followed by oil and gas. These are conventionally not job creating sectors, as they use highly capital-intensive technology. They would increase demand for specialist and professional groups, but not for people stuck in the pool of poverty. Given these considerations, it is very difficult to be convinced about the role that “trickle-down” effect might have played in reducing poverty in the country.

It seems, therefore that value-added in the agricultural sector (main contributor to growth) has been mainly due to nature’s blessings, not to an increase in investment and utilisation of labour input. The increase in output of major crops would have insignificant spillover effects on the wellbeing of the farm and non-farm labour, given the structure of the agricultural economy.

Economic Survey suggests that over the last five years Pakistan has experienced a consumption-led growth. This phenomenon explains several factors with reference to the economy. The official figures for inflation, especially in the food sector, indicate that the main impact of consumer demand has been on domestic and imported products, and the domestic supply responsiveness has been rather sluggish. The price along with the new sales tax, therefore, would tend to increase the gap between the rich and the poor.

It is partly explained by the difference in the proportion of consumption of the rich and the poor, which is quite significant, as pointed out in the Survey. Also, the rich have double luck on their side as they bear none or only a very modest burden of income tax. Of course the sales tax, being regressive, falls on the lower classes in a very disproportionate manner. In light of all these facts, the claims made by the Economic Survey about both a significant reduction in poverty and in unemployment in the country seem to be highly exaggerated. In fact the two do not seem to connect.

The lot of the poor in the rural sector will not take a real turn for the better until the core problem in that area is resolved. It relates to the fact that there is highly skewed distribution of ownership and access to productive assets in the sector.

The arguments in this essay have been presented mainly in the framework of the methodology of headcount to calculate poverty, ignoring the question of absolute poverty. The focus of several official programmes has been on the latter aspect of poverty, especially through what is known as PRSP-I. The emphasis of the new PRSP-II has further shifted away from the basic issues, from the creation of social safety nets albeit with very feeble results. The evaluation of PRSP requires, however, a separate analysis and cannot be accommodated in this space.

The claims of the government about reduction in poverty rest on its argument that increase in income per capita from $586 in 2002-03 to $925 in 2006-07 is one of its principal achievements. When adjusted, however, by factors of inflation and of purchasing power, this growth has no doubt been high since 1999, compared to the previous period of 1990s, but certainly nowhere near the level in real dollars to justify this extravagant claim.

The writer taught economics at Pakistani and Canadian universities before his retirement. Email: Izzud-din.pal@videotron.ca