Rising poverty

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VIADr Hafiz A Pasha
SOURCEBusiness Recorder
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The measurement of the number of poor in Pakistan has relied on different approaches. The most commonly used method is to derive a poverty line and determine the extent to which the per capita consumption expenditure of a family falls below this poverty line. The poverty line is the cost of meeting a minimum basic needs and ensuring that a minimum nutrition level is achieved. A more recent technique developed is the Multidimensional Poverty Index (MDPI). Also, the World Bank has defined an international poverty line equivalent to $3.20 per day, corresponding to the purchasing power parity in 2011.

The cost of basic needs approach has been applied consistently by the Social Policy and Development Centre (SPDC) from 2000-01 to 2015-16. Accordingly, the incidence of poverty appears to have fallen from 2000-01 to 2005-06 by 5 percentage points, down to 28 percent in the latter year. Thereafter, it increased to 39 percent by 2010-11. Apparently, it has since fallen somewhat modestly to 38 percent by 2016-17.

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The MDPI approach has been applied in Pakistan by the UNDP and the Oxford Policy Institute for the period, 2004-05 to 2014-15. The estimates indicate a continuing process of decline in the level of poverty from 55 percent in 2004-05 to just above 38 percent in 2014-15.The World Bank estimates that poverty has fallen at a faster pace and was down to 35 percent by 2014-15.

The basic conclusion is that while the paths may have differed, the three approaches indicate that the incidence of poverty ranged from 35 percent to 38 percent in 2014-15. Therefore, the number of poor people was 68 to 74 million in 2014-15.

There is then the question as to what has been happening to the incidence of poverty since 2014-15? From 2013-14 to 2015-16 Pakistan was operating under an IMF Programme? What happened to poverty during these years of stabilization? What has been the path of poverty since then? In particular, what is likely to have been the change in the level of poverty in 2018-19, the first year of the new Government? Now that Pakistan has entered another IMF Programme with steep targets for achieving stabilization, what is the outlook for poverty during the tenure of the Programme?

Projections of the future level of poverty require a clear and precise understanding of the primary determinants of poverty. Past empirical research in Pakistan reveals that there are four factors which determine the direction and extent of change in the incidence of poverty.

First, the higher the growth rate is in real per capita income the greater the likely reduction in the incidence of poverty. Second, the ‘trickle-down’ effect is larger if there is reduction in income inequality and the gap narrows between the income shares of the top 20 percent and the bottom 20 percent of the population. Inequality is more likely to fall if there is faster employment growth and the tax-to-GDP rises. Third, relatively stable food prices play an important role in preventing increase in poverty. Fourth, the level of real pro-poor expenditure is also a factor is poverty alleviation. This expenditure includes spending on education and health and on social protection.

Turning to the trend in poverty from 2014-15 to 2017-18, there was, first, significant growth in real per capita income of 2.7 percent. Second, inequality actually fell because of the relatively large increase in the tax-to-GDP ratio and a continuing increase in employment. Third, a major positive factor was the relative stability in food prices. During the three years, the annual rate of inflation in food prices was only 2.4 percent versus the overall rate of inflation of 3.7 percent. Consequently, the incidence of poverty fell from 36.8 percent in 31.3 percent in 2017-18. The decline of 5.5 percentage points implied that almost six million people were taken out of po’verty in these three years.

The year 2018-19 has, unfortunately, witnessed a change in the trend. The per capita income growth was only 0.9 percent and more recent estimates indicate that it may have been even lower. Inequality has probably increased due to the big fall in the tax-to-GDP ratio and the growth in employment was restricted by the very large decline in real development spending. Fortunately, these negative developments were partly countered by the low inflation in food prices at 4.1 percent versus the overall increase in the price level of 7.3 percent. The increase in the incidence of poverty is 3.7 percentage points, from 31.3 percent in 2017-18 to 35 percent in 2018-19. This implies that almost 8 million people fell below the poverty line in 2018-19.

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Initial indications for 2019-20 are not encouraging. The, more or less, common expectation is that GDP growth rate will be close to 2.4 percent. As such, there will be no increase in per capita income. Food prices are rising much faster by almost 5 percentage points in comparison with the overall rate of inflation. However, the increase in inequality may be limited by the expected increase in the tax-to-GDP ratio and because of more employment created by higher development expenditure. Nevertheless, there is a real risk that the incidence of poverty could increase by almost 5 percentage points from the level of 35 percent in 2018-19. Therefore, by the end of 2019-20, the level of poverty in Pakistan could once again approach 40 percent. Almost 87 million people could find themselves in the grip of poverty by the end of 2019-20, with the increase during the year of as much as 10 million.

The outlook regarding the rise in poverty is extremely worrying. Strong policy measures and administrative steps will have to be put in place on a top priority basis to bring down the prices of vegetables and limit the increase in other food items. In addition, the BISP and Ehsaas Programmes will have to be expanded rapidly. The focus of the latter programme must be to create more employment opportunities rapidly and facilitate the absorption of unemployed youth.

The tragedy is that the incidence of poverty in Pakistan may be back to the level that prevailed over a decade ago. The IMF Programme must have a human face and enough fiscal space created for strong anti-poverty interventions. Otherwise, the process of implementation of deep and wide-ranging structural reforms may be frustrated by the rise in public discontent.

(The writer is Professor Emeritus at BNU and former Federal Minister)

(This news/article originally appeared in Business Recorder on December 10th, 2019)

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