Economic development and poverty

Poverty is a complex phenomenon. It is hard to figure out why a certain percentage of people is trapped in poverty and what is the best approach to wipe out this disease from the society.
There is a school of thought which would like the government to intervene more forcefully in ensuring better, if not equal, distribution of wealth, preferably through fiscal policy while its opponents believe in trickle-down effect and favour vigorous growth that would automatically take care of the problem.
Empirical evidence is quoted to advance a particular line of argument. Influenced by a variety of thoughts on the subject, governments in Pakistan have experimented with different brands of economic management, ranging from laissez-faire giving birth to a few ultra rich and powerful families to large-scale nationalisation of industries resulting in inefficiencies in production and huge losses to the economy.
Admittedly, Pakistan is not alone to face such a dilemma. Other countries have also experimented with different routes to deal with the scourge of poverty.
Although nothing could be said with certainty yet there is now a growing body of evidence to suggest that economic growth could be a key factor in poverty reduction.
An ERD working paper of the Asian Development Bank on "Economic growth and poverty reduction in Viet-Nam" released last year is probably the latest addition on the subject to establish a positive relationship between the two variables.
A series of reforms, known as Doi Moi in Viet-Nam, paved the way for the country's speculator growth in the 1990s which averaged 7.9 percent a year during the decade, remarkably higher than 5.5 percent for East Asia and the Pacific region (excluding Peoples Republic of China (PRC) or the 5.6 percent growth for South Asia.
During most of the 1990s, the incidence of poverty fell sharply by an average of 4.1 percentage points a year in Viet-Nam as compared to the average reduction of only 2 percent a year for the East Asia and Pacific region.
Marked improvement in the quality of life was manifested by the relatively high literacy (92.9 percent) and life expectancy (69 years) as well as low mortality (37 per 1000 live births) in the latter 1990s.
While Viet-Nam was a stunning example of a highly positive co-relation between growth and poverty reduction, other Asian developing countries also exhibited the same traits.
PRC with an average growth rate of 10.4 percent was the next one to reduce its poverty level by 2.5 percentage points per annum.
Bangladesh, Cambodia, India, Philippines, Indonesia and Thailand with an average growth rate of 2.8 percent, 2.6 percent, 3.8 percent, 1.9 percent, 6.4 percent and 7.2 percent were able to alleviate poverty by 1.7 percent, 1.0 percent, 1.4 percent, 1.3 percent, 2.1 percent and 1.0 percent per annum respectively.
It may be noticed that though there is no exact correspondence between growth rate and poverty reduction between different countries, the relation between the two seems to be well established, however.
Much better results in Viet-Nam could be attributed to the country's reform efforts which focused initially on the dismantling of collective farms, redistribution of land to peasant households through long-term leases and abolition of price controls on goods and services.
The government of Viet-Nam then eliminated production and consumption subsidies and streamlined the public sector.
The reform effort also included stabilisation of inflation and liberalisation of foreign trade and investment.
To an outsider, it looks like a miracle that poverty in Viet-Nam was reduced from 61 percent in 1993 to only 37 percent in 1998.
Some other findings of the ADB's report are also interesting. The provincial panel data was analysed which suggests that the proportionate increase in the income of the poorest quintile was appreciably larger than those of the top 20 or 40 percent of the population.
Such a conclusion was at variance with typical findings for other countries which indicated that welfare gains from growth are smallest for the lower quintile and rise with income group.
So far as the role of distributive factors was concerned, these could contribute to reinforcing both growth and poverty reduction in the long run.
The findings of the Asian Development Bank in selected countries are not much different when compared with the trends on global basis.
With a steady rise in income, the proportion of the developing world's population living in extreme economic poverty-defined as living on less than $1 per day - fell from 32 percent to 25 percent between 1990 and 1999.
An extrapolation of this trend to the year 2015 shows a headcount index of about 16 percent - indicating that the global goal of halving poverty between 1990 and 2015 could be within reach.
Per capita private consumption growth in developing countries averaged about 1.4 percent between 1980 and 1990 and 2.4 percent between 1990 and 1999. However, these figures mask an ugly reality.
The incidence of poverty remained largely unchanged in sub-Saharan Africa, Latin America and the Caribbean's and in the Middle East and North Africa.
In terms of numbers, poor people in these regions actually increased by about 7 million per annum between 1990 and 1999.
On the other hand, decline in global poverty was driven by East Asia between 1993-99 and South Asia in 1996-99 where per capita income tended to record higher increases.
Seen closely, a strong relationship between growth and poverty level is quite intuitive.
The larger the size of the pie, the greater is the chance for everybody to have a bigger share to enjoy provided the tax regime is not regressive and the poor are not discriminated against.
Pakistan's experience is also somewhat suggestive of this relationship. GDP growth rate which averaged 6.5 percent during 1980s declined to 4.6 percent during 1990s.
The growth rate dropped to only 2.2 percent in 2000-01 but rose somewhat to 3.4 percent during 2001-02 and 5.1 percent during 2002-03.
These trends had some influence on poverty. According to the latest Economic Survey of the government of Pakistan, "there was broad consensus that the momentum gained in the fight against poverty during the 1980s was lost during the 1990s when poverty continued to rise."
The poverty level was the highest at 32.1 percent during 2000-01 when growth was extremely low at 2.2 percent but improved to 31.8 percent during 2003.
Another reason for rise in poverty during 2000-01 could be crippling drought which severely damaged rural areas where majority of the poor people reside and seek their livelihood.
The similarities between Pakistan and most of the other developing countries don't seem to extend beyond this point. Pakistan's official poverty level at about 32 percent is much higher than about 21 percent or so for the developing world as a whole.
The actual picture could be much more bleak if account is taken of the difference of the definition of poverty line which was probably adopted by our planners not to fully show a miserable reality.
Also, though the year-wise position may show a favourable impact of growth on poverty, there is a steady increase in poverty in the country on a long-term basis.
Based on the present trends, Pakistan would be lagging far behind the position of developing countries as a whole which are steadily moving towards poverty alleviation.
The ticking bomb of increasing poverty has to be diffused otherwise it could tear apart the social fabric of the country.
The government is undertaking certain right measures but shying away from others. As a matter of policy, it has focused on accelerating the growth rate for poverty alleviation and has partly succeeded.
The economy is on way to recovery and would soon be able to record a growth rate of 6 percent or beyond if the government steers the course. One way to measure the degree of success is to argue that poverty level would have been even higher if the growth rate had followed the trends witnessed between 1996-97 and 2000-01.
Another policy plank is to devote more resources for Public Sector Development Programme (PSDP) which is considered the main vehicle to upgrade infrastructure and improve social conditions in order to enhance the capability of the poor people to participate effectively in growth process.
The total outlay on PSDP, which is targeted at Rs 160 billion during 2003-04, is planned to increase to Rs 200 billion during 2004-05, Rs 240.3 billion in 2005-06, Rs 295.3 billion in 2006-07 and Rs 367.5 billion in 2007-08.
While intentions of the government are pious, there have been two problems with this approach.
Expenditures on PSDP were usually reduced during the course of the year whenever the fiscal policy was to be tightened to attain a certain level of fiscal deficit. Besides, the country does not have the capacity to utilise the targeted amount fully and effectively. However, the Finance Minister continues to stick to this approach.
He has stated that next year's budget would focus on investment and growth while some other areas like further reduction in debt burden, privatisation of public sector enterprises and accelerated development of infrastructure and social sectors would continue to receive high priority.
While there is nothing basically wrong with this approach, it has to be complemented with certain other initiatives if attack on poverty is to be made more meaningful and effective.
Viet-Nam is a success story because, besides increasing growth rate, it took certain other measures like redistribution of land to peasant households and elimination of production subsidies which altered the status quo in a decisive manner. No such action is being contemplated in Pakistan.
In fact, Prime Minister Jamali has ruled out such a possibility and land reforms in the past failed to achieve the desired results due to complete hold of the landlords over the organs of the state.
Production subsidies enrich the bigger landlords solely because they have surplus agricultural supplies while poor peasants hardly get any benefit from such a policy.
Policy-makers have to seriously think whether flourishing feudalism can co-exist with effective anti-poverty measures and the economic and political rights of the citizens.
The situation in cities is also not encouraging. The acquisition of houses and plots by the well-to-do is making them perpetually rich because they can afford to indulge in such lucrative activities while the poor people cannot even afford to feed and educate their children properly with the result that the gulf between the two classes is widening with the passage of time.
It is clear that if holding of real assets is not controlled or at least their role in accelerating income inequalities is not minimised, the dream to move to an egalitarian society would never be fulfilled.
The government has also not been able to use the instrument of family planning and population control to remove poverty and minimise income inequalities because its efforts are meagre and not well directed.
Reduction in the population growth rate in the recent years has largely come through the voluntary measures adopted by the richer sections of the society while poor sections continue to breed without any let-up due to the casual attitude of the government.
This has deepened income inequalities and is one of the main reasons why the number of poor is increasing at a faster rate than other developing countries and pushing up the overall poverty level in the country.
Economic managers find solace in the declining rate of population growth rate but make no serious efforts to popularise family planning and reach the targeted groups. Sometimes one feels that priorities of the government are wrong.
Perks and privileges of members of the assemblies as well as ministers who are already more than affluent are raised periodically without giving any relief to the common man, including the pensioners, low paid employees of the government and other weaker sections of the society.
High consideration to facilitate car buyers in the Cabinet meetings is another classic example of distorted thinking.
The government seems to be hell-bent to safeguard the interests of car buyers who belong to well-to-do families while it does not appear to be much interested in the plight of common people.
If the rich people are so eager to buy new cars, they could have been asked to pay higher amount of taxes on the vehicles through a change in tariff rates and higher revenues so mobilised could have been spent on welfare projects for the poor people.
Through this process, prices of new cars could have been allowed to increase to the equilibrium level and windfall profits to the middlemen could have been eliminated.
There is another dilemma. Whatever social services are provided by the government through allocation of budgetary resources are generally pre-empted by the influential sections of the society while the weaker sections continue to be neglected due largely to their ignorance and lack of clout.
Even the supposedly impartial organs of the government continue to behave as if they are meant to serve the powerful groups.
In a World Bank document released on 11th February, 2004, it has been specifically noted that governance problems resulting from inadequate spending on police and the justice system impact the poor sections of the society the most which means that they are largely deprived of their inalienable right to security and justice.
This is almost a routine experience in Pakistan but it hurts more when such a slur comes from an international agency.
Our banking system is also not far behind in making mincemeat out of the poor people. Ordinary depositors who are spread throughout the length and breadth of the country were paid a paltry average return of 1.34 percent in January, 2004, while the borrowers got loans at an average interest rate of 5.04 percent. It is not difficult to figure out the class of people in each group and the net loss in purchasing power which the poor depositors had to sustain.
All in all, the rise in growth rate could make certain impact notably in the long-run but the die seems to be heavily loaded against the poor because of other reasons.
In order to make a real difference, the government has to change its mindset and go beyond conventional means which at the moment seems difficult due to the influence of vested groups in various spheres.