The process of economic growth cannot be sustained for long unless accompanied by improvement of the socio-economic indicators like availability of health facilities, education prevalence, including adult literacy and gross primary and secondary school enrolment, human development index, income distribution including the level of per capita gross national income and product (GNI and GDP) and changes in them over time, and numbers below the poverty line.
Seen in this perspective, it becomes necessary that economic policy be designed in a way that the benefits of growth or enhanced growth, which indeed would be the result of optimum utilisation of available factors of production, including labour or human capital, reach the owners of the factors of production in an equitable manner.
The actions adopted by those at the helm of affairs to enhance growth should automatically translate into a gradual process of social development indicating continued improvement in social indicators.
An appropriate mix of these indicators would help determine qualitative aspect of human capital and its appropriate employment in the economy. A chain reaction would then take place.
A growing economy, as opposed to a stagnant one, would become the engine of employment improving the relative lot of poor and rich alike. The more attractive the economic climate for growth, the more would be the demand for labour to produce goods and services. Jobs for the jobless in turn would augment not only the level of income but would also simultaneously reduce poverty as more people become earning hands.
In sum, when a government functionary says that the economic policy in vogue is geared at improving economic welfare, the assertion necessarily implies an improvement in the level of income distribution and employment rather than economic growth per se.
Most of the emerging economic powers in Asia like China, Singapore, Korea, Malaysia and others have to pay due consideration to improve the performance of the socio-economic indicators. They can learn from the experience of developed nations like the United States of America, the United Kingdom and other OECD members as to how successfully they have managed to cope with the social phenomena like corruption, abject poverty and unequal income distribution.
The policies and experiences of these nations provide guidelines to those economies who wish to remove the social imbalances during the phase of higher growth rates of output. For reasons best known to policy formulators, Pakistan, has not so far been able to follow these guidelines despite a sustained and sometimes quite high economic growth in recent years.
The quantitative economic measures like GDP, estimated around 8 percent in 2004-05 and a little below 7 percent in 2005-06, reveal an outstanding economic recovery in the last few years and forecast that the economy would continue growing in the years ahead. The gross fixed capital formation or gross fixed investment grew by 30.7 percent during 2005-06 as against a rise of 28.6 percent last year.
Overall, the manufacturing sector registered a growth of 8.6 percent against the target of 12 percent in 2005-06 compared with last year's achievement of 12.6 percent, taking this sector's share in GDP to 18.2 percent. The large-scale manufacturing sector also registered a broad-based growth of 9.0 percent in the current fiscal year against a target of 14.5 percent and last year's achievement of 15.6 percent. The services sector grew by 8.8 percent in 2005-06 as against 8 percent in the last year. Total foreign direct investment (FDI) rose to $3,525.4 million during July 05-May 06, showing an increase of over 200 percent compared with $1,170.8 during July 04-May 05.
As part of market orientation of the economy, privatisation was pursued with speed though controversies arose with respect to transparency. The cumulative value of our exports was $14,391 million during FY05 which rose to $14,961 million in July 05-May 06, registering a growth of 3.97 percent this fiscal. The cumulative value of imports, which was $20,598.1 million during FY05, rose by a still sharper speed to reach $25,598 million in July 05-May 06, showing an increase of over 24 percent over FY05 so far.
Evidently, the growth of imports was much larger than the growth of exports and a matter of concern but $4,136.25 million remitted by overseas Pakistanis during July 05-May 06 as against $3,809.81 million received during the same period of last fiscal year lessened somewhat the extra burden of imports on our foreign exchange reserves.
What should have been the effect of such an outstanding growth pattern and higher level of output on the socio-economic indicators remains uncertain. In an address at a Press conference, Adviser to Prime Minister on Finance, Dr Salman Shah, however, has apparently shown optimism about the socio-economic change in the country when he said: "The labour force survey shows that 5.8 million jobs were created over the two years due to which the rate of unemployment had declined.
The Pakistan living standard measure (PLSM) shows a substantial reduction in poverty from 32.4 percent to 23.9 percent." Despite this bold statement, it needs an in-depth and transparent analysis to verify the actual state of socio-economic changes in the country.
To elaborate, poverty is a multidimensional concept and is not easy to define. Four different approaches are normally used to measure its extent, including the monetary approach, the capabilities approach, the social exclusion approach and the participation approach indicate that complexities are their. However, two of them namely, capabilities approach and social exclusion approach are stated to be more reliable.
The former, pioneered by Amartya Sen, emphasises that income is valuable only when it increases the capabilities of individuals and thereby permits a functioning society. A person whose capabilities or functioning falls below a minimum acceptable standard is termed as poor. The latter approach emphasises a situation when policies inhibit individuals or groups to participate fully in the society in which they live. As a result of exclusion, the incomes, capabilities or other characteristics of the poor fail to match the norms of their community or the reference group.
In Pakistan, poverty is generally measured on the basis of daily calories intake, that is, neither on the basis of social exclusion approach nor on capabilities approach. As per Household Integrated Economic Survey 2004-05, which adopts the monetary approach based on calories intake, the overall percentage of population living below the poverty line declined from 34.5 percent in 2001 to 23.9 percent in 2004-05.
It declined from 39.3 percent to 28.1 percent in the case of rural areas and from 22.7 percent to 14.9 percent in urban areas. However, even a cursory look at the statistics issued recently by the government will reveal that there is still many a slip between the cup and the lip.
The economic survey of Pakistan 2005-06 shows that 65.9 percent of the country's population living in rural areas is directly or indirectly linked with the agriculture sector for their livelihood.
Furthermore 44.8 percent of the country's workforce is employed in the agriculture sector of the economy. Unfortunately the growth rate of this sector declined to 2.5 percent in 2005-06 from 6.7 percent in the last fiscal year but surprisingly the share of the agriculture sector in employment has increased from 43 percent in 2003-04 to 45 percent in 2005-06.
Two interpretations can be made from these patterns. Firstly, a rise in the level of employment along with a decline in the level of output demonstrates that the per capita output and income in the agriculture sector has decreased. Moreover one can also interpret that that the percentage of workforce falling in the category of disguised unemployment has also increased in the agricultural sector due to higher rate of employment and lower rate of output growth. A reduction in the income level of 65.9 percent population of Pakistan shows that their living standards have further declined and deteriorated during the last fiscal year.
Secondly, the overall per capita GDP in Pakistan has registered a growth of 14.1 percent, rising from $742 to $847 in 2005-06. It clearly demonstrates that the rest of the 34.1 percent population has enjoyed a significant growth in their level of incomes. The rate of growth in their incomes was so high that it had covered up all the reduction in per capita incomes of the agriculture sector in our economy.
It signifies that as of now our economy stands distinctly polarised into two segments, viz., agricultural and industrial, where unequal income distribution and concentration of economic power led to the rise in overall per capita incomes. It is amazing that despite the claims of authorities that recent estimates of poverty have been applauded by the donor organisations like the Asian Development Bank (ADB) and others, they could not convince the World Bank and United Nations Development Programme (UNDP) which questioned the official estimates of poverty in Pakistan.
As per their own estimates, the poverty rate in Pakistan presently ranges between 25.7 percent to 28.3 percent. They also contend that the estimated level of poverty around 23.9 percent does not portray the real picture of the living standards of the rural population in Pakistan. Therefore, both organisations have strongly emphasised to improve the methodology of estimating poverty in Pakistan.
Dr Nadir Shah, of the Pakistan Institute of Development Economics (PIDE), explaining his views on the subject in 2005 said: "As the rural-based agriculture sector and urban-based manufacturing sector expand, it will help generate employment opportunities for both groups. In more general terms, it would help reduce poverty in the long term. The same pace of economic growth for about next seven to ten years would only help translate the real benefits to the common man." Unfortunately, the theoretical relationships explained by the analyst do not match the empirics as far as Pakistan's performance on the social fronts is concerned.
In spite of somewhat sustained economic recovery for the last five years, economy is still held hostage by the prevailing social evils and imbalances. In an economy where concentration of economic power is mounting, the gulf between haves and have-nots widening and suicides and social crimes rising, the reduction in the level of poverty seems highly doubtful.
Similarly, a sharp rise in the level of prices along with a declining level of real incomes should have added fuel to fire and adversely affected the purchasing power of the lower income group on the one hand and made them earn their livelihood by hook or by crook on the other.
The most ironical situation in our economy, which emerged recently and stood aggravated because of half-hearted steps by the authorities, is that the prices of necessities which directly impact the welfare of the poor like cooking oil, sugar, wheat, pulses and similar other items, increased exponentially in the last few years while the prices of luxuries like automobiles, mobiles, televisions and other such items demonstrated either a downward trend or stable/only marginally higher trend. The YOY percentage increase in per liter/kg prices of milk, sugar and beef in April 06 was worked out at 40 percent, 11.0 percent, 15.6 percent respectively when compared with the respective levels in April 05.
The average increase in the prices of major pulses (Masoor, Moong, Mash and Gram) was estimated at 28.78 percent during the same period. The lower income group of our society, which is highly vulnerable to fluctuations in the prices of necessities, faced a crushing blow in the form of 12.8 percent food inflation during July 04-May 05, which was followed by a further increase of 7.1 percent during FY06 so far (June 05-May 06).
So, in the span of just two years, a food basket which in index terms cost, say, Rs 100 in FY04 rose first to Rs 112.8 in May 05 then to Rs 119.9 or Rs 120 in May 06. In 2005-06, with an expansionary fiscal policy still in place justified on grounds of devastating October 8th earthquake, fiscal deficit to GDP ratio has risen to 4.2 percent as against the target of 3.8 percent.
Last year, this ratio was just 3.3 percent compared with the target of 3.0 percent. As per latest SBP data, monetary growth has clearly exceeded the target of 12.8 percent touching 13.1 percent growth at the end of first eleven months of the current fiscal year. In the wake of this increase in money supply with a staggering over-hang of past years yet to be worked through, it appeared quite difficult to control the level of inflation when supplies as expressed by GDP were to grow at a lower than targeted pace in 2005-06 was much lesser than the 8.6 percent achieved in last year. It is clear that the policies put in place could neither check the rising level of prices nor the expectations about future inflation.
Unemployment is another growing threat for the long-term economic stability of our economy. The International Labour Organisation (ILO) in its report has expressed that unemployment rate in South Asia rose from 2.9 percent in 1995 to 3.4 percent in 2002, with unemployment rate in Pakistan, for example, climbing in recent years to nearly 8 percent. However, the evidence provided by the labour force survey 2005 asserts that 5.8 million jobs were created during the last two years reducing the overall unemployment rate in the economy.
The economic survey for 2005-06 shows that the rate of unemployment, that was estimated at 8.2 percent both in 2001-02 and 2002-03 and 7.69 percent in 2003-04 and 2004-05, stood reduced to 6.5 percent in the current fiscal year. On the face of, it is an encouraging figure alluding one to believe that things are changing for the better. But one may ask whether this improvement is across the board or not.
Has the people, suffering from vicious circle of poverty, got some benefits from these enhanced employment opportunities or only the children of the prosperous enjoyed a considerable share of the cake? We know that they alone are the most facilitated people to acquire better education and hence "be employed". The annual report of SBP shows that even after a 0.6 percent decline in the level of unemployment, an increase in the level of unemployment was observed in Sindh and Balochistan where it rose from 5.17 percent to 5.87 percent and 7.60 percent to 8.38 percent respectively.
Unemployment and poverty are much more pronounced in Balochistan and those parts of rural Sindh that are firmly in the tribal and feudal grips and remained untouched by the prosperity witnessed in the big cities. The situation is not much better even in certain parts of the country's most prosperous province - Punjab. Growing rural unemployment, particularly among the educated classes, has resulted in rising feelings of depression, dejection and uncertainty that has caused increasing incidents of social and moral crimes.
Though the policy-makers have asserted that a pro-poor budget announced for 2006-07 would remove the anxieties of the deprived classes of the society, it may not be more than a wane hope if strong steps are not taken to reduce inequalities and regional disparities.
Different organisations and analysts like the International Labour Organisation (ILO) are of the view that not only the pattern but the sources of growth and the manner in which its benefits are distributed are also equally important from the point of view of achieving the goal of poverty reduction.
From this perspective, productive and remunerative employment assumes a central role in making economic growth pro-poor. It is, therefore, essential to have a better understanding of the mechanisms through which the linkages between economic growth, employment and poverty reduction work.
Likewise, employment considerations need to be integrated into development strategies in general and poverty reduction strategies in particular.
In general, an employment-intensive growth strategy, accompanied by a rise in productivity, is key to reducing the level of poverty via the income effect in the short run and raising the productive capacity of the future workforce in the long run.
To this end, policies must be directed at productivity-enhancing investments and the establishment of labour-intensive industries to generate employment for unskilled and semi-skilled labour in both rural and urban areas. Further policy implications include a need to focus on enhancing the numbers and quality of human capital especially among the poor through their enhanced access to education (especially primary and secondary), vocational training and health care, improvements in physical infrastructure, easy access to credit and the creation of social safety nets.
Economic policies that have caused nothing than growing disparities and unequal income distribution won't do. Fiscal and tax restructuring, however, can be highly helpful in achieving the goal of equal income distribution.
Serious efforts should be made to enhance the ratio of direct taxes and reduce the proportion of indirect taxes in total tax revenue. Similarly, efforts should be made in letter and spirit to control the level of prices in general and food inflation in particular if policy makers want to alleviate poverty.
And last but not the least is that even the soundest economic policies cannot make any difference in the lives of the common citizens if a country does not have strong and independent institutions to implement them. Pakistan inherited a strong civil service, judiciary and police, which satisfied the demands of the then population.
Over time, the nature of governance has become more complex and the capacity of these institutions has failed in keeping pace with the population explosion in the country, specially among the poor. These institutions have been weakened by successive corrupt governments. The practices of nepotism and red-tapism have badly affected their efficiency and resulted in an incompetent dispensation of services.
IN SUM: only institutional independence and stability strengthened by transparency to weed out corruption will pave the way not only to achieve sustainable economic growth and development but also reduce overall level of poverty in the country.
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