The poverty spiral

The State Bank annual report - a fairly credible yardstick for gauging health of different sectors of the economy - says that the poverty ratio in Pakistan has witnessed a 2.3 percent rise in 2009, reaching 36.1 percent from 33.8 percent in FY08. In real terms this means that 62 million Pakistanis, out of a population of 170 million, have slipped below the poverty line, which should ring alarm bells in the right quarters.
The report has attributes the slippage to two major factors: a sharp rise in inflation and reduction in subsidies. Other contributory factors listed in the report include limited availability of fiscal space, inadequate infrastructure and institutional governance issues, which has slowed the progress of initiatives undertaken by the government for social uplift.
A review of socio-economic indicators shows that there has been only a marginal improvement in health, education and employment indicators. However, according to the Millennium Development Goals Report FY2009, around 55-90 million more people have fallen below the poverty line due to the recent financial crisis.
It has been observed that despite a downslide in various poverty indicators, ie the headcount ratio, poverty gap and severity of poverty, a sizeable portion of the population remains clustered around the poverty line, which should be more worrisome because these segments are likely to be ignored in the immediate context. The government has indeed taken a number of pro-poor initiatives, and has built a network of comprehensive social protection, which includes direct and indirect measures.
However, the beneficial effects of these programmes have apparently been nullified by the sharp inflationary spiral and the gradual reduction in subsidies under terms of conditionalities imposed by the international financial institutions. A World Bank study had said in 2006 that 56 percent of the Pakistanis ran the risk of falling into the poverty trap, although one analyst has since claimed that the number of Pakistanis living on a daily income of $2 or less has risen as high as 74 percent.
As oil and food prices are the major determinants of inflation in the country, keeping the prices within reasonable limits by slashing minor taxes on them can have an overall salutary impact. It is said there are as many as 21 different taxes on POL products, for instance.
Effecting a rational cut in such over-taxation even by a small margin can make a big difference for those in the poverty trap, while the accruing revenue shortfall can be counterbalanced by broadening the tax base, which remains narrowest in the whole region. Secondly, as supply side shocks in food and oil prices can unleash inflationary trends, exercising greater control over supply side distortions can help lower the inflation rate.
Thirdly, a major cause of inflation in our country is resort to indirect or regressive taxes, which are in essence and effect, anti-poor and inflationary. Under this taxation mechanism, both the high-income and the low-income consumers have to pay the same amount of tax on consumer goods used by them, although their incomes are vastly different. As a result, the low-income consumers have to part with a higher percentage of their earning than do the high-income consumers, which pushes the low-income consumers deeper into the poverty quagmire.
Fourthly, a substantial increase in wheat support price also has an inflationary effect on consumer prices, particularly the food prices. (This is due to the fact that wheat and wheat-related products account for 5.1 percent of the CPI basket.) As we have argued in this space earlier as well, poverty alleviation programmes can deliver only when the government brings about pro-people changes in its monetary policies.
Further, instead of distributing cash under various poverty alleviation programmes, the government should invest these amounts in skill development and employment generation initiatives for the target groups. By exercising greater fiscal discipline, the government can easily generate funds for such pro-people projects. It should also launch fast-track projects in water and power sectors, which will also help augment the country's productivity, and put our economy on an even keel.
Above all, the inter-provincial disparities in development level should be minimised in the larger interest of uniform national development, which will serve to promote greater inter-provincial cohesion. Unfortunately, there has been greater stress in our country on approval and launching of projects than on their time-bound and cost-effective implementation.
Launch of poverty reduction programmes should not be treated as an end in itself, but only a means to an end. The government should exercise greater political oversight on these projects to ensure their early completion. The finding that 62 million Pakistanis have fallen below the poverty line is quite disturbing. The government must start emergency pro-people initiatives to reverse the trend.