The urban-rural divide

The estimates of the extent of the urban-rural divide in Pakistan presented in this article are from my recently published book titled 'Growth and Inequality in Pakistan'. The urban-rural divide in terms of per capita value added or income is an important dimension of regional inequality in Pakistan. It highlights, in particular, the magnitude of the pressure potentially for migration of the people from rural to urban areas, especially to the metropolitan cities of Pakistan.
Questions of special interest are, first, the size and growth of the off-farm economy in the rural areas as a measure of diversification. Second, the extent of dominance of the services economy in the urban areas and the distribution between the informal and formal sectors are important not only from the viewpoint of the incidence of poverty and but also in terms of the taxable capacity.
The methodology essentially relies on the quantification of sectoral value-added in the rural and urban areas respectively. This is based on the distribution of employment and the level of income per worker. The primary sources of information are the Labor Force and Household Integrated Economic Surveys carried out by the Pakistan Bureaus of Statistics. The latest estimate of the regional distribution, urban versus rural, of Pakistan in terms of economic activity is for 2015-16.
The perhaps unexpected finding is that the national economy is split up into, more or less, two equal parts, one of the urban and the other of the rural economy. Given that the population distribution is 36 percent in the rural areas and the remainder, 64 percent, in the urban areas, there is clearly a major difference in the relative per capita value-added.
The share of the national value added by sector in the rural areas is 94 percent in agriculture; 42 percent in industry and 37 percent in services. As such, the share of urban areas is 6 percent in agriculture, 58 percent in industry and 63 percent in services.
There are a number of surprises. First, the share of rural areas is higher than perhaps expected in manufacturing at over 30 percent. This is due to the presence of large agro-based units and small-scale work in household enterprises. Second, construction activity in housing and on-going public sector development projects is higher in rural areas. Overall, the share of the non-farm economy is perhaps again surprisingly large, contributing almost 62 percent to the rural GDP and showing faster growth than agriculture.
The sectors which are predominantly located in urban areas, with shares in the national value added in excess of 60 percent are large-scale manufacturing, wholesale and retail trade, finance and insurance and ownership of dwellings. The respective shares are 71 percent, 68 percent, 85 percent, and 65 percent. Overall, the urban economy in 2015-16 consisted primarily of services and industry, with shares of 73 percent and 24 percent respectively. Within services, informal activities have a large share of 61 percent in value added.
There has been a significant divergence between the growth rates of the urban and rural economies since 2007-08. The urban economy has demonstrated an annual growth rate of almost 4.5 percent, while the rural economy has increased annually by less than 2.5 percent. Over the last eight years, the income gap has widened further by 17 percent. In per capita terms, the growth rate in urban areas is over one percentage point faster.
Currently, the difference between urban and rural per capita GDP is as much as 97 percent. It has risen from 62 percent in 2007-08 and 73 percent in 2010-11. As such, the pressure on rural to urban migration is likely to increase in coming years, especially if the urban economy continues to grow at a significantly faster rate.
Turning to the relative size of the urban and rural economies in the different provinces, the findings are also revealing. The Province with the largest component of its GDP in urban areas is Sindh, as expected, with a share of 68 percent. Of course, this is due to the presence of Karachi. However, the population shares of urban and rural areas respectively are very close to each other in Sindh.
The province with the lowest share in urban areas is Khyber Pakhtunkhwa of 26 percent. The corresponding shares for Punjab and Balochistan are 46 percent and 51 percent respectively. In the latter case, the high share, despite a relatively low rate of urbanization, is a reflection of the lack of economic activity in the rural areas of the Province.
The next question relates to the magnitude of the per capita urban-rural income differential in each Province. As highlighted above, it is the largest in Balochistan at 168 percent; followed by Sindh at almost 100 percent, Khyber-Pakhtunkhwa at 54 percent and the lowest in Punjab at 46 percent.
The final result of interest is of the provincial rankings of per capita value-added. In the rural areas, Punjab has the highest per capita value-added as expected, followed by Sindh, Khyber Pakhtunkhwa and Balochistan.
The results with regard to urban ranking are, as expected: Sindh has the highest per capita value-added. Thereafter, the rankings are somewhat unexpected. The second position is occupied by Balochistan, followed by Punjab and Khyber Pakhtunkhwa.
The importance of the findings above are, first, that the increase in the rural-urban divide means that for greater priority will have to be attached to agriculture, as the primary driver of growth in the rural economy. Otherwise, there is the danger that with the low rate of growth in the rural GDP, the incidence of rural poverty could remain high and even start rising. Also, while the urban sector has exhibited faster growth, a large part has been in the informal economy. This highlights the likelihood that the number of working poor may have increased.
Finally, the widening urban-rural divide implies that there could be more migration from the country side to especially the large cities of Pakistan, as we have seen recently, for example, to Lahore. Pakistan already has the highest rate of urbanization in South Asia. Further pressure on metropolitan areas of the country will exacerbate overcrowding in housing, traffic congestion, air pollution, crime and violence.
(The author is Professor Emeritus at BNU and former Federal Minister)