Finance Minister Ishaq Dar on April 8, 2016 with the technical support of the World Bank announced a new official poverty line of Rs 3030 per capita per month in terms of cost of basic need. The government accordingly claims that poverty has declined from 51% in 2004-05 to 29.5% in 2013-14.This claim is misleading and unsupported by the deteriorating economic conditions in the country since 2008. In this context, it is important to evaluate poverty trends and determine whether the poverty decline is consistent with underlying economic realities in Pakistan.
The new official poverty line is not only arbitrary but also ignores the consumption patterns of the poorest 10% households in the country. The poverty decline as measured by the new official poverty line is not consistent with rising malnutrition and declining social and economic indicators. This is mainly due to the fact that under the official methodology, the government uses Consumer Price Index (CPI) which underestimates the inflation rate. Thus, any underestimation of inflation will result in a misleading decline in poverty. A deeper look into the rate of change in CPI, Food Inflation and Sensitive Price Indicator (SPI) suggests that CPI inflation rate remained significantly lower than Food Inflation and SPI between 2002 and 2011. Changes in CPI were significantly lower at 21% compared with 28% in Food Inflation and SPI between 2001-02 and 2004-05. Similarly, CPI suggests lower price changes at 30.3% compared with 38%in Food Inflation and SPI between 2004-05 and 2007-08. In the most recent period 2007-08 and 2010-11, changes in CPI were much lower at 53.7% compared with 65.3% in Food Inflation and SPI indicating an increasing level of underestimation of CPI over time. Thus, underestimation of inflation as measured by CPI is causing a fallacious decline in poverty. On the other hand, high Food Inflation has been hurting the poor severely since they spend more than 70% of their total income on food items.
It is noteworthy that a rapidly declining poverty level to an unacceptable level from 34% in 2001 to 8% in 2013-14 under the old methodology forced the government to realise the flaws and revise its method of measurement of poverty. But the government once again failed to address the real issue of underestimation of CPI for political reasons. Instead of correcting this downward bias and revising CPI upward, it has announced a new official poverty line with the support of the World Bank. Though the new official poverty line of Rs 3030 per capita per month is higher than the previous official poverty line, this step does not address the fundamental issue of underestimation of inflation. Thereby, neglecting the questions of efficacy and evaluation of various government policies under donors' program during the past years and their impact on the poor.
Ignoring the issue of underestimation of inflation does not explain the persistent decline in poverty and lead to drawing fallacious conclusions about the government policies. This has been contended by the Members of Technical Group on Poverty including the writer being a member of the group at the Planning Commission in the same meeting on April 8, 2016 that the GDP growth rate declined from an average 6-7 percent per annum during 2004 to 2007 to 3 percent per annum since 2008, unemployment increased and inflation remained high and therefore a rapid decline in poverty from 51% in 2004-05 to 29.5% in 2013-14 is not possible during this period. Notably, this period is accompanied with sluggish economic activities, low growth, and increased food and energy prices and unemployment in the country.
The writer has now tried to correct this downward inflationary bias by using SPI inflation rate and updated the official poverty line by SPI instead of CPI as against the government. The results indicate that poverty did not decline to 29.5% and the poverty level was at 47.5% in 2013-14.The number of poor in the country has increased from 76.1 million in 2004-05 to 89.4 million in 2013-14 suggesting that deteriorating economic conditions coupled with food and energy crisis has adversely affected the poor and vulnerable groups until recently.
It is noteworthy that in past a growth trajectory of 6% per annum reduced the poverty in Pakistan. Therefore, recently achieved growth rate of 3-4%cannot reduce poverty during the last few years. This is supported by the declining exports, rising unemployment and reduced allocation for social sector (health and education) compared with huge allocation on roads and highways. Thus, if government wants to reduce poverty, it needs to undertake reforms to increase growth rate to 6%per annum and initiate projects that benefit the poor. The projects like metro bus and orange line are expensive and will divert spending from pro-poor areas to other less priority areas, which will not only increase poverty but also increase the gap between the rich and the poor.
(The writer is former Advisor of Planning Commission and currently working as Advisor at Centre for Policy Studies, (CIIT) Islamabad)