Microeconomic Perspective on Poverty Evolution in Pakistan

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Table of Contents

Brief Background on Pakistan
Current Policy Environment in Relation to Poverty
Human Development Index as a Poverty Metric in Pakistan
Captured Components by Human Development Index
Components not Captured by the Human Development Index and Welfare Indicator
Separating the Poor From the Non-Poor
Summary Statistic
References

Poverty ranks among the major socio-economic challenges affecting Pakistan, with widespread adverse implications. Like in other developing countries, destitution in Pakistan has evolved across decades, with a declining spiral in the 1980s and a gradual reversal of the achieved gains in the 1990s by poor economic policies (Afzal et al., 2020). Historically, penury in the country has been higher in rural than in urban areas. The headcount ratio, human development indicators, and the total population living below the poverty line reveal a remarkable decline in impoverishment levels across the country. From a macroeconomic perspective, rampant poverty has been primarily driven by lofty double-digit inflation, unemployment, and income inequalities. The periodic spike in poverty levels, notwithstanding economic growth, implies incongruous policy functionality in relation to drivers of poverty and the subsequent failure to improve the indicators. Although growth is associated with poverty reduction and improvements in human development, public policies in Pakistan should exert independent influences to alleviate impoverishment and improve its human development indicators.

Brief Background on Pakistan

Pakistan is a South Asian country and the world’s fifth-most populous. With a predominantly semi-industrialized economy heavily dependent on agriculture, textiles, and food production, a sizeable share of the population resides in the rural areas. Studies indicate that 59% of rural Pakistan is poor and that poverty and inequalities rose more sharply in the 1990s in these neighborhoods than in urban settings (Hameed et al., 2016). Although the country has recorded a 66% decline in poverty levels, particularly between 2003 and 2014, the relationship between GDP growth and poverty eradication is not distinctly discernible. For instance, in 1991, 1997, and 2004, Pakistan’s poverty headcount was 34%, 26.3%, and 51.7% of the total population, respectively, against GDP growth rates of 5.06%, 1.01%, and 7.36% (Afzal et al., 2020). The poverty levels have been aggravated by high population growth rates in the last few decades without corresponding employment growth. Consequently, unemployment is a major driver of poverty in Pakistan.

Additionally, Pakistan has experienced the adverse impacts of inflation and multidimensional inequalities in income, consumption, and wealth scores. Indeed, IMF’s austerity measures drove inflationary pressure upwards, with the associated costs disproportionately falling on the poor. The resultant increases in prices of necessities have exacerbated poverty alongside the detrimental impacts of inequalities. Although Pakistan has formulated elaborate designed to stimulate economic growth, human development indicators have remained relatively low, especially in education, nutrition, and health, and general wellbeing of the people. From this perspective, the country’s poverty indexes have focused on statistical and econometric measurements, such as consumption models, instead of improvements in the social sector.

Current Policy Environment in Relation to Poverty

In collaboration with national and international agencies, Pakistan’s government has launched various public policies designed to help the country alleviate poverty. The country’s current policy environment is inclined towards improving governance and public institutions’ responsibility so they can respond better and more effectively to poverty. However, these interventions are undermined by various unique factors which erode the effectiveness of monetary and fiscal policies in addressing unemployment, inflation, and inequality. For instance, Pakistan’s volatile strategic location and intra-state tensions demand enormous military spending, which exacerbates the inflationary pressure by injecting additional finances into the economy. For instance, in the financial year 2014-15, the country’s defense budget grew by 73 billion Pakistan rupees to hit 700.2 billion (Hussain et al., 2015). According to Hussain et al. (2015), such disproportionate expenditures impede development by diverting resources that could have been spent on delivering public services and activities such as lowering taxes.

Further, Pakistan’s financial indicators have been experiencing a downward trend, with economic growth, inflation, currency stability, and debt financing projected to grow against the desired trajectory. For instance, the economic growth rate was anticipated to be at 2.4% in 2020 compared to 2018’s 6.2%, while inflation was forecasted to hit 13% (Chaudry, 2019). Additionally, current expenditures have increased exponentially for the 2020 financial year, with 75% while development allocations have fallen. Coupled with high non-development expenditure, scarce revenue sources, and ineffective tax collection practices which fall heavily on the poor, public policies on poverty amelioration are rendered impotent. As a result, attempts to address unemployment, inflation, and inequalities have been whittled by systemic and structural setbacks, leading to poor human development indicators (Hassan et al., 2016). Therefore, the current policy frameworks are considerably dysfunctional and do not directly lead to improvements in the social sector.

Human Development Index as a Poverty Metric in Pakistan

Human Development Index (HDI) is a composite statistical index encompassing the decency of living standards by assessing the longevity of life, educational progress, and material wellbeing in Gross National Income. According to Javaid et al. (2018), HDI is a broader metric spreading its attention beyond distributing commodities and services to feature their impact on human decisions and the expansion of choices. Over the years, Pakistan has recorded mixed HDI statistics, with the most consistent being a steady increase in life expectancy to 67.11 years. Additionally, Pakistan’s literacy rate and education standards continue to decline significantly. Although multiple factors influence this trend, low budgetary allocations for the education sector, substandard curricula, low enrollment, and high dropout cumulatively contribute to the phenomena. Moreover, rapid population growth, unemployment, and poverty make Pakistan’s knowledge acquisition lag behind.

Although Pakistan has realized remarkable improvement in healthcare access and quality, it still ranks behind its South Asian counterparts, such as India, Sri Lanka, and Bangladesh. The country still records disproportionate mortalities from preventable and curable causes such as tuberculosis, uterine cancer, diarrheal, and neonatal diseases. Among the prominent drivers of high death rates from treatable causes are the exorbitant medical costs, impeding access to healthcare, and expanding the disease burden among the low-income earners and the unemployed. Other illnesses and conditions such as poliomyelitis and HIV/AIDS are increasing at an alarming rate and whose effects are aggravated by the majority of the population’s low caloric intake.

Captured Components by Human Development Index

HDI is intended to capture the fundamental dimensions that define the quality of life and human development. For instance, access to education, life expectancy, and standard rank among the most integral drivers and global development outcomes. A long healthy life reflects the overall health status of a population and the associated mortality levels. Regarding education access, the statistics reveal the expected and average years of schooling in a given country. In Pakistan, there are vast gaps in access and overall educational attainment. Although the country has developed elaborate policies to stimulate enrollment, mitigate student attrition rates, and encourage tertiary education, the general performance has been worse than its South Asian counterparts. The gross national income (GNI) captures the cumulative amount of money earned by the population and its business. Notably, Pakistan’s GNI has been erratic, with some years recording decline while others reflect positive growth.

Components not Captured by the Human Development Index and Welfare Indicator

HDI, although considerably comprehensive, HDI does not capture other critical components that contribute to human development, such as freedoms and political elements. Additionally, the measured items are weighted equally, despite not contributing to human development equally. This implies that the overall HDI figure may be disproportionately influenced by one item, while others remain relatively low. Linked to this is the metric’s inability to capture short-term changes and the widespread inequalities within a country. Although GDP is the widely used welfare indicator, it does not adequately address Pakistan’s scenario since it focuses on economic activities while disregarding broader measures that reflect people’s wellbeing. In this regard, the most appropriate welfare indicators are household real incomes, per capita expenditures, and calorie intake.

Separating the Poor From the Non-Poor

With the defined welfare indicators, the poor can be separated from the non-poor by comparing their income levels against the set poverty threshold and the minimum earnings required to cover the basic expenses. Additionally, the impoverished can be identified by low capita expenditures and constrained calorie intake. In this regard, people whose expenses fall below the limit will be categorized as poor. On the converse, the population segment whose expenses surpass this level will be classified as non-poor.

Summary Statistic

Item

Minimum

Household Real Incomes $10/day

Per Capita Expenditure $2.5/day

Calorie Intake

1000kcals

Average

337.5

A family with an average of 337.5 per day will be deemed poor.

References

Afzal, A., Mirza, N., & Arshad, F. (2020). Pakistan’s poverty puzzle: Role of foreign aid, democracy & media.Economic Research−Ekonomska Istrazivanja, 1-15. Web.

Chaudhry, H. (2019). Budget 2020: Govt predicts 2.4pc growth, Rs7 trillion in expenditures. Dawn. Web.

Farooq, S., & Ahmad, U. (2020). Economic growth and rural poverty in Pakistan: A panel dataset analysis. The European Journal of Development Research, 32(4), 1128-1150. Web.

Hameed, A., Padda, I., & Karim, S. (2016). Multidimensional poverty mapping for rural Pakistan.SSRN Electronic Journal, 1-27. Web.

Hassan, M. U., Khalid, M. W., & Kayani, A. (2016). Evaluating the dilemma of inflation, poverty, and unemployment.Bulletin of Business and Economics, 5(2), 67−82. Web.

Hussain, F., Hussain, S., & Erum, N. (2015). Our defense expenditures pro-poor or anti-poor in Pakistan? An empirical investigation. The Pakistan Development Review, 54(4), 875-892. Web.

Javaid, A., Akbar, A., & Nawaz, S. (2018). A review of the human development index.Pakistan Journal of Humanities and Social Services, 6(3), 357−369. Web.

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