GROWTH WITH EQUITY: POLICY LESSONS
FROM THE EXPERIENCE OF PAKISTAN
Sayyid Tahir and Salman Syed Ali*
INTRODUCTION
Analysis of poverty and income inequality has a long tradition in Pakistan.This study breaks some fresh ground in a number of respects. Following the summary of the economic background in chapter I, a consistent series of poverty estimates from 1963/64 to 1993/94 (14 observations) is developed in order tofacilitate the analysis of poverty trends, together with data on income inequality in chapter II. Chapter III integrates an analysis of trends in poverty with those of inequality and growth. A closer look is then taken at the impact of changes in major domestic policies (fiscal, monetary and selected sectoral policies as well as important policy initiatives) on poverty and inequality in chapter IV. The paper concludes by drawing some policy lessons in chapter V.
I. ECONOMIC CHALLENGES AND
MAJOR CHANGES IN THE ECONOMY
A. Economic growth
The real gross domestic product (GDP) growth rate in Pakistan averaged4.38 per cent during the 25 years from fiscal years 1972/73 to 1997/98. However,it varied considerably during that period. After an impressive performance in the1960s, the rate declined to as low as 4.3 per cent between 1969/70 and 1974/75.That was the period during which East Pakistan separated to become Bangladesh,and the policy of nationalization of business units was pursued on a large scale.The average GDP growth rate for the 1970s was 4.8 per cent.
A significant improvement in the GDP growth rate took place during the Zia-ul-Haq regime in 1977-1988. The growth rate was 6.7 per cent from1979/80 to 1984/85, but it averaged 6.1 per cent over the 1979/80 to 1989/90
*International Institute of Islamic Economics, International Islamic University, Islamabad.
period. A number of factors contributed to the upturn from the 4.8 per centlevel of the 1970s. Some of those factors were an improvement in the general law and order situation, a revival of confidence in the government, a decision by the Pakistani regime to support Afghanistan against foreign occupation and an inflow of foreign aid to help the Afghan Mujahideen, and increase dremittances from abroad. The GDP growth rate fell to 5.7 per cent from 1985/86 to 1989/90. During that period, Pakistan followed a policy of privatization,which was not so successful in stimulating business and private investment.During the same period, remittances from Pakistani workers in the Middle East declined, which reduced the growth rate of the gross national product (GNP)and may have contributed to the reduction of GDP growth in subsequent periods.
The 1988 to 1996 period was one of political instability. Four governments assumed office during that time. Another element of the political turmoil was the rise of ethnic unrest from 1985 onwards in Karachi, the hub of economic activity in Pakistan. That unrest later escalated to create a serious law and order problem in the city.
The year-to-year GDP growth rates were highly volatile during that period,running from as high as 7.7 per cent in 1991/92 to as low as 2.3 and 1.3per cent in 1992/93 and 1996/97, respectively. In 1990, Pakistan aga inembarked upon a privatization programme together with the introduction offinancial liberalization policies, this time under structural adjustment packages of the World Bank and the International Monetary Fund. The extra ordinarilyhigh GDP growth that took place in 1992/93 was mainly the result of the inflow of foreign capital, both for direct investment as well as for portfolio investment.
The growth rate of per capita GDP averaged 2.5 per cent during the22-year period from 1972 to 1994/95. Likewise, per capita income showed arising trend (table 1). In the 1970s, per capita income grew at an average rate of 2.3 per cent. From 1971/72 to 1974/75, the rate was quite low at 1.2 percent but it increased considerably in the second half (1974/75 to 1979/80) to3.3 percent. It remained at 3.3 per cent from 1979/80 to 1984/85 but then declined significantly in the last half of the 1980s to 2.4 per cent. A similar declining trend in the average rate was recorded in the first half of the 1990swhen it averaged 1.3 per cent from 1990/91 to 1994/95. However, on a year-to-year basis, the growth rates of per capita income showed large variations during the 1990s, ranging from a high of 3.3 per cent in 1991/92 to a low of minus 1 per cent in 1992/93. During 1997/98 it was estimated to be 2.8 per cent.
Table 1. Real growth rates: 1949/50 to 1997/98
(Percentage)
Period GDP Agriculture Manufacturing Per capita income
1949/50to 1959/60 3.1 1.6 7.7 0.6
1959/60 to 1969/70 6.8 5.0 9.9 3.9
1969/70 to 1979/80 4.8 2.3 5.4 2.3
1969/70 to 1974/75 4.3 0.8 4.6 1.2
1974/75 to 1979/80 5.3 3.9 6.2 3.3
1979/80 to 1989/90 6.1 4.0 8.8 2.4
1979/80 to 1984/85 6.7 3.7 9.5 3.3
1984/85 to 1989/90 5.7 4.3 6.9 1.5
1990/91 to 1994/95 4.8 3.5 5.8 1.3
1990/91 5.6 5.0 6.3 0.5
1991/92 7.7 9.5 8.1 3.3
1992/93 2.3 –5.3 5.3 1.0
1993/94 4.5 5.2 5.5 1.0
1994/95 5.2 6.6 3.6 2.8
1995/96 5.2 5.8 4.8 1.2
1996/97 1.3 0.1 1.2 –1.8
1997/98 5.4 5.9 7.0 2.8
Sources: S. M. Naseem, 1996, for data before 1989/90; subsequent data were taken from the Pakistan Economic Survey, various issues.
B. Composition of economic growth and employment
A structural shift occurred in the economy as evidenced by the changes in the growth rates of income and employment across various sectors, especially agriculture, industry and services. The GDP growth rate was consistently higher in manufacturing compared with that of the agricultural sector. But the services sector grew rapidly. In terms of GDP and employment, the services sector constituted the strongest sector. This observation is quite surprising, given the fact that the large and rapidly growing services sector is considered to be adeveloped country phenomenon.
Differential growth over the years has contributed to changes in the sector alshares of GDP and employment. The share of the commodity-producing sector declined from 61.6 per cent in 1969/70 to 50.6 per cent in 1997/98 (table 2).Two major constituents of this sector, agriculture and manufacturing, have shown divergent trends. The share of agriculture as a percentage of GDP was38.9 per cent in 1969/70, but it declined steadily to about 24 per cent in1997/98. The share of manufacturing, on the other hand, increased slightly from16 to 17.9 per cent of GDP during the same period. The services sector, which
Table 2. Sectoral shares in gross domestic product
(Percentage)
Sector 1969/70 1985/86 1990/91 1997/98
Commodity producing sectors 61.1 51.0 51.5 50.6
Agriculture 38.9 27.3 25.7 24.2
Manufacturing 16.0 16.7 17.7 17.9
Electricity and gas distribution 2.0 2.4 3.5 3.9
Others 4.7 4.6 4.6 4.6
Service sector 38.4 49.0 48.5 49.4
Trade 13.8 16.2 16.5 16.3
Transport,storage and Communi 6.3 10.0 9.6 9.9
Public administration and defence 6.4 7.4 7.1 6.4
Others 11.9 15.4 15.3 16.8
Source: Pakistan Economic Survey, various issues.
includes trade, transport, communications, public administration and defence,increased considerably from 38.9 per cent of GDP in 1969/70 to 49.4 per centin 1997/98.
Absorption of the labour force into the economy is not complete. The unemployment rate fluctuated between 0.16 and 2 per cent from 1963/64 to1996/97, with a rising trend in the 1960s, followed by a slight downturn in thefirst half of the 1970s, an upward trend in the mid-1980s, another slight decline in the second half of the 1980s and a rising trend in the 1990s
.Agriculture, which is predominantly rural-based, is the largest absorbing sector for the labour force. In a rural versus urban comparison, urban un employ-ment is seen to be consistently higher than rural unemployment levels. For example, in 1996/97, urban unemployment was 4.8 per cent and a difference of about 2 per cent persisted throughout the 1990s.
If the absorption of the labour force is classified by major industrial sectors,a shift can be seen with the pattern of employment moving away from the commodity producing sectors (agriculture and manufacturing) into the services sector during the years following the 1960s (table 3). Agriculture witnessed adrop in the total share of employment from 65.3 to 59.9 per cent from 1951 to1961 and 46.8 per cent in 1997; however, it was the single largest absorber of labour. Manufacturing witnessed an increase in its employment share between1951 (9.8 per cent) and 1970/71 (15.5 per cent); since then, however, it has witnessed a continuous drop, reaching 10 per cent of total employment in 1997.On the other hand, the services sector share of employment consistently increased each year from only 24.9 per cent in 1951 to over 43 per cent in 1997; the sub-categories of the services sector all increased their share of total employment.
Table 3. Employment distribution by industry, 1951-1997
(Percentage)
Labour force surveys
Major industry Census Census
1951 1961 1970/71 1974/75 1993 1997
Employed 100.0 100.0 100.0 100.0 100.0 100.0
Agriculture 65.3 59.9 57.6 54.8 48.1 46.8
Manufacturing 9.8 13.7 15.5 12.7 12.0 10.0
Services 24.9 26.3 26.9 30.9 40.0 43.2
Sources: S. M. Naseem, 1996; the 1997 data were taken from the
Pakistan Economic Survey,1996/97.
The greater dependence on the agriculture sub sector and the high year-to-year variability in its share of the employed is an indication of the vulnerability both of the economy and the poor to seasonal and agricultural shocks. At the same time, rapid growth in the services sector share of employment and its relatively stable share of total GDP in recent years indicates lower marginal productivity as well as the existence of downward pressure on wages in that sector.
C. Major shifts in economic and social policies
With regard to major shifts in economic and social policies, the follow ingpoints are particularly notable.The 1960s were a period of free market economy with emphasis on industrialization with the government role restricted to infrastructure development.It was also a period of controlled foreign exchange, with relatively less emphasison welfare programmes. The period ended with the break-up of Pakistan in December 1971. The 1963/64 to 1971/72 period of our data set corresponds to that period. The advent of the “green revolution” in agriculture was also an important feature of that era.
The Zulfiqar Ali Bhutto regime from 1972 to 1977 opted for large-scalenation alization in the agricultural, industry and financial sectors, as well as an increase in the general welfare role of the government. The data period from1971/72 to 1979 in this study encapsulates the effects of the government policies,in addition to the pattern of economic activity during that era. An important change that took place during that period was the significant inflow of remittances from overseas workers, particularly in the Middle Eastern countries.
The 1980s can be characterized by a review of the policies of the Bhutto regime. During the martial law period from 1977 to 1985, policy shifts took place that favoured denationalization. The most significant related events of that period include:
(a) The involvement of the former Union of Soviet Socialist Republics(USSR) in Afghanistan from 1979 to 1989, as a result of which liberal economic assistance became available from foreign sources;
(b)The institution of zakat and ushr (see chapter IV), which were established in the early 1980s to provide aid to the needy on a regular footing;
(c)A tremendous boost for the private sector when the policy of denationalization was followed by large-scale privatization in the early1990s under the pretext of the Structural Adjustment Programme (STAP) that was launched in 1986/87.
In the 1990s, reforms introduced under STAP have been pushed further.The emphasis has been markedly on lowering the budgetary deficit through are eduction of public sector activities as well as reforming the economy through progressive decreases in import tariffs, the liberalization of the foreign exchange regime and the opening of the financial sector to foreign banks and insurance companies. The most recent feature of that approach was the energy policy of the Benazir Bhutto regime, from 1993-1996. An important initiative on the human resource development side was the start of the Social Action Programme (SAP) in 1992/93 under the sponsorship of international donor agencies. That programme was aimed at improving the quality of life through access to education, health and other facilities.
II. ANALYSIS OF TRENDS
AND PATTERNS OF EQUITY
A. Absolute poverty
A number of poverty measurement studies have been undertaken in Pakistan.However, they differed in their definition of the poverty line, the time period covered, the level of disaggregation allowed, regional coverage and unit of analysis, either individual or household.
There are three approaches to the definition of the poverty line (see figure).The first approach arbitrarily specifies a monetary amount as the poverty line.An income level can be set, for example, below which 20 per cent of the population falls.
No comments:
Post a Comment