June
23, 2006
Strong Growth,
Falling Poverty
The Ministry
of Finance released the Pakistan Economic Survey
for 2005-2006 fiscal year, and once again there
was very good news. The headline is that despite
the devastating earthquake and the oil price shock,
the Pakistani economy turned in another excellent
year with growth of 6.6%. This comes on the back
of last year’s 8.6% growth and the previous
year’s 7.5%. This gives Pakistan perhaps
its best three-year performance in its history,
and means that it is keeping pace with the explosive
growth of India. In fact, outside of oil producers
and China, Pakistan has the best performing emerging
economy over the last three years.
This rapid growth has been led by services and
industry. Compared to last year, industrial growth
slowed from the double-digit pace of 12.6% down
to a still very exuberant 8.6%. Service sector,
which accounts for almost half of the economy,
grew 8.8%, with banks and other financial institutions
leading the way. What dragged the overall growth
rate down was the poor performance of the agricultural
sector. While livestock did well, there were significant
declines in cotton and sugarcane, and wheat output
was essentially static. If agriculture returns
to more normal growth patterns this coming year,
Pakistan should easily achieve its target of 7%
expansion for 2006-2007.
Pakistan’s growth is starting to reach a
critical threshold where significant social transformation
begins. The rapid growth of the last five years
compares favorably with the 1960’s, when
Pakistani growth averaged 6.8%. But Pakistan is
now a much more industrial and urban economy than
it was in the 1960’s, when it was totally
dominated by the agricultural sector.
This sharp increase in economic growth, combined
with a stable exchange rate, has pushed the per
capita GDP sharply upwards. It has now reached
about 50,000 rupees, or 850 dollars. Back in 2002,
Pakistani GDP per capita was only 582 dollars.
This sharp growth in per capita income has set
off a boom in consumer spending. In real terms,
after inflation, consumer spending has been rising
at about 10% per year for the last three years.
Cars, televisions, mobile phones, air conditioners,
and all sorts of other gadgets are selling with
abandon.
But what about the poor? What about the 35% of
Pakistanis who live on less than 1 dollar per
day, and meet the national definition of poverty?
Have they benefited at all by this economic boom?
In theory, the poor too should benefit from a
booming economy. As growth surges, opportunities
for employment for unskilled labor become more
available. Rising demand for labor lifts wages
and improves income. The money spent by the better
off often goes to purchase the services and labor
of the poor. Secondly, the surging economy fattens
the coffers of the government tax collectors.
The increase in government resources, if spent
on proper items, can also significantly reduce
poverty. This can be by the government directly
hiring the poor for government jobs, or by providing
government assistance and aid to the poor. In
fact, Pakistan has increased its spending on the
Public Sector Development Program, the main budget
category or anti-poverty spending, from 100 billion
rupees in 2000 to over 400 billion in the coming
year.
The net result of all this is that poverty has
in fact dropped. The Economic Survey cited the
results of government poverty surveys done in
2000 and 2005. What they reveal (and their conclusions
were confirmed by respected international development
officials) is that poverty has declined from 34%
to 24% of the population. Admittedly, this is
based on a very minimal definition of poverty,
the ability to purchase 2350 calories per day
on a consistent basis, which translates to annual
income of about 10,000 rupees per person. Overall,
the actual number of Pakistanis that fall below
this poverty line declined by over 12 million
people. This is a huge achievement. Another 10
years of 7% growth and this deep poverty will
be almost eliminated from Pakistan. Continuing
good economic policies is critical to achieving
this highly desired transformation.
