Pakistan Beats India
By Nayyer Ali MD
Pakistan bested India last week, and I’m not referring to cricket. While victory in the sport that drives both nations mad gave Pakistanis bragging rights, the more significant event was the World Bank’s report on poverty in South Asia. What it declared is that Pakistan has basically almost eliminated extreme poverty, while roughly 300 million Indians, a total larger than the entire population of Pakistan, still live in that dire strait.
Poverty is measured in many different ways, so to compare poverty across countries one needs to use the same measure. One measure is to define poverty as income below 50% of the median national income. But if two countries have very different median national incomes, this can lead to some bizarre results in which the far richer country has a higher poverty rate. In the US, the government defines poverty as an income less than 13,000 dollars for a single person, and less than 24,000 dollars for a family of four. But a family earning 24,000 dollars (about 4 million rupees per year at current exchange rate) in Pakistan would be considered very well off. Of course, much of that is explained by the far lower costs for many basic services in Pakistan.
The World Bank uses three different levels of poverty. An absolute level of extreme poverty, defined as income less than 1.90 dollars/day, a lower middle income poverty line set at 3.20 dollars/day, and an upper middle income poverty line set at 5.50 dollars/day. In their new report, they stated that Pakistan has the lowest poverty rates across the board in South Asia, except for Sri Lanka. Using the extreme poverty line, they found this to be 4.4% of the population in Pakistan, compared to 12.5% in Bangladesh and 22.5% of the population in India. This means that only about 9 million Pakistanis live in extreme poverty while 300 million Indians still do. Using the lower middle-income threshold, the poverty rates are 36% for Pakistan, 49% for Bangladesh, and 62% for India. But how can this be? Doesn’t India have a higher per capita income than Pakistan? And hasn’t Pakistan suffered from poor economic performance for decades while India has been growing strongly?
Making an informed judgment about the state of economic development in Pakistan as compared with India or Bangladesh is not easy. Cross-country comparisons run into lots of problems. Using market exchange rates to create a GDP per capita number in dollars is deeply flawed because it does not account for differences in price levels. One must also not be taken in by cultural confounding elements, such as comparing beef consumption in Pakistan vs India, for obvious reasons. One should also not confuse annual growth rates with actual material level of development. Japan has had very slow growth for 30 years, but still is far richer than Bangladesh. Finally, the economic construct called GDP is a shorthand developed through a very sophisticated economic analysis of an economy that relies on a proper measure of all the significant elements in that economy. Because Pakistan has not done a proper measure of its economy (called rebasing) since 2006, its GDP is hopelessly undermeasured. When Pakistan rebased in 2001 after a 20-year interval the GDP was found to be undercounted by 25%.
The current gap is likely about the same if not larger as the economy has undergone significant changes since 2006. Just for comparison, the US rebases its economic statistics annually. Both the prior government and the current one has claimed they intend to rebase, but so far have failed to do so. Under the previous government, the Finance Ministry could not even get most industrial units to fill out and return the basic surveys.
The main criticism made of the current government is that inflation is too high. It is running 9%, and core inflation is about 6.5%, with the SBP keeping discount rate at 7%. IMF thinks they should tighten slightly and raise rates to 8%. However, this ignores the global commodity price boom, food and oil and natural gas all are spiking, and Pakistan is not immune to those pressures. Inflation is likely to peak in the next few months and start to subside.
Outside of inflation, the government’s economic performance has been good. Manufacturing is at an all-time high. Pakistan has outgrown India since 2018, and managed COVID much better. Car sales at record high, exports at record high, and tax revenues for July-September rose from 1 trillion rupees last year to 1.4 trillion rupees this year. Wheat harvest was at a record high this past year over 28 million tons. The rise in tax revenues completely rebuts any narrative of economic decline.
To compare across countries one cannot use market exchange rates, otherwise one ends up thinking the average Indian actually lives on 5 dollars a day and pays prices that Americans pay for goods and services. They do not, otherwise half of the country would starve to death and have no housing or clothes. To understand relative living standards, one has to understand relative price levels, and this requires a massive research effort to do this for every nation on Earth. This project is done by only one source, the World Bank’s International Comparison Program (ICP). With that data, the WB can then translate the purchasing power of each local currency against the dollar, and then allow for legitimate cross-country comparisons. The last full survey was done in 2017.
That survey established the actual level of individual consumption (AIC) of goods and services, which is the best indicator of the actual material standard of living in the country and allows for the best cross-country comparison. So, what did the World Bank find? Pakistan AIC per capita was 4,580 dollars compared with 4,169 for India and 3,369 for Bangladesh. Pakistan’s reported GDP per capita is abnormally low at 4,975 given its level of consumption, and my view is this best explained by the failure to rebase the GDP, which is actually about 20-25% higher if it were properly measured. That would put Pakistan’s GDP per capita around 6,200, about the same as India, but consumption is higher because Pakistan has much less inequality and extreme poverty than India. Given that Pakistan has grown faster than India since 2018, there has been no significant change in the relative position of the two nations.
The World Bank also provides the Price Level Index for each country, which is basically a number that represents how many local currency units (LCU, for Pakistan that is the Pakistani rupee) equals one dollar in purchasing power. The current PLI for Pakistan is about 40. PLI for India is 22.
This means that it takes 22 Indian rupees to buy a dollar’s worth of good/services while it takes 40 Pakistani rupees. But since the Indian rupee trades at 75 to the dollar while the PKR is at 170, this means the cost of living in India is 20% higher than in Pakistan. Someone earning 75,000 Indian rupees in Delhi has a much lower standard of living than someone earning 170,000 PK rupees in Lahore. The Indian has the living standard of someone in Lahore earning only 136,000 rupees.
While GDP numbers based on market exchange rates show India well above Pakistan, and Bangladesh having caught up to, and perhaps exceeded Pakistan, those numbers are flawed. Pakistan has a much lower price level than both of those countries, and much less income inequality. In the end, the average Pakistani has a significantly higher living standard and far less extreme poverty than in India or Bangladesh. This is damning with faint praise though. Pakistan still fails to provide universal education and decent health care to its population. It has higher infant mortality than either India or Bangladesh. It still needs decades of rapid growth to raise living standards to that of a developed nation.
