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Poverty, Growth and Inequality

Submitted to: Madam Sahanaz

Submitted by:

Sehrish Naqvi 070753

Nandana Zubair 070737
Sana firdous 070750

Date: 26,April, 2010


A recurring issue in discussions on development is whether the main focus of

development strategies should be placed on growth, or poverty, and/or on inequality. This
paper argues that this way of formulating the question of development goals poses a false
dilemma. Rather, the answer can be simply expressed in two statements: First, the rapid
elimination of absolute poverty, under all forms, is a meaningful goal for development.
Second, to achieve the goal of rapidly reducing absolute poverty requires strong, country-
specific combinations of growth and distribution policies. These two statements raise
conceptual, measurement, theoretical and empirical issues, including clarifying the
distinction between absolute and relative poverty. Absolute poverty is defined in
reference to a poverty line that has a fixed purchasing power determined so as to cover
needs that are physically and socially essential. Setting absolute poverty reduction as the
prime development goal is thus simply saying that a fundamental objective of
development is to ensure that everybody satisfies his/her basic needs. The poverty line
may be multi-dimensional, incorporating both an income poverty line for needs that can
be met monetarily, and non-monetary lines for other needs. Absolute poverty lines need
not be the same across countries, even after correcting for purchasing power parity for
income poverty, as basic needs are bound to differ across societies. Nor do they need to
remain fixed over time, as basic needs are likely to evolve. This absolute definition of
poverty, in use in many countries, must be contrasted with a relative definition of
poverty, where the poverty line is established not in terms of some well defined basic
needs, but as a fixed proportion of some income standard in the population, for example
the mean or median income. The European Union considers as poor those whose
economic resources are below 50 per cent of the mean income in member countries. Of
course, one might consider such a relative definition of income poverty as the limit of the
absolute definition of poverty when the updating of the poverty line is continuous and
explicitly based on mean income changes, rather than being made at rather long time
intervals and on a more discretionary basis. But, what matters for the purpose of this
paper is that such a relative definition of poverty – sometimes referred to as 'relative
deprivation' - becomes in some sense independent of growth. The absolute level of
income and therefore a large part of the development process does not matter anymore
with such a definition. Only relative incomes, or pure distributional features matter.
Fixing the poverty line relative to average income can show rising poverty even when the
standard of living of the poor have in fact risen. There is an increasing consensus among
economists that relative deprivation matters, but there does not appear to be a consensus
that individual welfare depends only on one’s relative position, and not at all on absolute
standard of living as determined by incomes.

Once it is accepted that the reduction of absolute income poverty is a meaningful

development goal, and then a direct link may be established between development,
growth and distribution. An arithmetic identity links the growth of the mean income in a
given population, with the change in distribution – or in 'relative' incomes - and the
reduction of absolute poverty. In other words, poverty reduction in a given country and at
a given point of time is fully determined by the rate of growth of the mean income of the
population and the change in the distribution of income.
“Poverty-Growth-Inequality (PGI) Triangle”, a development strategy is thus fully
determined by the rate of growth and distributional changes in the population. Formally,
the relationships implicit behind the PGI triangle are less simple. For instance, the
elasticity of poverty with respect to growth for a constant distribution turns out not to be
constant across countries with different development levels and distribution and across
the various ways of measuring poverty. This also applies to the elasticity of poverty with
respect to inequality indicators. The real challenge to establishing a development strategy
for reducing poverty lies in the interactions between distribution and growth, and not in
the relationship between poverty and growth on one hand and poverty and inequality on
the other, which are essentially arithmetic. There is little controversy among economists
that growth is essential for (income) poverty reduction under the assumption that the
distribution of income remains more or less constant. In fact, much evidence points in
this direction.

Likewise, much evidence suggests that a worsening of the distribution tends to increase
poverty. Yet, the real issue in establishing a development strategy is whether growth and
distribution are independent of each other or, strongly inter-related. Is it the case for
instance that faster growth tends to reduce inequality or on the contrary, to increase it?
Could too much inequality in a given country act to slow or, to accelerate growth? On
the distributional consequences of growth, several recently published microeconomic-
based case studies indicate clearly that the relationship is at once strong and complex.
This is in contrast to the large number of cross-country regressions which find no
significant relationship between growth and inequality and on the basis of which it would
be tempting to conclude that ‘growth is good for the poor’, whatever its nature. Cross-
country studies are also mostly inconclusive regarding the effects of inequality on
growth, and it is difficult to conceive of direct micro-economic evidence that would
identify that relationship with precision.

Economic Growth and Income Inequality:

Economic Growth will reduce Income inequality if:

1. Wages of the lowest paid rise faster than the average wage
2. Government benefits, such as; unemployment benefits, sickness benefits and
pensions are increased in line with average wages.
3. Economic Growth creates job opportunities, which reduce the level of
unemployment. Unemployment and lack of employment is one of the biggest
causes of relative poverty.
4. Minimum Wages increased in line with average earnings
Economic Growth May not Reduce Income Inequality and Poverty if:

1. Economic Growth often creates the best opportunities for those who are highly
skilled and educated. In recent years, in the UK, we have seen faster wage growth
for highly paid jobs than unskilled jobs.
2. Modern economies are creating an increased number of part time / flexible service
sector jobs. In these sectors wages have been lagging behind average earnings.
3. In the UK, government benefits have been indexed linked. This means increased
in line with inflation. This means that benefit incomes have fallen behind average

Economic Growth will not necessarily solve unemployment. For example, growth cannot
solve structural and frictional unemployment; this is unemployment caused by lack of
skills and geographical immobilities.

Poverty in Pakistan:
Poverty in Pakistan is a growing concern Although the middle-class has grown in
Pakistan to 35 million, nearly one-quarter of the population is classified poor as of
October 2006. The declining trend in poverty as seen in the country during the 1970s and
1980s was reversed in the 1990s by poor federal policies and rampant corruption. This
phenomenon has been referred to as the poverty bomb. The government of Pakistan with
help from the International Monetary Fund (IMF) has prepared an Interim Poverty
Reduction Strategy Pape that suggests guidelines to reduce poverty in the country.

As of 2007, Pakistan's Human Development Index (HDI) is 0.572, higher than that of
nearby Bangladesh's 0.543, which was formerly a part of the country itself. Pakistan's
HDI still stands lower than that of neighbouring India's at 0.612.

Incidences of poverty in Pakistan rose from 22–26% in the fiscal year 1991 to 32–35% in
the fiscal year 1999. They have subsequently fallen to 25–26% according to the reports of
the World Bank and the UN Development Program reports. These reports contradict the
claims made by the Government of Pakistan that the poverty rates are only 23.1%.
Furthermore, the poverty rate declined to 17.2% in 2007-08 according to the World Bank.

According to the Human Development Index (HDI), 60.3% of Pakistan's population lives
on under $2 a day, compared to 75.6% in nearby India and 81.3% in nearby Bangladesh,
and some 22.6% live under $1 a day, compared to 41.6% in India and 49.6% in

Wealth distribution in Pakistan is highly uneven, with 10% of the population earning
27.6% of incomeAccording to the United Nations Human Development Report,
Pakistan's human development indicators, especially those for women, fall significantly
below those of countries with comparable levels of per-capita income. Pakistan also has a
higher infant mortality rate (88 per 1000) than the South Asian average (83 per 1000).

Spatial distribution of poverty:

At the time of partition and independence in 1947, Pakistan inherited the most backward
parts of South Asia with only one university, one Textile Mill and one Jute Factory. The
country has made tremendous progress and its per Capita GNP remains the highest in
South Asia. During the last decade poverty elimination programs helped many of the
poor to participate and rise up. However the Global financial crisis and other factors like
the occupation of Afghanistan have impacted Pakistani growth. Poverty in Pakistan has
historically been higher in rural areas and lower in the cities. Out of the total 40 million
living below the poverty line, 30 million live in rural areas. Poverty rose sharply in the
rural areas in the 1990s and the gap in income between urban and rural areas of the
country became more significant. This trend has been attributed to a disproportionate
impact of economic events in the rural and urban areas.

There are also significant inhomogeneities in the different regions of Pakistan that
contribute to the country's rising poverty. In the 1999 Fiscal year, the urban regions of the
Sindh province had the lowest levels of poverty, and the rural areas of the North West
Frontier Province had the highest. Punjab also has significant gradients in poverty among
the different regions of the province.

The North West Frontier Province of Pakistan was one of the most backward regions of
the South Asian Subcontinent. Despite this, tremendous progress has been made in many
areas. The NWFP now boasts several universities including the Ghulam Ishaq Khan
University of Science and Technology.Peshawar a sleep cantonment during British towns
is a modern cosmopolitan city. Much more can be done to invest in the social and
economic structures. NWFP remains steeped in tribal culture, though the biggest Pathan
city is Karachi where the Pakhtuns are one of the richest class of people. The Pakhtuns of
the region are heavily involved in the transportation, lumber, furniture and small arts and
crafts business. Some deal in cross border arms and drugs smuggling. This smuggling
actively encouraged by the West and by Pakistan during the Soviet invasion of
neighboring Afghanistan is intact and according to Western reports supported the Taliban
regime.] These and other activities have led to a breakdown of law and order in many
parts of the region.
Poverty and gender:

The gender discriminatory practices in Pakistani society also shape the distribution of
poverty in the country. Traditional gender roles in Pakistan define the woman's place as
in the home and not in the workplace, and define the man as the breadwinner.
Consequently, the society invests far less in women than men. Women in Pakistan suffer
from poverty of opportunities throughout their lives. Female literacy in Pakistan is 43.6%
compared to Male literacy at 68.2%, as of 2008. In legislative bodies, women constituted
less than 3% of the legislature elected on general seats before 2002. The 1973
Constitution allowed reserved seats for women in both houses of parliament for a period
of 20 years, thus ensuring that women would be represented in parliament regardless of
whether or not they are elected on general seats. This provision lapsed in 1993, so
parliaments elected subsequently did not have reserved seats for women. Reserved seats
for women have been restored after the election of 2002 . Female labour rates in Pakistan
are exceptionally low.
Economic and social vulnerability:

Un-Employment Rates
1998 Census
Administrative 1981
Unit Both
Male Female Census
Pakistan 19.68 20.19 5.05 3.1
Rural 19.98 20.40 5.50 2.3
Urban 19.13 19.77 4.49 5.2
NWFP 26.83 27.51 2.58 2.2
Rural 28.16 28.64 4.00 2.0
Urban 21.00 22.34 0.74 3.7
Punjab 19.10 19.60 5.50 3.2
Rural 18.60 19.00 6.00 2.5
Urban 20.10 20.7 4.70 5.0
Sindh 14.43 14.86 4.69 3.3
Rural 11.95 12.26 3.70 1.6
Urban 16.75 17.31 5.40 5.8
Balochistan 33.48 34.14 8.67 3.1
Rural 35.26 35.92 9.81 3.0
Urban 27.67 28.33 5.35 4.0
Islamabad 15.70 16.80 1.70 10.7
Rural 28.70 29.40 8.20 13.5
Urban 10.10 11.00 0.80 9.0
Unemployment Rate: It is the percentage of
persons unemployed (those looking for work
and temporarily laid off) to the total
economically active population (10 years and

Vulnerability" in this case stands for the underlying susceptibility of economically

deprived people to fall into poverty as a result of exogenous random shocks. Vulnerable
households are generally found to have low expenditure levels. Households are
considered vulnerable if they do not have the means to smooth out their expenses in
response to changes in income. In general, vulnerability is likely to be high in households
clustered around the poverty line. Since coping strategies for vulnerable households
depend primarily on their sources of income, exogenous shocks can increase reliance on
non-agricultural wages. Such diversification has not occurred in many parts of Pakistan,
leading to an increased dependence on credit.

While economic vulnerability is a key factor in the rise of poverty in Pakistan,

vulnerability also arises from social powerlessness, political disenfranchisement, and ill-
functioning and distortionary institutions, and these also are important causes of the
persistence of vulnerability among the poor.

Other causes of vulnerability in Pakistan are the everyday harassment by corrupt

government officials, as well as their underperformance, exclusion and denial of basic
rights to many in Pakistan. Also, lack of adequate health care by the state lead the poor to
seek private sources, which are expensive, but still preferable to the possibility of medical
malpractice and being given expired medicines in state run medical facilities. Also, the
failure by the state to provide adequate law and order in many parts of the country is a
factor in the rise of vulnerability of the poor.

Environmental issues:

Environmental problems in Pakistan, such as erosion, use of agro-chemicals,

deforestation etc. contribute to rising poverty in Pakistan. Increasing pollution contributes
to increasing risk of toxicity, and poor industrial standards in the country contribute to
rising pollution

Lack of adequate governance:

By the end of the 1990s, the manner in which power is exercised in the management of a
country's social and economic resources for development emerged as Pakistan's foremost
developmental problem. Corruption and political instabilities such as various separatist
movements in Balochistan and Waziristan resulted in reduction of business confidence,
deterioration of economic growth, reduced public expenditure, poor delivery of public
services, and undermining of the rule of law . The perceived security threat on the border
with India has dominated Pakistan's culture and has led to the domination of military in
politics, excessive spending on defense at the expense of social sectors, and the erosion of
law and order.

Pakistan has been run by military dictatorships for large periods of time, alternating with
limited democracy. These rapid changes in governments led to rapid policy changes and
reversals and the reduction of transparency and accountability in government. The onset
of military regimes have contributed to non-transparency in resource allocation. In
particular, the neglect by the Pakistani state of the Balochistan and North Western
Frontier Provinces has rendered the region poverty-stricken. Those who do not constitute
the political elite are unable to make political leaders and the Government responsive to
their needs or accountable to promises. Development priorities are determined not by
potential beneficiaries but by the bureaucracy and a political elite which may or may not
be in touch with the needs of the citizens. Political instability and macroeconomic
imbalances have been reflected in poor creditworthiness ratings, even compared to other
countries of similar income levels, with resulting capital flight and lower foreign direct
investment inflows. The current government of Pakistan has professed commitments to
reforms in this area.

In addition, Pakistan's major cities and urban centres are home to an estimated 1.2 million
street children. This includes beggars and scavengers who are often very young. The law
and order problem worsens their condition as boys and girls are fair game to others who
would force them into stealing, scavenging and smuggling to survive. A large proportion
consumes readily available solvents to starve off hunger, loneliness and fear. Children are
vulnerable to contracting STDs such as HIV/AIDS, as well as other diseases.


Pakistan is home to a large feudal landholding system where landholding families hold
thousands of acres and do little work on the agriculture themselves. They enlist the
services of their serfs to perform the labor of the land. 51% of poor tenants owe money to
the landlords. The landlords' position of power allows them to exploit the only resource
the poor can possibly provide: their own labor.

Poverty and Support for Militancy:

Poverty and the lack of a modern curriculum have proved destabilizing factors for
Pakistani society that have been exploited by militant organizations banned by the
government to run schools and produce militant literature. Though many madrassas are
benign, there are those that subscribe to the radicalist branches of Sunni Islam,

As a result, militant Islamic political parties have become more powerful in Pakistan and
have considerable sympathy among the poor. This phenomenon is more pronounced in
the North Western Frontier Province
Causes of Poverty in Pakistan:

Pakistan is a poor country. Its economy is facing fluctuations now a day. At the time of
independence Pakistan has very low resources and capital, so the processes of progress
were very slow. Unfortunately the politicians of Pakistan were all not well aware of
modern global system and the progress processes and the needs of country. Due to bad
policies today Pakistan is facing a lot of problems. The continuous failure of policies
leads the people of country to miserable conditions. The major problem in the country is
poverty which is becoming the cause of crime and social disorder.

It is difficult to point out all causes of poverty in Pakistan but the major causes of are
given below:

Government Policies:

Government is not well aware of present conditions of country. The policies of

government are base on the suggestions of officials which do not have awareness about
the problems of a common man. After implementation the policies do not get effective
result. After the failure of one policy, government does not consider its failure and
announces another policy without studying the aftermaths of last one. Heavy taxes and
unemployment crushes the people and they are forced to live below poverty line. The
suitable medical facilities are not provided to people and they are forced to get treatment
for private clinics which are too costly.


Another cause of poverty is corruption. There are two types of corruption. There is not
morality and every one is trying to earn more and more by using fair and unfair means.
Officials waste their time has low efficiency. Only one relationship that is exists in
society is money. One has to pay a heavy cost to get his right. Law and order conditions
are out of control and institutions are failed to provide justice to a common man. Justice
can be bought by money only. But government is unable to control such type of things. In
this whole scenario some corrupt people has been occupying the resources and common
man is living in miserable conditions.

Division of Agricultural Land:

Pakistan is an agricultural country. Most of people are farmers by profession. One has
land which is fulfilling the needs of his family but he has to divide the land into his
children when they got young. After division the land is not sufficient to support a
family. Now the families of his children are suffering and spending their lives below
poverty line.

In our society social bonding are gradually becomes thinner and thinner. A race of
material object has been started even no one tried to understand the problems of others.
Every one is gradually changing from human to a bioman which only know about his
needs and have no concept about the limitations of others. People are not ready to help
each other. At last every one has lose his trust on others which effect our social and
economic system and it is another cause of poverty.

Lack of Education:

The literacy rate of Pakistan is very low. Most of people do not have any concept about
the modern earning sources. Most people are unable to adopt technology for their
business needs, that’s why business do not meet international standards and results as
decrease in revenue which lead the society to poor financial conditions.

Large Scale Import:

The import of Pakistan is greater than export. Big revenue is consumed in importing good
every year, even raw material has to import for industry. If we decrease import and
establish own supply chains from our country natural resources the people will have
better opportunities to earn.

Law and Order:

There are lot of problems regarding law and order. Terrorist attacks create uncertainty in
stock markets and people earning from stock are getting loss due to which the whole
country faces uncertain increase in commodity prices.

Fluctuated Foreign investment:

Foreign investor comes to local markets. They invest millions of dollars in stock markets
and stock market gets rise in index. Then the investor withdraws his money with profit
and market suddenly collapses. The after math always be faced by poor people.


Government is unable to manage the departments and country has low reserve assets. So
the meet the requirements some companies run by government are sold to foreign
investors. The commodities or services provided by the companies are becoming costly.
For example if government sold a gas plant then prices for gas in country rises.
Moral Culture:

The main reason for poverty is the social dishonesty and irresponsible behavior of people.
Every one is trying to get rich by using unfair means. A shop keeper is ready to get whole
money from the pocket of customer. People doing jobs are not performing their duties
well. In society the man considered brave or respectful who do not pay taxes or
continuously violate the laws. This irresponsible behavior continuously increases and
produces loss for county

Poverty and Globalization:

Very little rigorous empirical analysis is available on the effects of Globalization on

Poverty reduction in Pakistan. Key results from some of the available studies are
summarized below. Available analysis7 of the impact of trade liberalization and a decline
in foreign remittances on poverty in Pakistan, using a CGE framework, reveals that tariff
reduction in the absence of a decline in remittances in Pakistan reduces poverty, as
measured by the head count, poverty gap and severity ratios (FGT indicators) in both the
rural and urban areas of Pakistan. In terms of welfare, all households appear to gain. The
results show that the gain in welfare is larger for urban households than for rural
households. In addition, poverty reduced by a larger percentage in urban households than
in rural households. In a second set of experiments, it was found that trade liberalisation
in the presence of a decline in remittances reduces welfare in urban households but rural
households still show an increase in welfare over the base year. According to all FGT
indicators, poverty increases in urban households but not in rural households. The
combined shock is more harmful to households in the urban areas than for households in
the rural areas. However, this welfare gain and reduction in poverty level in rural
households is less than the welfare gain and poverty reduction in the presence of trade
liberalisation only. Aggregate statistics show that the negative impact of remittance
decline dominates the positive impact of trade liberalization in urban areas. On the other
hand, in the case of rural areas, the positive impact of trade liberalization dominates the
negative impact of a decline inremittances. Kemal and Nazre Hyder (1997) in their
influential paper Globalization With Equity - Policies And Growth, had stated that while
the WTO agreement might result into higher level of welfare not all the countries are
going to benefit from it. They therefore examined the extent to which Pakistan could
benefit and the implications for growth, employment and poverty alleviation. The study
found that while trade liberalization was expected to reduce the anti-export bias and
would help in accelerating growth. Since the exports in a country like Pakistan are
expected to be labour intensive, employment and hence the wage rates would tend to
increase. Nevertheless, the study warned that liberalization and to some extent
globalization could result into lower levels of employment unless special efforts were
made. Anwar (2001) in his paper “Impact of globalization and liberalization on Growth,
Employment and Poverty: A Case of Pakistan” finds that globalization did not lead to
poverty reduction in Pakistan during the 1990s. He finds that despite highly attractive
incentives to attract foreign investors to Pakistan foreign investment has remained low.
Similarly despite liberalization the author notes that trade performance has been poor.
“The stabilization initially achieved proved to be short lived as the adjustment and reform
Process lost its momentum. The repeated attempts to stabilize the economy together with
liberalization pushed the economy into a vicious circle. The lowering of tariff rates led to
a considerable loss of revenue and resulted in stagnant tax to GDP ratio, resulting in
increased need to cut development expenditure to reduce the budget deficit. The
Government sought to restrain aggregate demand not only by granting wage increases
below the rate of inflation but also by freezing employment in the public sector. These
developments together with liberalization led to lower GDP growth, increased
indebtedness, higher unemployment and thus higher poverty incidence”.

Ordenetal (2006) in their recent study of the impact of global cotton prices in Pakistan
evaluate the importance of cotton to the incomes of rural households based on the
2001/02 Household Integrated Economic Survey (HIES). The study distinguishes
between landowners and sharecroppers and results are reported separately for Punjab and
Sindh, and for the primary cotton-producing districts within each province. Cotton
income accounts on average for 32.6% of the total income of landowner households
producing cotton in Punjab. Sharecroppers in Punjab are slightly less dependent on their
cotton income. Cotton income is more important to landowner and sharecropper
households producing cotton in Sindh based on the 2001/02 HIES. Cotton accounts for an
average of 53.3% of total income of landowner cotton-producing households in Sindh,
and 56.0% for sharecroppers. Among all cotton-producing households, 47.2% are in the
lowest two quintiles of the distribution of households within the national population
based on per capita consumption expenditures. Among landowner households producing
Cotton, 41.2% are in the lowest two quintiles. Sharecropper households producing cotton
are more heavily concentrated in the lower end of the national distribution, with 65.5% in
the lowest two quintiles. A simulated increase of low cotton prices in 2001/02 back
toward the higher levels of earlier years moves a substantial number of cotton farmers out
of poverty. The study estimates that an increase of real cotton prices by 20% reduces the
poverty rates among landowner cotton households in Punjab and Sindh from initial levels
of 32% and 43% respectively, to 25% and 22%. Among sharecropper households
producing cotton, a 20% increase in cotton prices lowers rates of poverty from 56–58%
in Punjab and Sindh to 38% and 45%, respectively. At the national level, a 20% increase
in cotton prices causes poverty among all cotton-producing households to fall from 40%
to 28%. The study estimates that this reduces poverty in Pakistan by 1.939 million

Poverty is one of the major social problems Pakistan is facing. It is one of the most
important and sensitive issues not only for our self but also for the whole world. Poverty
can cause other social problems like

• Theft
• Bribe
• Corruption
• Adultery
• Lawlessness
• Injustice

To eradicate the evils of society we have to fight with poverty. We can't control theft by
enrolling thousands of policemen. Corruption and injustice can't come to an end through
tight legislation but by demolishing poverty.

A low level of domestic income for an individual results in lack of access to education,
health care, and other communal facilities like lake of sanitation, transportation and
communication. The poverty of thought is the major social problem. To eradicate poverty
in Pakistan we have to fight with the causes and factors of poverty. Unless the causes and
factors of poverty will be settled the poverty will never end.

Ignorance is one of the important aspects of poverty. Ignorance is lake of information or

lake knowledge. In this modern age of scientific revolution we are far behind in the
education and most importantly scientific education. Our literacy rate is less than fifty
percent the female education rate is even in miserable state. The right kind of education
to the individuals is the solution of poverty. The right kind of education to the farmer is
the knowledge of scientific ways of agriculture. A progressive and professional thinking
is required in the farmers.

Problems and Methdology:

Poverty is an ethical concept, not a statistical one. Inherent in the term “poverty”, when
applied to human beings, is the notion of a life situation that should not exist. It is not
only lack of roti, kapra aur makan—food, cloth and shelter. Amartya Sen aptly sums up
many dimensions of poverty as lack of “capability” capability to overcome violence,
hunger, ignorance, illness, physical hardship, injustice and voiceless ness. The World
Bank has argued that poverty often lies in the absence of opportunity, empowerment and
security, and not just the absence of food on the table. Still, there is a hunger to have a
statistic that sums up poverty, something handy both for analysis and for comparison
across groups and among time periods. For this reason there are a variety of statistical
measures of poverty. None of them do a very good job of capturing the multi-
dimensional concepts of poverty discussed above. All require severe conceptual
compromises to make them comparable either across groups or time. Nevertheless, they
provide whatever is available to monitor poverty reduction in a consistent manner.
Comparing poverty in the same country at different periods of time raises many
difficulties. One is that, often, household income and expenditure surveys change their
methods (wording of questions, sampling method, interview technique) that make them
difficult to compare. If the poverty line used changes between periods, the results are
incomparable. An inescapable problem is that even with no differences in the surveys
themselves and in the poverty line, adjusting for prices changes between periods to make
poverty lines comparable bristles with difficulties. This is particularly so in Pakistan,
where there are serious flaws with the two price indices available. One is the consumer-
price index (CPI), which deals with many commodities of consumption but covers only
urban areas; it does not capture price changes in rural areas where the bulk of the poor
live. The other, the Survey Based Index (SBI) of prices, has the advantage of being
collected at the same time from the same households as the consumption data.
Unfortunately, it is difficult to estimate price changes for all goods that households
consume because prices of non-food items are not available in the survey. These are the
two choices. Pakistan should improve its prices indices with a sense of urgency for many
reasons. A comparable survey using the same poverty line in 1998-99, 2000-01 and
2004-05, adjusted by both the CPI and SPI revealed the following: According to both
measures, poverty headcount had been rising throughout the 1990s and peaked in 2000-
01, a bad drought year. It then fell sharply in 2004-05, a very good agricultural crop year.
Under the CPI, poverty headcount dropped by 10.6 per cent, under the SBI it dropped
five per cent. Those two estimates probably capture the extremes. A less flawed price
index might well find a third estimate in between these extremes. How can poverty drop
so sharply in just four years? How can the same data yield such different results due to
different estimates of the same thing — price changes? The answer is that incomes of a
very large portion of the population are just above and just below the official poverty
line. Compared to 2000-01, the consumption distribution has improved substantially in
2004-05, meaning almost all families are better off. The fact that there is an enormous
clustering of population around the poverty line means that even small changes in
consumption or income can affect poverty headcount ratios dramatically. This is the case
in Pakistan, where the improvement in consumption distribution in 2004-05 has led to a
sizeable decline in poverty. It also explains why a difference in the estimated rate of price
inflation between 2000-01 and 2004-05 of about eight per cent (depending on whether we
use CPI or SBI) makes such a huge difference in the estimated fall in poverty; i.e., over
10 per cent in one case and five per cent in the other. This clustering of Pakistan’s
population just above and just below the poverty line also implies that families are quite
vulnerable to falling into poverty with the slightest run of bad luck. A drought or bad
agricultural year, an illness of a breadwinner, rises in prices of basic commodities not
compensated by rises in income—all of these can cause families to fall into poverty.

Sustaining a declining poverty trend requires a concerted effort to improve the

capabilities of the poor and vulnerable. It also requires well-designed programmes
that help to mitigate the vulnerabilities induced by economic downturns or natural
Disasters. Pakistan’s poverty-reduction strategy is consistent with these objectives
broad-based rapid growth along with improvements in social services and putting
in place a social safety net. The challenge lies in carefully designing and
implementing the policies to achieve the desired outcomes. The 2004-05-poverty
data show that rapid growth did reduce poverty quite sharply. Whether by five or
10 per cent is somewhat academic. It also points to the urgent need for enhancing
capabilities through better social mobilisation, education, public health and rural
infrastructure. Finally, strengthening the social-welfare support system that is a
notable impulse of Pakistan’s Islamic heritage will help go a long way in reducing
poverty and vulnerability in all its dimensions. Last but not least, making data
publicly available will not only promote transparency but also allow everyone the
opportunity to assess the progress that is being achieved.