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Growth, poverty & politics

By Shahid Javed Burki

A quick look at Pakistan's economy since the country gained independence in 1947 reveals an interesting pattern. In terms of the growth in GDP and increase in per capita income, the economy did very well in the 1960s, and again, in the 1980s.

Once again, there is a noticeable pick up in the financial years 2002-2003 and 2003-2004. In other words, the economy has done well under military rule. However, there is now a growing realization that growth alone does not better the lives of the people.

How has Pakistan fared in terms of alleviating poverty, improving income distribution and providing people access to basic goods and services?

Digging a bit deeper into the performance of the economy, and looking at it from the perspective of the poorer segments of the population reveals the same pattern as do GDP growth rates.

Once again, the incidence of poverty declines when the military is in charge. At the time of independence some 60 per cent of the population lived in absolute poverty, a condition of life in which the basic needs of those who are affected by it are not fulfilled.

Those who are absolute poor go hungry most of the time; they cannot provide basic health care to themselves and their families; children cannot be sent to schools; and jobs, which even if available, are mostly in the low-wage informal sectors of the economy. With 60 per cent of the population living in poverty, Pakistan in 1947 had as many as 21 million people who suffered from this kind of deprivation.

In the period 1947-58 - the period during which politicians ruled with the help of the civil bureaucracy - the country added eight million people to its population.

There was no decline in the incidence of poverty, in part because of the arrival of millions of people as refugees from India. A very large number of these people arrived as destitutes, leaving behind their properties and most of their possessions.

It took about a decade and a half to settle these people on the lands and businesses left behind by the six million Hindus and Sikhs who had gone to India.

When Ayub Khan put Pakistan under martial law in October 1958, the pool of poverty had increased by another five million, to about 26 million people in a population of some 44 million.

Economists have disputed the impact of Ayub Khan's model of economic growth on the incidence of poverty as well as on income inequality. No firm data is available to suggest what happened to these measures of welfare during this period.

My own estimate is that while inequality increased, the incidences of poverty declined significantly. It couldn't have been otherwise. There is much empirical evidence gathered by the World Bank and other development institutions to suggest that rapid economic growth, even with some worsening in income distribution, reduces the number of people living below the poverty line.

Even more important, agriculture contributed significantly to Pakistan's economic growth during this period. The green revolution was led by the small and medium sized landholders and they were much more inclined to user labour-intensive techniques than large farms.

Also, the Ayub government launched an ambitious programme of rural works which was focused on building infrastructure in the countryside by using surplus labour.

When Ayub Khan was forced out of office in March 1969, Pakistan's population had increased to 56 million. Of this some 40 per cent - or 22 million people - lived in poverty.

This was a generally accepted estimate. In fact, it was this estimate, made popular by Mahbubul Haq in his writings and speeches, that introduced the concept of the "bottom 40 per cent" in development thinking.

The collapse in December 1971 of the second military government headed by General Yahya Khan brought the civilians back to power. It also saw some increase in the incidence of poverty, attributed in part to the consequence of a sharp slowdown in economic growth, the result of a series of failed monsoons, and the outcome of the deep restructuring of the economy undertaken by the government of Zulfikar Ali Bhutto.

A committed Fabian socialist, Bhutto brought dirigistic management to the economy. There were far-reaching consequences of this structural change, including the impact on the poorer segments of the population.

A reduction in GDP growth and a decline in the rate of growth of agricultural output contributed to keeping the incidence of poverty at the level reached at the conclusion of the Ayub Khan period.

In July 1977, when General Ziaul Haq removed Bhutto from power, Pakistan's population had increased to 72 million of which 28 million were absolute poor. This was six million more than in 1969.

With the advent of the Ziaul Haq rule, a firmer statistical picture is available in so far as the incidence of poverty is concerned. More systematic surveys were conducted in this period that provide a better indication not only about the number of people living in poverty but also the characteristics of the poor.

This period not only saw a sharp pick-up in economic growth, it also witnessed Pakistan's second green revolution, this time centred around increasing production and productivity of cotton, the country's main cash crop.

Since cotton is grown in the areas that were poorer to those producing rice and wheat, there was a tremendously positive impact on the incidence of poverty of this development.

The Zia period ended in August 1988, with his death in an air crash. At that time Pakistan had a population of 97 million, of which about 18 per cent or 17 million were poor. This was a remarkable development. While the size of the population in this 11 year period increased by 25 million, the number of poor declined by 11 million.

Was the state under General Zia ul-Haq responsible for these happy results? Zia himself suggested that his Islamization programme, much of which was focused on the introduction of zakat, contributed significantly to this development.

This Islamic tax on the rich to raise resources for distribution to the poor may have contributed a little to the decline in poverty. However, the two more important reasons were the growth rates based on agriculture and large amounts of remittances sent by the Pakistani workers in the Middle East.

Most of these workers came from very poor households; most of them remitted the bulk of their large earnings to their families; and, contrary to some impressions at that time, most of this money was used to meet the basic needs of the recipients. More than anything else, remittances played a significant role in reducing the level of poverty.

This trend towards reduction in the incidence of poverty was reversed during the decade of the 1990s. Once again a slowdown in the rate of economic growth played an important role.

This period also saw a significant decline in remittances, particularly after the first Gulf War when a large number of Pakistani workers in the Middle East were sent back home.

By 1999, the incidence of poverty had climbed back to 36 per cent of the population. Since the population increased to 131 million, the number of people living in poverty reached 47 million.

The size of the poverty pool began to increase at the rate of 10 per cent a year, or at a rate four times the growth of population. This is when the military returned to power under General Pervez Musharraf in October 1999. On the eve of Pakistan's fourth military rule, the country was faced with an extremely serious crisis of poverty.

Unlike the performance of the economy under General Ayub Khan and Zia ul-Haq, growth did not immediately pick up with the transfer of power back to the military in 1999.

In the first full year of Ayub Khan's stewardship, GDP increased by 4.9 per cent compared to only 0.9 per cent the year before. In Zia ul-Haq's first year in office, growth in GDP climbed to 7.7 per cent compared to only 2.8 per cent the year before.

In 2000-2001, the first year of General Musharraf's rule, GDP increased by only 2.2 per cent as against 3.9 per cent in the year before. Yearly growth data can be very misleading and should not be used to draw firm conclusions.

Nonetheless, the economic strategy followed by the Musharraf government put emphasis initially on stabilization rather than growth and poverty alleviation. In the first two years of Musharraf's rule, the incidence of poverty probably increased.

In the middle of 2003 when growth returned to the country, there were some 50 million people living in the pool of poverty, the largest number in the country's history.

It would be tempting to conclude from these broad trends about GDP growth and changes in the incidence of poverty that the military was much more adept at economic management than the civilians; that democracy failed to deliver growth and palpable improvement in the lives of ordinary citizens.

Economic performance was particularly poor in the first post-independence decade and again in the 1970s and 1990s - the three periods when politicians were in charge. In the 1950s and 1990s, the economy suffered because of the quick changes in governments which meant that a consistent set of policies could not be followed.

In the 1970s, while there was political stability, the economy was profoundly restructured by an expansion in the role of the state. Also, the political administration at that time was deeply suspicious of private enterprise and private entrepreneurs were fearful that their investment could be subject to expropriation by the government.

What this points to is not that the military was necessarily a better manager of the economy. It indicates that military rule brought political stability and a continuity of economic policies and these always help economic growth.

The periods of Ayub Khan and Ziaul Haq saw the same group of civilian managers stay in charge of the economy. The military did not interfere in the day to day management of the economy.

It only provided broad oversight. President Ayub Khan was more involved himself in economic decision-making than was General Zia ul-Haq. However, even Ayub left the formulation of broad strategies in the hands of economic experts.

Economists never tire of repeating that what the market dislikes the most is uncertainty. This was what troubled the Pakistani economy the most during the 1960s, 1970s and 1990s.

Investors were not confident that the assumptions they were making about the future would prevail. Of these three periods, the 1990s were the most uncertain since each government that came to office was happy to change policies adopted by the one it succeeded.

No serious attempt was made by the politicians to restructure the economy and to remove the weakness that had caused growth to stagnate and poverty to increase. With the economy recovering and the poverty pool beginning to shrink, the time has come for a serious restructuring of the economy, to get it off the roller coaster ride it has been on for almost six decades, and to lay a solid foundation for a robust structure that would last and grow in size.

[taken from]

Date/Time Page Created: 12/01/2004

Date/Time Last Modified: 12/1/2004 8:30:07 AM

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