Updating poverty and inequality estimates

THE NEWS
By Haroon Jamal
Synopsis

The Government of Pakistan (GoP) has declared a reduction of 10.6 percentage points in the poverty incidence of the country during 2001-05 based on the latest available household survey data. According to the Pakistan Economic Survey 2005-06, poverty declined from 34.46 per cent during 2001, to 23.94 per cent in 2005. This decline has been witnessed in rural as well as urban areas of the country. In urban areas, the incidence of poverty reduced from about 22.69 per cent during 2001, to 14.94 per cent in 2005. In rural areas, it declined to 28.1 per cent during 2005, compared to 39.26 per cent in 2001. The Survey also reports that the poverty line of 2004-05 is adjusted by the inflation rate (Consumer price Index- CPI) during 2001-05.

On the contrary, the World Bank (WB) report on Pakistan’s poverty objects to using CPI for inflating 2000-01 poverty line and instead suggests using the sure based prices index - Tornqvist Price Index (TPI) the report concludes “In summary, we strongly recommend using the TPI based inflation to update the 00-01 poverty line for 04-05, which yields a poverty headcount of 29.2 per cent. This will imply a decline in poverty of 5.2 percentage pints between 00-01 and 04-05.”

However, one should be aware how TPI is calculated and what are its drawbacks. TPI can only incorporate homogenous goods like food items and fuels. Moreover, the household survey does not report on quantities of non-food items consumed and provides only expenditure. The extent of adjustment in TPI can be ascertained from the fact that TPI includes only 75 items, whereas CPI includes more than 300 items. Further, TPI might provide a wrong picture on the inflation rate if two or more distinct goods are included within a single commodity.

The CCFs are estimated separately for urban and rural areas. It is argued that consumption behaviour, purchasing patterns, dietary habits, taste and ecology are significantly different for urban and rural groups. Following Jamal (2002), these functions are estimated from the lowest quartile of distribution after ranking households by per capita expenditure. Household per adult daily calorie consumption is regressed on total household expenditure (excluding taxes). The functional form is chosen on the basis of maximisation of R2 criterion. Nonetheless, other statistical tests are also applied before choosing the functional form. The results of these functions are furnished in table A-1. The estimated coefficients of calorie-consumption functions are applied to derive the poverty line for urban and rural areas. (see table-1)

In order to ease in interpretation, minimum calorie requirements are converted into per capita term using household demographic data and proportionate minimum requirements.

The estimated poverty lines for urban and rural areas are mapped on household per capita total expenditure for computing various poverty aggregates. Table 2 displays these measures of poverty during 2004-05 overall, 30 per cent of the population was poor, according to the above definition of poverty and the poverty line. The incidence and depth of rural poverty are high as compared to the urban areas, whereas urban poverty severity is high as compared to its rural counterpart. (see table-2)

Our estimates show a decline of about 3.52 percentage points (as against the GoP’s claim of 10.6 percentage points) in poverty incidence during last three years. The incidence figures propose that about 46 million people were below the poverty line during 2004-05, as against 47 million during 2001-02.

Apart from the disagreement with the official numbers, the reduction in poverty however, does not come as a surprise. The overall average Annual Growth Rae (AGR) of the economy during 2001-05, was nearly six per cent compared to only 3.3 per cent each year during the preceding four years. There is consensus among researchers and analysts that economic growth may not always be a sufficient condition for poverty reduction but it certainly is necessary one. To illustrate the point, a historical relationship between the Gross Domestic Product (GDP) growth and poverty incidence in the context of Pakistan is plotted in the following charts. In general, both charts suggest an inverse relationship between poverty and economic growth.

Admitting, that there is a disagreement between the government” and the “civil society” over the official poverty figures, it is worth highlighting some plausible causes responsible for the decline in the poverty trend. Perhaps the principal factor is the timing of both surveys. First, the period during 2004-05, was exceptionally favourable in terms of growth the macroeconomic stability. A remarkable growth of 7.5 per cent in agriculture was recorded in FY2004-05 as against 0.1 per cent growth during FY02. Second, growth in the manufacturing sector was 12.5 per cent as against 4.5 per cent during FY02, Second, a significant increase in public spending during the past three years created an enabling environment for the decline in the poverty incidence. However, rising trends in inflation (especially food prices), unemployment and in other equality worsening did not let poverty decline sharply and substantially.

On average, 2 per cent rise in annual growth in poverty incidence in estimated during 1987-88 and 2004-05. Our estimates indicate a relatively higher increase in urban poverty during this period. A comparison of 2001-02 and 2004-05 shows that the decline n urban poverty is relatively less than the rural poverty. Rural poverty in this period has dropped with an AGR of 4 per cent, while the decline is about 2 per cent in the case of urban poverty incidence. Another important finding of this research is the national poverty incidence during 2004-05 which is the same as the poverty incidence estimated during 1998-99. The regional composition however has slightly altered and now urban poverty is more as compared with the poverty estimate for 1998-99 (28 per cent v/s 25 per cent).

Conclusion

This research note provides poverty figures estimated from the latest available household survey (PSLM/ HIES 2004.05). In the absence of any suitable CPI inflate poverty line of 2000-01, the poverty line for 2004-05 is recomputed from the latest survey using a consistent methodology.

The estimates show a decline of about 3.52 percentage points (as against the GoP’s claim of 10.6 percentage points) in poverty incidence during the past three years. Overall, 30 per cent of the population was poor during 2004-05, indicating that about 46 million people were blow the poverty line during 2004-05, as against 47 million during 2001-02.

The trend in poverty incidence, estimated with the consistent methodology, revels that national poverty incidence during 2004-05, is exactly the same as was estimated during 1998-99. The composition however, has slightly altered and now urban poverty is more as compared to the poverty estimates for 1998-99. The level of income inequality in terms of GINI coefficient also shows an upward trend.

— (This article is a synopsis of a well written research report produced by Social Policy and Development Centre (SPDC), Karachi.)

TABLE-1: ESTIMATED POVERTY LINES (2004-05)

Urban Rural

Per Day Calorie Requirements- Per Adult Equivalent Unit 2230 2550

Per Day Calorie Requirements- Per Capita 1901 2117

Poverty Line- Rupees Per Capita per Month 990 778

(Per cent of Poor Individuals)



Head Count Index (Incidence) Poverty Index (Depth) FGT2 Index (Severity)



Pakistan 29.85 6.51 2.13

Urban 27.70 6.62 2.29

Rural 30.85 6.45 2.06

Source: Author’s estimates based on PSLM/HIES, 2004-05