Wednesday, December 26, 2007

Updating poverty and inequality estimates

By Haroon Jamal

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).


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.)


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

Monday, December 24, 2007

The first 100-day agenda

Tuesday, December 25, 2007
Abid Hasan

The writer is a former adviser to the World Bank.

Soon a new government will be in place. It will face several daunting challenges: Pakistan's slide into becoming a failed state, increasing macro-imbalances, high levels of poverty, and abysmal human development indicators.

The three most important pillars of state – Constitution, Superior Judiciary and Political System -- have been systematically weakened, and civil institutions deliberately allowed to atrophy. Consequently there is no serious challenge to the military unilaterally taking upon itself to rule overtly or covertly. The political system is fractured from military rule, political manipulation by the agencies and poor governance within the parties. Internal strife and terrorism are increasing. The federation is very fragile. The military's public image has been badly tarnished by its overbearing, unconstitutional and intrusive role. The majority of citizens are excluded from the circle of development, and the state as a protector of rights and provider of basic services is virtually non-existent for the poor.

Pakistan will continue to fail its citizens, perhaps not survive in its present from, if the civil and military leadership continue governing on a "business as usual" basis. A paradigm shift in governance and economic management is imperative. The Charter of Democracy and common elements of manifestos provide an excellent platform for a consensus agenda to rebuild Pakistan into a strong federation where there is rule of law, inter-provincial harmony, internal peace and progress for all.

Using the opportunity of the first 100 days honeymoon, the incoming government should embark on an aggressive reform agenda. Some suggestions are made to initiate debate and inject new ideas.

The first area is Governance Reforms to rebuild the critical foundations of the state. Several actions are needed. Restoration of the original 1973 Constitution, while including amendments to rebuild the judiciary and key state institutions, enhance provincial autonomy, fully enshrine the local government system, prohibit the role of the security agencies in politics, and strengthen the political system.

A critical first step to rebuilding the judiciary and other key institutions (i.e., dealing with accountability, media regulation, civil service recruitment, regulating markets, etc) is to (i) select their staff in a depoliticised and professional manner ensuring they meet the highest standards of integrity, independence and professional competence (ii) pay market-based salaries. Together these would ensure that the best Pakistanis work in key institutions. Without the best human resource, these organisations will severely under-perform as in the past, and Pakistan's institutional foundations will remain weak. One mechanism for staff selection in all the above-noted institutions is to establish an independent constitutional entity – a Judicial and Regulatory Staff Commission (JRSC) -- staffed by untainted and unimpeachable retired judges and well respected citizens. The JRSC would validate incumbents and select new staff. The US selection system provides another example.

The superior judiciary needs to be rebuilt by (i).the JRSC selecting judges, new ones and those to be restored (iii) benchmarking salaries to the earnings of top lawyers so the best and the brightest are attracted to give up lucrative legal practice (iii) chief justices, with help of leading Pakistani and international jurists, formulate new guidelines based on global best practice in respect of : accountability of judges; changing contempt of court laws to encourage healthy public debate on judgments; and restricting suo moto and judicial activism to truly major public interest issues

The federation needs to be reinforced by (i) abolishing the concurrent list and devolving most services to the local governments (ii) enhancing the shares of the provinces in the NFC to at least 50%, right away, and in turn higher flow of PFC resources and capacity building support to LGs to enable them to effectively deliver services. (iii) Market-based pricing of water and hydro-carbon resources to enable the provinces to fully benefit from these resources.

The political system needs to be strengthened by (i) overhauling the Election Commission; (ii) having a suitable mix of proportional representation and "winner take all" systems to ensure accurate representation in parliament; (iii) increasing representation of women; (iv) new rules for transparent elections within parties; (v) introducing public financing of campaigns to reduce incentives for corrupt practices by parties for fundraising.

The role of the military should be redefined, while ensuring Pakistan has the finest military machine, by (i) constitutionally prohibiting agencies from indulging in political matters; (ii) holding parliamentary debate on the appropriateness of defence strategy and spending in light of present and future (rather than past) external/internal security threats, and, based on that, revising the military budget; (iii) continuous education within the services on the military's duty to respect and protect the Constitution' and (iv) reducing the military's commercial activities.

Initiating fundamental civil service reforms as Pakistan can no longer afford a mediocre, demotivated and bloated civil services. Measures would include (i) strengthening the Public Services Commission; (ii) benchmarking salaries to market levels and enhancing security of service, while at the same time strengthening performance and accountability arrangements. Market-based salaries are absolutely essential, for as Confucius said, "If you pay people peanuts, you will have monkeys to work for you"; (iii) staff rationalisation; and (iv) increasing the representation of women.

Other key governance improvement reforms include (i) establishing an independent Accountability Commission headed by a retired Supreme Court judge, to replace the NAB which has been politicised and has lost its credibility; (ii) abolishing PEMRA and replacing it by an independent Freedom of Information Commission headed by a retired Supreme Court judge, which would be responsible for both promoting freedom of information in the media as well as responsible journalism; (iii) making PTV independent of the government; and (iv) enhancing respect for the Constitution and the rule of law within society through educating the younger generation and a continuous media campaign.

The second plank of reforms should be a new paradigm to combat terrorism. Pakistan must disengage from fighting other people's wars, and a bold "carrot and stick" programme should be initiated, comprising (i) strengthening the intelligence and establishing an aggressive rewards programme; (ii) ensuring that the fringe religious parties and madrassahs operate fully within the bounds of the Constitution and refrain from bigotry and inciting hate, while protecting their constitutional rights; (iii) requiring the madrassahs to impart government curricula for grades 1-10, in addition to religious education, and rewarding those which comply; (iv) a nationwide campaign to seek popular support for the programme and to demilitarising the mindset of society.

The third pillar of the reform agenda would be actions to sustain a high growth and accelerate poverty reduction. Despite the hype about growth rates, foreign reserves and the KSE index, the economy is now vulnerable to the external payments crisis and slowing of growth. Budget and external accounts deficits are unsustainable. Dependence on uncertain foreign capital is excessive. The energy pricing policy is irresponsible and unsustainable. Inflation is high and hurting low- and fixed-income families. Unemployment is high and human development indicators abysmal. A bold programme is needed to simultaneously achieve rapid growth, sustained reduction in poverty, improvement in income distribution, reduction of unemployment, and a sustainable external position.

On the macro-economic front, immediate steps should include (i) aggressive fiscal reforms to simultaneously reduce fiscal deficits, while enhancing resources for pro-poor expenditures,.as follows: accelerating the stalled FBR reforms ; extending GST and eliminating non-standard exemptions; capital gains tax , especially to capture the very high profits within the real estate sector and stock market; and creating fiscal space by eliminating both subsidies to the rich and the very large number of wasteful and uneconomic projects in the PSDP; (ii) tighter monetary policy, slower growth of consumer credit and reform of the interest rates to improve effectiveness of the monetary policy and reduce inflation; (iii) bold measures to accelerate exports, including: exchange rate adjustment; industry-specific productivity and competitiveness enhancement programmes; and reduction in anti-export bias through trade liberalisation and investment climate reforms; (iv) taxing speculative short-term inflows and increasing attractiveness of FDI in the export sector. It is critical that capital inflows are used productively to create surpluses needed to service them.

In respect of human development and poverty reduction, expenditures should be significantly increased for following (i) income subsidy for the very poor, vulnerable and unemployed including conditional cash transfers to poor families to achieve education/health goals; (ii) a labour-intensive community-driven public works programme (iii) local government programmes for improving delivery of primary level education, health, sanitation and clean water and on-farm water management.

Other high priority actions on the development front should be (i) accelerating programmes to remove supply constraints on essential commodities, to help lower inflation; (ii) initiation of a crash programme to exploit all forms of domestic energy resources, along with rationalising energy prices in line with international prices while protecting lifeline consumers; (iii) reprioritising the PSDP infrastructure investments to fund only investments critical to sustaining growth.

One important ingredient for success in undertaking reforms that the new government must follow is assigning high performing civil servants and fully empowering and incentivising them to implement the special programmes noted above.

Pakistanis are yearning for real change and for a better future. History is replete with examples of countries becoming failed states from myopic leaderships pursuing status-quo policies. The military leadership must recognise that the mighty Red Army, with WMDs, could not save the Soviet Union from disintegrating. It needs to fully embrace constitutional rule and wholeheartedly support the new parliament and government to undertake fundamental governance and economic reforms to rebuild Pakistan. The above agenda is daunting for a nascent government, but these are trying times Tinkering on margin is no longer an option. Implementing the above agenda on the road less travelled is necessary to enable Pakistan to move from a failing state to a stable, democratic and inclusive middle income country.


Building cities and commerce for people

Tuesday, December 25, 2007
Nadeem Ul Haque

We are looking for ways to accelerate growth so that poverty can be reduced and living standards improved. We go borrowing and begging to do this! Yet not many of us question the myriads of opportunities for investment that careless regulation stifles. The most glaring example of this is urban regulation which through Pakistan's history has stifled huge investment opportunities.

Construction leads growth. That is why analysts in the US always watch it. But look what our city planning paradigm has produced.

No tall buildings or apartments anywhere! We are all supposed to live in kothis!

The last time serious construction took place was in the sixties. Even today the tallest and the best building in Lahore remains WAPDA house made in 1966! Contrary to what people think, tall buildings and less regulated development does not lead to social and environmental ills. Research shows, that despite propaganda, US cities continue to develop at a rapid pace while their environment is getting cleaner and social evils like crime are declining.

Hotel construction too has been seriously retarded since Ayub's time. Why are their only two hotels in Lahore and they were also built in the sixties and seventies? Despite Lahore being rich in history and culture, why is their no tourism in Lahore? No conventions? Indeed none anywhere in Pakistan. Dubai has large conventions and boasts hundreds of thousands of hotel rooms. Lahore barely makes a few hundred 5-star rooms. Is this to protect a certain hotel monopoly? One should ask the related question, why has there been no entry into the hotel industry in the last 40 years? Why are multinational hotels not visible in Lahore and everywhere in the country? They will say that there is no demand. Of course there is not when they have to build out of the city. Why not a city centre location?

Indeed why do we not exploit our history and our mountains, beaches for tourism? Why no hotels near Moenjo Daro and Harrapa? No hotels in the mountains? Why? Tourist industry is huge and growing in the world with countries like Turkey getting $20 billion a year from it yet we have virtually willed it away.

Nathia Gali and Murree still have a governor's house which is hardly used and which could be a lovely high priced hotel? The hills still have rest houses being preserved for the VIPs at government expense. Rest houses were made in areas where there were no hotels for the touring judges or civil servants. Why not replace them with hotels? How many of these rest houses are properly used for government business? Is there any study of this?

Where is the commercial centre in any of our cities? No downtowns. I was told by one regulator that the heart of Lahore should now move to Bedian. By fiat even though the connection to the rest of the country is over the Ravi, yet the city centre should be by the Indian Border. People have to be moved from the old city and their current locations in Gulberg further out to preserve government real estate in the centre of town?

We have no highway infrastructure, pollution is already a problem. But no matter, spread the city out more and destroy the green fields of Punjab. Why is the heart of the city government owned? Almost all the land from the Charing Cross to the airport along the Mall is owned by the government. Some of it is not even fully utilized. Some examples of this are the Staff College (which can easily be moved to join up with the civil service academy near DHA), Civil service academy (now State Guest House and there is an academy near the DHA) NIPA, Government house, Navy War College (where is the sea?), the never-used the chief justice house (preserved only for weddings of the well connected).

The US government owns only the White House (smaller than our governor's mansion and the Vice President's House. All of us know the famous town house 10 Downing Street? The UK government maintains no housing for its permanent secretaries or judges! Why do we, a poor country, maintain expensive housing for officials?

Why is the urban regulation paradigm still friendly to an urban sprawl based on kothis? Why do kothi wallahs determine the pace of development by having the right of refusal to commercial development? Apartment blocks because of height and other restrictions are made economically infeasible. Where can you get readymade serviced office space in Lahore? Where is good warehouse space? Retail space is on now 3-marla plots? What can you build on that?

Why do we maintain rent control? Every major city in the world has eliminated rent control. All rent control does is reduce the supply of rental real estate and destroys the incentive to maintain quality real estate. Our regulators, however, are of the view that they know the value of rental real estate better than the market. Not surprisingly, Mall Road has shabby property that tenants have been renting for years at a rent that has not kept pace with inflation or real estate values. People who have had leases for decades continue to hold them and sometime even sublet. Rent control must go as an urgent priority if the construction sector is to be revitalized.

Urban construction is one of the most growth and poor-friendly activity in a country. Financial markets, pension funds can be based on it. It is sad that we are holding it back. Developing urban centres rather than urban sprawls are also intellectually and culturally invigorating. After all, most of mankind's major achievements--philosophy, democracy, industry, drama, art--have taken place in congested city centres. Let us embrace commercial development not fear it.

The writer is a former vice-chancellor of the Pakistan Institute of Development Economics.