Sunday, May 4, 2008

Income Inequality


For the rich only
Income and wealth
disparities galore in our society

By Huzaima Bukhari and Dr Ikramul Haq

According to a study conducted by the Centre for Research on Poverty and Income Distribution (CRPID), 63 per cent of poor in Pakistan fall in the category of 'transitory poor'. The State Bank of Pakistan (SBP) has also admitted in its annual reports that the standard definition of 'transitory poor' includes those households that are below the poverty line for most of the time, but not always, during a defined period.

The remaining 32 per cent and five per cent of the population that subsist below the poverty line are 'chronic' and 'extremely poor', respectively. 'Chronic' and 'extremely' poor are those households that are below the poverty line all the time during a defined period. Similarly, on the other side, 13 per cent and 21 per cent of total non-poor (above the poverty line) are classified as 'transitory vulnerable' and 'transitory non-poor', respectively.

This portrays an alarming situation, as more and more people are moving from the 'transitory' category to the 'chronic category', courtesy inequitable distribution of income and wealth, monopoly over assets and regressive tax policies. Rulers in Pakistan have never showed any commitment to economic and social justice as their primary political goal. One wonders if the new government is aware of this state of affairs and is devising some practical ways to help improve the situation.

Political economy is the theory of wealth, and of how wealth is created and shared within the society. Its key concepts are production, distribution, exchange and consumption. Historically, political economy is a response to the rise of capitalism and capitalist society. Its concepts are refined, redefined and added to as capitalism progresses from the mercantile or merchant capitalism of the sixteenth and seventeenth centuries to the agricultural and manufacturing capitalism of the eighteenth century; to the industrial capitalism of the nineteenth century to the rise of a unipolar world power in the twentieth century; to the quest for monopolies in the twenty-first century.

In the last five years, unfortunately, no one has conducted a comprehensive research to determine all the dimensions of the rich-poor divide in Pakistan. Various studies, wherein inequality-measuring criteria like the Lorenz Curve and the Gini Coefficient have been used, however, provide estimates of inequality in Pakistan. According to A R Kemal, studies on income inequality in Pakistan show different estimates because of the following five important factors:

One, different studies use different data sets -- some are based on Household Income and Expenditure Surveys, others make use of income tax data and still others splice the two sets of data. Two, while some studies consider inequalities in income, others consider inequalities in the consumption expenditures. Three, while some studies are done for Pakistan as a whole, others examine income inequalities in both the rural and urban areas. Four, while some studies report income inequalities across households, others report inequalities across population or earners. Five, some researchers classify data by deciles prior to the estimation of the Gini Coefficient; while others employ the income intervals that are not uniform.

All studies, however, confirm that income inequality in 2000-2007 was more than in any other time period in the history of Pakistan. The poorest 30 per cent lost their share, while the richest 20 per cent gained in both the urban and rural areas during the Musharraf-Shaukat era. The Gini Coefficient is named after Corrado Gini, an Italian economist who introduced it in 1912. The Gini Coefficient is derived from a statistical formula, and expresses the degree of evenness or unevenness of any set of numbers as a number between 0 and 1.

A Gini Coefficient of 0 would indicate equal income for all earners. A Gini Coefficient of 1 would mean that one person had all the income and nobody else had any. Thus, a lower Gini Coefficient indicates more equitable distribution of wealth in a society, while higher a Gini Coefficient means that wealth is concentrated in the hands of a few people. Sometimes, the Gini Coefficient is multiplied by 100 and expressed as a percentage between 0 and 100 ('Gini Index').

According to a US State Department report, released in 2006, the Gini Coefficient for Pakistan is 68.0. According to the same report, the 'Gini Index' for Japan is 14.9, for Sweden is 21.0, for Switzerland is 21.1, for Germany is 22.3, for the United Kingdom is 23.0, for Canada is 23.1, for France is 32.7, for Iran is 41.0, for the United States is 46.6, for Argentina is 52.2, for Mexico is 54.6, for South Africa is 57.8 and for Namibia is 70.7. According to another United Nations report, from 1987 to 1999, the Gini Coefficient for Pakistan was in the range of 0.33 to 0.43, but it increased to 0.68 in 2006, yet the previous government kept on harping the tune of a 'wonderful' economic turnaround.

Income inequalities in Pakistan, as elsewhere, largely reflect inequalities in the distribution of assets. Since the poor have virtually no assets and the lower middle-class owns very few assets, income distribution is skewed. Distribution of state land; development of plots and houses for the common people at affordable rates; the sale of shares of public enterprises in smaller lots; human resource development; and credit to micro-, small- and medium-enterprises are some of the ways that might help the poor in acquiring assets. However, the role of various official bodies set up by federal and provincial governments in this regard has been poor to say the least.

The income inequality in Pakistan has increased drastically in the last eight years and the trend continues unabated despite all claims of poverty reduction. The main factors that govern personal income distribution include distribution of assets; functional income distribution; transfers from other households, government and rest of the world; and tax and expenditure structure of the government.

However, the single most devastating factor for increased income and wealth inequalities in Pakistan remains the regressive tax system. Incidence of tax on the poor in the last 10 years has increased substantially (by about 35 per cent), while the rich are paying almost no direct tax on their colossal income and wealth. Study of Pakistan from this political economy perspective is very crucial, as our society is fast adopting dehumanising characteristics. We are faced with economic disparities, shortage of food and lack of essentials services. The great divide between the rich and the poor in today's Pakistan is assuming alarming proportions, and may eventually lead to a civil war if preventive measures are not adopted immediately.

(The writers are tax advisers and legal historians. They also teach at LUMS).