The great divide (on Inequality)

From Business Recorder 8-01-2010

Huzaima Bukhari and Dr Ikramul Haq

A number of informative - though highly disturbing studies - conducted by the Centre for Research on Poverty and Income Distribution (CRPID, www.crpid.org), confirm that rich-poor divide in Pakistan is increasing alarmingly. According to conservative estimates, 63% of the poor in Pakistan are in the category of 'transitory poor'. The rest of the 32% and 5% of the population - subsisting below the poverty line - are 'chronic' and 'extremely poor', respectively. Chronic and extremely poor are those households that are always below the poverty line, all the time during a defined period. Similarly, on the other side, 13% and 21% of the total non-poor (above the poverty-line) have been 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 regressive taxation leading to inequitable distribution of income and wealth, monopoly over assets by a few, and wasteful expending by the government. Rulers in Pakistan since 1948 have shown extreme apathy towards the poor. They are not at all interested to make Pakistan an egalitarian society - providing economic justice to all. One wonders if the present government, badly trapped by the forces that matter in the land in various non-issues, is cognizant of this state of affairs and devising some practical means to overcome it.
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, the 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, from the rise of a unipolar world power, to quest for monopolies in the 21st century.

Unfortunately, nobody in Pakistan has conducted a comprehensive research to determine all the dimensions of the rich-poor divide. Different studies (notably that of late A. R. Kamal and Talat Anwar) provide estimates of various inequality indices in Pakistan, wherein the Lorenz Curve and Gini Coefficients, have been most commonly used. According to Mr. A.R. Kamal, studies on income inequality in Pakistan show different estimates arising due to the following five important factors. Firstly, different studies use different data sets, some based on Household Income and Expenditure Surveys, others that make use of income tax data, and some other studies splice the two sets of data. Second, while some studies consider inequalities in income, others consider inequalities in the consumption expenditures. Third, while some studies are done for Pakistan as a whole, others examine income inequalities in both the rural and urban areas. Fourth, some studies report income inequalities across households; others report inequalities across population or earners. Fifth, some researchers classify data by deciles prior to estimation of the Gini-coefficient; others employ the income intervals that are not uniform. All studies, however, confirm that income inequality in 2000-2007 had been the maximum compared to any time period in the history of Pakistan. The poorest 30% lost their share, while the richest 20% 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 published 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, lower Gini Coefficients indicate more equitable distribution of wealth in a society, while higher Gini Coefficients mean that wealth is concentrated in the hands of fewer people. Sometimes, the Gini Coefficient is multiplied by 100 and expressed as a percentage between 0 and 100. This is called the "Gini Index". Pakistan's latest position, vis-୶is some selected nations, is illustrated in the Table.
According to UN Official report, from 1987-99 the Gini Coefficient for Pakistan was in the range of 0.33 to 0.43, which deteriorated to 0.68 in 2006, yet Musharraf and his "technocrat team" (sic) keep on claiming a wonderful 'economic turnaround" during the PML(Q) regime. It is a national shame and disgrace; for their insensitivity, indifference and apathy towards the poor masses of Pakistan for which, history will never forgive them.
Inequalities in income in Pakistan, as elsewhere, largely reflect inequalities in the distribution of assets. Since the poor have virtually no assets and the lower middle class own very few assets, income distribution is skewed. Distribution of state land; development of plots and houses for the common man at affordable prices and installments; the sale of shares of public enterprises in smaller lots; human resource development; and credit to the micro, small and medium enterprises are some of the ways that might help the poor in acquiring assets. However, the role of official bodies set up by federal and provincial governments in this regards (much-publicized 'Benazir Income Support Programme' or 'Khushal Fund'!) is simply hopeless - due to various weaknesses, even the allocated funds have not been distributed or are mis-utilised.

The income inequalities in Pakistan have increased sharply during the last 8 years and the trend continues unabated, despite tall claims (sic) 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. The single most devastating factor for increased income and wealth inequalities remains the regressive tax system. Incidents of tax on the poor during the last 10 years has increased substantively (35%) while the rich are paying no tax on their colossal income and wealth. A study of Pakistan from this political economy perspective is very crucial as our society is fast moving towards dehumanizing characteristics, unfettered and unchallenged. We are facing economic disparities, starvations, scarcity of eatables, and lack of essentials services. The Great Divide in today's Pakistan between the rich and the poor is assuming alarming proportions and may eventually lead to civil commotion, if curative measures are not taken immediately.

(The writers, tax lawyers, are visiting Professors at Lahore University of Management Sciences (LUMS)
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Table: List of recent Gini Indexes for a select

group of nations

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Japan 14.9 United Kingdom 23.0

Sweden 21.0 Iran 41.0

Germany 22.3 United States 46.6

France 32.7 Argentina 52.2

Pakistan 68.0 Mexico 54.6

Canada 23.1 South Africa 57.8

Switzerland 21.1 Namibia 70.7

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Source: US State Department report (2008)