Functional Income Distribution & Poverty

While there has been a secular decline in poverty, albeit at a low pace, different time periods show different trends. Can these differences be attributed to the slowing down of growth or the deterioration in income distribution has been responsible for slow reduction in poverty. Obviously even if the income distribution does not improve, the growth will reduce poverty. However, if the income distribution worsens, growth would not necessarily reduce poverty. The relative shares of labour and capital in the output, i.e. functional distribution of income, are one of the major factors in determining the levels of poverty when the incomes are rising. Three main factors governing personal income distribution are:

1. distribution of assets;
2. functional income distribution; and
3. transfers from other households, government and the rest of the world and the tax structure.

Industrialization affects distribution of personal incomes by altering the distribution of assets and by changing the functional income distribution. If wage earners do not hold any assets, changes in personal income distribution will be fully described by the functional income distribution, but if assets are uniformly distributed over the entire population, functional distribution is totally irrelevant in determining the personal income distribution. Neither of these two extreme cases are close to reality and accordingly, functional income distribution can be a useful indicator of personal income distribution of assets.

In a typically labour-surplus economy like Pakistan, the increase in investment which may also embody improved techniques of production tends to raise the share of capital in the output and hence deteriorates the functional income distribution. This is because real wages remain constant as long as supply of labour is unlimited, and as a result any increases in productivity tends to raise the rate of profit. However, trade unions, collective bargaining and labour legislation tend to raise the wage rates and thus lowering the increase in rate of profit.

Since green revolution technology is scale-neutral. It can result in poverty reduction and higher demand for labour [see Chaudhary (1976)]. Nevertheless, as pointed out by Hussain (1992), the impact of technology on size distribution of farms depends on the prevailing patterns of land ownership and the social organisation of agricultural production and that may have led to higher poverty especially in recent years. Poverty in recent years may also have gone up because of the increase in the input cost, stagnant yield per acre and that the farmer has to sell-off his output, to pay the debt. We may note that while an increase in input prices tend to increase the cost of production the increase in the price of output hardly benefits the subsistence farmers because of their limited marketable surplus.

Functional income distribution in Pakistan does indicate an improvement in the share of labour up to 1986-87; the share of wages in GDP increased from 30.2 percent in 1980-81 to 33.0 percent in 1986-87 which is in line with trends in poverty over that period. However, functional income distribution moved against labour as its share declined to 30 percent by 1990-91 [see Chaudhary (1992). A sharp growth in investment leading to higher demand for employment in the ‘60s, increase in wage rates during the ‘70s and both the increase in the demand for labour due to higher levels of output and increases in wage rates in the first half of the ‘80s have been responsible for improvement in the functional income distribution during this period. On the other hand, capital intensity has increased and growth rate of output has fallen in recent years. The increase in poverty in recent years, therefore, can at lest partly be attributed to changes in the functional distribution of income.

Source: Poverty Alleviation in Pakistan: Present Scenario and Future Strategy, Mohibul Haq Sahibzada. Republished with permission.