Growth, Poverty & Unemployment Scenarios

The growth of employment depends on the level of economic activity. Higher level of economic activity is likely to create demand for labour in the domestic market thereby reducing unemployment and income inequalities. Viewed in the background of historical development this section examines the prospects of growth, employment, and poverty during the remainder of the three years of the 8th Five-Year Plan period (1995-96 to 1997-98). Using a 97-equation macro-econometric model of Pakistan’s economy, commonly known as the PIDE Model ‘92, we generate three alternative scenarios regarding the growth, employment and poverty over the next three years.

The first scenario is the baseline scenario which essentially presents the state of growth, unemployment, and poverty in the years to come with no major policy initiatives taken to correct it. It serves as a reference point to evaluate alternative policy options. The second scenario, which we call alternative scenario I is basically an optimistic scenario in which the real GDP is allowed to grow at an average rate of 6.1 percent p.a. during the remainder years of the 8th Five-Year Plan. Corresponding to this growth target the unemployment and poverty situation is examined. The third scenario, which we call alternative scenario II is basically a moderate scenario in which the real GDP is allowed to grow at an average rate of 5.7 percent p.a during the last three years of the 8th Five-Year Plan.

The Baseline Scenario

The baseline forecasts show that the economy is not likely to be in good shape, at least during the next years. The unemployment situation is likely to get worse. The real GDP growth rate is projected to be 5.3  percent in 1995-96, helped by 5.2 percent growth in agriculture, and 4.7 percent in manufacturing. The remainder of the three years of the 8th Five Year Plan suggest that the real GDP would grow at an annual average rate of 5.5 percent; agriculture and manufacturing would grow by 4.6 percent and 5.4 percent respectively. The rate of inflation is likely to remain in the double-digit level. The (open) unemployment rate will rise to an unprecedented 8.0 percent in 1995-96 but likely to decline thereafter as economic activity picks up. In absolute terms, these unemployment rates suggest that approximately 2.94 million workforce will remain unemployed in 1995-96 but this number is likely to decline only marginally. The share of wage income in the GDP remains stagnant during the remainder of the 8th Five-Year Plan period. Thus, the incidence of poverty, so measured, is not likely to decline in the next three years. This is certainly not the happy state of affairs and should not be acceptable. Specific policy measures must be taken to arrest the worsening unemployment situation.

Alternative Scenario I

To see how the situation can be improved upon, we generate an optimistic scenario — fairly close to the government targets, namely, to attain a GDP growth rate of 6.0 percent plus over the next three years of the Plan period; to bring inflation rate down to single-digit level and reduce the incidence of poverty by reducing unemployment. Table 6 reports the results of alternative scenario I.

The growth rates of the real GDP in this scenario are 6.1 percent in 1995-96 and 6.1 percent, on average, over the next three years, supported by 6.0 percent and 5.0 percent growth in agriculture respectively; and 5.9 percent and 6.7 percent growth in manufacturing, respectively. The rate of inflation is likely to come down to 10.8 percent in 1995-96 and further to 7.8 percent by the end of the Plan period. Such an impressive growth performance is likely to arrest worsening unemployment situation. Against  an impressive growth performance, the unemployment rates are likely to come down to 6.1 percent in 1995-96. If such growth performance along with low inflation rate are sustained over   the rest  of  the  8th  Plan  period,  the  unemployment rate is likely to come down to 5.7 percent level by the end year of the Plan. In absolute terms, the number of jobless workforce will be reduced to 2.24 million and further to 2.22 million against 2.94 million and 2.87 million in the baseline scenario over the next two years, respectively. By the end of the Plan period the number of workforce without job will be around 2.20 million as compared with 2.79 million in the baseline scenario. The share of wage income in the GDP is substantially higher than the baseline scenario. Such an impressive growth rate over a sustained period is likely to improve the wage income thereby reducing the poverty levels as well.

To achieve such an impressive growth targets on a sustained basis to arrest worsening unemployment situation, investment rates to the tune of 22-24 percent will be required during the Plan period. This is apparently a viable policy option; but can these targets be achieved on a sustained basis in an environment of political tension and disturbed law and order situation in the major ‘growth poles’ of the country. The current state of affairs demand extra efforts on the part of the government.

Alternative Scenario II

Given the current state of affairs, a moderate scenario is generated and the results of such exercise are reported in Table 7. The real GDP is set to grow by 5.7 percent and 5.6 percent over the next two years, supported by a moderate growth of 5.6 percent and 4.5 percent in agriculture; and 5.6 percent and 6.5 percent in manufacturing during the next two years, respectively. Over the remaining years of the Plan period, the real GDP, agriculture and manufacturing are expected to grow by average rates of 5.7 percent, 4.8 percent and 6.4 percent respectively. Inflation rate is projected to be 12.2 percent and 10.6 percent respectively over the next two years and the remaining Plan period is expected to end at an average rate of 10.4 percent.

Against the moderate growth performance, the corresponding unemployment rates are respectively 7.2 percent and 6.4 percent over the next two years — much lower than what is reported in the baseline scenario. If the real GDP grows unhindered on a sustained basis in the range of 5.6-5.8 percent during the remainder of the Plan period the unemployment rate will come down to 6.0 percent level by the end of the Plan period. In absolute terms, about 2.64 million and 2.41 million workforce will remain out of job respectively over the next two years even if the economy registers a moderate growth rates of 5.7 percent and 5.6 percent. However, if the economy registers a moderate growth rate on a sustained basis during the remainder of the Plan period, the number of unemployed workforce will come down to 2.32 million by the end of the Plan. Poverty situation also improves over the next three years. In order to achieve the moderate growth targets, investment rates to the tune of 20-22 percent will be required during the rest of the Plan period.

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