Growth, Employment & Poverty Alleviation

One of the most lively debates about the causes and cures of poverty has focused on the relationship between economic growth and poverty alleviation. The literature emerging from the debate appears to have given rise to a number of stylised propositions. First, there is a strong positive effect of economic growth on enabling conditions for poverty reduction through enhanced provision of direct and indirect employment opportunities, social welfare services and infrastructure that can potentially benefit the poor. This is the view taken by the proponents of “trickle-down” hypothesis. Second, growth does not necessarily alleviate poverty as the process may not be sufficiently equitable. Thus poverty alleviation cannot be left alone to be accomplished by the “trickle-down” process. Policy interventions for improving the distribution of assets and income and the provision of social services along with the creation of conditions for enhancing economic growth are necessary. This is the view commonly referred to as the “basic needs approach”. Third, there is no inherent trade-off between growth and poverty alleviation.

The relationship between growth and poverty reduction has been examined in a cross-section study of a sample of 13 countries by ESCAP (1993 a). It was found that the rate of growth had a positive and statistically significant effect on poverty alleviation. On average, a one percent increase in annual rate of growth of GDP is associated with a decrease of about 0.9 percent in percentage of people under the poverty line. Despite the limitations of univariate cross-section regression, the findings provide general support to the proposition that growth has a positive effect on poverty alleviation. Individual country experiences, however, present a somewhat different picture. For example, despite the very high growth rate in Thailand, the reduction in poverty though significant, has been comparatively modest. Malaysia has been able to achieve both a high rate of growth and an impressive reduction in poverty. Bangladesh, on the other hand, has dramatically reduced poverty in spite of a very low growth rate.

In general, the high economic growth rates in East and Southeast Asian countries led to impressive reduction in poverty. These countries, however, also pursued social policies and welfare programmes along with overall development strategy focusing on strong growth. There were a number of key factors responsible for achieving higher growth rate on the one hand and a significant decline in poverty on the other in the East Asian nations. Prominent among these are the outward orientation — a commitment to become active players in the global market which imposed efficiency on the functioning of their economies. This outward orientation also substantially helped alleviate poverty through the creation of employment opportunities in labour-intensive industries. Second, these countries made significant investment in people in the form of expenditure on health, education, housing and social welfare. Such investment benefited the poor and simultaneously increased the growth potential. Third, macroeconomic prudence in the public sector was practised vigorously.

While experience has shown that growth alone is not sufficient to improve the welfare of all the poor, experience has also shown that growth is absolutely essential to reducing poverty. A bad macroeconomic environment that reduces a country’s ability to grow is without question the most serious danger to poor. Further, it hurts poor regardless of the government’s social strategy.

Pakistan’s growth record has been impressive over a relatively long period. The economy has grown at around 6.0 percent per annum in real terms since the early 1960s. This growth pattern has been achieved despite a number of adverse ‘shocks’ during this period. There have been two wars with India in 1965 and 1971; a number of bad harvests followed by an equal number of good ones; a prolonged recession that engulfed the main commodity-producing sectors from 1970 to 1977; the wide-ranging process of nationalisation which gripped the manufacturing sector in the mid-’70s; the manifold increase in petroleum prices that started in 1973; the inflow of workers’ remittances in the ‘70s that quickly graduated from a tiny trickle to an avalanche by mid-’80s; massive influx of Afghan refugees from the turmoil in Afghanistan numbering around 3.5 million; and succession of violent political transition. There is a consensus that this growth has translated into declining poverty in the 1960s and the 1970s and even more rapidly during the 1980s. However, the incidence of poverty appears to have increased in the early 1990s due to slowing down of economic activity [See Burki (1995)]. Notwithstanding impressive growth record and notable reductions in the incidence of poverty in the 1980s, poverty alleviation remains the most formidable development challenge for Pakistan.

A great deal of efforts and research activity have been devoted to investigating the extent, characteristics and causes of poverty in Pakistan. These studies provide extremely useful information regarding the trends of rural and urban poverty in Pakistan based on micro level data covering a time period from 1963-64 to 1990-91 present study will summarise the main findings and policy conclusions of some of the studies covering the period from 1984-85 to 1990-91. The findings of earlier studies are well-documented in Malik (1993, 1994) and need no repetition here.

The purpose of this paper is manifold. Firstly, it summarises the trends of rural and urban poverty in Pakistan. Secondly, eco- nomic growth and unemployment are analysed in historical perspective covering the period of three and a half decades. Finally, three alternative scenarios pertaining to growth, unemployment and incidence of poverty are presented for the period up to 1997-98 — the end of the 8th Five-Year Plan. These scenarios are generated using the PIDE macroeconometric model of Pakistan’s economy. The incidence of poverty is represented by the share of wage income in the GDP.

The paper is structured as follows. The trends in rural and urban poverty is summarised in Section II. In Section III, we discuss economic growth, unemployment and sectoral shifts in employment while alternative scenarios pertaining to growth, unemployment and incidence of poverty are presented in Section IV. Final section contains concluding remarks.

Dr. Ashfaque H. Khan

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