The government can take due credit for its growth performance this year. The GDP growth for the first time in more than a decade has reached 6.4 percent, and unlike last year it is supported by an increase in the investment rate from 16.7 percent last year to 18.1 percent this year. The fiscal deficit was reduced to 3.3 percent and State Bank reserves continued to rise. These figures are consistent and credible. What is not plausible however is the Finance Minister's claim that the percentage of population below the poverty line has declined by 4.2 percentage points compared to the level in the year 2000. There is a fudge in this figure and the reasons are as follows:
The composition of growth is contrary to the official claim of poverty reduction: The agriculture sector where the majority of the poor subsist has shown a sharp decline in growth from 4.1 percent last year to 2.6 percent this year. It is the large-scale manufacturing sector with a growth rate of 17.1 percent, which has determined the overall GDP growth performance. Even in this sector, growth is predicated on a relatively small group of industries, namely consumer durables, automobiles, textiles and cement. These are industries with low employment elasticities and where highly skilled and relatively well-paid workers are employed. Therefore these are hardly the industries whose growth could be expected to reduce poverty so quickly. Much less can they be regarded to be producing goods for the poor.
Income inequality between the richest 25 percent and the poorest 25 percent of the population has been increasing over the last decade. Even though data for the last two years is not available, yet the composition of growth suggests that income inequality has remained acute. The fact that inflation in the prices of the poor person's basket (food items), has increased at a higher rate than the average inflation rate, provides further indication that the distribution of real income between the rich and the poor may have become more unequal. When income inequality is high and increasing, a small increase in GDP growth cannot be expected to lead to such a sharp reduction in poverty as claimed by the Finance Minister.
The claim of poverty reduction is being made on the basis of a small sample survey of only about 5000 households, selected without regard to provincial coverage and conducted for only one quarter, April to June this year, when earnings from wheat harvesting enable a larger consumption expenditure by the poor. The results of this small sample survey are being compared to sample results in the base year drawn from the standard and periodic Pakistan Integrated Household Survey (PIHS). This has a much larger sample (14,000 households) with representation from each province, and averages out the seasonal variations in household expenditure by covering four quarters (one year). Given the quite different design of the sample surveys in the year 2000 and the year 2004 respectively, the results are technically incomparable. It would be like comparing apples with oranges. The specific differences in design of the two surveys indicated above, are such that a reduction in poverty would tend to arise from the differences in sample design rather than a change in the real magnitude of poverty.
A professionally sound assessment of changes in the levels of poverty over the last four years would have to wait till the next round of the PIHS is conducted. Given the level of income inequality and the composition of growth, the recent increase in the GDP growth rate can at best provide grounds for the hope that poverty may have stopped growing. There is certainly neither adequate evidence nor any analytical reason to suggest such a sharp reduction in poverty (4 percentage points), as the Finance Minister in cavalier fashion proclaimed before an incredulous populace. He can take well-deserved credit for his achievements in terms of overall investment, growth and financial stability. Not for having substantially reduced poverty. To do so would be to assume out the very problem that is to be confronted, now that we have the fiscal space.