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Dr. Akmal Hussain
Newspaper: The Daily Dawn, Lahore
Dated: Wednesday, February 20, 2008

With the prospects of a new government emerging after the elections, an assessment of the economic performance of the Musharraf regime and the lessons learned may be helpful for developing a new policy framework. An evaluation of two official claims may be central in this context. First, did the relatively high GDP growth during the period 1999-2007 actually lead to a substantial poverty reduction as claimed by the government? Second, did the economic policies of the previous government initiate a process of sustained high economic growth? In this article we will examine the question of poverty reduction in the light of the latest research. In the subsequent article we will evaluate the second official claim, that of achieving sustained high GDP growth.

The government has claimed that in the period 2000-01 to 2004-05 it has reduced the percentage of the population below the poverty line from 34 percent in the year 2000-01 to 23 percent in the year 2004-05, that is a reduction by 11 percentage points. This means that almost one third of Pakistan’s poverty problem has been eliminated within a period of four years. If true this would be one of the most dramatic economic achievements in the history of the developing countries, including the Soviet Union under Stalin and China under Mao. India achieved a 10 percentage point reduction in poverty after 20 years with an average annual GDP growth rate of 8 percent. We will examine the Musharraf government’s claim of a huge poverty reduction by first analyzing the sources of GDP growth during the period and then putting the government’s poverty estimates to scrutiny, on the basis of a recent study done by Dr. Haris Gazdar, Dr. Asad Sayeed and me.

An analysis of the sources of growth during the period 2000-01 to 2004-05 shows that the composition of growth during the period was pro rich rather than pro poor. It was fueled mainly by the services sector, (particularly banking and communications) which contributed 60 percent of GDP growth during the period and the manufacturing sector primarily manufacture of automobiles, luxury consumer electronics, cement and textiles, which contributed 30.4 percent of GDP growth during this period. It is clear that GDP growth during the period was overwhelmingly pro rich since none of the sectors which mainly constituted the growth was either producing goods for the poor or directly providing employment to them. In fact the labour force survey data of the government shows that unemployment rates rose sharply from 6.1 percent in 1999 to 8.3 percent in 2004. Therefore the nature and composition of GDP growth during this period could not be expected to have substantially reduced poverty.

Let us now scrutinize the poverty estimates of the government. With respect to the estimation procedure it is important to understand that the magnitude of change in the incidence of poverty depends on two factors: (a) The base year used for comparison at two points in time. (b) The inflation rate used as a deflator to estimate changes in the consumption over time at constant prices. Now, regarding the first factor the government’s estimate of poverty reduction uses the year 2000-01 as the base year which is a year of bad harvest, and compares it to the year 2004-05 which is a good harvest year. Clearly comparing a drought year with a good harvest year will, ceteris paribus, exaggerate the magnitude of poverty reduction. It is therefore more appropriate to compare the year 1998-99 with the year 2004-05. With respect to the second factor, the government’s poverty estimate uses an inappropriate inflation rate based on the consumer price index, which only covers 16 urban centers. It does not take account of prices in the rural areas where the majority of the poor reside. Indeed inflation rate data based on both urban and rural areas was available from the Pakistan Living Standard Measurement (PLSM) survey. The PLSM date of course shows a much higher inflation rate. The government instead chose the CPI index for inflation which would yield an artificially low inflation rate and thereby a much higher magnitude of poverty reduction. Mr. Talat Anwar in an earlier study has attempted to correct the biases in the official poverty estimates by using the year 1998-99 as the base year and the inflation rate drawn from the PLSM data. His estimate shows that during the period 1998-99 to 2004-05 poverty declined by only 1.8 percentage points, from 31.1 percent in 1998-99 to 29.3 percent in 2004-05. Our own poverty estimate also takes account of the inconsistencies in the Sindh sub sample and yields a poverty reduction estimate of only 0.6 percentage points with poverty declining from 31.3 percent in 1998-99 to 30.7 percent in 2004-05. One can conclude therefore that, there has been no significant poverty reduction during the period 1998-99 to 2004-05. This conclusion is consistent with the sources of growth analysis based on national income data.

In the three years after 2004-05 the demand-supply imbalances in the economy resulting from design errors of economic policy led to accelerated inflation, particularly food inflation, severe shortages of atta, electricity, gas and fuel. The accelerating inflation rate particularly for items in the poor man’s basket would be expected to have worsened the poverty situation. Therefore in the Musharraf period as a whole (1999-2007), while high GDP growth rates were generated, they failed to significantly reduce poverty. It is important to draw the scientifically correct lessons in order to redesign economic policy to address the central economic policy challenge that still remains: Initiating a process of sustained high economic growth that is restructured in favour of the poor to achieve rapid poverty reduction.

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