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In
first part of this article, last week, I had summarised factors affecting
poverty levels into three categories. viz. 1) Macro-economic policies
of the government, 2) Social security and rehabilitation programs
3) Entrepreneurship promotion and encouragement.
Under macro-economic policies we discussed fiscal policies and social
sector spending patterns whereby military expenditures, debt repayments
and public sector investments took priority over social development
expenditures. Even with higher allocations under PRSP the relative
priorities have changed little from the past and Pakistan has to do
considerable catching up in cross-country benchmarks, even within
the standards of South Asian countries. Planners are still deluding
themselves that higher economic growth levels will somehow compensate
for past neglect in development of social standards.
The other aspect of macro-economic policies relates to sectoral priorities.
The acceleration of economic growth over the past couple of years
has been achieved through foreign remittances, foreign aid and growth
of large scale industries like spinning, cement, pharmaceuticals and
car industry. All these industries are capital intensive with low
employment generation capacity. Power looms, carpet industry, leather,
sports goods, fisheries, gems and jewellery and cutlery have not shown
promising growth. Power loom sector that employs over half a million
labour is undergoing severe crisis due to high yarn prices, smuggled
cloth competition and technical redundancy. Similarly other employment
generating small scale industries are not faring too well.
General Musharraf's government had committed priority to four areas
- agriculture, SMEs, natural resources and IT, at least on paper.
Had follow up actions been effective in mobilising productivity in
these areas, poverty incidence would have begun to show downward trends.
But, beyond hyperbole, not much has been achieved in these areas.
The government has slipped back into past habit of stimulating growth
through elitist sectors that do not produce the 'trickle down effects.'
Agriculture is bleeding in the transition from support price mechanisms
to market economy and input costs have risen precipitously (imposition
of sales tax on inputs being a major factor) without a commensurate
increase in their farm gate income levels. The ill-planned (and un-regulated)
transition to market mechanisms for agricultural commodities has back
fired violently in wheat this year. The retrogressive impulses to
revert back to the old state-controlled system with all its corruption,
exploitation and inefficiencies have been inflamed and the unholy
alliance of rent-seekers (food department, middlemen and millers)
is going to anchor their stakes strongly. Farmers and urban poor are
going to loose out in the end, as in the past. And this is exactly
the area where bulk of poverty resides.
Rural poverty (36.3 percent) is significantly higher than urban poverty
(22.6 percent). More so, although agriculture is the predominant activity
in rural society, a substantial proportion of the rural labour force
(estimated 40 percent) depends on non-farm activities. The non-farm
activities are suffering by low economic growth in agriculture and
decline in public sector development spending. Three sanctuaries of
poverty in Pakistan are farmers, rural SMEs and urban SMEs and there
exists a strong economic nexus between them. Unless this chain of
economic activity is provided institutional support, poverty levels
will continue to rise.
SMEs still remain the retarded siblings of the economy. SMEDA was
created as an autonomous body with a dynamic culture to stimulate
SME entrepreneurs in the country but has now been reduced to an appendage
of the Ministry of Industries and Production and is listed as a department
of the Ministry on their website. If the Ministry was able to stimulate
SMEs then why was SMEDA created in the first place? Similarly the
development of natural resources and IT sector has not lived up to
the promises made in 1999.
SMEs that constitute 99.7 percent of business enterprises in the country
and employ 80 percent of the non-agricultural labour force are the
key to urban poverty. Apart from the new Prudential Regulations issued
by the State Bank for SME sector, no institutional steps have been
taken for their invigoration. There was a half-baked attempt to coerce
them in the tax net that back fired; they remain predominantly outside
the formal economy where institutional help cannot be extended to
them. The spectre of WTO driven trade regime in 2005 and Intellectual
Property Rights compliance issues is likely to further erode their
ability for a subsistence level existence.
Next, there is the fragility or the inadequacy of social security
and rehabilitation programs for the poor, especially in the rural
areas. This area includes 1) public works programs to create assets
and employment opportunities. e.g Khushhal Pakistan, 2) Micro-credit
through agencies like Khushali Bank and NGOs like Agha Khan Foundation,
Kashf etc. 3) Welfare oriented charity funding - Zakat funds that
have recently been diverted from relief to rehabilitation. There are
donors funding NGOs in this area for rehabilitation purposes. 4) Public
sector social security schemes like Employees Old Age Benefits Institution
(EOBI), Employees social security Schemes etc.
While significant growth (capacity and funding) is taking place in
development of social security and rehabilitation programs, both through
public sector agencies and NGOs, the enormity of the problem belittles
the quantum of resources employed in this area. For example the total
number of Zakat fund recipients is 2.5 million. The Khushhali Bank
is reaching 20,000 households at present and is planning to expand
its outreach to about 600,000 households in six years time, which
would account for only 10 percent of the six million poor households
in the country. Compared to some other countries, the micro finance
sector in Pakistan is in the initial stages of development. Estimates
suggest that as many as 5.6 million households in Pakistan need micro
finance services, but services reach only a tiny fraction of this
population, probably less than one percent.
According to official figures, Pakistan's population of 140 million
- growing at close to 2.6 or 2.8 percent per year - includes 46 million,
or 33 percent, living below the poverty line. Another 40 percent of
the population lives at subsistence level. Nearly two-thirds of Pakistan's
population lives in rural areas. All said and done, the collective
impact of social security and rehabilitation programs is to provide
a security net against absolute destitution of Ethiopian syndrome.
Even with adequate resources (a tall order at best) the most it can
do is to stall further degradation and elevate poverty stricken population
to subsistence levels. Will that be enough in a fast moving, competitive
international economic environment? We are chasing a moving target,
not an absolute goal set in comparison to our existing situation.
What will matter are relative income levels to other countries. Pakistan
must start measuring itself relative to other countries with similar
economic situations.
John Fowles said, "I am not afraid of poverty because it starves;
I am afraid of poverty because it stagnates." The mental stagnation
of seventy percent of population is what should haunt us, more than
how many calories do they consume daily.
The rise out of this pit of economic retarded ness will come through
harnessing the entrepreneurial spirit of farmers and SMEs in the formal
economy, as all other highly developed countries have achieved behind
the glittering façade of fortune 500 companies and multinationals.
And we have a long way to go because we have not even begun to walk
in that direction as yet.
I will conclude this discourse on poverty with some thought provoking
statistics regarding Pakistan's banking sector that perhaps is the
most accurate indicator of the size of Pakistan's informal economy.
Out of the 28 million bank accounts of all types held in Pakistan
by all scheduled banks, 85 percent have a deposit range of Rs. 1,000
to Rs. 50,000 amounting to 24 percent of total deposited amount. On
the other end, 0.39 percent have a deposit range of one million rupees
and above accounting for 34 percent of the total deposited amount.
According to a senior official of the State Bank, there are no more
than half a million bank accounts that could be termed operational
in the business sense. That indicates the size of the informal economy
that resides outside the Banking sector. Any effort to begin alleviating
poverty has to begin with curing this economic distortion.
Iqbal
Mustafa
1360 words
08 May 2004
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