Trends in absolute poverty and governance in Pakistan: 1998-99 and 2004-05

Abstract

The paper emphases that the rate of price inflation matters in determining the changes in poverty level over time. Althouoh revisiting of official poverty line for 2001-02 by the Planning Commission is rationally and empirically valid the consumer price index (CPI)-adjusled official poverty line for 2004-05 lacks empirical support, invoking questions of the relevance of poverty estimates based on the CPI approach. The use of CPI underestimates the poverty level in 2004-05, as inflation as measured by CPI is lower than the household survey-based index and sensitive price index. Based on poverty lines from the household survey data using the official methodology, the results indicate that incidence of poverty first increased in Pakistan from 31.1 percent in 1998-99 to 34.4 percent in 2001-02, and then declined to 29.3 percent in 2004-05. The high inflation seems to have eroded the positive effects of rapid economic growth, resulting in higher poverty line and slower poverty reduction. It is, thus, essential to reduce inflation if the government aims to protect the poor. Considering the 1998-99 to 2004-05 period as whole, the results indicate that although the incidence of poverty declined by 1.8 percentage points, the number of poor increased by 2.6 million in Pakistan during the same period. At the province level, rural poverty declined in Sindh, followed by Punjab and the NWFP, whereas it increased in Balochistan between 1998-99 and 2004-05. Similarly, urban poverty declined only in Punjab and Sindh, whereas it remained stagnant in the NWFP and Balochistan during this period. While good governance has been an important pillar of Pakistan's poverty reduction suatcgy, governance indicators constructed by independent institutions showed a worsening of trends. Trends in corruption also indicate that country's ranking as having highly corrupt public officials and politicians worsened during this period. The evidence of rising extent of corruption is consistent with the rising trends in inequality, since corruption increases inequality through perpetuating unequal distribution of assets. The worsening of governance indicators accompanied by a decline in poverty suggests that reduction in poverty was largely attributable to high economic growth. Had the governance indicators improved, the reduction in poverty would have been much higher. Thus, there is a need to pursue governance reforms more vigorously to improve the state of governance that would enhance the current rate of poverty reduction.