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Summary of Human Development Index of Pakistan (2003)

Factors that are keeping a vast Majority of Pakistanis below Poverty Line


Key Point: The poor of Pakistan are poor because the entire system is created and manipulated by the elite and powerful to deprive the poor a large portion of their actual and potential income.
The resources the poor need and deserve such as credit, health and education services, access to markets, and legal services are not available to poor. Since Ayub Khan’s government and by all subsequent governments, most of the State funds have been used for non-development purposes including providing subsidies to elites/powerful, military and other security expenditures, and establishment of theocracy instead of urgently needed investment in economic infrastructure, and provision of health and education.

Solution the Report Offers: Overcoming poverty means empowering the poor to acquire greater control over their use of productive resources including their own labor, and keeping their incomes and savings in their own hands. It means enabling the poor to get organized and have institutionalized access over local government, and participation in decisions regarding the allocation of government resources at the local level, and the design and implementation of local government projects for the poor. Overcoming poverty means shifting the location of the poor in the local power structures from being victims to active subjects in achieving equitable access over markets, and over institutions providing credit, health and education services.

What keeps the Poor, Poor?

- 52.5% of the extremely poor work for their landlord for very low wages. Many others have 1 or 2 acres of land which is not sufficient to support a family.
- The extremely poor do not have enough income to buy food so they suffer from acute nutritional deficiencies. People in poor families are sick over 90 days in a year. Lack of public health services forces them to spend a good portion of their income in private health services.
- The poor have to borrow money from landlords with interest rates reaching 60% or more. It forces them to work for landlords without any wages. (57.4% of the extremely poor worked for landlord without wages.)
- Over 73-83% of the extremely poor and poor are illiterate and many do not have skills to get good paying jobs. Many children from poor families are also working at hazardous jobs even though it is illegal.
- As much as one-third of the income of the poor peasant is lost because they have to pay about 12% more to buy their inputs from their landlord, have to sell their output for less to traders and landlords, and monthly/annual bribes to local administration officials.
- In case of disputes among the poor, they usually have to spend more than their annual income (usually financed by borrowing or selling livestock) to resolve the dispute.
Still only about 38% of the disputes are resolved. This is because of a lack of fair and uncorrupt legal system.
- Poor small farmers also do not get enough water because of an irrigation system that badly needs maintenance/improvement, general shortage of water, water is stolen by big landlords. (About 60% of the water is wasted because of not maintaining irrigation systems.)

And what keeps the Elites Rich?

Elites/powerful want only one thing - That is everything. They do not want to leave anything for others. If you want to understand poverty, unemployment/low wages, inequality in the world, study the rich, not the poor. So how are policies created to direct all the money and power to the elites/powerful?

I. The Ayub Regime 1958-69: Economic Growth, Inequality and the Roots
Of Financial Dependence

- The economic strategy undertaken by the Ayub regime, while it accelerated GDP growth, sharply accentuated inter-personal and inter-regional economic inequalities.
- The government through a range of protection measures and concessions in the 1960s, enabled the emerging industrial elite to make large rupee profits from domestic and export sales, without the market pressures to diversify into high value added industries or to achieve international competitiveness. The government during the 1960s adopted a deliberate policy of concentrating national income in the hands of the upper income groups.
- The phenomenon of negative value added in industry was an important reason why during the 1960s, despite import substitution and large export volumes, foreign exchange shortages persisted. This set the ‘mould’ for Pakistan’s narrow export base (concentration on low value added end of textiles) and the debt problem that remains till today.
- Ayub’s regime policies created a sharp increase in the requirement of foreign aid. According to the Economic Policy, Economic Structure and Poverty official figures, gross foreign aid inflows increased from $373 million in 1950-55 to $2,701 million in 1965-70. The rapid increase in foreign aid was accompanied by a change in its composition from grants to higher interest loans. Consequently, the debt-servicing burden rose dramatically from $17 million in 1961 to $196 million in 1970.
- Given the policy of re-distributing incomes in favor of the rich, it is not surprising that by the end of the 1960s a small group of families with inter-locking directorates dominated industry, banking and insurance in Pakistan. In terms of value added 46% of the value added in the large scale-manufacturing sector originated in firms controlled by only forty-three families. In banking, the degree of concentration was even greater than industry. For example, seven family banks constituted 91.6% of private domestic deposits and 84.4% of earning assets. Furthermore, State Bank compilation of balance sheets of listed companies indicates that the family banks tended to provide loans to industrial companies controlled by the same families. The insurance industry, although smaller in size than banking, also had a high degree of concentration of ownership. The forty-three industrial families controlling 75.6% of
the assets of Pakistani insurance companies tended to favor industrial companies owned by the same group. The major industrial families and entrepreneurs were a fairly closely-knit group. Not only did many of them have caste and kinship relations, but also members of the families tended to sit on each other’s boards of directors. For example about one-third of the seats on the boards of directors of companies controlled by the forty-three families were occupied by members of other families within the forty-three. Not only were the forty-three families dominating industry, insurance and banking, but also had considerable power over government agencies sanctioning industrial projects. PICIC (Pakistan Industrial Credit and Investment Corporation) was the agency responsible for sanctioning large-scale industrial projects. Out of the twenty one directors of PICIC, seven were from the forty three leading industrial families and were actively involved in the public sector financial institutions that directly affected their private economic interests.
- During the process of rapid economic growth of the 1960s, while an exclusive and highly monopolistic class was amassing wealth, the majority of Pakistan’s population was suffering an absolute decline in its living standards. For example, the per capita consumption of food grain of the poorest 60% of Pakistan’s urban population declined from an index of 100 in 1963-64 to 96.1 in 1969-70. The decline was even greater over the same period in the case of the poorest 60% of rural population. In their case, per capita consumption of food grain declined from an index of 100 in 1963-64 to only 91 in 1969-70. There was an even larger decline in the real wages in the industry: In the decade and a half ending in 1967, real wages in the industry declined by 25%. An ILO/SAAT study has estimated that in 1971-72, poverty in the rural sector was so acute that 82% of rural households could not afford to provide even 2,100 calories per day per family member.

II. The Z.A Bhutto Regime 1973-77: Investment, Growth and the Budget Deficit

- In the Bhutto period, private investment as a percentage of GDP declined sharply to 4.8% from 8.2% in the preceding period mainly because of nationalization (not to create equity but to concentrate power in the hand of the regime.) The decline in investment had already begun after 1965 war. Nationalization and other economic measures intensified it.
- In the Bhutto period, budget deficits widened further as expenditures on defense and administration increased sharply. Higher defense expenditures were part of Bhutto’s policy of refurbishing the defense establishment in the hope of winning it over after his hand picked appointment of General Ziaul Haq as the Army Chief. Large expenditures on government administration arose mainly out of Bhutto’s decision to build new para military institutions such as the Federal Security Force which he expected to be personally loyal to him. He also enlarged and re-structured the bureaucracy through the policy of ‘lateral entry’ which enabled loyalists outside the civil services cadre to be appointed at the upper and middle echelons. Bhutto’s attempt to build a demesne of patronage within the state apparatus had huge financial consequences. For example, defense expenditure as a percentage of GDP increased from 2.7% in 1965 to 6.7% in 1974-75. Similarly general administration as a percentage of GDP increased from 1.1% in 1964-65 to as much as 1.8% in 1974-75.

III. The Zia Regime 1977-89: Economic Growth and the Prelude to Recession

- Two factors helped Zia regime: (a) the generous financial support received from the West, and (b) the acceleration in the inflow of remittances from the Middle East which increased from US$0.5 billion in 1978 to US$3.2 billion in 1984. Although the GDP growth rate during the Zia period did increase, yet this higher growth rate could not be expected to be maintained because of continued poor performance of three strategic factors that sustain growth over time: (i) The domestic savings rate continued to remain below 10% compared to a required rate of over 20%. (ii) Exports as a percentage of GDP continued to remain below 10% and did not register any substantial increase. (iii) Inadequate investment in social and economic infrastructure. As defense and debt-servicing expenditure increased, the Annual Development Program (ADP) through which much of the infrastructure projects were funded, began to get constricted. As table 4 shows, ADP expenditure as a percentage of GDP fell from an average of 7.4% in the Z.A. Bhutto period, to 6.2% in the Zia period. It is not surprising that when the cushion of foreign loans and debt relief was withdrawn at the end of the Afghan War, the underlying structural constraints to GDP growth began to manifest themselves: Debt servicing pressures resulting from the low savings rates, high borrowings and balance of payments deficits related with low export growth and poor infrastructure, combined to pull down the GDP growth into a protracted economic recession in the 1990s.
- During the Zia Regime State funds were directed for unproductive political purposes instead of urgently needed investment in the maintenance of the irrigation system and technical training of the human resource base.

IV. The Deepening Crisis 1989-99: Economic Growth, Employment and Poverty in the Decade of the 1990s

During the decade of the 1990s, political instability, the use of public office for private gain and the worsening law and order situation perhaps had a significant adverse effect on private investment and GDP growth. Yet these factors merely accentuated the tendency for declining growth that was rooted in structural factors, which were manifest even in the 1980s. The failure of successive governments in this period to address the deteriorating infrastructure and the emerging financial crisis further exacerbated the unfavorable environment for investment.

Table: Development Expenditures (ADP) as a Percentage of GDP (Period Averages)


Average During Development Expenditures (ADP) as a % of GDP

1972/73 to 1976/77 (Zulfiqar Ali Bhutto)
7.4 %
1977/78 to 1986/87 (Zia-ul-Haq) 6.2 %
1987/88 to 1996/97 (Benazir Bhutto/Nawaz Sharif, etc.) 4.2 %
1997/98 to 1999/2000 (Nawaz Sharif) 3.5 %

Source: Economic Survey, GOP, Economic Advisor’s Wing, Finance Division, Various Issues.