Lahore School of Economics

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Growth model fuels inequality

Khaleeq Kiani

According to a recent case study by Zunia Saif Tirmazee and Mariyiam Haroon of the Lahore School of Economics presented at a Pakistan Institute of Development Economics (PIDE) seminar earlier this month, income distribution has been inequitable.

Pakistan has experienced tremendous economic growth over the last decade, but this did not reduce poverty and inequality. While discussing two indicators — efficiency and equity — the paper explained that efficiency required the overall improvement and equity required the improvement to be equitably distributed across various segments of the population.

Pakistan and the IMF, for the first time, seem to be almost on the same page about the current year’s economic growth forecast, despite the downside risks from militancy, monsoon floods and energy constraints.

While the government maintains its stance on achieving the 5.1pc growth rate target this year, the IMF expects it to rise to 5pc of GDP in the medium-term from last year’s 4.14pc due to easing of fiscal adjustment and improvements in the energy sector, public enterprises and investment climate.

This means that the country is now entering its average growth band of 5-6pc after a gap of seven years. It is estimated that the economy has the potential to reach 8-10pc growth in 5-6 years, provided the energy and security situation is improved and structural corrections are made sooner than later.

In the past too, Pakistan had seen swings in growth. But did this growth translate into an improvement in the lives of the majority of the population?

Most economists are not much impressed by the inclusiveness of past growth cycles, and strongly suggest that the government put in place policies at the beginning of another growth crest to benefit a majority of the people, rather than only a few.

According to a recent case study by Zunia Saif Tirmazee and Mariyiam Haroon of the Lahore School of Economics presented at a Pakistan Institute of Development Economics (PIDE) seminar earlier this month, income distribution has been inequitable.

Pakistan has experienced tremendous economic growth over the last decade, but this did not reduce poverty and inequality. While discussing two indicators — efficiency and equity — the paper explained that efficiency required the overall improvement and equity required the improvement to be equitably distributed across various segments of the population.

The paper revealed that there has been an overall improvement as indicated by an upward shift of the concentration curve, but concentration curves got steeper over time, indicating efficiency without equity.

Between 2008-09 and 2010-11, the average per capita income was higher than the social mobility index, implying that income distribution was inequitable. And the income equity index is less than one across all regions for both years, which depicts a high level of inequality. However, the magnitude of inequality varied across regions.

The paper also noted that growth in per capita income was achieved at the expense of equity. This meant that increasing incomes were being channeled towards higher expenditures and were not facilitating savings. The paper concluded that growth was not inclusive since it was achieved at the expense of equity — as the benefits of growth were unevenly distributed, with the poor benefiting less than the rich.

Perhaps mainly because of this reason, the country is far from achieving 16 targets of the Millennium Development Goals set for 2015. These particularly relate to universal primary education, reduction in extreme poverty and hunger (notwithstanding major contribution by an effective BISP), gender equality and women empowerment and lowering of child mortality rates.

Over 12m children are still out of school. Half of young children are under nourished and more than 39m people are still defined as poor. And the population growth rate of 2pc suggests that Pakistan would become the 5th most populous nation by 2050, further constraining limited resources. The youth bulge is already emerging more as a challenge than a dividend.

The Human Development Index has put Pakistan at 146 out of 187 countries. India and Bangladesh improved to 135 and 142 respectively.

Launched in July, the planning commission’s Vision 2025 recognised these challenges and hinted at pursuing steps to achieve the goal of private sector-led growth for a competitive economy and sustainable growth.

Sakib Sherani, former principal economic adviser to the finance ministry, suggested inverting the pyramid and making people at the top pay more, with people at the bottom benefiting more from government spending. This would make growth more equitable.

He said there are several dimensions of non-inclusiveness in growth. The inequitable growth benefited more the owners of capital than labour, while the government had been prioritising spending that was not inclusive and skewed.

Mr Sherani stressed on the need for more attention for labour-intensive sectors like agriculture, construction and garments. Adjusting spending priorities, which the current government has taken, is a right step, he said.

Former chief economist of the planning commission Dr Pervez Tahir said inclusive growth could not be achieved through privatisation. He said the process was started in the 1990s for retiring debt, alleviating poverty, reducing the fiscal deficit, stopping the bleeding of the public exchequer, spurring investment and employment, and improving industrial performance.

Unfortunately, none of these objectives were achieved. Debt exceeded GDP in the heydays of privatisation. Poverty increased till 2001, while the fiscal deficit over the long-term has remained unsustainable. Investment has not increased; only ownership has changed. The share of investment in GDP has gone down from 26pc to 15pc, while unemployment has increased. And the privatised units showed no marked improvement. Efficiency and profitability have nothing to do with ownership, but with management, he added.

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posted by S A J Shirazi @ 1/07/2015 03:38:00 PM,

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