Institutional Imperatives of Poverty Reduction

FINAL VERSION INSTITUTIONAL IMPERATIVES OF POVERTY REDUCTION By Akmal Hussain Distinguished Professor, Beaconhouse National University Lahore Institute of Public Policy, Beaconhouse National University, Lahore 17th April 2008 1 ACKNOWLEDGMENTS The author wishes to thank Dr. Hafiz Pasha for his guidance and support in writing this paper. In particular his advice regarding the methodology for estimates in table 7 is appreciated, without implicating him. Also acknowledged is a debt of gratitude to Dr. Shahid J. Burki, Mr. Sartaj Aziz, Dr. Parvez Hassan and Dr. Aisha Pasha for valuable comments and suggestions on an earlier draft. Thanks are also due to Mr. Ahsan Shah for research assistance and to Mr. Muhammad Azeem for typing successive drafts. The responsibility however for the analysis, the views expressed and any errors that might remain rests with the author alone.2 INSTITUTIONAL IMPERATIVES OF POVERTY REDUCTION By Akmal Hussain Ms. Bushra, a poor 30 year old woman, threw herself in front of a moving train in Lahore together with her two children, Saima, age 3 and Zubair, age 5. The mother is reported to have covered the eyes of her children before all three were crushed under the train. She left a suicide note written in the copy book of Zubair in the school satchel found near the site of the tragedy. In the suicide note Ms. Bushra stated poverty as the cause of her decision to commit suicide along with her children. [News Report in the daily Dawn, 13th April 2008]. He who is without empathy for the suffering of others, has no right to be called human. [Jalal-ud-Din Rumi, 1207-73] INTRODUCTION: POVERTY AND INSTITUTIONAL CHANGE The high food inflation in the last three years has pushed 11 million people into a state of hunger and poverty. Given the present trend, if no policy action is taken, an additional 22 million people will be impoverished over the next four years. (See Table 7). According to the World Food Programme Survey for the Vulnerability Analysis and Mapping Unit as many as 77 million people upto March 2008 are deemed “food insecure”1 , where the food insecure population is defined as those consuming less than 2350 calories per person per day. The statistical evidence clearly shows Pakistan is in the grip of a poverty crisis. Ms. Bushra’s action stands as stark testimony of the human experience of poverty. It also poses a challenge to policy makers as much as to economists to undertake urgent policy action on the basis of a scientific analysis of the problem. 3 This paper is an attempt to provide such an analysis and the outline of possible public action to address the poverty crisis. The poor in Pakistan like all human beings have a creative potential. Yet by being denied the minimum of food and basic necessities, such as health, education and employment opportunities, they are rendered incapable of actualizing their human potential.2 In understanding this constraint to human development, the poor in Pakistan cannot simply be seen as individuals with certain adverse ‘resource endowments’, making choices in free markets. Poverty occurs when the individual in a fragmented community is locked into a nexus of power, which deprives the poor of their actual and potential income. The poor face markets, institutions and local power structures, which discriminate against access of the poor over resources, public services and governance decisions which affect their immediate existence. (A. Hussain, 2000)3 . This paper provides evidence to show that the poor have unequal access over capital, land and labour markets. It is argued therefore that inequality and poverty are built into the structure of the growth process itself. It is now widely recognized that inequality adversely affects both the sustainability of growth as well as its capacity for poverty reduction (WB Report, 2006)4 . The power structure, and the inequality it engenders, excludes a large proportion of the population (poor, women, the sick and the illiterate). Therefore there is a constriction of the human potential through which entrepreneurship, investment, innovation and productivity growth can occur to sustain GDP growth5 . Until 2003, most studies on poverty in Pakistan had examined the problem simply in terms of measuring the number of people below certain poverty lines. However if poverty is to be overcome, it is important to understand the processes of poverty creation and to identify points of intervention in the process through which the poor can be enabled to overcome poverty on a sustainable basis. In this context some of the questions that arise are: How do distorted markets for inputs and outputs of goods and services result in the loss of the actual or potential income of the poor? How do local structures of power with respect to landlords, local administrative officials, and institutions for the provision of health, credit and dispute resolution, deprive the poor of their income, assets and the 4 fruits of their labour? These questions will be examined in section-I of this paper. Equally important for an understanding of the nature of poverty and the growth process is the question of how the institutional structures of governance and the incentive systems embodied in government policy constrain growth and poverty reduction. The argument in this paper is that poverty is rooted in the institutional structure of society and state in Pakistan. Therefore overcoming poverty will involve inducing changes in both the polity and the economy as part of an integrated process of institutional change (A. Hussain, 2008)6 . As North has argued, the polity is the fundamental basis of economic performance7 . This is because it is in the realm of the polity that the “rules of the game” and the associated incentive systems for the economy, are stipulated. In this paper however while acknowledging the primary role of the polity, we will focus on institutional changes in the economy as the basis of sustainable growth with equity. (North, Wallis and Weingast 2006)8 . It is in moving towards a stable democratic constitutional order that Pakistan can create the institutional conditions for sustained and equitable growth: opportunities in the polity and economy for all citizens, merit based selection, competition, efficiency and innovation. Thus the path to democracy within a stable constitutional order is also the path to sustainable and equitable economic growth. In sections I and II of this paper we identify the structural factors that constrain growth and induce endemic poverty. These structural factors are located in the institutional framework that conditions both markets and governance. In section-III we briefly indicate some of the policies for institutional change in the medium term that can be undertaken to overcome the structural constraints to equitable growth. In section IV, an analysis of poverty trends during the Musharraf regime (1999-2008), is presented, together with new estimates of the impact of food inflation on poverty during the last three years to suggest that a poverty crisis is at hand. At the end of section-IV, short term policy actions for addressing the poverty crisis are outlined. 5 I. MARKETS, INSTITUTIONS AND POVERTY In this section we will examine the four features of the power structure that makes markets asymmetric to function adversely against the poor. I.1 Power, Tenancy and Tied Labour In landlord dominated areas, where landlords control the local state apparatus as well as the credit market the poor tenants are locked into a nexus of power and debt bondage with the landlord. Consequently the tenants are obliged to work part time on the landlord’s farm as labourers either at less than market wage or no wage at all. The NHDR survey data shows that 51 percent of the tenants get locked into debt dependence on the landlord, and out of these, 57 percent are obliged to work as labourers on the landlord’s farm without wages, while 14 percent work for a wage below the market rate (Hussain et.al., 2003)9 . Thus the structure of power and dependence creates distortions in the labour and capital markets, which systematically deprive the poor of their actual and potential income. The consequent inefficiency in the allocation of labour and capital resources constrains agricultural growth, increases inequality and engenders persistent poverty. (See table 1). TABLE 1 LOAN DEPENDENCE ON THE LANDLORD AND LABOUR EXPLOITATION OF THE POOR PEASANTRY Extremely Poor Poor Non-Poor Total Loan from landlord (%) 50.8 29.4 11.7 34.4 Work for landlord against wages (%) 14.0 24.3 5.1 16.9 Daily wages (Rupees) 28.0 43.6 60.0 40.0 Work for landlord without wages (%) 57.4 38.5 25.4 43.5 SOURCE: NHDR/PIDE Survey 2001. 6 I.2 Power and the Double Squeeze on the Peasantry In landlord dominated areas the landlord’s power impacts the disposal of the produce by poor farm households which have direct consequences for their food consumption. As the following table 2 shows, under asymmetric tennurial arrangements, the extremely poor farmers are obliged to pay a larger proportion of their farm produce to the landlord as rent, compared to other categories of the peasantry. For example, the extremely poor have to pay 28.21% of their production value to the landlord, compared to 13.39% by the poor households and only 8.41% by the non-poor households. Consequently, the extremely poor households are forced to keep only 39.59% of their crop output for household consumption, compared to 48% by poor households and 54% by non-poor households. TABLE 2 DISPOSAL OF CROP HARVEST BY INCOME CLASS Total Production Value Paid in kind to labour (Value)/Tota l Production Value* 100 Paid as rent (Value) /Total Production Value* 100 Paid to landlord under share cropping agreement (Value)/ Total Production Value* 100 Given to Relatives (Value)/ Total Production Value* 100 Crop Sold (Value) /Total Production Value* 100 Crop Kept for Own Use/Total Production Value* 100 Extremely Poor 13864 1.45 1.10 28.21 0.09 29.57 39.59 Poor 22538 2.76 1.40 13.39 1.06 33.27 48.12 Non-Poor 37626 4.70 0.83 8.41 1.61 30.02 54.43 SOURCE: NHDR/PIDE Survey 2001. The evidence suggests that due to the relatively smaller crop share retained by the poor tenant households, they face a food deficit near the end of the year. As they run out of their household stock of food grain, they are obliged to purchase grain in the market at year end when market prices are relatively high. (Hussain, 1988)10. Such households are then faced with the necessity of borrowing for food consumption. This is also suggested 7 by the NHDR evidence, which shows that the extremely poor households borrow for food consumption (Hussain et.al., 2003)11 . Poor farm households are thus placed under a double squeeze: First by the power of the landlord, who obliges them to give up a relatively larger proportion of their crop output as a crop share to the landlord. A second squeeze is placed by the seasonal variation in the market price of grain, which obliges the extremely poor households to purchase a relatively larger proportion of their food consumption requirements from the market near the end of the production cycle, when prices are high. (A. Hussain, 2004)12 . I.3 Adverse Changes in Tenancy Arrangements and Poverty As the evidence suggests, since the majority of the rural poor are tenants, therefore any deterioration in tenancy arrangements would be expected to accentuate poverty. Due to weakening relative power position of poor tenants, tenancy arrangements have changed adversely against them. They now have to bear a higher proportion of input costs compared to the landlord on the tenant operated farms. The evidence shows that the contribution of tenants to input costs (for each of the major crops) such as tractor rental13 , hired labour, seeds and fertilizers have increased during the period 1990-91 to 2000-01. TABLE 3 CONTRIBUTION OF TENANTS IN INPUTS PERCENTAGES 1990-91 2000-2001 Tractor Labour Seeds Fertilizer Tractor Labour Seeds Fertilizer Extremely Poor 36.3 13.8 24.8 26.0 43.5 28.5 31.0 31.8 Poor 29.5 18.8 22.8 24.5 41.3 30.5 34.5 34.0 Non-poor 39.8 25.8 28.8 27.3 44.5 32.8 38.8 34.5 Total 34.3 22.5 24.8 25.5 42.8 30.3 34.0 33.3 SOURCE: NHDR/PIDE Survey 2001. For Crop wise figures, see: Akmal Hussain et.al., UNDPPakistan National Human Development Report 2003, op.cit., page 64, table 16. The above evidence suggests that the adverse changes in tenancy arrangements with respect to input contributions of the tenant have become a significant structural factor in generating poverty. While the financial burden on the poor tenants has thus increased, 8 their lack of control over the timing water application, combined with adulterated inputs, keeps the yield per acre of the peasant at a low level, thereby further squeezing net incomes. I.4 Asymmetric Markets for Inputs and Outputs In the UNDP, Pakistan National Human Development Report 2003, it has been argued that local elite power structures in rural areas distort markets in favour of the rich and against the poor. The poor peasants face input and output markets where they have to pay a higher price for their inputs and get a lower price for their outputs compared to large farmers. The study showed that the poor peasants are losing as much as one third of their income due to asymmetric markets (Hussain et.al., 2003)14 . II. GOVERNANCE, INSTITUTIONS AND GROWTH In this sub-section we will show how the institutional structure of governance constrains the provision of adequate health, education and security, which are major factors in perpetuating poverty. We will also show how the incentive system implied in rent based governance constrain sustained and equitable growth. II.1 Poverty and Illness The NHDR showed that due to inadequate diet and lack of access over safe drinking water and sanitation facilities, 65.1 percent of the extremely poor and 55.6 percent of the poor in the sample survey were suffering from ill health. The data also shows that the poor respondents reporting sickness at the time of the interview had on average suffered from their sickness for 95 days of the year15. (See table 4). The study showed that the prevalence of disease amongst those who are slightly above the poverty line is a major factor in pushing them into poverty. Those who are already poor get pushed into deeper poverty as a result of loss of income due to absence from work, and high medical costs resulting from illness. Thus the unequal access over public health facilities and the relatively high prevalence of disease amongst the poor becomes a structural factor that further accentuates both poverty and inequality. 9 TABLE 4 PERCENTAGE OF POOR WHO ARE SICK, NUMBER OF DAYS OF SICKNESS, TREATMENT EXPENSES AND DISTANCE TRAVELLED FOR MEDICAL CONSULTATION [HEAD OF HOUSEHOLD ONLY] Economic Status Sick at the Time of Survey (percent) Number of Days in Current Sickness (Mean) Treatment Expenses (Rs.) Percent of Patients Travelling over 6 Kms. Extremely Poor 65.1 94.9 1885 49.4 Poor 55.6 27.4 497 29.5 SOURCE: NHDR/PIDE Survey 2001. II.2 Education, Poverty and Growth The relatively low levels of literacy, high school enrolment rates and the poor quality of both school education as well as higher education in Pakistan compared to other South Asian countries indicates the low priority given to education. This is understandable in a country where allocation of public resources and the institutional framework for translating them into outcomes are determined by a ruling elite in which the military, the bureaucracy and the landlords have been dominant factions. Within this power structure there is greater priority for expenditures on the military, bureaucracy, and transfer of public resources as rents to various strata of the elite and its dependents. Building an institutional framework for higher education based on high quality research is also not a high priority. Education requires an environment of freedom to pose and pursue new questions and to engage in critical thinking. This is inimical to a rent based power structure that relies on authoritarian rule whether in a military or civilian form. Although the literacy rate has increased sharply from 46 percent in 1999 to 54 percent in 2006, the gender gap remains high (23 percentage points) and has not changed significantly over the period16. The gross primary school enrolment rate at about 70 percent has remained unchanged over the last two decades inspite of the multi billion dollar Social Action Programme during the 1990s. At the same time almost 25 percent of the total population (over 40 million) consists of adult illiterates. Due to the relatively low school enrolment rates the number of adult illiterates is expected to rise during the 10 coming decade, thereby increasing poverty even if greater employment opportunities become available. In Pakistan, 91.6 percent (Majid, 1997)17 of the labour force is unskilled, with low productivity and poor adaptability to technical change. This constitutes a significant structural constraint to both growth and poverty reduction. The survey evidence in the Pakistan National Human Development Report shows that one of the key factors that can pull a poor household out of poverty is whether or not the family has a second earner. The data indicates that the magnitude of the second earner’s income depends on the level of education (Hussain et.al., 2003)18 . The poor coverage and quality of school education and vocational training in Pakistan thus constitutes a significant structural constraint to growth as well as poverty reduction. The extremely poor quality of higher education in most universities of Pakistan and the control of many of them by obscurantist and coercive religious groups is as much a constraint to equitable growth as it is to building an enlightened, pluralistic and democratic polity. II.3 Poverty, Justice and Citizens’ Security The poor live in localities both rural and urban, which are inadequately policed and in case of theft or violence against their person the cost of seeking redress through the judicial system is in most cases unaffordable and where undertaken, the expenses in terms of time and money, lock the poor into permanent debt. This is another factor that engenders endemic poverty, reinforces inequality and thereby constrains economic growth. [See Table 5]. TABLE 5 FREQUENCY OF DISPUTES, RESOLUTION AND COST OF RESOLUTION BY ECONOMIC STATUS (CASES REPORTING DISPUTES ONLY) ECONOMIC STATUS DISTRIBUTION OF REPORTED DISPUTES (%) AMOUNT SPENT ON MEDIATION (MEAN) PERCENT OF REPORTED DISPUTES RESOLVED Extremely Poor 17.1 Rs. 18,333 38.5% Poor 48.7 Rs. 12,074 59.5% Non Poor 34.2 Rs. 18,264 80.8% Total/Average 100 Rs. 15,123 63.2% Source: NHDR/PIDE Poor Communities Survey 2001. 11 II.4 Low Domestic Savings Rate, Taxation and Growth Given the rent based governance model in Pakistan the business elite enjoys various forms of financial support from the government (subsidies, cheap credit, import protection, tax exemptions). Therefore, it is not surprising that entrepreneurs (many of whom are also landlords) following the tradition of the landed elite engage in conspicuous consumption and tend to have a low propensity to save. The domestic savings rate in Pakistan has historically been below the investment rate, thereby creating a persistent savings gap that has induced a growing national debt particularly during high GDP growth periods. (For example, the average annual domestic savings as a percentage of GDP during the period 2001 to 2007 was 16.5 percent. By contrast the investment rate required to sustain the target growth rate of 7.5% with an ICOR of 4, is 30%)19. The consequent debt servicing problem has now become a constraint to growth just as it did in the Ayub period in the 1960s and in the BenazirNawaz period in the 1990s. The low savings rate and the consequent dependence on foreign inflows is a major factor in the stop-go pattern of GDP growth in Pakistan’s history. (For a detailed discussion of this phenomenon, see, A. Hussain, 2008, chapter 2)20 . The high debt servicing requirements resulting from a tendency of the rent seeking elite to consume rather than save, and at the same time avoid direct taxes, has obliged successive governments to charge high and increasing rates of indirect taxes. An earlier study on the increase in the incidence of the tax burden, shows that the percentage increase in the tax burden as a percentage of income was highest at 6.8% for the lowest income group (less than Rs.700/- per month) and lowest at -4.3 percent for the highest income group, (over Rs.4500/- per month). The evidence shows that over time the tax burden for the poor increased and for the rich declined21. Thus the rent based governance model and its incentive systems have induced a pattern of elite consumption and government tax policy that further reinforces income inequality in the growth process. 12 II.5 Institutions, Export Structure and Growth Pakistan as it emerged in 1947, not only inherited various institutions of the state with their underlying structures of power, but also rent seeking and risk averse behavioural proclivities of the economic elite. In the post independence period the inherited governance model, the power structures, the associated institutional framework, and the tradition bound nature of the industrial elite, had as great an impact on government economic policy as on the pattern of investment and export growth. Pakistan’s slow export growth and the consequent perennial pressures on the balance of payments constitute a structural constraint to sustaining high GDP growth. Slow export growth is rooted in the rent seeking nature of the industrial elite and its failure to diversify into non-traditional high value added exports. Even after 60 years of industrial growth, the percentage of total investment going into textiles and related goods has not declined. (It was 41 percent in 1964-65 and 44 percent in 1990-91). In terms of output, 80 percent of Pakistan’s manufactured exports consist of textiles and clothing compared to 12 percent for the developing countries group and 6.5 percent for the world as a whole22 . The persistence of Pakistan’s textile based export structure is an important factor constraining overall export growth. This is because of a changing composition of demand in the global market where the world trade in textiles is growing at a much slower rate than non-traditional manufactured exports. Pakistan’s textile industry which has remained at the lower end of the value added range emerged in the 1960s as a result of large government subsidies. The institutional structure of policy created disincentives to innovation, productivity increase and export diversification. By the 1990s the structure of state support to industry was substantially dismantled. However even then, as late as 1990-91 as much as 7 percent of GDP was transferred by the government to industrialists in the form of subsidies (Kemal, 1999)23 . Diversification of industry into higher value added exports was constrained by government patronage on the one hand and on the other, the lack of risk taking dynamism amongst most industrialists. 13 II.6 Official Corruption and Poverty Poverty and inequality increased rapidly during the 1990s due to the decline in GDP growth, coupled with a decline in employment elasticities, labour productivity, and real wages in both the agriculture and the industrial sectors. (A. Hussain, 2004)24. In the subsequent period 1998-99 to 2004-05, while GDP growth accelerated sharply there was no significant poverty reduction. (See Table 7). This proposition is also established in the recent work of Talat Anwar25 and H. Gazdar, A. Sayeed and A. Hussain26. At the same time unemployment as well as inflation rates, particularly food inflation, increased sharply. The economic burden on the poor has intensified further due to inadequacies in two major aspects of governance: (i) Inefficient delivery mechanisms for translating development expenditure into improved health, sanitation, education, services and access over justice for the poor. Consequently, the disproportionate shortages of these services for the poor compared to the rich, have deprived them of an important redistributive mechanism in the economy. (ii) During the 1990s corruption in government, had a significant adverse impact on economic growth and poverty27. During the period of the Musharraf government even though GDP growth accelerated widespread corruption persisted. Corruption levels in this period were even higher than in South Asian countries such as Sri Lanka, India and Nepal. (Talat Anwar, 2006)28. According to the Transparency International Report (December 6, 2007), during the last two years corruptions levels increased sharply. For example the percentage of people in the all Pakistan sample, who paid bribes for obtaining services doubled to over 30 percent compared to 15 percent in the year 2006. The report places Pakistan among the top 10 countries which are most affected by bribery. Widespread corruption in government contributes to constraining growth and increasing poverty in three ways: (a) the rising magnitude of corruption over time and at different levels of decision making in the government is a major factor in the uncertain policy environment and a constraint to estimating accurate project 14 feasibilities. This would be expected to constrict investment, GDP growth and employment; (b) the transfer of resources from entrepreneurs to politicians and government officials results in a misallocation of national resources and a lower level of productive investment and hence GDP growth, than would be the case in the absence of such corruption. (c) the financial cost of individual projects increases, thereby simultaneously inducing slower GDP growth for given levels of investment and also reducing the employment elasticities with respect to investment. (d) To the extent that the poor are obliged to pay bribes for public services while in many cases the affluent with political influence may not have to pay bribes, means that the distribution of real income between the rich and the poor is worsened by the mode of provisioning of public services. II.7 Institutional Factors in Slow and Unstable Crop Sector Growth29 In agriculture the average annual growth rate of major crops has declined from 3.34% during the eighties to 2.38% in the nineties. At the same time, the frequency of negative growth years in some of the major crops has increased. This has accentuated the process of poverty creation: In a year of negative growth (i.e. bad harvest) the small farmers operating at the margin, have to borrow for consumption requirements and go into debt. In the following season, in the absence of an investible surplus, they are unable to reconstitute the production cycle and hence slip into poverty. Thus the instability of crop sector growth and the increased frequency of negative growth years becomes a structural factor in poverty creation. Underlying this phenomenon are five major institutional constraints: (a) Reduced water availability at the farm gate due to poor maintenance of the irrigation system and low irrigation efficiencies of about 37 percent. While the availability of irrigation water has been reduced, the requirement of water at the farm level has increased due to increased deposits of salts on the top soil and the consequent need for leaching30. The consequent large water deficit means that the farmers even in the irrigated areas are dependent on rain fall. Given the vicissitudes of weather particularly due to global warming, (which 15 has caused wide variation in the timing, location and quantum of rain fall) rain does not always fall in the right quantity at the right time for the water deficit farmers. Consequently, there is greater instability in crop sector output than before. (Akmal Hussain, 1999)31 . (b) What makes improved efficiency of irrigation even more important is that the extensive margin of irrigated acreage has been reached, so the future agricultural growth will have to rely on improving the efficiency of water use and other inputs. Thus the rehabilitation of Pakistan's irrigation system for improving irrigation efficiency has become a crucial policy challenge for sustainable agriculture growth. (c) It is well known that high yielding varieties of seeds gradually lose their potency through re-use, changing micro structure of soils, and changing ecology of micro organisms in the top soil. In wheat for example the average age of seeds in Pakistan is 11 years compared to 7 years for all developing countries (A. Hussain, 1999)32. Therefore, breeding of more vigorous seed varieties adapted to local environmental conditions, and their diffusion amongst farmers through an effective research and extension programme is necessary33 . (d) A new dimension to the imperative of improving research capability in the crop sector is indicated by the possibility of declining yields per acre related with global warming. Given the sensitivity of wheat seed to temperature increase, even a 2-degree centigrade increase in average summer temperatures could mean an absolute yield decline of between 10 to 16 percent during the 21st century. (Qureshi, Ata and Iglesias, 1992)34. With a 2.8 percent population growth, even a decline of 5 percent in yield per acre associated with global warming, could mean serious food deficits and high food inflation rates for Pakistan, with relatively greater adverse consequences for the poor. It is, therefore, necessary to develop heat resistant varieties of food grains. 16 (e) One of the most important constraints to sustainable growth in the crop sector is the degradation of soils, resulting from improper agricultural practices such as: (i) lack of crop rotation and the resultant loss of humus in the top soil; (ii) stripping of top soil and resultant loss of fertility associated with over grazing; (iii) water erosion along hill sides and river banks due to cutting down of trees and depletion of natural vegetation. According to one estimate, over 11 million hectares have been affected by water erosion and 5 million hectares by wind erosion. (Alim Mian and Yasin Mirza, 1993)35 . II.8 Institutional Constraints to Growth in the Large Scale Manufacturing Sector The growth rate of the large scale manufacturing sector was 12.43% in the period 1959/60 to 1969/70, and fell to 2.21% in the period 1996/97 to 1999/2000. In the subsequent four years the growth of this sector accelerated sharply, but has begun to decline again in the last two years. The factors underlying the tendency for large scale manufacturing to decline are as follows: (a) A fundamental structural constraint to industrial growth as indeed the underlying factor in slow export growth, is the failure to diversify exports. The large scale manufacturing output, particularly exports are concentrated in the traditional low value added end of textiles. (b) A changed pattern of global demand for industrial products with a shift towards higher value added and knowledge intensive products. Pakistan’s industrial structure was not positioned to respond quickly to these changed market conditions. (c) An erosion of the domestic framework within which investment and growth is sustained. This includes: (i) a continued threat to the life and property of citizens due to the persistent poor law and order situation; (ii) high electricity tariffs and relatively high interest rates; (iii) lack of trained professionals especially in the high skill sector; (iv) an inadequate technological base through which industry can respond in a flexible way to changing patterns of demand; (v) an adverse policy environment in the past within which tariff and export incentives were 17 distorted against those entrepreneurs who were seeking to improve quality and productivity for export growth; (vi) dumping of smuggled, poor quality and extremely low priced imported goods which are in many cases counterfeit copies of branded Pakistani manufactured goods. III. POLICIES FOR ADDRESSING THE STRUCTURAL CONSTRAINTS TO GROWTH AND POVERTY REDUCTION In the preceding section of this paper we have identified some of the structural factors underlying endemic poverty and unstable growth. In this section we will indicate briefly the policies that can be undertaken to overcome the structural constraints to sustained and equitable growth. III.1 Empowering the Poor for Market Access The evidence shows that asymmetric markets and local power structures constitute structural factors in persistent poverty. They siphon off as much as one third of the actual incomes of the poor, deprive them of their potential savings and keep their productivity and incomes at a low level. A pro poor policy must address these structural factors if poverty is to be overcome on a sustainable basis. Better access for the poor over the markets for labour, land, agricultural inputs and outputs, means changing the balance of power in favour of the poor at the local level. This requires facilitating the emergence of autonomous organisations of the poor, particularly poor women at the village, Union Council, Tehsil and district levels. It also means enabling the poor to access credit, training, and technical support for increased employment, productivity, and incomes. III.2 Land for the Landless One of the most important factors in endemic poverty in the rural areas (where the majority of Pakistan’s poor reside), is the fact that millions of households do not have access over land or their ownership of this productive asset is less than the critical level required for subsistence. The data show that the poor peasants where they own land have on average two acres while the bigger farmers are able to rent in additional land the poor ones either rent out their small holdings for a pittance or are obliged to sell their land 18 altogether: As many as 76.5 percent of the extremely poor farmers and 38.9 percent of the poor farmers sold their land over the last 10 years. (Hussain et.al. 2003)36. The evidence shows that the poor had to sell their land for urgent consumption needs related with health expenditures, crop failures and marriages. Thus lack of access over this vital productive asset is an important structural factor in endemic poverty. In order to alleviate the problem of landlessness it is proposed that the government launch a programme of allotting state owned land to the landless as part of its overall strategy of growth with poverty reduction. However, it is important to recognize that providing ownership of land to the landless is a necessary but not a sufficient condition for alleviating their poverty. Enabling the landless to make the transferred land cultivable, to actually settle on the new land and to achieve a sustainable increase in their income, productivity and savings are equally important factors in making the scheme successful37 . III.3 Mainstreaming the Poor through Equity Stakes An institutional change that could bring the poor into the mainstream of the market economy could be to establish professionally managed public limited companies in which the poor have a substantial equity stake. This concept was first propounded by Professor Rehman Sobhan and successfully tried out in the diversification process of the Grameen Bank in Bangladesh. It was also tried out in India by Dr. Kurien who set up the Amul (originally a cooperative) which is entirely owned by the poor and is now one of the largest manufacturers of milk products in the corporate sector in South Asia. In the Pakistan case there may be considerable potential for developing livestock and milk production by the rural poor and providing these products to large private sector corporations for the manufacture and export of milk and meat products. These private sector corporations which would be buying their inputs from the poor could also be owned substantially by the poor. The equity stake to the poor could be initially achieved through the provision of loans which could be paid back from the dividends of the corporations. Similar public limited companies owned by the poor and run by high 19 quality professionals could also be established in key main stream sectors of the economy such as energy, telecommunications and electronics. III.4 Health Policy for the Poor In the preceding section shows that illness is a major factor that pushes people into poverty therefore improved nutrition and health conditions are important for poverty reduction. Improving the nutrition, preventive hygiene, provision of safe drinking water, improving the service delivery of basic health units, and improved diagnostic and treatment capabilities of Tehsil and District Hospitals are urgent imperatives to deal with the crisis of health and poverty. III.5 Education for Development As we have argued, education is a major factor that pulls people out of poverty. It is also perhaps the single most important factor that can induce sustained and equitable growth. Education can achieve this objective by providing equality of opportunity for productive employment to all the people not just the elite. The strategic aims of an education policy would be: (a) Improve the coverage and quality of schools, particularly for girls. (b) Skilling the labour force by establishing a network of industry specific vocational training institutes in every province. (c) Capacity building of selected universities to enable them to conduct research and teaching at world class standards. III.6 Combating Corruption In the preceding section-II we have argued that two of the most important governance factors that prevent sustained high growth and rapid poverty reduction are the persistent high levels of corruption and inefficient delivery mechanisms for the provision of public services. Addressing these issues requires establishing new institutions at different levels of governance. The institutional structure that makes corruption endemic, also increases transaction costs and thereby constrains specialization, productivity and growth. Therefore, a policy of combating corruption through the establishment of institutions in state and civil society, 20 would be important drivers of change for development. In this context six new institutions could help control corruption: An independent judiciary with adequate resources and judicial officers to provide access to justice at every tier of governance and in every region: national, provincial and district levels. An independent and constitutionally mandated structure of ombudsman’s offices at the district, tehsil and union council levels to listen to and rectify public complaints about the equitable provision of public services. At the same time the ombudsman’s offices at each tier, would hear and rectify citizens’ complaints about corruption and misuse of office by government functionaries. Citizens’ Protection Committees at the mohallah and village levels where complaints about the provision of public services and against corrupt officials can be registered and systematically taken up38 . An independent media equipped with adequate investigative reporting capabilities to independently report corruption cases and monitor the performance of government departments with respect to the provision of public services39 . An independent Federal Bureau Statistics (FBS) that directly reports to the Parliament through a Parliamentary Committee on Policy Impact Assessment. The FBS would be tasked to conduct periodic surveys on the incidence of poverty, gender specific employment, inflation, productivity and real wages. The FBS would also be tasked to provide survey based data on the quality and coverage of services such as health, sanitation, hygienic drinking water, education and vocational training40 . The bilateral as well as multilateral Donors in Pakistan could establish a Multidonor Transparency Support Unit (MTSU) whose task would be to determine the extent to which donor funds have achieved the purposes for which they had been provided to both government as well as civil society organizations. 21 III.7 Institutional Policies for Stabilizing Crop Sector Growth Institutional change for improved irrigation efficiency. The poor maintenance and operation of the canal irrigation system that is a major constraint to both the rate of crop sector growth, is associated with both a decline in the efficiency of the irrigation department as well as inadequate funding. Given the lack of motivation, management capability and funding, a restructuring of the role, functioning and organization of the irrigation department may be necessary. Therefore the required policy initiative is to develop more cost effective and decentralized institutional structure, involving local communities in the operation and maintenance of canals and water courses. In this context autonomous community organizations of water users along individual distributaries need to be formed and then take responsibility for both revenue collection and maintenance. Policies for improved seeds, agriculture research and diffusion: Seeds, Agriculture Research and Diffusion. The breeding of more vigorous seed varieties adapted to local environmental conditions and their diffusion amongst farmers is required through an effective research and extension program. The existing institutional framework for agriculture research suffers from a proliferation of research institutes, which are inadequately funded, often lack professional expertise, proper equipment and the research environment necessary to produce significant results. Finally, there is considerable overlapping of research responsibilities across institutes. Consequently, research has by and large failed to produce operationally usable results much less increase input efficiency41 .