1
RISING POVERTY TRENDS: CAUSES AND
REMEDIES
By
Dr. Akmal Hussain
International Food Policy Research Institute, The Role of Agriculture in Poverty
Reduction in Pakistan: Proceedings of the seminar organized by the International Food
Policy Research Institute and Beacon House National University, March 12, 2005,
Lahore, Pakistan (Washington, DC: IFPRI, 2005) 2
RISING POVERTY TRENDS: CAUSES AND REMEDIES
By Dr. Akmal Hussain
Distinguished members of the panel, Dr. Isher Ahluwalia, Sartaj Aziz Sahib, Dr. Salman
Shah, Dr. Ait-Kadi, distinguished ladies and gentlemen, friends, colleagues, my students
who are also my teachers.
It is a great pleasure to be here.
After a decade of slow growth, we appear to have turned the corner in the last four years,
and now I think the challenge, is to sustain high GDP growth and at the same time
restructure it for faster poverty reduction.
I remember 20 years ago when we started researching on this issue, poverty used to be a
sort of add on to the main policy document. It was a marginal issue, which you
mentioned at the end of a policy paper on growth. Now poverty has become central to the
economic strategy and is indeed central to the crisis of both society and state in Pakistan.
As President Musharraf correctly pointed out a few weeks ago, the principal threat to
Pakistan is not external but internal. Endemic to the internal threat in a medium term
sense is the simple fact that every third household in Pakistan is hungry; seventy-five
percent of our people are sick; the majority does not have access to clean drinking water!
I think this is the breeding ground of the violence, which is threatening both the fabric of
the society and indeed the state itself.
I thought I would start with a few opening remarks on where we are right now in terms of
our overall growth rate and then follow that up with a brief description of what happened
in the decade of the 1990s in terms of poverty, inequality, and employment. We would
then look at the last four years when at the end of a decade of slow growth, the GDP
growth rate begins to accelerate steadily. However, simultaneously with the steady
increase in overall GDP growth, you have an extremely unstable growth rate in
agriculture, precisely in the last four years, and if you look at the figures for the last 40
years, a similar picture of increasing instability emerges. I think this fact then becomes
the leading edge for examining the structural features of the problem of rural poverty. I
then hope to very quickly bring together some of the possible policy interventions that
can be made in the short and medium term.
I will not go into the details of the policy strategy for poverty reduction because I think I
have done my bit as far as that is concerned. I spent about three years doing this book on
poverty, growth and governance for the UNDP; so those of you who are interested could
perhaps have a look at the Pakistan National Human Development Report, UNDP, 2003.
However, I will quickly conclude the presentation with what appeared to me to be
obvious policy measures, once we have examined the structure of the problem of growth
and poverty. 3
I think it is clear that during the decade of the 1990s the GDP growth rate was
substantially below the historical trend rate in Pakistan; the historical trend rate in
Pakistan was about 6 percent and the growth rate during the 1990s was less than 4
percent. Not only was the GDP growth rate slow, it was accompanied by three features
which we did not have before, or at least did not have these occurring simultaneously
before together with slow growth. These three features are, (i) a sharp increase in
poverty; (ii) a substantial decline in the employment generation capability of the
economy, that is declining employment elasticities with respect to GDP growth; and (iii)
there was also a historically unprecedented increase in inter personal income inequalities.
So you had high poverty, growing inequality, and declining employment elasticities of
growth occurring simultaneously.
The poverty trends during the 1990s are well known: Poverty measured in terms of the
calorific norm increased from about 17 percent of the population below the poverty line
in 1986–87 to about 32.6 percent at the end of the decade of 1990s. Similarly,
employment elasticities declined pretty sharply, and inequality, measured in terms of
both the Gini coefficients as well as the ratio between the top 20 percent of the income
scale and the bottom 20 percent of the income scale, increased sharply from about 5 in
the 1980s to 8 at the end of the decade of the 1990s. So overall, I think the picture in the
1990s was pretty grim. The fact that the employment generation capability was declining
and inequality was increasing simultaneously with slow growth would be expected to
substantially increase poverty, and that is indeed what happened. The percentage of the
population below the poverty line doubled over the decade of the 1990s. So what
happened in the first four years, between 2000 and 2004? GDP growth increased from 1.8
percent in the year 2000–01 to 3.1 percent, in the following year; and in the year 2004,
the GDP growth rate was 6 percent. So what we have is a steady acceleration in the GDP
growth. However, when we look at agriculture, we find a very different picture with
agricultural growth being minus 2.2 percent in the year 2000–01 and minus 0.1 percent in
the following year, and then jumped to 4.1 percent in the year 2003, and fell sharply
again to 2.6 percent in the year 2004.
Now when we look at the overall growth performance, two obvious questions arise: (i) Is
this growth rate sustainable? (ii) What would be the likely impact with respect to poverty
reduction? On the issue of sustainability, the cause of concern is that the GDP growth rate
in the last year has been primarily predicated on the growth of the large-scale
manufacturing sector, because agricultural growth was just about 2 percent. So the
overall 6.4 percent growth rate is fueled essentially by the large-scale manufacturing
sector. And within the large-scale manufacturing sector, there are essentially three
industries, which underlie the high-growth performance of that sector i.e., textiles,
construction, and automobiles. Since, the majority of the poor live in the rural sector, if
the agriculture sector is growing around 2.6 percent, which in any case is highly unstable,
there is not likely to be a significant reduction in poverty. As far as the large-scale
manufacturing sector is concerned, the worry is that growth in the three industries
(textiles, automobiles and consumer electronics) which underlie the overall growth of the
large scale manufacturing sector are not likely to significantly impact poverty. This is 4
because they neither generate employment nor produce output for the poor.
The construction sector which has also grown rapidly, will of course generate
employment, and growth and put income into the hands of the poor. I would say, having
looked at the data, that in the last four years, there is nothing that leads me to believe that
there has been a significant reduction in poverty, despite the fact that we had fairly high
growth rates. This is something to think about, because if you look at the Indian case,
there is now, of course, a lively debate in India. One strong view in India, supported by
people like Professor Abhijit Sen, is that in spite of having 8 to 9 percent GDP growth
over the last few years, there has been no significant reduction in poverty in India.
So the issue that arises is twofold. (i) What is the target growth rate that Pakistan needs to
achieve to enable a significant dent into poverty? (ii) What should be the structure of
growth such that we are able to enhance the capacity of growth for poverty reduction?
These are two distinct issues. First, the overall growth rate to target; and second, the
composition of that growth so as to enhance what we call the elasticity of growth with
respect to poverty reduction. It appears that there is a relationship between growth,
poverty reduction and inequality: The higher the level of inequality, the higher the growth
rate you need to make a dent into poverty. It is like sharing a cake. If you have a small
cake and you give only 10 percent of the cake to the poor, they are likely to remain
hungry. So the cake has to become very large rather quickly in order for 1/10th of it to
affect the welfare of those who are poor today. You need at least a 7.5 percent GDP
growth sustained over a period of time to make a significant impact on poverty reduction.
The second challenge is in respect of the growth itself. There is a view prevailing
amongst some economists in India as well as policy makers in Pakistan that all that is
required is to have high growth with an open economy framework and poverty reduction
will be the outcome. In other words, there will be a trickle-down effect. Now, without
going into the debate of whether there is a trickle-down effect of GDP growth or not, let
us assume that there is. My point is that what we are concerned with is not just trickle
down or poverty reduction per se, but the pace of poverty reduction. The faster you want
to reduce poverty, the more important it becomes to restructure the growth process itself
so as to enhance its poverty-reducing capability. You have to intervene in the
composition of growth if you want to reduce poverty quickly. The structural aspects of
growth, therefore, acquire some importance, and I think that is a challenge faced by both
India and Pakistan.
Coming back to this problem of instability, it gives you an interesting clue into the
relationship between agriculture growth and poverty. If you look at the last 20 years, the
number of bad harvests is much more than the number of bad harvests in the two decades
before that. In the last two decades, there were seven, but in the two decades preceding
this, there were only five bad harvests. In the last four years, the amplitude of fluctuations
in agriculture output, on an annual basis have increased sharply. Why is this happening?
If you actually talk to farmers, they will tell you that they have to leach the soil before
they start ploughing and planting. One ton of salt per acre per year is being deposited on
agriculture land due to the salinity problem. Farmers have to flood the soil to get rid of 5
that salt. The second problem, of course, is that over the years, improper agricultural
practices and loss of organic material within the soil itself have resulted in a situation
where the responsiveness of yield to input application, has been declining. So in other
words, you need more water precisely at a time when there is less water available.
Remember, the decade of the 1990s was a decade of fiscal constraint, and the single most
important consequence was that the minimum budget required to maintain the canal
irrigation system was not made available. Only 45 percent of the finance required to
maintain the irrigation system was actually made available.
So the irrigation system in the last decade has deteriorated, and that is why our irrigation
efficiencies have now become rather low: Something like 63 percent of the water is lost
during transportation from the river to the root zone of the crops. The irrigation
efficiency, in other words, remains only 37 percent. So precisely at the time when less
water is available, more water is required by the farmers. Consequently, farmers, even in
the irrigated areas, are now more dependent on rainfall at the right time and in the right
amount. It is, therefore, not surprising, given the vagaries of the weather, that we have
such high instability in terms of agricultural output.
What does this instability do to the poor? Remember, the amplitude of fluctuations have
increased. It is the smallest farmer who gets constricted. The small or marginal farmers,
operating less than 7.5 acres basically go into debt. They have to borrow money for
consumption purposes. That is what we discovered when we did the survey for this
report. The small farmer is actually borrowing large sums of money for consumption
purposes. Once they borrow for consumption purposes, the next year they are unable to
reconstitute the production cycle. They do not have the investable surplus to buy the seed,
water, and fertilizer, and when that happens, the small farmer gets locked into a debt trap.
The average total debt of the poor farmer is three times his annual income because of this
vicious cycle. I would suggest that the instability of agricultural growth, ceteris paribus
would be expected to increase poverty. Therefore, when we talk about poverty reduction
through growth, what we have to think about is not just the average but the fluctuations in
it, particularly in the agriculture sector. Controlling these fluctuations to achieve stability
in agriculture growth thus becomes a key policy challenge in the context of poverty
reduction. GDP growth in the last four years has been induced by increased public sector
expenditure, reduced interest rate and a sharp increase in private sector credit especially
consumer credit. By contrast in order to reduce fluctuations in agricultural output, we
need to build new institutions through which, (i) farmers, particularly small farmers can
be enabled to increase the humus in the top soil, (ii) new heat resistant varieties of seeds
can be developed and (iii) application efficiency of irrigation can be increased through
building brick lined water channels and improved on farm water management.
We have come full circle. In the 1960s, we had an elite farmer strategy. We thought we
could solve the problems by adopting the high-yielding varieties of foodgrain and
focusing on the rich, who had the money to buy the inputs, to generate high growth rates.
Now, both growth and poverty reduction in agriculture depend on a poor farmer strategy
rather than an elite farmer strategy. As far as growth is concerned, more than half the
farm area is under farms below 25 acres. Of this area, about half, or slightly less than 6
half, is operated by tenants. When you look at the yield potential, you see the large farms
have grown rapidly and have nearly achieved the yield potential in many cases. The
greatest potential for yield increases is, in fact, in the small farm sector. So, if we could
increase yield in this sector, we could simultaneously accelerate growth and at the same
time improve the distribution of income to achieve faster poverty reduction.
Now, let me try to identify some of the structural constraints to both growth and poverty
reduction, at least in the agriculture sector. Unless we address the structural constraints in
an organized and serious fashion, we are not likely to either sustain high growth nor are
we likely to be able to significantly impact poverty.
The first, as I have already pointed out, is the problem of the topsoil. We need an
effective institutional framework for improved extension services to the farmers. In the
Indian Punjab, a large number of soil testing stations are noticeable. They look at the
chemistry of the soil, and then they advise the farmer on the exact composition of
fertilizer to use.
The second structural constraint to growth, and I think this is something that we have not
worried enough about, is the age of the seed we use. As you know, when we keep reusing
the same seed from year to year, its potency depletes. The average age of seed in Pakistan
is 11 years, compared to the developing country average of 7 years. So, institutions for
developing new seeds particularly, heat-resistant seeds, now that global warming is
occurring, will have to become an essential element in your growth strategy.
The third issue is the extremely unequal distribution of land ownership. Fifty percent of
rural households are landless. Of the households that are cultivating land, just over 25
percent are tenants. The problem with tenancy is that they have neither the capacity to
increase yield, nor do they have the incentives to increase yield because they know that
half the increase in output will go to the landowner. Therefore, I think the issue of
providing ownership rights to tenants will be the single most effective way of reducing
poverty and indeed of accelerating agricultural growth.
The fourth structural constraint to poverty reduction, and growth is our asymmetric
market structure.
Ladies and gentlemen,
Poverty reduction is not just about resources. Equally important, it is about power and the
structure of power. The survey for the UNDP, NHDR showed that the poor lose
something like 37 percent of their income to asymmetric markets. When the small farmer
goes to buy the inputs, he pays a higher price than when the large farmer goes to buy it.
When the small farmer goes to sell milk or rice or whatever else he wants to sell, he gets
a much lower price than the larger farmer. So in other words, this market mechanism,
which is being postulated as the basis of resource allocation, is in terms of its present
asymmetry, loaded against the poor. One of the important features of making the market
mechanism efficacious is to bring in institutions that bring about equity with respect to 7
access. We need to provide the small farmer and the poor farmer fair access, not just over
markets but over all the institutions which provide some product or some service and this
includes all the public sector institutions, be these for justice or security or health or
education, and at the local level.
That brings us to the issue of local governance. We will have to start looking at the local
government more seriously. Let us get out of the old hype that the local government
reforms are a great success, and will empower the poor. The poor at the moment are
unable to participate in decisions regarding local resource allocation or provision of
services. What we need is an institutionalized relationship between organizations of the
poor on the one hand and local governments on the other, so that the poor begin to
systematically participate in decisions that affect their existence at the local level. Unless
we do that, markets will continue to remain asymmetric, and poverty will continue to get
reproduced, regardless of the level of growth generated at the aggregate level.
Finally, ladies and gentlemen, is the question of health. We have historically been locked
into our own epistemology of development by regarding health and education as sectoral
issues. They have been considered to be marginal to the mainstream of the growth
process. When Dr. Mahbub ul Haq came up with the human development indices, he
helped change the focus from sectoral to human development. But health and education
still remain, and have remained, marginal to our thinking about growth. I would propose
that we start thinking of health and education as central to the process of growth itself. In
the UNDP, NHDR survey, the questions posed were “How much money are the poor
losing when they access health facilities?” and “What percentage of the poor are sick?” It
turned out that 65 percent of the poor who were interviewed in 10 districts were sick at
the time of the interview, and they reported that, on average, they had been sick for three
months of the year. Obviously it impacts productivity and the ability to earn income, even
if the poor have access to employment, which in many cases they don’t. The point is that
the cost of medical care is too high. So when a person falls sick, that becomes probably
the single most important determinant of his falling into poverty. If you are on the
margins, you get pushed into poverty. If you are poor, you get into deeper poverty. I have
recently visited the peri-urban areas of Multan. Sewerage was flowing down the main
street. The residents reported that every person in that neighborhood is sick, and they
knew why because the sewerage is going right into the canal from where the ladies go
and bring the drinking water. When a person falls sick, just a single visit to the doctor
throws them into hunger. Just one visit to the doctor brings hunger to the whole family,
and therefore, they said that when somebody falls sick, they pray to Allah that either he
gets cured or be taken away.
So, ladies and gentlemen, health is an issue that is central to productivity, growth, and
poverty reduction. It cannot be treated as a social sector issue. It is a growth issue.
Therefore, when one is planning for growth and poverty reduction, the paradigm that we
have right now is not adequate, because it does not address the structural constraints to
growth and poverty reduction. I think issues of empowering the poor at the local level so
that they can get access over markets, providing health, sanitation, drinking water and
education must become central to our poverty reduction strategy. 8
Ultimately, the distribution of income depends on the distribution of productive assets.
We have to do something to improve the distribution of land ownership. And finally, the
one-step that the government has taken, and it was a good step, is to initiate the water
sector program. I think that the government has undertaken a number of commendable
initiatives for accelerating economic growth. But before we get carried away by the
figures of growth, please remember to ask yourself three questions. First, can we sustain
it? Second, is this growth rate high enough to make a dent into poverty? Given the level
of income inequality, if the growth rate is not high enough then poverty will not go down.
Third, you have to start thinking of changing the composition of growth itself, and
changing the composition of growth involves issues of building new institutions, of
changing the asymmetry of power, of making markets more accessible to the poor, and of
providing them with health and education. These are all issues that must become the
central concern of those who claim to be engaged in poverty reduction. Thank you very
much.
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