Why we are poor
By Dr Muhammad Yaqub

The News, Sept. 12, 2011

There are several studies done by the international organisations and specialists that indicate widespread and rising poverty in Pakistan. The Human Development Report of the United Nations places Pakistan at 125 out of 169 nations in overall standing in the human development index.
Applying the standard criterion that a person earning less than $2 (Rs172) a day would be considered poor, more than half of Pakistan‘s population is estimated to fall in that category. The other estimates of the level of poverty range from the low of about 25 percent to a high of 43 percent of the total population. Even at the lower end, it means that about 45 million people are living below the poverty line. Moreover, the national average of poverty conceals a substantial variation between regions and classes of people. Poverty is higher in rural areas and among women, and there is proportionately more poverty in the interior of Baluchistan, Sindh and Khyber-Pakhtunkhwa.

The fundamental question is as to whether the high and rising level of poverty is a natural phenomenon reflecting inherently inadequate resource endowment or it is a man-made phenomenon generated and propagated by social and political structure and economic policies that keep a large majority of the people poor?

At the time of independence, the areas falling in Pakistan were largely agricultural; the land was fertile, canal irrigation system was fairly developed, and there was abundance of ground water, mineral resources and hard working manpower. What was needed was initiation of a set of coherent and comprehensive long term policies for agricultural and mineral development to exploit the full potential of the country’s natural resources for the benefit of all its citizens, and economic and social programmes in the public sector for the welfare of the majority financed with taxes collected mostly from the relatively rich.

The first order of business of the government should have been to take measures to change the pattern of land ownership left behind by the British colonists. No meaningful attempt was made at reforming the land ownership pattern and exploitative tenancy practices. Moreover, the rulers distributed the state land for political patronage. The pattern of ownership of agricultural land, exploitation of landless workers by absentee landlords, anti-growth agricultural policies and neglect of input needs for output expansion in agriculture retarded agricultural development.

Agricultural pricing policies in the earlier period had unfavourable terms of trade for agriculture leading to income transfer from rural to urban areas. Whatever income was left in the hands of the agricultural community was usurped by the landlord class due to concentration of land holdings in their hands and their overwhelming influence in decisions for income sharing. These factors, along with rapid population growth, led to disguised and open unemployment, and poverty increased in rural areas. The rural labour force began to migrate to cities in search of jobs but ended up living in urban slums, creating opportunities for their exploitation by the emerging industrialist class.
The industrial development was initiated behind high tariff walls and widespread tax concessions and tax holidays, and without any effective legal or social protection to industrial workers. Moreover, licensing of industrial projects was used as a vehicle for political patronage and corruption, particularly under a regime of overvalued exchange rate and subsidised foreign financing. Accordingly, the new industries earned huge income without due share in it of the working class and without adequate tax payment to the government. Thus, the industrial policy quickly created a rich industrial class that had a major hold on the industrial assets and urban wealth at the cost of industrial workers residing in slums and ordinary consumers that ended up paying high prices for domestically manufactured items of daily use due to the protectionist economic policies.

The resource mobilisation measures of the government and its expenditure priorities were also equally responsible for slow economic growth, high price inflation and widespread poverty. The government mainly relied on indirect taxes and borrowing for budget financing rather than developing a transparent and broad-based elastic tax system, meeting the requirements of horizontal and vertical equity. The incidence of indirect taxes and inflation fell mainly on the poor. Heavy and persistent reliance on expensive internal and external borrowing added to the burden of the budget that was met disproportionately by the poor through a regressive tax system and inflation. It is an established fact that indirect taxes and taxation through inflation are the cruelest form of taxation hurting the poor most.

On the expenditure side, particularly in the early period, defence consumed a large proportion of the meagre budgetary resources and whatever spending was done on civilian projects benefitted the richer segments of the society. Instead of building farm to market network of roads and creating other infrastructure for agricultural and mineral development, the government spent a large amount of resources in building motorways for high speeding vehicles, airports, other prestige projects and urban infrastructure mostly for use by the minority of the rich, and mostly confined in the Punjab, Karachi and a few other large cities. Additionally, instead of increasing spending on education and basic health facilities, and providing clean water to the majority of the population, resources were spent in building a new capital, hill top estates for the comfort of the president and the prime minister, bungalows for the herd of ministers, centrally air-conditioned government secretariats, posh residential accommodations for parliamentarians and civil and military bureaucracy, and rest houses of all sorts all over the country for travelling comfort of the elite.
The heavy burden of reckless internal and external public sector borrowing that has been mostly wasted on such spending, and siphoned off by the higher echelons of the government through corruption, has gradually shrunk the fiscal space thereby inhibiting economic and social development. By now, defence and debt serving consume almost all the revenue resources of the country. Moreover, corruption and inefficiency have brought public sector enterprises to the brink of bankruptcy, being bailed out by government guaranteed bank loans at the cost of the poor. In the process, the public sector has also lost the ability to provide “public goods” to the ordinary citizens as well as trust of the people.

The monetary policy and the banking system have been an equal partner in transfer of resources from the poor to the rich. The deposit base of the banking system consists of accounts of small savers. Bank lending has been concentrated in big cities and businesses following the pattern of concentration of asset holdings. Moreover, corruption and political exploitation have meant large scale willful loan defaults and loan write off benefitting the rich and powerful. At the same time, the small savers have been given a negative real rate of return under the cover of Islamic banking and based on an interest rate policy that hurts the poor. Accordingly, the banking system has added to transfer of income from the relatively poor savers to the relatively rich borrowers. A part of the financial savings that are held mostly by the poor and lower middle class for their rainy days is then taken away annually by the government as “zakat,” which is spent mostly on political considerations or siphoned out through corruption. The poor and low income class of savers is thus exploited in more than one ways.

There is no doubt that the root cause of poverty is not lack of resource endowment but the exploitative social and political structure and anti-poor economic policies. Notwithstanding slogan mongering by various political parties and by past military dictators, economic and social polices perused by successive governments are mainly responsible for the prevalence of poverty. The widespread rural and urban poverty is a man-made and policy-induced, and not a God-created, phenomenon.

The writer is a former SBP governor.