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Old Saturday, May 09, 2020
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Default The Prevailing Problem of Poverty in Pakistan and the Strategies to Deal with it

Poverty
Poverty is defined as the condition when a person or household lacks the resources necessary to be able to consume a certain minimum basket of goods. This basket of goods consists of either food alone or food, clothing and housing combined. The World Bank defines poverty in absolute terms. The bank defines extreme poverty as living on less than US$1.90 per day. (PPP), and moderate poverty as less than $3.10 a day.

From the surface, poverty in definition is the inability of a person of household to buy a basket of essential goods. Yet in reality it encompasses very divergent and macro economically more detailed constituents. For example, higher cost of medical care is directly linked to the ability or inability of the poor households to buy essential goods. Hence, even though healthcare is not considered either as a service or a good in the basket of inflation, it clearly impacts the income level of household especially the lower strata of income earners. Hence, the absolute definition of poverty is not accurate. In real, poverty may be defined as the inability of people or household to buy essential goods of services which are a prerequisite for their survival.

Causes of Poverty in Pakistan
Poor Governance
Governance is defined as the manner in which power is exercised in the management of a country's social and economic resources for development. Good governance implies a capacity to turn public income into human development outcomes. Good governance is an essential pre-condition for pro-poor growth as it establishes the enabling regulatory and legal framework essential for the sound functioning of land, labor, capital and other factor markets.

Political Instability
In general, political instability and macroeconomic imbalances have been reflected in poor creditworthiness ratings of the country, even compared to other countries of similar income levels, with resulting capital flight and lower foreign direct investment inflows. Low FDIs also contributes to loss of possible job for low earning labor market. This results in aggravation of poverty statistics of Pakistan.

Non Transparency in Resource Allocation
Non-transparency in the management of public accounts has led to a distortion of development priorities and a tendency to safeguard the interests of specific groups at the expense of the larger public interest. Examples include the government's hesitance to impose agricultural income tax; the tendency to frequently grant concessions or exemptions on taxes and tariffs, which often benefit powerful pressure groups; and ad hoc decision making on imports and exports as well as pricing in the agricultural sector, which can favor hoarding and speculation.

Weak Public Sector Capacity
Over-centralization in the public sector has led to inefficient delivery of social sector related and other services with the resulting disenchantment of the citizenry in the ability of the State to provide effective and accessible services. At the same time, the role of the private and civil society sector has not been systematically encouraged to build synergistic public private partnerships to achieve greater scale and coverage in the delivery of these services

Economic Determinants of Poverty in Pakistan

Lack of Employment Resources
As per Pakistan Bureau of Statistics figures, the average annual GDP of Pakistan for past 5 years stand at 3.5% which is not sufficient enough to accommodate the average 3% increase in labor force every year. As a result, millions of young workforce joins the ranks of unemployment at an early age. Lack of sufficient resources for employment increases the burden of families to support its members with the same level of income. Hence, majority of the poor population whose hopes are pinned at the employment of their next educated lot is further pushed into abject poverty by the lack of jobs. Lack of employment opportunities impact all spheres of society, yet the poor are the hardest hit whenever any macroeconomic indicator worsens off due to low savings.

Inflation
High inflation acts as a regressive tax on household incomes by eroding purchasing power, and has particularly adverse impacts on households dependent on fixed salaries, as well as low-income households in general. Inflation not only erodes the purchasing power but also acts as a factor for exhaustion of savings from poor household. As per PBS statistics, Pakistan has witnessed average inflation of 8-9% in last 5 years. The annual increase in the wages of low paid workers in both the public and private sector was not sufficient to cover this increase in prices. As a result, savings of poor people eroded and increased cost of basket of essential goods increased poverty in Pakistan.

Taxation System
The highly regressive taxation system of Pakistan penalizes the poor in relative terms. Most of the advanced countries with high HDI like Sweden, Norway, Iceland etc with high per capita income rely on high percentage of direct taxes as a major source of revenue which ensures that individuals with higher income are taxed heavily and vice versa. High reliance of regressive and direct taxes ensures that government taxes people primarily of consumption and not income. As a result, poor people are discouraged to even increase the spending on essential items. Examples of regressive and direct taxes adversely impacting poor people includes sales tax, taxes and duties on oil which in turn increase the cost of basic items of inflation basket, taxes on mobile phones and internet usage etc.

Social Determinants of poverty in Pakistan

Land Holdings and Agriculture system
Pakistan has been deeply rooted in feudal system even before its inception. The biggest disadvantage of a feudal system is that the land holdings are concentrated with a handful of rich individuals which share a major portion of the income proceeds from the agricultural produces. Majority of individuals working in the agricultural lands are paid low income. As a result of unequal distribution of land holdings, poor people are unable to use their own produce or generate enough income. Agricultural sector accounted for 18% of total GDP of Pakistan in 2019. Majority of the income generated did not make its way down to the worker level due to extractive nature of land holdings.

Low level of Human Development Index
A country's future growth potential and ability to reduce poverty is strongly dependent on its stock of social capital, and investments made to increase that stock. The level of human development in Pakistan is currently very low, and little improvement has taken place during the last decade of year. As per UNDP, Pakistan stood at 152nd position out of 189 countries in its HDI.

Strategies to Overcome Poverty in Pakistan

Economic Strategies
Income growth in Pakistan has been the main driver of poverty reduction, according to a World Bank report. Pakistan’s Gini coefficient and Palma ratio (the ratio of income held by the top 10% compared to income held by the bottom 40%) have fluctuated over time, but has followed a general downward trend, indicating that income inequality has declined. If Pakistan needs to decrease the poverty in quick succession, it needs to implement economic strategies to decrease income inequality. The concept of decreasing income inequality to hamper poverty levels may sound easy yet in practice it is highly difficult as policy level changes are required in a number of areas ranging from tax reforms to land laws. Pakistan can implement the following strategies to decrease poverty in the long run.
• Increase minimum wage from Rs. 17,500
• Expand the earned income tax base
• Build subsidized assets for working families and poor class including cheap residential areas
• Provision of highly subsidized essential goods 40% of population which is living below the poverty line as per World Bank Statistics.
• Making tax structure of FBR more progressive and industry specific with majority of the tax revenue being targeted from highly profitable industries offering services to upper class like high end construction, expensive electronic equipment, expensive cars and restaurants etc.
• Increase the tax of inherited properties/income.
• Streamline the process of zakat collection and its redistribution to relevant households.
• Introduce medical care and social security for poor class and strengthen the services in BHUs and DHOs.
• Creating jobs in both the public and private sector by investing in infrastructure and offering short term tax rebates on such investments.
• Easy access of microfinance and refinance facility for lower economic strata.

Financial Institutions/NGOs in tackling Poverty
Financial institutions especially microfinance banks can play a pivotal role in the provision of capital to poor people, however, they in consultation with MOF and SBP need to revisit the tedious requirements for disbursement of loans. Banks and financial institutions are traditionally defined as a tool of financial intermediation. This implies that these institutions play a critical role in provision of capital, debt and other facilities to poor people by routing the money from economically upper class households. However, provision of money to poor people in Pakistan may be tricky and close to impossible due to the fact that majority of low income earners have no documented flow of money and hence they do not feel need for a bank account. In the absence of any documented flow of money, banks are unable to establish the creditworthiness of potential borrowers. Hence, financial inclusion is a pre requisite for tackling poverty via financial institutions. Moreover, SBP also needs to take into account various requirements including collateral or guarantee for loans offered by banks. In addition to this, the markup rate on small microloans has historically been on the upper side due to their high inherent risk of default. However, banks can effectively tackle all these issues if they diversify their loan portfolio effectively. Moreover, government can also offer refinance schemes or subsidy for loss sharing on these microloans to banks which will further ensure extension of capital to poor class by banks. Extension of capital to poor will have a long lasting impact on poverty.

Social Strategies
Social strategies to counter poverty include increasing the literacy rate and financial education and eliminating gender gap in education and employment. Numerous studies in economics have studied the relationship between poverty and literacy rate. Economists still have to agree over the short and long term impact of increase in literacy rate over poverty. However, it is evident that increase in literacy rate and financial education of poor class will impart them with more skills in labor market. Increase in skills at an individual level will result in increased employability chances. Moreover, Pakistan is also faced with a disparity in gender balance in both the education and employment. Female literacy rate in Pakistan is 48% as compared with 65% of that of male. This marginalization based on gender has a negative impact on poverty alleviation in Pakistan. There are various fields in Pakistan including healthcare, education, financial services etc where female specific positions are vacant just because either not enough suitable candidates are available or they are just not willing to work due to family issues. Increase in female literally and employment rate will have a cascade effect in future with more female available for educating and employing other female. Female employability also increases the household income.
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