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Over a period of five years between 1999-2004, the government of Pakistan spent Rs.1 trillion on poverty reduction. According to the Finance Ministry, Poverty Reduction Special Programme included budgetary and non-budgetary expenditures both by the federal and provincial governments.

by Dr. Khalil Ahmad

The credit for any reduction in poverty in the country goes to privatisation, de-regulation and liberalisation, not to the so called pro-poor expenditures.

Over a period of five years between 1999-2004, the government of Pakistan spent Rs.1 trillion on poverty reduction. According to the Finance Ministry, Poverty Reduction Special Programme included budgetary and non-budgetary expenditures both by the federal and provincial governments.

Now, the ‘Labour Force Survey 2005’ (first two quarters) reports that over the last five years, the government has spent a hefty amount of Rs.1332 billion on poverty-related and social sector programmes to help the poor and vulnerable sections of the society. The PRSP expenditures — budgetary and non-budgetary — during 2001-05 stood at Rs.1124 billion; the budgetary expenditures averaged 4.1 per cent of the GDP for the period. Of this, the government spent Rs.316.2 billion on pro-poor sectors exceeding the targeted Rs.278 billion by Rs.38 billion. And, by the end of the third quarter of 2005-06, Rs.250 billion had been spent on pro-poor sectors.

Both reports count and boast of gains. For example, the writers of the first report claim that increased pro-poor expenditures appear to have contributed in employment generation. As a result, the unemployment rate that was 8.3 per cent in 2001-02 declined to 7.7 per cent in 2003-2004 and to 6.5 per cent during July- December 2005.

The report claims that since 2003-2004 and till the first half of 2005-2006, 5.82 million jobs were created while the average job creation stood at 1.0-1.2 million per annum. This is quite unfounded and doubtful. One must contend whether it is pro-poor expenditures that helped reduce the unemployment rate or something else: such as de-regulation and liberalisation of the economy. In the same breath, the writers of the report say that the IT sector alone generated 114,737 jobs in 2005-2006. Obviously, the amount spent on deregulation and liberalisation does not come under pro-poor expenditures.

Further evidence strengthens the doubts about the efficacy of pro-poor expenditures in reducing poverty. The report says two sectors, education and health, absorbed half of the pro-poor budgetary expenditures. Sure, how they could generate jobs and reduce unemployment rate to the tune of 1.8 per cent. The gains, according to the report, in education sector are improvement in literacy and enrolment rates; and in that of the health sector is immunisation.

The report also tells about other programmes such as Khushal Pakistan Programme-2 (KPP-2) and Khushal Pakistan Fund (KPF) started during 2005 for poverty alleviation. The KPP-2 is a special programme that aims at initiating small development schemes with an amount of Rs.20 billion to be spent during the current fiscal year under the Public Sector Development Programme (PSDP).

Another boast of the report needs to be checked. The report claims that the percentage of population living below the poverty line, which stood at 34.46 per cent in 2000-2001, declined to 23.9 per cent in 2004-2005. In rural areas it fell to 28.10 per cent from 39.26 per cent while in urban areas from 22.69 per cent to 14.9 per cent. At the same time, it is argued that ‘strong economic growth’ created employment opportunities. In other words, this implies that high economic growth is a result of pro-poor expenditures.

All this is surrounded by two controversies: i) whether high economic growth trickled down or not; and, ii) whether the number of people living below the poverty line declined or not. Under the circumstances, it may safely be assumed that the relation between poverty reduction expenditures and poverty alleviation gains is not a causal one. With careful research some other factors will be found responsible both for economic growth and poverty reduction. And, surely these factors are de-nationalisation, privatisation, de-regulation and liberalisation of the economy.

Let’s look for some other evidence: a report that bases itself on third-party international sources such as IMF, World Bank, world Economic Forum, Global Competitiveness Report, International Country Risk Guide, in its latest edition (Economic Freedom of the World 2006 Annual Report that is actually based on the data for 2004), awards Pakistan the following scores (out of 10; the higher the score the higher the rank and the freer the country economically):

In the area of the size of government (that includes government consumption, transfer and subsidies, government enterprises and investment, and top marginal tax rate), Pakistan’s score is both improving and fluctuating: in 2000 it was 6.6; in 2001, 7.3; in 2002, 7.7; in 2003, 7.3; and in 2004, 7.2.

In the area of legal Structure and security of property rights (that includes judicial independence, impartial courts, protection of intellectual property, military interference, and integrity of legal system), Pakistan’s overall score is declining: in 2000 it was 4.6; in 2001, 3.4; in 2002, 2.7; in 2003, 2.3; and in 2004, 2.5.

In the area of access to sound money (that includes growth of money supply, inflation variability, recent annual inflation, and freedom to own foreign currency), Pakistan’s score is generally on the rise: in 2000 it was 6.5; in 2001, 2002, 2003, 6.8; and in 2004 6.4.

In the area of freedom to exchange with foreigners (that includes taxes on international trade, regulatory trade barriers, size of trade sector, official versus black market exchange rates, and restrictions on capital markets), Pakistan’s score is steadily improving: in 2000 it was 4.2; in 2001, 4.7; in 2002 5.9; and in 2003 and 2004, 5.8.

In the area of regulation of credit, labour and business (that includes regulation of credit and labour markets, and regulation of business), Pakistan’s score on the whole is improving: in 2000 it was 5.2; in 2001, 5.6; in 2002, 6.0; in 2003, 5.8; and in 2004, 6.5.

This explains the whole economic picture of Pakistan. Every Pakistani with a little economic thinking knows for sure that since the regime of General Ziaul Haq, the government in Pakistan has been on the way to denationalising the nationalised entities, privatise the state enterprise, de-regulate the state monopolisations and liberalise the economic and business activities, though with a heavy heart. Indeed, it is this process that is responsible for the reduction in poverty, not the pro-poor expenditures whether budgetary or non-budgetary. The above scores testify to this opening of Pakistani economy.

A recent research by Goldwater Institute, USA, confirms that states with low-tax and low-spending (Arizona, Colorado, Florida, Georgia, Missouri, Nebraska, Nevada, South Dakota, Tennessee and Texas) enjoyed sizable decreases in poverty rates during the 1990s, while states with high-tax and high-spending (Alaska, California, Delaware, Hawaii, Massachusetts, New Mexico, New York, Rhode Island, Vermont and Wyoming) actually suffered an increase in their levels of poverty. It concludes that decline in poverty in the ‘small government’ states strongly confirms the hypothesis that reduced taxes and state spending encourage the emigration of people and businesses to areas where private-sector job growth is able to flourish and become a powerful and effective anti-poverty programme. However, while taxes and business climate alone are not the only factors in reducing poverty rates, they certainly help most in the war on poverty.

A few weeks back, President General Pervez Musharraf said that he had a deep desire to help the poor people of Pakistan. He should realise that it is not a Herculean task. What you need to do, first and foremost, is to improve the functioning of the legal structure and security of the property rights; reduce the size of the government; ensure the accessibility of sound money; assure the citizens of Pakistan freedom to exchange with foreigners; and impose minimum of regulations on markets of credit and labour, and business activity.

This will restore to the people of Pakistan that confidence without which they would never be able to pursue their economic ends on their own. In simple words, people need an environment in which they are free to start a business venture, in which their earnings are safe, their property secure, their freedoms taken care of and their choice is not limited. This will bring real prosperity to them which will last for generations.


Dr. Khalil Ahmad is the founder and Executive Director of the Alternate Solutions Institute, Pakistan’s first free market think-tank.

This article appeared in The News International on December 24, 2006.