Professional Documents
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1, 2014 21
Abdul Hamid
Military Accounts Training Institutes,
Saddar, Rawalpindi, Pakistan
E-mail: ahamid_dcma@hotmail.com
Naeem Akram*
Ministry of Economic Affairs,
C Block, Pak Secretariat,
Islamabad, Pakistan
E-mail: naeem378@yahoo.com
*Corresponding author
Abstract: Inequality along with poverty has been a serious challenge for most
of the developing countries. There have been several historical, political, social
and economic dimensions of the inequalities. The present study provides a
detailed analysis of various income dimensions of inequality at national and
provincial level in Pakistan. This paper also provides a detailed analysis of the
causes and consequences of these inequalities. The analysis shows that the gaps
between haves and have-nots is widening. The distributional inequality has not
been given much significance in Pakistan and the distributional policy
measures like direct taxes have been weak. As a result, the direct tax to GDP
ratio could not be increased over 10% in the country. The study finds that
income inequalities have increased during 2001 to 2008. As in 2001-02, GINI
coefficient was calculated as 0.27 and in 2007–08, it reached to 0.29. It has also
been observed that inequality is highest in Sindh followed by Punjab, Khyber
Paktunkawa (KPK) and Baluchistan provinces.
1 Introduction
Poverty along with inequality has been a serious challenge for most of the developing
countries around the world. Several authors and researchers have made attempts to
analyse the impact of income inequality on poverty and suggested various policies to
combat these issues. Unfortunately, concept of segmented high growth and its
trickle-down effect to the grass root level could not be materialised in most of the
developing countries including Pakistan. According to World Development Report titled
‘Attacking poverty’ out of the world’s 6 billion people, 2.8 billion live on less than $2 a
day, and 1.2 billion live on less than $1 a day. In rich countries less than 1% of children
do not reach its fifth birthday, while in the poorest countries this ratio is 20%. Similarly,
in rich countries fewer than 5% of all children under five are malnourished, on the other
hand, in poor countries the ratio is above 50%. The average income in the richest
20 countries is 37 times the average in the poorest 20 – a gap that has doubled in the past
40 years.
Pakistan is not only suffering high incidence of poverty but there is also existence of
multi-dimensions of inequalities in income. Besides income inequality, other dimensions
of income inequality includes:
a wages
b assets
c region
d consumption
e financial.
2 Literature review
Despite the fact that collection of data regarding the poverty is a daunting task in
Pakistan, there are numerous studies conducted on poverty and income inequality in
Pakistan. A brief overview of the available literature is presented as under.
Adams and He (1995) calculated the income Gini-coefficient as 0.381 and
Gini-coefficient of land ownership as high as 0.769 during the period 1986–1987 to
1988–1989. The household in the lowest income quintile receive 50% of the per capita
income from non-farm income sources while the households in the top quintile receive
more than 36% of their per capita income from agriculture. According to the study
non-farm income sources and livestock tends to decrease inequality. Agriculture income
accounts for 35 to 45% of overall income inequality in rural areas. Similarly, Anwar et al.
(2004) find that unequal land ownership is one of the major causes of rural poverty in
Pakistan. Around 67% of rural households do not own land. Lack of access over land and
assets in rural areas was found to be strongly correlated with poverty persistence in these
areas as poverty level was the highest among the landless households. They also found a
highly skewed landownership pattern for the country.
Haq (1998) argued that economic led growth policies must be accompanied by
distributional policies, which actually lead to trickles down effect, otherwise, only rich
segment of the society benefits from economic growth.
Nasir and Mahmood (1998) find that education, occupation, gender, regional location,
sector of employment and other non-market forces such as discrimination play a
significant role in the distribution of earnings. The study reveals that any increase in
income inequality accompanied by increase in workers’ income throughout the
population leading to improvement in the position of the poor is not a matter of great
concern. However, if the gap between rich and poor increases at the cost of the poor, it is
a serious problem. Proper distribution of personal earnings should be, therefore, focused
to reduce the household income inequality.
Federal Bureau of Statistics (2001) reported that the Gini-Coefficient measurement of
consumption inequality has increased during the period 1992–1993 to 1998–1999. The
World Bank (2003) also found the similar results for the same period.
Anwar (2003) comes to the conclusion that poverty and inequality are closely related
and for a given mean income, more income inequality leads to high poverty ratio. Anwar
(2005) found that the overall inequality for Pakistan and for rural areas, measured by
Gini-coefficient, has increased during the period 1998–1999 to 2001–2002, while
declined for the urban areas during the reference period.
Jamal (2003) measured the poverty and inequality dynamics in Pakistan during the
period 1988–1999. He also measured the impact of formal structural adjustment lending
(SAL) on welfare and poverty. Low economic growth during the reference period
attributed to high poverty level especially in the rural areas. Jamal (2006) found that
decrease in inequality is important for poverty reducing efforts. Inflation, sectoral wage
gap, and terms of trade in favour of manufacturing were found as the major causes of
inequality. The estimates also shows that inequality can be reduced by progressive
taxation, increase in investment and development expenditure on social services. A
positive correlation was found between per capita GDP and income inequality.
24 A. Hamid and N. Akram
Akhtar (2008) has found that inequity in wages and earnings was one of the
significant causes of overall inequality in a country. His estimates show a rising trend in
earning disparities within each occupational category in short-run as well as in the long-
run.
Tabassum and Majeed (2008) found that one of the main causes of a significant
negative relationship between economic growth and income inequality is the credit
market imperfections in less developed and low income countries. It was also found that
human resource development, openness and government spending on social welfares
leads to high economic growth and less inequality.
Gazdar (2009) is of the view that there are four key dimensions of structural
inequality in Pakistan:
a gender
b region
c economic class
d social identity.
The structural inequalities stems from historical and geographical patterns of deprivation,
market distortions, less public attention to particular regions due to political, social or
population factors. Gender deprivation and discrimination in labour markets is a great
obstacle for female working force. This discrimination stems from social traditions,
religion, political and economic norms. Social identity, race, ethnicity, region, religion,
etc. remains one of the significant inequality dimensions. The inequality of opportunity in
the form of education, economic activities, employment, region, assets, etc. must be
addressed through favourable actions like government employment, infra-structure
development, educational opportunities and assets provisions for such groups who suffer
from this inequality. The main inequalities of economic opportunity are regional
underdevelopment, market distortions and unequal access to public services.
Zakir and Idrees (2009) find fluctuating trends in income/consumption inequalities,
and rising trends in both welfare and growth. In rural areas, all three measures, i.e.,
inequality, welfare, and growth remained low compared with urban areas. Income
inequality was found to be more severe than consumption inequality.
Human Development in South Asia 2007 (A Ten Year Review) shows that share of
South Asia in the total number of poor has increased significantly from 40% in 1993 to
47% in 2004. Over the past decade, the number of malnourished people in the region has
gone up from 290 million to 299 million. Out of 27 million children not immunised in the
world, 11 million are in South Asia. The proportion of the undernourished has ballooned
from 19 to 24% of the total population of Pakistan.
from Labour Force Surveys (various issues) and Pakistan Economic Surveys (various
issues). Data on consumption and other social indicators is used from Pakistan Social and
Living Standard Measurement (PSLM), Federal Bureau of Statistics (various issues).
Human development indicators and data on other international comparison is used from
Human Development Report issued by UNDP (2010) and World Development Report
issued by The World Bank (2010).
∫ Y ( y)dy = 1 p
θ∫
LC ( p) = 0
1
Y ( y )dy (1)
∫ Y ( y)dy
0
0
p
The numerator ∫0
Y ( y )dy is the sum of the incomes of the bottom p proportion of
1
population while the denominator θ = ∫ Y ( y)dy
0
sums the incomes of all. When
individuals are ordered in increasing incomes values LC(p) shows the cumulative % of
total income held by a cumulative p proportion of the population. For example, if
LC(0.7) = 0.3, then it means that the 70% poorest individuals hold 30% of the total
income held by whole population.
Gini-coefficient based on Lorenz curve measures inequality and its value ranges
between 0 and 1. A low value of Gini coefficient indicates equal distribution of wealth,
with 0, corresponding to complete equality, while higher value of Gini coefficients
indicates more unequal distribution, with 1 shows complete inequality, i.e., only one
person holds whole income with zero for other population. It can be well described in
Figure 1. The value of Gini-coefficient is the shaded area ‘A’ divided by ‘A+B’. The
Gini-coefficient has value 0 if there is perfect equality and value 1 if there is perfect
inequality.
The Gini-coefficient can be defined as follow:
k −1
G = 1− ∑ a( Y b + Y ) ( X
i =0
i +1 i i +1 − Xi ) (2)
where
G Gini coefficient.
26 A. Hamid and N. Akram
In economic literature, Gini coefficient and the ratio of the highest to the lowest
consumption quintiles has been used as a measure of income inequality. Table 1 and
Figures 2 to 4 present a comparative analysis of inequality in Pakistan. It reveals that
during the FY 2001–2002 to FY 2007–2008, Gini coefficient as well share of the highest
to lowest quintiles has slightly increased. Combining these results with the headcount in
Pakistan, it can be inferred that during 2001–2002 to 2007–2008, economic growth has
helped in reducing the number of poor, but it has failed to put any distributional impact in
Pakistan.
Major finding that has emerged regarding income inequality is that during 2001–2002
to 2007–2008, inequality both in urban areas, rural areas and in overall Pakistan
has increased. However, situation of the consumption share by the highest to
lowest quintile was 4.15 in 2004–2005 it has declined to 4.0 for FY 2007-08. In
rural areas, rich-poor gap has narrowed in 2005–2006 as the ratio declined from 2.19 in
2004–2005 to 1.97 in 2005–2006. However, in FY 2007–2008 it has once again increased
to 2.2.
Contrary with rural area ratio of highest to lowest quintiles witnessed an increasing
trend during 2001–2002 to 2005–2006, as in the period ratio has increased from 10.4 in
FY 2001–2002 to 13.0 in FY 2005–2006. However, in FY 2007–2008 it has declined to
10.9.
Multi-dimensional income inequality in Pakistan 27
Table 2 presents a vulnerability of the poor in Pakistan over the years. It reveals that
percentage of ‘extremely poor’ has been reduced by half from about 1% to 0.5% of the
population, during 2004–2005 and 2005–2006. Similarly, there was also an improvement
of 1% in the proportion of ultra-poor from 6.5% to 5.4% during the same period.
However, the proportion of the ‘quasi non-poor’ increased from 35 to 36.3%. The
proportion of population defined as ‘vulnerable’1 at 20.5% remained the same during
2004–2005 and 2005–2006.
The further gender bifurcation analysis shows that women have less monthly payment
and income compared with their male counterparts (Table 3).
Table 1 Distribution of income
Figure 2 Consumption share by the lowest and highest quitiles (urban, rural and Pakistan)
(see online version for colours)
28 A. Hamid and N. Akram
Figure 3 Gini-coefficients (urban, rural and Pakistan) (see online version for colours)
Figure 4 Consumption share by the lowest and highest quitiles (urban, rural and Pakistan)
(see online version for colours)
Gender discrimination, in most of the traditional families; starts at a very early stage
where boys are preferred more than girls in education, nutrition and other facilities. This
preference is reflected with boys receiving a larger share of education, health and
nutrition spending. Consequently, it results in less employment opportunities and
subsequently low female (personal and family) income as reflected from the data given in
the table. The average monthly payment to female labour force is around 40% less than
the monthly payment to male employed labour force.
One of the main reasons of gender inequality and powerlessness of women is their
less access and control over financial and physical assets (house, land, etc.).
Table 3 Distribution of employed labour force by average monthly income (payments)
(see online version for colours)
Majority of the population (56%) is financially excluded as data given in the table show
that financial availability in Pakistan is very low. A further break-up across gender
reflects that 42% males and 68% females have no access to finance from any type of
sources. Gender discrimination prevails in terms of financial availability as women have
less access than men in all kinds of financial services including formal and informal.
Women low literacy, mobility constraints, less access to information restrains them in
accessing financial institutions for micro-credit and loans.
Gender inequality prevalent in Pakistan not only in terms of financial availability,
the examination of main social targeted safety net programmes (Zakat and
Bait-ul-Mall) reveals that discrimination is also found in terms of beneficiaries of these
programmes.
The concept of segmented high growth and its trickle-down effect to the grass root
level could not be materialised in most of the developing countries including Pakistan.
There exists various inter and intra-regional inequalities, this situation is creating
obstacles in economic development and harmony among various provinces of the
federation.
Table 5 and Figures 6 and 7 show the provincial Gini-coefficients. The maximum
inequality is observed in Sindh province for all the reference years (except for the year
2004–2005) followed by Punjab, KPK and Balochistan Provinces. The minimum
inequality is found in Balochistan for all the surveyed years.
Multi-dimensional income inequality in Pakistan 31
Figure 7 Provincial consumption share by the lowest and the highest quitiles (see online version
for colours)
Rural Urban
No land No house No property No house
ownership ownership ownership ownership
Punjab 26.13 34.53 31.54 31.90
Sindh 41.26 32.68 20.15 13.31
Khyber Pakhtunkhwa 32.35 40.02 38.94 42.17
Balochistan 52.49 52.44 35.08 31.14
Source: Social Policy Development Centre (SPDC) Report 2004
Table 6 reveals that there exists huge variation among the provinces in terms of
population having no land ownership and no house ownership. Inequalities in income in
Pakistan are largely reflected in equalities in the distribution of assets. Since the poor
have no assets and the lower middle class generally have very little assets, income
distribution is uneven. Similarly, income inequalities in Pakistan have increased
exponentially during the last decade despite the claims of poverty reduction (study
reference).
Figure 8 Distribution of assets in provinces (rural) (see online version for colours)
Rural poverty is found to be strongly correlated with lack of asset in rural areas. The
landless households are substantially high in rural areas. Unequal land ownership in the
country is found to be one of the major causes of poverty, as poverty level was the
highest in population having no asset ownership. This can be substantiated in case of
Balochistan having highest incidence of poverty, in rural Balochistan about half of the
population, i.e., 52.49% of has no land ownership and 52.44% has no house ownership.
Baluchistan has the highly unequal land ownership pattern followed by, Sindh, NWFP
and Punjab. In rural Sindh 41.26% of the population does not have any land holdings and
32.68% have no house ownership. Population of about 32.35% has no land assents and
40.02% have no house ownership in rural Khyber Pakhtunkhwa. There is a strong debate
on whether land holding is directly proportional to incidence of poverty. In case of
Multi-dimensional income inequality in Pakistan 33
Punjab, population having no house ownership is 34.53% and population having no land
ownership is about 26.13% and only 12.4% of rural households who owned any land at
all fell below poverty line2 population.
Figure 9 Distribution of assets in provinces (rural) (see online version for colours)
While reviewing the urban scenario it has been found that incidence of poverty is high
among those households that do not have any property assets. As given in above table, in
Punjab 31.54% of population has no property ownership and 31.90% have no house
ownership in urban areas. Studies reveal that there is a direct relationship between staying
above poverty line and having some kind of property ownership. Interestingly, in Sindh
the lowest level of poverty appears to be among the urban property owners3 this trend is
observed due to large population living in Kacti Abadies and house ownership or
property ownership is subjected to ‘kabza’ sytem. That is whoever gets the place, he or
she is the owner of that place and with seeking any permission they will construct their
houses or business. Overall, 20.15% of the population does not own any property and
13.13% have no house ownership in urban Sindh. Studies reveal that incidence of poverty
is very high in rural as well as urban Balochistan. The comparison of asset ownership in
urban areas of Balochistan and Khyber Pakhtunkhwa, depicts that in Balochistan
35.08 population does not have any property ownership while in Khyber Pakhtunkhwa it
goes up to 38.94%. Similarly, in Balochistan 31.14% does not have any house ownership
while in Khyber Pakhtunkhwa population that does not own any house is 42.17 which is
highest among the four provinces.
5 Conclusions
The present study has reviewed the situation of inequality in Pakistan. By using the data
of PSLM and Labour Force Surveys, a comprehensive analysis has been made for the
existences of inequalities in income, asset wages and availability of financial facilities in
the context of gender and regional development.
34 A. Hamid and N. Akram
1 Without sustainable Economic growth, it is very difficult to reduce the income and
social inequalities. Therefore, it is suggested that concentrated efforts are made to
achieve the objective of sustainable economic growth. In this regards, it is suggested
that there is a need to promote urbanisation by creating space for poor in cities,
entrepreneurship and technical education, so that poor are able to start their own
business. Furthermore, executing the reforms to improve the governance structure in
Pakistan can also help the neglected segments of the society to reap the benefits of
economic development.
2 Tax reforms can play an important role in reducing the gap between haves and haves
not. In this regard, it is suggested that instead of relying on indirect taxes, direct
taxes on high income may be imposed. Furthermore, tax exemptions on agriculture
and services sectors may also be withdrawn and Agricultural Tax may be imposed
with full spirit. This will not only reduce the income gap to some extent but it will
also helpful in controlling the fiscal deficit and inflation.
4 The cross-country analysis shows that above-mentioned programmes can play very
effective role in reducing the income inequalities but it does not dispense the
importance of direct transfer programmes to the vulnerable groups, so there is need
of expansion and continuation of Banzir Income Support Programme (BISP),
Pakistan Baitulmal and Sasti rooti (Punjab Government) schemes in Pakistan.
Multi-dimensional income inequality in Pakistan 35
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Notes
1 This group, as the nomenclature implies, is at the verge of poverty and negative economic
shocks from within the household (e.g., death or illness of an earning member) or outside
(e.g., inflation, unemployment or natural calamity) can easily shift these households to the
ranks of ‘poor’.
2 SPDC Estimates.
3 SPDC Report 2004.