CAUSES OF LOW PER CAPITA INCOME OF

PAKISTAN AND DEVELOPING COUNTRIES

Group No 15

23 - Abdullah Sharafat
28 - Behrouz Khan

INTERNATIONAL FINANCE
(DR. ALLAH BAKHSH KHAN SB)
 CAUSES OF LOW PER CAPITA INCOME
OF PAKISTAN AND DEVELOPING
COUNTRIES

Definition:     

“Per Capita Income means the average income of whole population in a country in a year.”

Situation in Pakistan:

Per capita income of Pakistan is increasing at the rate of 3.7 %. Last year per capita income of Pakistan
was $ 1046 but now per capita income of Pakistan is increased to $ 1095.

Concept Summarized:

                    PCI = National Income / Population.

In order to find out the PCI for the year 2010, at current price, the national income of a country is
divided by the population of the country in a particular year.

PCI for 2010 = National Income for 2010 / Population in 2010.

The following points highlight the five main causes of low per capita output. The causes are: 1. Low
Rates of Saving and Capital Accumulation 2. Shortage of Skilled and Educated Workers 3. Lagging
Technological Know-How 4. High Population Growth and Unemployment 5. Political Instability and
Government Policies that Discourage Production. Per capita income is an average income of each person
of a country. Now a day, per capita income is used as a symbol of progress and prosperity of a country.
Countries having more per capita income are considered as rich and developed countries.

Per capita income is an average income of each person of a country. Now a day, per capita income is
used as a symbol of progress and prosperity of a country. Countries having more per capita income are
considered as rich and developed countries.

 Economic Causes
  Social Causes
 Political Causes

ECONOMIC CAUSES
Unemployment, Lack of Foreign Investment, Use of Backward Technology, Increase in Utility Charges,
Poverty, Backward Agricultural Sector, Improper Income Distribution, Inflation

SOCIAL CAUSES
Dishonesty & Corruption, Illiteracy, Backward Infrastructure, Low Living Standard

POLITICAL CAUSES
Law and Order, Poor Governance, Landlordism, Nepotism

Conclusion: Per capita income of Pakistan is very low as compare to the per capita incomes of rich
nations. Use of modern technologies and control on population is necessary to improve the per capita
income.

ECONOMIC CAUSES

Following are the economic causes of low per capita income:

   Vicious Circle of Poverty

Vicious circle of poverty is the largest reason of low per capita income. Developing countries including
Pakistan are trapped into VCP. A poor country is poor forever due to the VCP. 21.0 % population is very
poor population in Pakistan.

 Unemployment

Unemployment is the major cause of low per capita income. Unemployment means no source of income
and result is low per capita income. Rate of unemployment is 5.5 %, 16 % is underemployed and 20% is
disguised unemployed in Pakistan.

Lack of Foreign Investment

Due to backwardness, political instabilities and improper availability of infrastructure the attraction for
foreign investment is not suitable. Foreign investment (Jul-Mar) is $ 1.8 billion in Pakistan. Foreign
investment is reduced by 45%. Lack of foreign investment means less employment opportunities and
low per capita income.

  Low National Income

Low per capita income in Pakistan is also the result of low level of national income. Low level of national
income means low level of saving and low level of investment. All these factors contribute toward
poverty.

 Use of Backward Technology

Techniques of productions used by developing countries are backward. Due to out-dated methods of
production, productivity level is low. Low level of productivity means narrowness of market and
reduction in exports and increase in imports.

 Increase in Utility Charges

Utility charges like water, gas, electricity, telephone bills etc. are increasing day by day in Pakistan. More
utility charges lead to reduction in the saving of population and its result is low per capita income. At
present growth rate of electricity and gas sector is 0.4 %.

Poverty

Poverty in Pakistan is very common, 21.0 % population is treated as poor population. Poverty is also a
cause of low per capita income. Low per capita income means low level of saving and low level of
investment. Its result is poverty.

      Backward Agricultural Sector

People have adopted just subsistence farming styles in agriculture sector. They are not farming
according to the commercial patterns. Sometimes, due to natural calamities and use of backward
techniques of production, there is reduction in production and it decreases the income of poor farmers.
Its share in GDP is only 21.5 %.

      Absence of Credit Facilities

Poor population is needed credit facilities to take an active part in economic activities to remove low per
capita income. But in Pakistan, availability of credit is not desirable. Poor people has no access to credit
it is only for rich landlords. Conditions for credit issuing are so tights and credit is not given in time.

  Improper Income Distribution

Imbalanced distribution of resources is an additional cause of low per capita income in Pakistan. This
situation leads to increase the gap between rich and poor. Due to undesirable distribution of income
and wealth, poor population is unable to take part in economic activities to remove poverty. 20 % rich
population has complete control over the 50 % national resources in Pakistan.

  Low level of Productivity

Due to use of backward technologies and inefficiencies of labour & entrepreneur, productivity level in
Pakistan is very low as compare to developed countries. Value of annual productivity of Pakistani labour
is much lower than the value of labour of rich nations. Annual value of productivity of labour is only $
100 against $ 2500 in advanced countries in Pakistan.

  Low level of Saving

Low level of saving is mainly due to low income. It leads to less investment and less return. Due to less
return people remains poor forever. Domestic savings are 9.9 % of GDP. Low level of saving means low
per capita income in Pakistan.

  Inflation

High rate of inflation is an extra reason for low per capita income. Due to inflation much amount of
money is not enough to purchase much quantity of goods and services. Inflation decreases the savings
and investments of poor people. Rate of inflation (CPI) is 13.3 % in Pakistan.

  Imposition of Taxes

Government has to impose taxes to raise its revenue. Imposition of taxes reduces the disposable income
of people. Lack of disposable income means low saving and low investment, poverty and low per capita
income. Amount of FBR tax collected is Rs.1380 billions. 

  Non-Productive Expenditures

Government has to make a lot of unproductive expenditures on social heads and to make strong
defence. These high expenditures are also a reason of low per capita income.

 Low Rate of Capital Formation

Rate of capital formation in Pakistan is very low. Low rate of capital formation means low opportunities
of employment, low level of productivity and deficit in balance of payment that leads to low per capita
income. Rate of capital formation is just 5 % in Pakistan

A. SOCIAL CAUSES

Following are the economic causes of low per capita income:

Vicious Circle of Poverty

Vicious circle of poverty is the largest reason of low per capita income. Developing countries including
Pakistan are trapped into VCP. A poor country is poor forever due to the VCP. 21.0 % population is very
poor population in Pakistan.

 Unemployment

Unemployment is the major cause of low per capita income. Unemployment means no source of income
and result is low per capita income. Rate of unemployment is 5.5 %, 16 % is underemployed and 20% is
disguised unemployed in Pakistan.

Lack of Foreign Investment

Due to backwardness, political instabilities and improper availability of infrastructure the attraction for
foreign investment is not suitable. Foreign investment (Jul-Mar) is $ 1.8 billion in Pakistan. Foreign
investment is reduced by 45%. Lack of foreign investment means less employment opportunities and
low per capita income.

  Low National Income

Low per capita income in Pakistan is also the result of low level of national income. Low level of national
income means low level of saving and low level of investment. All these factors contribute toward
poverty.

 Use of Backward Technology

Techniques of productions used by developing countries are backward. Due to out-dated methods of
production, productivity level is low. Low level of productivity means narrowness of market and
reduction in exports and increase in imports.

 Increase in Utility Charges

Utility charges like water, gas, electricity, telephone bills etc. are increasing day by day in Pakistan. More
utility charges lead to reduction in the saving of population and its result is low per capita income. At
present growth rate of electricity and gas sector is 0.4 %.

  Poverty

Poverty in Pakistan is very common, 21.0 % population is treated as poor population. Poverty is also a
cause of low per capita income. Low per capita income means low level of saving and low level of
investment. Its result is poverty.

    Backward Agricultural Sector

People have adopted just subsistence farming styles in agriculture sector. They are not farming
according to the commercial patterns. Sometimes, due to natural calamities and use of backward
techniques of production, there is reduction in production and it decreases the income of poor farmers.
Its share in GDP is only 21.5 %.

   Absence of Credit Facilities

Poor population is needed credit facilities to take an active part in economic activities to remove low per
capita income. But in Pakistan, availability of credit is not desirable. Poor people has no access to credit
it is only for rich landlords. Conditions for credit issuing are so tights and credit is not given in time.

  Improper Income Distribution

Imbalanced distribution of resources is an additional cause of low per capita income in Pakistan. This
situation leads to increase the gap between rich and poor. Due to undesirable distribution of income
and wealth, poor population is unable to take part in economic activities to remove poverty. 20 % rich
population has complete control over the 50 % national resources in Pakistan.

  Low level of Productivity

Due to use of backward technologies and inefficiencies of labour & entrepreneur, productivity level in
Pakistan is very low as compare to developed countries. Value of annual productivity of Pakistani labour
is much lower than the value of labour of rich nations. Annual value of productivity of labour is only $
100 against $ 2500 in advanced countries in Pakistan.

  Low level of Saving

Low level of saving is mainly due to low income. It leads to less investment and less return. Due to less
return people remains poor forever. Domestic savings are 9.9 % of GDP. Low level of saving means low
per capita income in Pakistan.

Inflation

High rate of inflation is an extra reason for low per capita income. Due to inflation much amount of
money is not enough to purchase much quantity of goods and services. Inflation decreases the savings
and investments of poor people. Rate of inflation (CPI) is 13.3 % in Pakistan.

 Imposition of Taxes

Government has to impose taxes to raise its revenue. Imposition of taxes reduces the disposable income
of people. Lack of disposable income means low saving and low investment, poverty and low per capita
income. Amount of FBR tax collected is Rs.1380 billions. 

 Non-Productive Expenditures

Government has to make a lot of unproductive expenditures on social heads and to make strong
defense. These high expenditures are also a reason of low per capita income.

 Low Rate of Capital Formation

Rate of capital formation in Pakistan is very low. Low rate of capital formation means low opportunities
of employment, low level of productivity and deficit in balance of payment that leads to low per capita
income. Rate of capital formation is just 5 % in Pakistan.

B. SOCIAL CAUSES

Following are the social causes of low per capita income:

Population Pressure

Rapidly rising population is also a cause of poverty. Existing population is already not provided basic
necessities of life. Therefore, increase in population will lead to decrease the per capita income. Now
population of Pakistan is 169.94 million with growth rate of 2.05 %.

Dishonesty & Corruption

Low per capita income is also due to dishonesty and corruption in management. Officers receive a huge
amount of illegal money for the legal and illegal job. These unnecessary payments reduce the savings of
poor and result is low per capita income.

 Illiteracy

Lack of education and training is also a cause of low per capita income. It reduces the abilities to work.
Sometimes a worker due to illiteracy remains unemployed or underemployed. Similarly, lack of skill in
entrepreneur also reduces his profit and its result is low per capita income. Literacy rate in Pakistan is 57
%.

 Backward Infrastructure

Non-availability or availability of backward infrastructure is also an additional reason of low per capita
income and poverty. Low level of education, backward state of technology, poor health, inefficiency of
labour and poor system of transportation & communication are cause low per capita income and
poverty. Backward infrastructure causes low attraction for foreign investment.

  Low Living Standard

Pressure of foreign counties in our economic activities, backward standard of productivities and
improper basic facilities to population reduces the living standard of population. Low living standard is a
symbol of low per capita income. Expenditure on health sector is only 0.55 % of GDP.

POLITICAL CAUSES
These are some political causes of low per capita income:

 Law and Order

Law and order conditions are at their poor stage. A huge portion of saving of population is wasted in
costly and lengthy legal process that leads to low per capita income. Chief Justices Iftikhar Muhammad
Chohdery himself has to wait for a very long time.

 Poor Governance

Instable government and instability in the policies of government are another cause of low per capita
income and poverty. Every government remains failed to establish such policy that leads to reduce the
poverty.

 Landlordism

Ignorant but big landlords control our whole economy. They have no sense of social welfare. In
government they take those actions that are in their personal interest. Their actions badly affect the
encouragement of per capita income
  Nepotism

Nepotism means the murder of talent and abilities. It refers to the employment opportunities according
to relation not according to worth. If population is poor but is talented it remains poor due to nepotism.
16 % employed labour force is performing their services below their capabilities.

Conclusion:

            Per capita income of Pakistan is very low as compare to the per capita incomes of rich nations. 
Use of modern technologies and control on population is necessary to improve the per capita income.