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Chapter – 4.



The fight against poverty represents the greatest challenge of our times. Considerable progress has nevertheless
been made in different parts of the world in reducing poverty. The proportion of people living in extreme poverty on
global level fell from 28 percent in 1990 to 21 percent in 2001 (on the basis of $1 a day). In absolute numbers the
reduction during the period was 130 million with most of it coming from China. In Sub-Saharan Africa, the absolute
number of poor actually increased by 100 million during the period. The Central and Eastern Europe and the CIS also
witnessed a dramatic increase in poverty. While incidence of poverty declined in South Asia, Latin America and the
Middle East witnessed no change.

The recent trends in global and regional poverty clearly suggest one thing and that is, that rapid economic growth
over a prolonged period is essential for poverty reduction. At the macro level, economic growth implies greater
availability of public resources to improve the quantity and quality of education, health and other services. At the
micro level, economic growth creates employment opportunities, increases the income of the people and therefore
reduces poverty. Many developing countries have succeeded in boosting growth for a short period. But only those
that have achieved higher economic growth over a long period have seen a lasting reduction in poverty – East Asia
and China are classic examples of lasting reduction in poverty. One thing is also clear from the evidence of East Asia
and China that growth does not come automatically. It requires policies that will promote growth. Macroeconomic
stability is therefore, key to a sustained high economic growth. Although extreme poverty on global level has
declined, the gap between the rich and poor countries is increasing, even when developing countries are growing at
a faster pace than developed ones – perhaps due to the large income gaps at the initial level. In a world of six billion
people, one billion have 80 percent of the income and five billion have less than 20 percent. In the next 25 years, two
billion more people will be added in the world we live. All but 50 million of them will be in the developing countries. In
the year 2025, seven out of the eight billion people will be living in developing countries. This issue of global
imbalance is at the core of the challenge to scale up poverty reduction.

In Pakistan, Poverty Reduction Strategy was launched by the government in 2001 in response to the rising trend in
poverty during 1990s. It consisted of the following five elements:- (a) accelerating economic growth and maintaining
macroeconomic stability, (b) investing in human capital, (c) augmenting targeted interventions; (d) expanding social
safety nets and (e) improving governance. The net outcome of interactions among these five elements would be the
expected reduction in transitory and chronic poverty on a sustained basis. The reduction in poverty and improvement
in social indicators and living conditions of the society are being monitored frequently through large- scale household
surveys in order to gauge their progress in meeting the targets set by Pakistan for achieving the seven UN
Millennium Development Goals by 2015. Among them the most important is halving the population living below the
poverty line from 26% in 1990 to 13% by 2015. The improvement in household social indicators and living conditions
at the national level during 2001-05, based on information from 76520 households is documented in last year
Economic Survey. Preliminary findings of Pakistan Social and Living Standards Measurement Survey (PSLM 2004-
05) on poverty status were released in end February this fiscal year.

Pakistan’s growth performance over the last four years is enviable in many respects. Sound macroeconomic policies
and implementation of structural reforms in almost all sectors of the economy have transformed Pakistan into a
stable and resurgent economy in recent years. The real GDP has grown at an average rate of over 7.5 percent per
annum during the last three years (2003/04 to 2005/06). With population growing at an average rate of 1.9 percent
Economic Survey 2005-06

per annum, the real per capita income has grown at an average rate of 5.6 percent per annum.

The strong economic growth is bound to create employment opportunities and therefore reduced unemployment. The
evidence provided by the Labour Force Survey 2005 (First two quarters) clearly supports the fact that economic
growth has created employment opportunities. Since 2003-04 and until the first half of 2005-06, 5.82 million new jobs
have been created as against an average job creation of 1.0 – 1.2 million per annum. Consequently, unemployment
rate which stood at 8.3 percent in 2001-02 declined to 7.7 percent in 2003-04 and stood at 6.5 percent during July –
December 2005. The rising pace of job creation is bound to increase the income levels of the people. Agriculture,
housing and construction, IT and Telecom sector, and SME are the sectors which have created relatively more jobs.

In recent years the role of remittances in reducing poverty has been widely acknowledged1. Remittances allow
families to maintain or increase expenditure on basic consumption, housing, education, and small-business
formation. Remittances constitute one of the largest sources of external finance for developing countries and
Pakistan is no exception. Total remittances inflows since 2001-02 and until 2005-06 have amounted over $ 19 billion
or Rs.1129 billion. It has averaged 4.1 percent of GDP during the last four years. Such a massive inflow of
remittances particularly towards the rural or semi-urban areas of Pakistan must have helped loosen the budget
constraints of their recipients, allowing them to increase consumption of both durables and non-durables, on human
capital accumulation (through both education and health care), and on real estate. To the extent that the poorer
sections of society depend on remittances for their basis consumption needs, increased flow of remittances would be
associated with reduction in poverty and possibly in equality.

Although, growth is necessary but it is not sufficient to make any significant dent to poverty. Realizing this fact the
government had launched a directed program under the title of Poverty Related and Social Sector Program some five
years ago. Over the last five years the government has spent Rs.1332 billion on poverty-related and social sector
program to cater to the needs of poor and vulnerable sections of the society. Such a huge spending on targeted
program is bound to make a significant dent to poverty.

Summarizing the above discussion it is clear that a strong growth (7.5 % on average) for three years in a row with per
capita income growing at an average rate of 5.6 percent; a large inflow of remittances (over $ 4.0 billion per annum)
in recent years, a huge expenditure on poverty-related and social sector program, and many other interventions were
bound to make a significant dent to poverty in Pakistan. It is with this that we turn to the status of poverty in Pakistan
for the period 2000-01 and 2004-05.

The Household Integrated Economic Survey (HIES) – a component of Pakistan Social and Living Standards
Measurement (PSLM) Survey provides important data on household income, consumption expenditure and
consumption patterns at national and provincial level with rural-urban breakdown. The information pertaining to
income and expenditure of the households are used to estimate poverty. Before we delve into the details of poverty
estimates a few words regarding the Survey is in order.

HIES Survey 2004-05: Its size and scope

The HIES – a component of the PSLM Survey 2004-05, is specifically designed to monitor poverty status of
population by collecting information on consumption expenditure at the household level. With a representative
sample size of 14706 households, it covered 5808 and 8898 households in the urban and rural areas of the country,
respectively. The Survey was started in July 2004 and the entire field operations were completed in June 2005.
Information on consumption/expenditure of 196 items including 89 food items were collected from each household.

1 See World Economic Outlook, April 2005, Chapter II, IMF

Poverty and Income Distribution

Consumption aggregate includes food items, frequently used non-food expenses (household laundry, cleaning,
personal care product, utilities, fuel and energy and transportation) and other non-food expenses such as clothing,
footwear, education, health and house rents. The poverty line is based on 2350 calories per adult equivalent per
day. It is also comparable with poverty line of 2000-01 as it was also based on 2350 calories and calculated from
Pakistan Integrated Household Survey (PIHS). The poverty line of 2004-05 is adjusted by the inflation rate during the
period 2001-2005.

Poverty Status 2001 and 2004-05: Survey Evidence

Table 4.1 gives a comparative snapshot of poverty status during 2001 and 2005. The latest estimate of inflation ─
adjusted poverty Iine is Rs.878.64 per adult equivalent per month ─ up from Rs.723.40 in 2001. Headcount ratio,
i.e., percentage of population living below the poverty line has fallen from 34.46 percent in 2001 to 23.9 percent in
2004-05, a decline of 10.6 percentage points. In absolute numbers the count of poor persons has fallen from 49.23
million in 2001 to 36.45 million in 2004-05. The percentage of population living below the poverty line in rural areas
has declined from 39.26 percent to 28.10 percent while those in urban areas, has declined from 22.69 percent 14.9
percent. In other words’, rural poverty has declined by 11.16 percentage points and urban poverty is reduced by 7.79
percentage points. The other two indicators, poverty gap and severity of poverty are aggregate measures of ‘spread’
of the poor below the poverty line, i.e., they aggregate the distance (proximity or remoteness) of all poor individuals
from the poverty line. A lower value indicates that most of the poor are bunched around the poverty line. In line with
the improvement in headcount, both the poverty gap and severity of poverty has also declined substantially in the
country. These findings are consistent with the developments on economic scene that have taken place since 2000-
01. A strong growth in economy, rise in per capita income, a large inflow of remittances and massive spending on
poverty-related and social sector programs were expected to reduce poverty in Pakistan.

Table-4.1 : Poverty Indicators 2001 and 2004-5

Headcount Poverty Gap Severity of Poverty
2001 2005 2001 2005 2001 2005
Pakistan 34.46 23.90 7.03 4.76 2.13 1.48
Urban 22.69 14.90 4.55 2.87 1.35 0.84
Rural 39.26 28.10 8.04 5.64 2.44 1.77
Poverty Line
723.40 878.64
(Rs.per adult equivalent per month)
Source : CRPRID / Planning Commission.

The estimation of poverty line enables the policy

makers to further identify and group the population Table-4.2 : Comparative Poverty Profile 2001 and 2004-05
Percentage of Population
into various ‘poverty bands’ such as extremely poor,
2001 2004-05
vulnerable and non-poor etc. Table 2 presents a
Extremely Poor 1.1 1.0
comparative profile of 2001 and 2004-05 for the six Ultra Poor 10.8 6.5
groups. While the percentage of population classified Poor 22.5 16.4
as ‘extremely poor’ remain almost identical in the two Vulnerable 22.5 20.5
periods, the proportion of ultra poor and poor have Quasi Non-Poor 30.1 35.0
declined appreciably. At the higher end, the Non-Poor 13.0 20.5
percentage of quasi non-poor and non-poor in the Source : CRPRID / Planning Commission.
economy increased notably.

Economic Survey 2005-06

Box Item : Endorsement of Poverty Estimates by the Development Partners

After the announcements of the preliminary results in February 2006 the Government of Pakistan constituted a
committee headed by the Secretary, Planning and Development Division and comprising of the representatives from
the development partners i.e., World Bank, Asian Development Bank, United Nations Development Program (UNDP)
and the Department for International Development (DFID), UK; experts from the CRPRID / Planning Commission,
other Government Agencies and local experts to validate the poverty related estimates obtained from the
methodology employed by the CRPRID/Planning Commission. This methodology was formulated at the time of
analyzing the data from 1998-99 PIHS. Applying this methodology on the data of PIHS 2000-01 and HIES 2004-05,
the World Bank endorsed the poverty line of Rs.723.4 and found that of 34.46 percent people were living below the
poverty line in 2000-01. Applying an inflation rate of 21.45 percent for the period 2001-01/2004-05, it also obtained the
poverty line of Rs.878.64 and that 24 percent of people were living below the poverty line in 2004-05, almost identical
to the CRPRID/Planning Commission estimate of 23.9 percent. The service of world renowned poverty expert Prof.
Nanak Kakwani, Director of the UNDP-International Poverty Centre, Brazil was hired by the UNDP to independently
look into the estimates of the CRPRID/Planning Commission. He also authenticated the poverty estimates for both the
years (2000-01 and 2004-05) as per the methodology used by the CRPRID/Planning Commission. The DFID’s
consultants also endorsed the methodology employed by the CRPRID/Planning Commission. In order to maintain
consistency across years, it is essential that we apply the same agreed upon methodology over the years, irrespective
of its weaknesses and strengths. Needless to state that poverty lines and its estimates are sensitive to the
methodologies used and specifically to the manner in which how and what type of price indices are used to inflate the
poverty lines. Different methodologies used by different development partners and other experts can throw different
numbers. One element is however, common that a substantial decline in poverty has taken place between the two
Survey periods.

Detailed analysis of the consumption patterns of the population grouped by quintiles provides strong evidence in
support of the observed reduction in poverty levels between 2001 and 2004-05. Table 3 compares mean and
median of real monthly consumption expenditure per adult equivalent of the 2 periods. Overall, the growth in real
mean expenditure of the population from Rs.1004 to Rs.1171 is 16.6 percent. The growth in real mean expenditure
of top 20% percent population at 22 percent is nearly 2½ times that of the bottom 20%. The closeness of mean and
median values across the bottom 80% of the population indicate that consumption expenditures are bell-shaped
normally distributed around the mean and median of each quintiles. Only the top 20% of the population exhibit
greater skewness in consumption behaviour as mean and median consumption expenditures are different.

Table-4.3: Consumption expenditure between PIHS 2000-01 and PSLM 2004-05 at the prices of 2001
PIHS 2000-01 PSLM 2004-05 Growth
Mean Median Mean Median (mean exp.)
Poorest 20 % 508 524 555 557 9.25
Second 690 690 775 775 12.32
Third 845 843 961 959 13.73
Fourth 1070 1060 1238 1227 15.70
Richest 20 % 1908 1582 2327 1912 21.96
All 1004 843 1171 960 16.63
Source : CRPRID / Planning Commission.

Comparing the share of major food and non-food items in total expenditure across the 2 points in time provides
another perspective on the stability of consumption behavior and reliability of the data. Table 4 gives the percentage
expenditure share of major items in the monthly per adult equivalent expenditure. Notable increase in shares
between the two periods is observed in transport category and other miscellaneous expenditure, e.g., email, internet

Poverty and Income Distribution

etc. The share of medical expenses and education record a marginal decline from 2001 level. In case of education,
this may reflect substitution by households of own expenditure with that provided by the government via upscaling
and better targeting of expenditures on education in PRSP.

Table-4.4: Percentage of per adult equivalent monthly consumption expenditure by commodity group
Commodity Group PIHS 2000-01 PSLM 2004-05
Food 49.5 49.1
Fuel and lighting 8.1 8.0
Personal care articles/services, laundry cleaning, paper articles 3.9 3.8
Personal transport and traveling expenses (not commercial) 3.7 4.9
Other misc. household exp. on goods and services(e-mail, internet etc) 3.9 5.2
Clothing, clothing material/services 5.7 5.0
Medical care 4.5 4.0
Education 3.5 3.0
House rent 12.0 11.9
Other remaining expenditures 5.1 5.1
Total 100.0 100.0
Source : CRPRID / Planning Commission.

Table 5 compares the growth rate in per adult equivalent monthly consumption expenditure on few commodity
groups of bottom 20% with the top 20% of the population for the year 2001 and 2004-05. Except for the negative
growth in medical care expenses of the richest 20%, all other commodity groups indicate a lower and in some cases,
i.e., education, clothing, and personal care, a negative growth rate for the poorest 20% during the period. A marginal
negative growth in clothing and items of personal care may reflect cheaper imports from China, while in case of
education, increased expenditure on education by the government may have substituted household own expenditure
on education. The highest growth (50.4 %) for the poorest 20% occurred in the transport and traveling expenses.

Table-4.5: Comparison of per adult equivalent monthly consumption expenditure between PIHS 2000-01 and HIES
2004-05 at 2001 prices by commodity group and quintile
Commodity Group Poorest 20 % Richest 20 %
**2001 *2005 Growth 2001 2005 Growth
Food 288.5 322.0 11.6 799.8 951.8 19.0
Fuel and lighting 47.3 50.0 5.7 140.6 169.9 20.9
Personal care articles/services, laundry
22.6 22.3 -1.4 66.9 82.8 23.9
cleaning, paper articles
Personal transport and traveling
11.0 16.6 50.4 92.1 153.4 66.5
expenses (not commercial)
Other misc. household exp. on goods
14.3 16.4 15.2 101.0 165.3 63.6
and services(e-mail, internet etc)
Clothing, clothing material/services 33.1 32.4 -2.2 93.5 101.4 8.4
Medical care 19.3 22.1 14.6 93.4 87.7 -6.1
Education 9.0 7.8 -13.7 96.5 108.0 11.9
House rent 39.3 43.0 9.3 313.2 365.7 16.8
Source : CRPRID / Planning Commission.

Consumption Inequality
The aggregative nature of income data collected in PSLM 2004-05 is strictly not comparable with the corresponding
data collected in PIHS 2000-01. Consequently inequalities in consumption expenditure are compared between the
two periods. Inequality based on consumption expenditure are generally lower than inequality based on income as
Economic Survey 2005-06

variations in consumption are less and it is based partly on a subset of homogenous (in terms of quality and price)
food items. The consumption inequality is measured by Gini Coefficient and ratio of highest to the lowest quintile.
The Gini Coefficient takes on a value between 0 and 1. The higher the value of Gini Coefficient, the greater will be
the inequality.

Table 6 shows the value of Gini for Pakistan and rural urban divide obtained from the PIHS 2000-01 and PSLM 2004-
05 data. The trend for Gini values indicate that consumption inequality has increased during the period. The
empirical evidence in the previous sections also indicates that consumption increased faster for top 20% of the
population as compared to the growth rate of bottom 20%. Historically, between 1970 and 1979 decline in absolute
poverty was also accompanied by rising inequality in Pakistan.

Table-4.6 : Gini Coefficient and Consumption Shares by quintiles

PIHS 2000-01 HIES 2004-05
Urban Rural Pakistan Urban Rural Pakistan
Gini coefficient 0.3227 0.2367 0.2752 0.3388 0.2519 0.2976
Consumption share by Quintile
Quintile1 5.3 12.8 10.1 4.8 12.6 9.5
Quintile2 8.1 16.9 13.7 7.6 17.1 13.2
Quintile3 12.1 19.5 16.8 11.6 19.7 16.4
Quintile4 19.4 22.4 21.3 18.3 23.0 21.4
Quintile5 55.1 28.4 38.0 57.7 27.6 39.4
Ratio of Highest to lowest 10.40 2.22 3.76 12.02 2.19 4.15
Source : CRPRID / Planning Commission.

The estimates also indicate that consumption inequality in urban Pakistan is higher than in rural Pakistan. Moreover
urban inequality increased faster than rural inequality during the 2001-05 period. The high urban inequality may be
attributed to the fact that urban work force is more diversified in terms of skill and education. The wage income is,
therefore more unequally distributed in urban areas than in rural areas. In addition, income from self-employment is
more concentrated in urban areas than in rural areas because urban self-employed ranges from wealthy
businessmen to petty traders whereas bulk of the rural self-employed are homogeneous in informal sectors.

The Gini Coefficient is a broad single aggregative measure. It suppresses the profile of the distribution. Table 6 also
reports the percentage share of consumption expenditure by quintile between 2001 and 2005 for overall Pakistan as
well as the rural and urban regions. The percentage share of expenditure indicates that while first three quintiles—
the lowest 60% witnessed few basis points decline in their consumption share, the last two quintiles—the highest 40
percent gained in their consumption share implying that inequality in Pakistan has increased marginally but relatively
more in urban areas. The ratio of the highest to the lowest quintile which measures the gap between the rich and the
poor also widened to some extent from 3.76 in 2001 to 4.15 in 2005. At regional level, the gap between the rich and
poor in urban areas has widened relatively more–increase from 10.40 to 12.02. In contrast, the gap between the rich
and poor in rural area remained more or less unchanged, that is, from 2.22 to 2.19. Furthermore, this also suggests
that the gap between the rich and poor in rural area remained low during the period.

Poverty-Related and Social Sector (PRSP) Expenditure

In recent years the realization that growth alone is not sufficient for poverty reduction is at the centre stage in
development policy and practice. During the last five years pro-poor expenditures were the most important fiscal
intervention to support the four critical elements of the poverty reduction strategy. In terms of impact on growth,
employment and poverty the pro-poor spending can be broadly categorized into 3 types:- i) The impact of increase
spending on Education, Health, Population Planning, Governance on chronic poverty is long term, but in the medium
Poverty and Income Distribution

to short term increasing access to these services imply more investment and employment for even lower income
strata specially in rural areas. ii) Spending on Irrigation, Roads, Highways, Rural Development, Land Reclamation,
Village Electrification increase employment in the short to medium run and mitigate transitory poverty. iii) Spending
on Food Subsidies, Social Security, and Food Support Programs directly target the poor and vulnerable by raising
their consumption levels. Thus invariably the pro-poor spending through the multiplier have positive impact on growth
and reduce poverty directly or indirectly. While the improvement in access to various kinds of social services during
2001-05 have been extensively documented in government publications including the last year Economic Survey, we
briefly review the trends in PRSP expenditure in ensuing pages.

The PRSP mainly relies on targeted expenditures on pro-poor sectors to cater to the needs of the poor and
vulnerable sections of the society. The trends in pro-poor expenditures during the last five years highlights
tremendous growth in PRSP related expenditures, which is reflected in Table 7. All together, social sector and
poverty related expenditures grew at an average rate of more than 20 percent per annum during the period under
review. There is nearly a three fold increase in the projected PRSP expenditure for 2006-07 when compared with the
actual expenditures of base year 2001-02

Within the various categories of pro-poor expenditure, human development comes out to be the priority item of the
Government with expenditures under this head constituting, on average, more than 50 percent of all PRSP related
expenditures. Given the fact that the majority of the poor reside in the rural areas, special initiatives of the
government towards rural development have received increasing importance during the last three years, which along
with higher expenditure on human development have resulted in substantial increase in rural development

Table-4.7: Social Sector and Poverty Related Expenditures (Rs Billion)

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
Actual Actual Actual Actual Budget Projected
Community Services 10.98 16.57 28.53 41.71 45.25 51.67
i. Roads, Highways & Buildings 6.34 13.15 22.75 35.18 37.71 43.06
ii. Water Supply and Sanitation 4.64 3.42 5.78 6.53 7.54 8.61
Human Development 90.67 105.81 134.05 155.81 196.84 244.6
i. Education 66.29 78.61 97.69 116.87 148.2 184.75
ii. Health 19.21 22.37 27.00 31.42 39.97 49.95
iii. Population Planning 1.33 3.12 4.68 4.57 5.27 6.02
iv. Social Security & welfare 3.66 1.30 4.14 2.03 2.34 2.67
v. Natural Calamities 0.19 0.41 0.54 0.92 1.06 1.21
Rural Development 24.30 34.18 44.52 59.69 68.74 77.93
i. Irrigation 10.13 15.54 22.50 37.87 43.6 49.2
ii. Land Reclamation 1.84 1.76 2.00 2.11 2.43 2.78
iii. Rural Development 12.33 16.88 18.60 15.36 17.7 20.22
iv. Rural Electrification 1.42 4.35 5.01 5.73
Safety Nets 8.33 13.75 12.32 8.438 9.65 11.03
i. Food Subsidies 5.51 10.86 8.51 5.35 6.17 7.05
ii. Food Support Program 2.02 2.24 2.80 2.70 3.11 3.56
iii. Tawwana Pakistan 0.80 0.59 0.59 0.078 0 0
iv. Low Cost Housing 0.06 0.42 0.31 0.37 0.42
Governance 32.98 38.54 41.81 50.52 58.21 66.38
i. Administration of Justice 1.98 2.25 2.44 3.11 3.59 4.01
ii. Law and order 31.00 36.29 39.37 47.41 54.62 62.37
Total 167.25 208.84 261.30 316.24 378.81 452.42
Source: Policy Wing, Finance Division

Economic Survey 2005-06

Another important aspect of the poverty reduction strategy is employment generation for the poor. In this regard,
expenditures on roads and highways ⎯ the most labour-intensive sector, constitute the major share in community
services. These expenditures are projected to rise by almost seven times in 2006-07 as compared to 2001-02,
representing an average growth rate of more than 50 percent.

The government’s commitment towards sustained expenditures on pro-poor sectors is reflected in the Fiscal
Responsibility and Debt Limitation Act promulgated in 2005. Under this law, social and poverty related expenditures
are not to be reduced below 4.5 percent of the GDP in any given year and budgetary allocations to health and
education will be doubled from the existing level in terms of percentage of Gross Domestic Product during the next
ten years. Expenditures on pro-poor sectors in 2004-05, at 4.85 percent of GDP was well above the requirement
under this Law. Pro-poor expenditure is projected to be 5.02 percent of GDP in 2005-06 and 5.25 percent of GDP in

The strategy going forward as enshrined in the Poverty Reduction Strategy Paper for the medium-term (2006/07 –
2008/09) aims at forging a broad-based alliance with civil society in the quest to alleviate poverty and accelerate
development. The complex and multi-dimensional nature of poverty warrants that strategies for poverty reduction
encompass plans for rapid pro-poor economic growth, sound macroeconomic management, structural reforms, and
social inclusion. The strategy is being enriched by the on-going process of dialogue with civil society and the poor.
The strategy places considerable emphasis on taking advantage of the opportunities offered by globalization.
Pakistan’s Poverty Reduction Strategy is underpinned by the following considerations:

” Continuing to ensure macro-economic stability and sustained high and broad-based economic growth
by taking advantage of the opportunities offered by globalization, while at the same time unleashing the
potential of domestic commerce, reducing inequalities and maximizing employment generation
” Directing public policy debate towards the needs of the poor.
” Bringing about an effective transformation of society, by forging partnerships and alliances with civil
society and the private sector.
” Understanding the nature of poverty, and using that as a guide for all public actions.
” Empowering the people, especially the women and the most deprived, by increasing access to factors
of production, particularly land and credit.

Given the significant resources required to fund the Poverty Reduction Strategy (PRS), the Government has
prioritized the PRS through the Medium Term Expenditure Framework (MTEF), which has been used to inform the

The PRSP process has been completely aligned with the Millennium Development Goals (MDGs) and the Medium
Term Development Framework (MTDF). While the MTDF provides a framework for translating the ‘VISION 2030’ into
action during the period 2005-10; its emphasis is on “sustained long term growth”. The PRSP on the other hand
presents the strategy to ensure that the growth is broad-based and leads to effective poverty reduction. The detailed
policies related to growth promotion are presented in the MTDF, while the PRSP takes those interventions as given
and focuses on the package of interventions required to ensure that the sustained high growth is translated into
effective poverty reduction; and the poor and marginalized are protected. In this regard, the following sub-strategies
will be at the core of the Poverty Reduction Strategy of the Government. They will form part of the PRSP-2 currently
under finalization, which will become operational from next fiscal year.

1. Maximizing the Gains from Globalization

Globalization is a multi-dimensional process which impacts all aspects of life, be it economic, social, cultural, or
political. For globalization to lead to poverty reduction, domestic enterprises need to be increasingly competitive in
Poverty and Income Distribution

the international market. This requires increased efficiency and upgrading skills of the labour force to improve its level
of human capital. It requires the enforcement of quality control and standards. For domestic enterprises to be
competitive in the global economy, good investment climate is essential, in which firms can start up, grow and

2. Trade Liberalization and Export Promotion

The Government has implemented a comprehensive program of trade reforms gradually moving the economy away
from protectionism towards greater trade openness and global economic integration. The Government has been
taking a number of defensive trade measures – in the context of WTO – to protect the domestic industry against the
dumping of cheap and illegal imports.

Sustained export performance is a key priority. Towards this end, the Government is making efforts in the areas of
trade facilitation, WTO related issues, export promotion and diversification, and extension of export promotion zones
and industrial clusters. The Government’s policy will focus on measures to sustain textile exports and promote other
sectors that are not yet capable of exporting. The Government is committed to liberalize and deregulate Pakistan’s
trade and widen the export base through further strengthening of industrial activity and strong institutional supply side
measures. The trade policy continues to focus on value addition for sustainable growth in export earnings.

3. Employment Generation and Poverty Reduction

Economic growth has been quite robust during the last five years and particularly in the tenure of PRSP-I (2003-06).
The growth momentum is likely to continue in the medium-term. In order to maximize the poverty reduction impact of
growth it needs to be aligned with an employment strategy that can ensure that growth is broad-based.

Certain sectors of the economy are critical for sustained employment generation and growth leading to poverty
reduction and improved income distribution. These sectors include, in particular:

” Agriculture (agro-industry, agri-business and livestock) and water sector development;

” Small and Medium Enterprises (SMEs); and
” Housing and construction sector.
Nearly 67 percent of the people live in the rural areas and majority of them are dependent on agriculture for their
livelihood. Therefore, agriculture will continue to receive highest attention. The rural sector also comprises a large
and expanding non-farm sector where employment generation is crucial. This also has the beneficial impact of
strengthening the farm and non farm linkages and enhancing growth through the multiplier effect. New jobs can be
created by accelerating growth in agriculture and by increasing the area under cultivation, raising crop yields,
diversification of cropping patterns, production of high value crops such as fruits, vegetables, flowers, etc. Livestock
has high potential for job creation and income generation as well.

The SME sector has an enormous employment generation potential. This extends to SMEs in both the urban and
rural areas. In order for SMEs to play their due role a comprehensive package of venture capital, credit, liberalization
of controls, technology and skill up−gradation, marketing and management advisory services is needed. The SMEs
in the rural areas are best placed to create new job opportunities and for income generation. SMEs can easily be
involved in a number of profitable ventures such as fruit and vegetable processing, dairy and livestock, floriculture,
fisheries, transportation of agriculture products and their marketing. The growth strategy in the MTDF provides for
incentives to promote the whole host of crucial requirements identified above for the promotion of the SMEs.

The housing and construction sector has received greater attention for employment creation in both the PRSP-I as
well as the MTDF. It has been identified that this sector has linkages with about 40 building material industries.
Moreover, this sector helps to further support the investment climate through its overall impact on the economy.

Economic Survey 2005-06

Given its strong background and forward linkages and large employment potential effects, this sector is crucial for
reducing poverty by generating job opportunities for the poor.

Equitable growth requires development and implementation of policies which will positively impact all segments of the
society in proportion to their requirements. Employment opportunities need to be created in both rural and urban
areas, farm as well as non-farm, and for men, women and youth.

4. Micro-Finance
Microfinance plays a critical role in improving the lives of the poor people. The poor use financial services not only for
business investment in their micro-enterprises but also to invest in health and education, to manage household
emergencies, and to meet the wide variety of other liquidity needs that they encounter occasionally. Evidence from
the millions of microfinance clients around the world demonstrate that access to financial services enables poor
people to increase their household income, build assets and reduce their vulnerability to the crises that are so much
a part of their daily lives.

In the context of Pakistan, the use of micro-credit holds importance for both the agricultural and non agricultural
sector. The need for credit is particularly important for poor farmers. Their requirement for agricultural inputs, seeds,
fertilizer, pesticide etc. tends to be cyclical as does their income. However the two cycles do not always coincide.
Rural loans for non agricultural purposes include such things as micro enterprises in unorganized sectors of rural

Realizing the importance of microfinance as a tool of poverty reduction and social mobilization, the government has
accelerated its efforts to establish strong foundations of microfinance in formal sector along with extending support to
the informal sector (NGOs) as well. Khushali Bank (KB) was established as the first specialized microfinance
institution in 2000 and the Microfinance Institutions (MFI) Ordinance was promulgated in 2001 to provide a separate
regulatory framework for microfinance institutions. As a result, during the last five years, four specialized
microfinance banks (excluding KB) have started operation, which includes the First Microfinance Bank Limited
(FMFBL) and Tameer Microfinance Banks working at the national level, the Rozgar Microfinance Bank Limited
(RMFBL) and Network Microfinance Banks Limited (NMFBL) which are operating at the district level. In addition, the
Pakistan Poverty Alleviation Fund (PPAF) has been working since 1999 as a distributor/ wholesaler of credit to the

Pakistan’s poverty reduction strategy has yielded handsome result in the shape of sharp reduction in poverty.
Although, poverty has declined but the fact remains that 23.9 percent people of Pakistan still live below the poverty
line. Further reduction in poverty is a major challenge for the government. A clear lesson from the past four years of
Pakistan and from other countries’ experience is that sustained growth on a consistent basis is needed to reduce
poverty. Macroeconomic stability is, of course, a prerequisite for the sustained economic growth that brings the
poverty reduction and rising living standards that we all want to see. But macroeconomic stability is not sufficient.
Rather, it is the foundation on which to build a thriving economy. Successfully targeted social programs, fair and
broad based fiscal regimes, labour markets that promote job creation, and high quality education opportunities for the
neediest, are also key to poverty reduction.