Dynamic of Economic Growth, Income Inequality and Poverty in Pakistan

Abstract

In this study, an attempt is made to quantify the extent and evolution of inequality and poverty in Pakistan. This study also deals with the relationship between economic growth, inequality and poverty. Poverty is strongly related to the absence of basic human and physical assets, especially education, health, land, sanitary conditions etc. The term inequality is used quite generally as income/consumption difference among the individuals or households with in a society. Existing work on trends in inequality and poverty in Pakistan is based on different methods of measurement. This dissertation estimates a consistent series of inequality and poverty to evaluate long term trends in overall Pakistan, its rural and urban sectors. The present study covers the period from 1990-91 to 2010-11 using micro data from Household Integrated Economic Surveys (HIESs), conducted by Federal Bureau of Statistics Government of Pakistan. Trend analysis of inequality and poverty has been done by employing axiomatic approaches. Moreover, the population has been decomposed into absolute poor (extremely poor and ultra poor), transitorily poor (transient poor and transient vulnerable) and non-poor (quasi non-poor and non-poor). In the axiomatic framework, six poverty indices (Head-count Index, Poverty Gap Index, Severity of Poverty Index, Sen Index, SST Index and Watts Index) have been estimated and incorporated on both income and consumption basis. The results reflected that almost all measures of poverty increased from the year 1990-91 to 2001-02 and then decreased after 2001-02 in overall Pakistan, its rural and urban areas. Basic needs like food, health, clothes, etc., are necessary for every person. Therefore poverty on consumption basis is significantly lower than income basis. By developing an axiomatic framework, six positive and normative inequality measures viii (Gini coefficient, Theil Index, Mean Log Deviation, Atkinson Index, Coefficient of Variation and Deciles Dispersion Ratio) have been estimated. The results revealed that inequality on the basis of income and consumption is not stable showing wide variation during the years 1990-91 to 2010-11. Almost all measures of inequality decreased from the year 1990-91 to 1996-97 and then increased continuously till 2010-11 in overall Pakistan, its rural and urban areas. Moreover, income inequality is significantly higher than consumption inequality. Throughout the period from 1990-91 to 2010-11 almost the poorest 20 percent and the middle 60 percent lost their income/consumption share, whereas the richest 20 percent gained their income/consumption share significantly in urban and rural regions along with overall Pakistan. The regression model encompasses the impact of growth on poverty and impact of growth on inequality. The experience of Pakistan‟s economy shows that growth has not translated into poverty reduction and the income/consumption inequality has declined with growth. The analysis of growth and poverty has shown that the growth elasticity of poverty is positive for all samples i.e., overall, rural and urban areas on income as well as consumption basis while growth elasticity of inequality is negative for the entire sample on both income and consumption basis and there is negative relation between inequality and poverty. The final regression model depicts the interrelationship between growth, poverty and inequality.