I. Introduction
The efficacy of economic growth in improving income distribution and reducing poverty has spawned an extensive literature. The discussion in development literature has been dominated by the examination of the hypothesis that increased inequality is but a natural consequence of growth, at least at the earlier stages of development. A considerable volume of literature emerged showing that a trade-off between growth and equity is not inevitable. The recent success of East and South- East Asian economies in achieving rapid economic growth is generally perceived to have reduced inequalities and at the same time, has received considerable attention.

Like growth and equity, the relationship between growth and poverty has been widely studied. The literature emerging from the debate appears to have given rise to a number of stylized propositions. First, there is a strong positive effect of economic growth on enabling conditions for poverty reduction through enhanced provision of direct and indirect employment opportunities, social welfare services, and infrastructure that can potentially benefit the poor. This is the view taken by the proponents of "trickle down" hypothesis. Second, growth does not necessarily alleviate poverty, as the process may not be sufficiently equitable. Thus, poverty alleviation cannot be left alone to be accomplished by the "trickle down" process. Policy intervention for improving the distribution of income and the provision of social services along with the creation of conditions for enhancing economic growth are necessary. This is the view commonly referred to as the "basic needs approach". Third, there is no inherent trade-off between growth and poverty alleviation.

The dominant view, however, is that economic growth that increases the demand for labour, particularly unskilled labour, will, therefore, reduce poverty. But poverty can also be reduced by increasing the productivity of the poor, either by targeted expansion of education, especially at the primary level, or by expansion of their access to physical and financial capital. Growth strategies that focus on expanding labour-intensive manufacturing exports, on promoting rural development, especially improved agricultural productivity, and on improving human capital of the poor will yield the largest poverty reduction benefits.

There has been a resurgence of interest in the subject in recent years for at least two reasons. Firstly, the accelerating trend towards globalization in the 1990s may have exacerbated prevailing inequalities and have increased poverty, especially in developing countries. Secondly, the social costs of the East Asian financial crisis have forced the international community in general, and international financial institution in particular to re-examine the development and debt strategies. Poverty reduction has, therefore, taken a center stage. It is now a key and more explicit element of a renewed growth-oriented strategy for low-income
developing countries.

The purpose of this Chapter is many fold. Firstly, it reviews the trends in inequality and poverty. Secondly, it examines the relationship between growth and inequality and finally, presents the poverty reduction strategy of the government.

II. Trends in Inequality
Various summary measures are used to describe and quantify inequality. The Gini coefficient is by far the most popular statistical indicator of inequality. The Gini coefficient varies from zero (complete equality) to 1 (complete inequality), the more unequal the income distribution, the higher the Gini coefficient. The Gini coefficient is an aggregate measure of inequality. It, however, obscures the differences within the various income groups. For example, the Gini coefficient may report a decline in inequality when redistribution of income takes place either from top to middle income class or from middle to the bottom income group. Therefore, by simply looking at the aggregate measure is not enough to know the distribution of income. What is required is to look both at the aggregate level as well as quintile income shares to analyse the trends and patterns of inequality. The trends in income distribution measured by the Gini coefficient as well as the respective income shares of the three categories of households: lowest 20 percent, highest 20 percent, and middle 60 percent for the selected years for which the data from the Household Income and Expenditure Survey (HIES) are available are given in Table 4.1.

Source: Federal Bureau of Statistics.

A cursory look at the table is sufficient to see that, on average, income distribution has worsened over the last three and a half decades. However, decade-wise analysis suggests that income distribution improved in the 1960s—the Gini coefficient declined from 0.386 in 1963-64 to 0.33 in 1970-71; but worsened in the 1970s. Income distribution improved in the 1980s but deteriorated sharply in the 1990s. Another indicator of income inequality is the shares of the lowest 20 percent and the highest 20 percent of households in the income. It can be seen from the table that share of the lowest 20 percent household increased in the 1960s, declined in the 1970, once again increased in the 1980s, but declined sharply in the 1990s. Converse is true in the case of highest 20 percent household. The ratio of highest 20 percent to lowest 20 percent represents the extent of inequality. This ratio, as reported in the table, exhibits more or less the similar trend as discussed above.

The derivation of the Gini coefficient can be explained through the use of the Lorenz Curve, which plots the cumulative share of the income received by the cumulative share of population, starting from the poorest income-receiving units. As will be discussed later, it is by now, well documented that poverty as well as distribution of income have worsened in the 1990s. This fact is demonstrated through the Lorenz Curve in Fig.1. The Gini coefficient increased from 0.346 in 1986-87 to 0.40 in 1996-97. This is amply demonstrated
by two curves representing 1986-87 and 1996-97 in Lorenz Curve.

Is there any relationship between growth and equality in Pakistan? As stated earlier, there is a perception in development literature that there is an inherent trade-off between growth and inequality. Simon Kuznets in his pioneering work showed that income inequality initially increases, reaches a peak and then starts to decline with economic growth. This hypothesis is known in the literature as "inverted U" hypothesis or Kuznets hypothesis. In the case of Pakistan, on average, higher growth rate has been weakly associated with declining Gini coefficient or improvement in distribution of income (See Figures 2 & 3).

The correlation coefficients (estimated on the basis of statistics reported in Table 4.1) between growth and income inequality measured by the Gini coefficient as well as by the ratio of highest 20 percent to lowest 20 percent are -0.21 and -0.14, respectively.

Further analysis in terms of rural/urban categories suggests that income distribution has worsened in the rural area while it has slightly improved in the urban areas during 1979 to 1996-97. As shown in Table 4.2, the share of lowest 20 percent household in rural areas declined from 8.3 percent to 7.3 percent while that of highest 20 percent, it has increased significantly from 41.3 percent to 49.3 percent. The Gini coefficient increases from 0.32 to 0.41, suggesting the deterioration of income distribution in the rural areas. As opposed to rural areas, the share of lowest 20 percent household in urban areas increased from 6.9 percent to 7.6 percent. while the share of highest 20 percent registered a marginal decline over the same period. The Gini coefficient also declined improvement in distribution.

Source: Calculated on the basis of FBS's HIES Data for selected years.

Based on the above analysis, following observations can be made. Firstly, growth is weakly associated with distribution. Secondly, as shown in Figures 2 and 3, no evidence of "inverted-U" hypothesis is found. Thirdly, a sustained higher economic growth may improve distribution in the medium-to-long-run. Fourthly, income distribution has worsened in the rural areas while it has marginally improved in urban areas during the period 1979 to 1996-97.

III. Trends in Poverty
Reducing poverty has always been the declared goal of all development plans in Pakistan. Pakistan’s growth record has been impressive over a relatively longer period of time. High rates of economic growth and the flow of remittances from overseas Pakistani workers have played an important role in poverty reduction in the 1970s and the 1980s. There is a general consensus that poverty in Pakistan has increased in the 1990s. The rise in poverty is mainly attributed to declining economic growth, persistence of severe macro-economic imbalances, reduction in the flow of remittances from overseas Pakistani workers, lack of social safety nets, and poor governance. Some economic reform initiatives, like privatization of state-income owned enterprises and subsequent shedding of surplus labour as well as withdrawal/reduction of subsidies, particularly on wheat, may have temporarily hurt the economic position of low-income groups in the transition phase. Sustainable economic growth accompanied by macroeconomic stability is ultimately the most powerful means of reducing poverty over the medium-term. This will require prudent macroeconomic management, robust private sector activity and investment, and sound sectoral and structural policies. Although growth is absolutely essential to reduce poverty, yet to have greater impact it is necessary that the efforts of achieving high growth must be accompanied by direct poverty alleviation measures and anti-poverty programmes. Having said this, it is an opportune time to discuss the trends in poverty in Pakistan, indicating the key characteristics of urban and rural poor and government's strategy to alleviate poverty in the medium-term.

The magnitude of poverty differs substantially depending on the definition used. The most commonly used measure of poverty is the headcount ratio. It is also known as the incidence of poverty and gives the proportion of the total population falling below the poverty line. The poverty line is derived in Pakistan on the basis of income which can provide daily intake of 2250 calories per person (2450 calories per adult equivalent in rural areas and 2150 in urban areas). According to the caloric-based poverty (headcount ratio), the incidence of poverty declined sharply from 46.5 percent in 1969-70 to 17.3 percent in 1987-88. The rural and urban poverty also declined sharply during the period, as shown in Table 4.3.

Table 4.3
Trends in Poverty: Head Count
(Poor Households as percentage of Population)

Source: Rashid Amjad and A.R. Kemal (1997).

"Macroeconomic Policies and their Impact in Poverty Alleviation in Pakistan", Pakistan
Development Review, Vol.36, Spring.

* Social Policy Development Centre, Karachi.

** S.K. Qureshi and G.M. Arif (1999), "Profile of Poverty in Pakistan, 1998-99" Pakistan Institute of Development Economics, Islamabad.

However, poverty has increased significantly in the 1990s— rising from 17.3 percent in 1987-88 to 22.4 percent in 1992-93 and further to 31 percent in 1996-97. The recent estimates suggest that poverty has further increased to 32.6 percent in 1998-99 [See Table 4.3]. In other words, the number of poor people that cannot meet their daily nutritional requirements and fell below the poverty line, increased from 17.8 million in 1987-88 to 43.9 million in 1998-99. Similar trends are observed in the case of rural and urban poverty. In fact, the incidence of poverty in rural areas has remained higher than the urban areas since 1966-67 [See
Table 4.3].

Poverty can also be measured by basic needs approach which is based on income distribution. In this approach, a basket of basic needs consisting of food, clothing, housing, education, transportation, basic health, potable water, etc., are taken into consideration. According to this approach, poverty has increased from 28.6 percent in 1986-87 to 35.9 percent in 1992-93 and further to 35.7 percent in 1993-94. It also suggests that poverty has increased at a greater pace in rural areas than in urban areas. Poverty profile under this approach is given in Table 4.4.

Table-4.4
Relative Indicators under
Basic Needs Approach
(Based on Distribution of Income)

Source: :S.M. Younus Jafari, "Assessing Poverty in Pakistan" in A Profile of Poverty in Pakistan, Mahbub-ul-Haq Center for Human Development, Islamabad, 1999.

The poverty of opportunity is yet another way to measure the incidence of poverty. It reflects the real causes of wider human sufferings, as a more satisfactory measure of poverty. This index is a composite of deprivation in three vital dimensions, i.e., income, health and education. The profile of poverty of opportunity in Pakistan is presented in Table 4.5.

Source: Murtaza H. Syed, "The Human Face of Poverty" in A Profile of Poverty in Pakistan, Mahbub ul Haq Center for Human Development, Islamabad, 1999.

The statistics in Table 4.5 show that the opportunities for the poor have sharply declined from 61 percent in 1970 to 44 percent in 1995—a 17 percentage points reduction in 25 years.

Who are the Poors?
An analysis of poverty by socio-economic groups, focusing on key demographic and economic characteristics of the poor, reveals the following main features and characteristics of the urban and rural poor in 1996-97.

* The incidence of poverty increases with the size of the household. Large households are more likely to be poor in both the urban and the rural areas.

* Households with high dependency ratio is more likely to be poor in both the urban and the rural areas.

* Household headed by female who does not receive transfers income is more likely to be poor in both the urban and the rural areas.

* The incidence of poverty is higher in household with single earner in the urban areas

* These households whose heads are illiterate or with low level of educational attainment are most likely to be poor in both the urban and the rural areas.

* If the head of the household is salary/wage earner, living in rented accommodation, and receiving no
income transfers is most likely to be poor in both the urban and the rural areas.

* Those households whose heads are unemployed/underemployed are most likely to be poor in urban area.

* Households with no livestock are likely to be poor in the rural areas.

Some notable observations regarding the incidence of poverty are as follows:

* A large family, having a high dependency ratio, headed by a female who does not have access to supplementary income from transfers, who is a single earner living in rented accommodation has the highest
likelihood of being poor.

* The chances of an illiterate head of house-hold, or who is either unemployed or underemployed or working on salaries/wages without access to informal transfers is move likely to be poor.

* Residents of small towns have a higher probability of being poor than those residing in provincial capitals or larger cities.

* In the rural areas those who have some livestock are less likely to be poor.

IV Poverty Reduction Strategy
Unlike in the past where poverty was treated as a by-product of the growth process, the present government has taken a conscious decision to bring the issue of poverty alleviation at the centrestage of economic policy making. The fundamental shift in policies would make the poor the focal point of the country's socio-economic development process.

As stated earlier, declining economic growth, severe macroeconomic imbalances, lack of social safety nets and poor governance have had adverse effects on the country's poor and most vulnerable. All these factors have been the major cause of poverty in many developing countries including Pakistan. The incidence of calorie-based poverty has increased from 17.3 percent in 1987-88 to 32.6 percent in 1998-99. The government is of the view that entrenched poverty and rising income inequality can themselves be impediments to growth.

The government believes that sustainable economic growth accompanied by macro-economic stability is ultimately the most powerful means of reducing poverty over the medium term. It is in this context that a strategy to reduce poverty has been prepared by the government, whose salient features are well documented in Chart 1. Sustained pro-poor economic growth, based on robust private sector activity and investment is the key element of the poverty reduction strategy. Macroeconomic policies are being integrated with social and sectoral objectives to ensure that plans are mutually supportive and consistent with a common set of objectives to spur growth and reduce poverty.

Focus on growth alone will not be sufficient to reduce poverty. Direct anti-poverty measures will be required to have greater impact on reducing poverty. Direct anti-poverty programmes are being integrated in the macro-economic framework. It is in this background that the government has prepared a poverty alleviation programme consisting of five major elements, namely, integrated small public works programme, food supplement programme, revamping the Zakat system, micro credit bank, and improving social indicators.

Integrated small public works programme will be undertaken both in the urban and rural areas. This will be implemented by the provinces in close collaboration with the local governments and communities. The government will be allocating reasonable resources for the programme by changing the composition of public spending away from current consumption to pro-poor growth-promoting investment in physical and human infrastructure. Provinces will also be encouraged to contribute to the programme.

Local governments will identify, formulate and execute the development schemes in close association will local communities and non-governmental organisations (NGOs). The rural schemes include: farm-to-market road, lining of canals, construction of spurs, culverts, ponds, soil conservation, and repair and resurfacing of small rural roads. These schemes are expected to contribute to agriculture and rural development, easier access to market, increased employment opportunities, better access to health, education and social amenities, and to strengthen domestic capabilities for designing, constructing and maintaining the country’s secondary and tertiary road networks, and increasing the availability of water for irrigation.

The urban schemes include: water supply, sewerage, solid waste management and renovation of civic amenities in small towns adjacent to larger cities. These schemes are expected to contribute to improve the infrastructure and environment of small towns. Better water supply is expected to reduce the time spent in obtaining water, particularly for women and children. Better sewerage facility is a first step towards improved sanitation in small towns. It will minimize health risks and improve environmental quality. The solid waste management scheme is expected to improve the collection and disposal of solid waste in small towns. This will not only improve environment but will also minimize the health risks.

For shielding the most vulnerable from adjustment costs, some kind of social safety nets is essential for enhancing the viability of structural reforms. As part of the social safety nets, the government is initiating a Food Supplement Programme through which three basic commodities, wheat (flour), edible oil, and sugar will be provided to the poor. The poor will purchase these three commodities through coupons, which will be provided to them. This programme will be implemented at the local government level through participatory process of identification of poor.

As part of the social safety nets, the government is also planning to initiate targeted cash transfer programme through Zakat System (religious levy). This system has been in operation since 1980 but available evidence suggests that it has had only a minimal effect on poverty reduction. The government is revamping and expanding the scope of Zakat System with a view to use it as an effective means of cash transfer to the targeted poor.

The government has also established a Micro Credit Bank to help improve poor peoples’ access to credit. The Bank, besides helping the existing support organisations through refinancing facilities, will develop the support organisations and the CBOs to expand the scope of credit operation. In addition to the Micro Credit Bank, the Pakistan Poverty Alleviation Fund (PPAF) which was established in February 1997 as a Private not-for-profit Limited Company to reach communities through the NGOs and the CBOs, will continue to provide micro-credit for income generating sub-projects and community physical infrastructure schemes to improve the living conditions of the poor.

The improvement in social indicators has many dimensions. The most important ones are education and health. A country’s achievements in these respects largely determine the quality of its stock of human capital which, in turn, is widely acknowledged as a major determinant of economic growth as well as an important means to alleviate poverty and improve income distribution. As part of the poverty reduction strategy, the government is devising policies to reduce the number of illiterates, particularly female illiterates in rural areas; extend the non-formal education to all parts of the country, especially in rural areas; improve the quality of education by overhauling curriculum, teachers training, strengthening of information and monitoring system, improving access to education through public, private, and voluntary organizations.

Primary health care and disease prevention and control remain the foundations of health sector strategy for reducing poverty. For this, reliance has been placed on achieving wider population coverages. At the same time, priority is being accorded to the much needed intersectoral integration, especially at service delivery levels. Some specific measures under the health programmes include: i) lady health workers programme for family planning and primary health care; ii) expanded programme of immunization; iii) nutrition programme; iv) TB and Malaria Control Programme; and v) HIV/AIDS programme.

Fertility and poverty are directly related. There is a vicious circle at work involving high infant/child and maternal mortality and high fertility rates among women. The need for a broad-based integrated health approach to replace the narrow focus on family planning services is considered a prerequisite for achieving further breakthrough in the population area.

Development process in Pakistan has generally focussed on achieving higher growth rates but social sector did not receive the attention as it deserved. To improve the country’s social indicators, the Social Action Programme was launched in 1992-93. It was based on the realization that long-term economic growth and poverty alleviation cannot be achieved without raising the level of human development. This programme addressed four important sectors, namely, primary education, basic health care, population welfare, and rural water supply and sanitation. The first phase of the programme has been completed and the second phase has been started from January 1st 1997 for a period of 5½ years.

The above discussed elements of anti-poverty programme along with sustained economic growth and macro-economic stability are likely to reduce poverty in Pakistan in the medium-to-long-run. However, the success of the various elements of the direct intervention and higher economic growth on reducing poverty will depend crucially on the quality of governance. Weak governance has not only constrained Pakistan’s economic growth and contributed to macro-economic imbalances but have severely reduced the effectiveness of public expenditures and weakened the macro-economic management. The government is committed to improve governance and has taken a number of measures since October 12, 1999. Improvement in governance will strengthen macro-economic management, which is vital for sustained economic growth and poverty reduction.