Background Paper for the IDB Group MCPS Document for Pakistan

Poverty, Inequality and Unemployment in Pakistan

Dr. Ghulam Muhammad Arif

Joint Director
Pakistan Institute of Development Economics
Islamabad, Pakistan
and

Dr. Shujaat Farooq

Research Fellow
Pakistan Institute of Development Economics
Islamabad, Pakistan

This paper is prepared by the authors as a background study for

the IDB Group Member Country Partnership Strategy (MCPS)
Document for Pakistan. The abridged version of this paper has
been included in the MCPS document.
The views expressed in this paper are those of the authors and
do not necessarily represent the views of the Islamic
Development Bank Group or its Board of Governors or
Executive Directors or its member countries or the Pakistan
Institute of Development Economics (PIDE).

Dul-Qadah 1432H (October 2011)

Contents
Executive Summary

vii

1.

Introduction

2.

Data Sources

3.

Overview of Poverty and Income Inequality Situation during 2000-2010

3.1
3.2
3.3
3.4

2
4
5
7

3.5
3.6
3.7
3.8
4.

5.

6.

7.

An Overview of Poverty Situation in Pakistan

Poverty Across the Provinces
Trends in Inequality
A Comparison of Poverty and Inequality in Pakistan with Selected
Asian Countries
Comparison of Inequality
Status of Achieving Poverty-Related MDG Targets in Pakistan
Poverty-Inequality Nexus
Growth-Poverty-Inequality Nexus

9
10
11
12

Government Policies/Initiatives for Reducing Poverty and Inequality

4.1
Government Past Policies
4.2
Diagnostic Analysis of Binding Constraints to Reducing Poverty and
Inequality
4.3
Government Medium-Term Policies and Plans
4.4
Main Challenges/Issues/Risks to Medium-Term Outlook
4.5
Role of Donors in Poverty and Inequality Reduction Efforts
4.6
Policy Recommendations for Fixing Binding Constraints

14
14
16

Identification of Focused Areas for MDBs Interventions in Reducing

Poverty and Inequality over the Medium-term

29

5.1
5.2
5.3

29
30
31

Identification of Vulnerable and Poor Regions

Identification of Vulnerable and Poor Groups
Islamic Microfinance for Poverty Reduction

20
22
24
27

Employment Situation in Pakistan

6.1
An Overview of Employment Situation in Pakistan
6.2
Comparison of Unemployment Rate in Pakistan with Selected Asian
Countries
6.3
Status of Achieving Employment Related MDGs
6.4
Growth-Employment-Poverty-Inequality Nexus

33
33
36

Government Policies/Initiatives for Increasing Employment

44

iii

39
41

7.1
7.2
7.3
7.4
7.5
7.6
8.

Government Past Policies and Programmes

Diagnostic Analysis of Binding Constraints to Reducing
Unemployment
Government Medium-Term Policies and Plans Related to
Employment
Main Challenges/Issues//Risks to Medium-Term Outlook Regarding
Employment
Role of Donors in Increasing Employment
Policy Recommendations for Fixing Binding Constraints

44
46
48
49
50
52

Identification of Focused Areas for MDBs Interventions in Employment

Generation Over the Medium-Term

53

8.1

53

8.2
8.3

Possibilities of Poverty Reduction Through SMEs Development by

Employment Creation
Vocational Training
Islamic Microfinance for Employment Generation

References

54
55
57

iv

List of Tables
Table 3.1:

Trends in Poverty: Headcount Ratios

Table 3.2:

Poverty Incidence Across Provinces

Table 3.3:

Gini-Coefficient and Consumption Shares by Quintiles

Table 3.4:

Ratio of Highest Quintile to Lowest Quintile

Table 3.5:

Rates of Economic Growth and Inflation in Selected Countries

Table 3.6:

Headcount Poverty Rates in Selected Asian Countries

Table 3.7:

Gini-Coefficient, Inequality in Income or Expenditure in Selected Asian

Countries

Table 3.8:

Millennium Development Goal Related to Poverty

Table 3.9:

Gini-Coefficient by Regions and Overall

Table 4.1:

Direct Transfers and Beneficiaries

Table 4.2:

Governance Indicators

Table 4.3:

Infrastructure by Provinces

Table 4.4:

Macroeconomic Targets (PRSP-II)

Table 4.5:

Projected PRSP Budgetary Expenditures

Table 4.6:

Macroeconomic Indicators

Table 4.7:

Proposed PRSP Allocations, MDG Costing Estimates and Resource Gap

Table 4.8:

Cost of War on Terror to Pakistan

Table 4.9:

Committed and Disbursed Foreign Assistance

Table 4.10:

Source and Donor-Wise Disbursements

Table 4.11:

Sector-Wise Disbursements of Project Aid

Table 4.12:

Pakistans External Debt Servicing

Table 6.1:

Labour Force Participation Rates and Unemployment Rates for Adult and
Youth

Table 6.2:

Share of Employed Labour Force in Various Sectors

Table 6.3:

Employment-to-Population Ratio Among Adults and Youth in Pakistan

Table 6.4:

Unemployment Rates and Employment-Population Ratio of Selected

Countries

Table 6.5:

Ranking of Labour Market Efficiency in Selected Countries

Table 6.6:

Demographic Trends and Decent Work Issues in Selected Countries

Table 6.7:

MDG Indicator of Women Share in Non-Agriculture Employment

Table 6.8:

Vulnerable Employment in Adults and Youth

Table 6.9:

Working Poor Estimates

Table 6.10:

Labour Productivity Per Hour Worked by Sector

Table 6.11:

Growth, Employment, and Poverty in Pakistan

Table 7.1:

Active Borrowers, Active Savers and Active Policy Holders by Peer Group

Table 7.1:

Share of Employment in the Informal Sector of the Economy

List of Figures
Figure 3.1:

Relationship Between Inequality, Poverty and Growth

Figure 3.2:

Real GDP Growth Rates

Figure 6.1:

Segmentation of Informal Employment

vi

Executive Summary
This study has reviewed the poverty and inequality situation in Pakistan. It has examined the
employment situation and explored the growth-employment-poverty-inequality nexus. The
relationship between growth, poverty and inequality is complex in Pakistan. During the high growth
decades (1960s) and low growth decades (1970s), both poverty and inequality moved in opposite
direction. The high economic growth during the 1980s contributed to a sharp decline in poverty, but
accompanied by a mild increase in inequality. The fall in economic growth during the 1990s resulted
in a rise in poverty while inequality decreased modestly. During the first half of the last decade, the
economy witnessed a high growth and poverty declined from 34.5 percent in 2000/01 to 22.3 percent
in 2005/06, while inequality increased sharply. Unemployment rate, despite high growth, did not drop
sharply. Although, after 2006, no official statistics on poverty is available; however, according to
unofficial sources, poverty has gone back to the early 2000s level with rising unemployment.
Poverty in Pakistan is mainly a rural phenomenon. Across the provinces, poverty is highly fluctuated
in rural Sindh and southern Punjab. Historically, Pakistan has not witnessed a secular decline in
poverty; it has fluctuated considerably. During 2000-2006, the country witnessed a sharp decline in
poverty and later, because of both the high inflation and slow economic growth, poverty levels are
likely to have reversed and could be as high in 2010 as was in 2001. The country was on the track to
achieve MDG poverty-related targets up to 2006, however, at present, the ground realities reveal that
it will be unlikely to reduce poverty to 13 percent by 2015.
The labour force participation rates have witnessed an increase of 2.1 percentage points during the last
decade (2001-10). The stable unemployment rates during this period suggest that the labour force
participation grew faster than the new job opportunities. Though the female participation has
gradually increased; however, it is still very low. Both the youth and female are disadvantageous in
the labour market with high unemployment rates and access to modest earning opportunities even
during the high economic growth period (2002-07).
While comparing with five Asian countries: China, India, Malaysia, Indonesia and Thailand; Pakistan
has relatively high fluctuations in growth and inflation during 2000-10 period. One common
characteristic among the selected countries and Pakistan is that the poverty is largely a rural
phenomenon. The five selected countries have witnessed a decline in poverty over the last two
decades, while in Pakistan; it has been fluctuated since 1990. The other selected countries noticed a
decline in poverty in both urban and rural areas; whereas in Pakistan, it declined mainly in urban
areas. Gini-coefficients show that both India and Indonesia witnessed a higher inequality, while it
declined in other countries (China, Malaysia and Thailand) including Pakistan. The share of bottom 10
percent population in total income or consumption has improved in China, Malaysia, Pakistan and
Thailand; whereas it declined for India and Indonesia. Regarding employment, most economies have
employment-to-population ratios in the range of 55 to 75 percent; however this ratio is comparatively
low (52 percent) in Pakistan.
The Government of Pakistan has initiated Social Action Program during 1990s, which did not bring
the desired change in social indicators. To counter the rising poverty and unemployment, the
government launched Poverty Reduction Strategy Paper (PRSP) in 2003 by addressing different
aspects of poverty: high economic growth; governance; investing in human capital; and bringing the
poor, vulnerable and backward regions into mainstream of development. PRSP-I (2003-06) remained
successful by achieving its pro-poor targets, while high inflation, poor economic performance and law

vii

and order situation has counter-cycled the positive effects of PRSP-II (2008-12). Though the
government has some narrowly targeted social safety nets programs; however, the extent of benefits to
the poor from these targeted programs has not been up to the desired level.
The binding constraints to achieve high growth with low levels of poverty, inequality and
unemployment are political instability, poor governance, lower government investment on knowledge
and skills, infrastructural bottlenecks and social and economic exclusion of poor in decision-making.
One important aspect that has severely affected the development is the role of Pakistan in the War on
Terror. Though a number of donors are assisting the government to improve the welfare of the poor;
however, the coverage of these interventions is too limited to meet the challenges. A major proportion
of foreign assistance is going to overcome the budget and current account deficits, as a result, the
government is facing rising public debt especially the external debt and debt services.
To ensure equal distribution of resources, there is a need to include the poor in the development
stream by providing economic, social and political freedom. Agriculture is the key sector of Pakistans
economy and there is a need of intervention in the areas of horticulture and livestock to diversify the
farmers resources. In addition, a special development in terms of physical and social infrastructure is
required to develop the rural non-farm sector. Rural to urban migration could be a way out of poverty
toward the self-help. City is an opportunity for the poor. History has shown that poverty is eliminated
in merchant cities. The ongoing demographic transition in Pakistan should also be viewed for the
policy purpose as it presents the economy with a demographic gift in the form of a surge in the
relative size of the working-age population.
Rather than universally targeted, the narrowly targeted interventions are required especially in the
rural areas of Pakistan. The households who have no land, headed by females or Zakat recipients are
among the poorest of the poor households. The southern districts of Punjab and all rural areas of
Sindh, Baluchistan and KPK are the poorest regions of the country with poor physical infrastructure
and access to education and health services. Much effort from the government side is required to
eliminate the issues related to poor governance including corruption, and nepotism. Stable
macroeconomic system is prerequisite to generate sufficient employment opportunities especially for
the poor. Supportive physical and social infrastructure is necessary to develop better rural-urban
linkages and better integration across the regions.
Micro financing can be helpful in poverty reduction and making the economy self-reliance. There are
1,613 branches of the credit services to the poor and the active borrowers are around two million.
However, their outreach is not adequate as out of more than 45 million poor households, only 2
million have access to it. More importantly, microcredit services generally exclude the poorest of the
poor because they lack assets necessary to have access to these services.
Islamic banking can also make a positive contribution in poverty reduction by fulfilling the
socioeconomic objectives of Islamic society inscribed in the objectives of Shariah. By 2007, six
licensed Islamic banks and 12 conventional banks with more than 330 branches were operating
compared with one bank with 10 branches in 2003. However, the Islamic banks in Pakistan are not
providing microfinance services. Some non-bank Islamic institutions are providing the micro-credit
services; however, their outreach is very limited in the country. For employment generation in
Pakistan, it is critical to link Islamic microfinance services with the vocational training institutes by
providing their graduates these services. It is suggested to form an Islamic Fund to provide microinsurance against unforeseen risks and uncertainties resulting in loss of livelihood.

viii

Poverty, Inequality and Unemployment in Pakistan

1.

Introduction

The concept of inclusive growth demands for widespread expansion of opportunities so that all
segments of the society can benefit from economic expansion (Osmani, 2008). The idea of
inclusive growth has been commonly explained through the employment, poverty and inequality
nexus. Pakistan is an interesting case to study this nexus. As Osmani (2008) has observed, since
1980 Pakistan has experienced three distinct phases regarding the relationship between growth,
poverty and inequality. The high economic growth during the 1980s contributed to a sharp
decline in poverty, but accompanied by a mild increase in inequality. The fall in economic growth
during the 1990s resulted in a rise in poverty while inequality decreased modestly. The high
economic growth during the first half of 2000s (2003-06) was different from the earlier episode;
inequality increased sharply with rapid decline in poverty. Unemployment rate, despite high
growth, did not drop sharply.
By focusing on the last decade (2000-2010), this study has first reviewed the poverty and
inequality situation in Pakistan, and then it has examined the employment situation to explore the
growth-employment-poverty-inequality nexus. During this period, the Government of Pakistan
has developed Poverty Reduction Strategy Paper (PRSP) and the Medium-Term Development
Framework. In these policy documents, high sustained economic growth is considered necessary
condition for poverty reduction. However, in view of the possibility that benefits of growth do not
transfer equally to all segments of the society, the poverty reduction strategy has given
importance to transfer income programmes including Zakat, microfinance and more recently
Benazir Income Support Programme (BISP). This study has reviewed these policies in particular
to see the possible role of Islamic microfinance in employment generation and poverty reduction.

2.

Data Sources

This is a review study, which has drawn the data related to growth, poverty, inequality and
employment from secondary sources. For poverty and inequality, the study has primarily relied
on the estimates based on the income and expenditure household surveys.1 The last such survey,
known as the Pakistan Socio-economic Living Standard Measurement Survey (PSLM), was
carried out in 2007/08. However, its poverty related data could not be made public. Thus, the
latest available data for poverty and inequality is for the 2005-06 period. However, because of
both the high inflation and slow economic growth since 2008, several sources have attempted to
estimate poverty for the more recent years 2008 and 2009. Poverty data from these sources have
1

Pakistan has a long history of conducting Household Income Expenditure Surveys (HIES), started in 1963. These
surveys were renamed as Pakistan Integrated Household Survey (PIHS) in the mid-1990s. The latest series of such
surveys is known as the Pakistan Socio-economic Living Standard Measurement Survey (PSLM). However, income
and expenditure module of all these surveys remained same, thus providing data for consistent poverty series.

also been included in the analysis. However, for these recent years data are not available for rural
and urban areas separately.
This study has used the poverty estimates based on the official poverty line methodology. It is
worth noting that in 2003, the Planning Commission announced the official poverty line based on
the threshold level of 2,350 calories per adult per day plus a minimum expenditure required for
non-food needs. A number of developing countries follow the consumption and calories intakes
where the poverty line ranges between 1,970 and 2,350 calories.2
Poverty estimates based on the official poverty line are available for the 2000-06 period. Recent
estimates of poverty for 2008 and 2009, as noted earlier, are not strictly comparable with the
earlier estimates. Data on income distribution is also available only for the 2000-06 period. This
study has used the Gini-coefficients as the measure of inequality, based on the consumption
expenditure data.
Regarding the employment analysis, Labour Force Surveys (LFS) are the main data source,
available for the 2000-09 period. For employment (unemployment as well), the LFS uses the oneweek reference concept. Unpaid family helpers are also part of the labour force. For country-wise
comparison, this report has relied on information as given in the World Development Report,
UNDP, and SAARC reports. The poverty data in these reports are based on the $1.25 a day
concept which is altogether different from the official poverty line methodology.

3.

Overview of Poverty and Income Inequality Situation during 2000-2010

3.1.

An Overview of Poverty Situation in Pakistan

For the situation analysis of poverty and inequality, this study has focused on the 2000-10 period.
However, the decade of 1990s has also included in the analysis to put the current poverty and
inequality trends in a longer perspective. Data presented in Table 3.1 show that the 1990s has
witnessed a gradual increase in poverty levels, from 26.8 percent in 1992/93 to 30.6 percent in
1998-99. This rise in poverty was because of a six percentage points increase in rural poverty
while urban poverty declined during this period. The rising trends in overall poverty continued
until 2000/01 period, but this time the increase was both in rural as well as urban areas. In
addition to fall in economic growth, several factors are responsible for the rise in poverty in the
1990s including political uncertainty, economic instability, and persistence of wide fiscal and
current account deficits. The inflows of foreign remittances, which are believed to be one of the
major factors for reducing poverty during the 1980s, also declined markedly during the 1990s.
Bad weather conditions and severe droughts lowered the agriculture growth, and led to an
increase in rural poverty. Urban population was to some extent successful in protecting its wellbeing level during the 1990s.
Table 3.1 shows a sharp decline in poverty during the first half of the last decade, from 34.5
percent in 2000/01 to 22.3 percent in 2005/06 - a decline of more than 12 percentage points in
2

Bangladesh has 2,112 per capita; China 2,150; Indonesia 2,100; Philippine 2,000; Sri Lanka 2,250 per adult
equivalent, and Thailand 1,970 (GoP, 2006).

only five years3.The percentage of population living below the poverty line in rural areas has
declined from 39.3 percent in 2000/01 to 27 percent in 2005/06 while the corresponding decline
in urban areas was from 22.7 percent to 13.1 percent, suggesting that sharp decline in rural areas
could not narrow the rural-urban gap; rural poverty in 2005/06 was more than double the urban
poverty.
Poverty estimates may vary considerably when a different methodology is applied. For instance,
the data presented in Table 3.1 is based on the official poverty line methodology that uses the
Consumer Price Index (CPI) for price adjustment. Using CPI for price adjustment, World Bank
(2006a) shows a smaller decline in poverty from 34.4 percent in 2000/01 to 29.2 percent in
2004/05 at the national level and from 39.1 percent to 34 percent for rural households. The fall in
overall poverty levels was only 5 percentage points between 2001 and 2005 according to the
World Bank estimates.

1992-93
1996-97
1998-99
2000-01
2004-05
2005-06
2007-08
2008-09
2008-09
2008-09

Table 3.1. Pakistan: Trends in Poverty: Headcount Ratios

Urban
Rural
24.6
28.3
22.6
33.1
20.9
34.7
22.7
39.3
14.9
28.1
13.1
27.0
-

Overall
26.8
29.8
30.6
34.5
23.9
22.3
29.9a
33.8b
36.1b
30-35c

Source: Economic Survey, Government of Pakistan, 2008-09.

a: Interim Report (October 2008), Economic Stabilization with a Human Face, Panel of Economists
constituted by the Planning Commission, Government of Pakistan.
b: Task Force on Food Security (World Bank) cited in Economic Survey 2008-09 (p.197).
c: Independent Estimates cited in Economic Survey 2008-09 (p.197).

One of the main reasons of poverty reduction during 2000-06 was the high economic growth
recorded by most sectors. In addition to high growth, other factors that are likely to have
contributed to poverty reduction include the increased public spending especially on education,
health and infrastructure (rural electrification, roads, and irrigation improvements). Overall propoor expenditures increased from 3.8 percent of GDP in 2001/02 to 4.8 percent in 2004/05 (GoP,
2005). The inflow of foreign remittances has mounted over $19 billion during 2001/02 and
2005/06 period, being an average of 4.1 percent of GDP. The contribution of remittances in
economic growth and poverty reduction in developing countries including Pakistan is well
documented (Iqbal and Sattar, 2005; Arif, 2009). The economy also found a large fiscal space
after 9/11, when much of Pakistans debt was written either off or rescheduled, allowing debt
repayments to be used on development projects.
3

It is important to note that the official poverty estimates for 2000/01 period have been revised upward from 32.1
percent to 34.5 percent, because of some flaws in earlier estimates (GoP, 2006).

After 2006, no official statistics on poverty are available. The last HIES or PSLM was carried out
in 2007/08, but poverty estimates have not been made public. The economy of Pakistan has been
facing severe challenges since 2007/08 with a declining rate of economic growth, double-digit
inflation particularly the food inflation, power shortage, soaring oil prices and poor law and order
situation. The war on terror has also resulted to divert public expenditure from development to
security. The present socio-economic situation is likely to have adversely affected the efforts for
poverty reduction. The government sources consider that poverty is likely to have increased from
22.3 percent in 2005/06 to 30-35 percent in 2008/09 (GoP, 2008). In 2008, the Planning
Commissions constituted Panel of Economists has reported in its Interim Report that poverty
may have increased by 6 percentage points from 23.9 percent in 2004/05 to 29.9 percent in
2008/09.4 Similarly, the Task Force on Food Security (World Bank) estimated that poverty head
count ratio is likely to have increased from 29.2 percent in 2004/05 to 33.8 percent in 2007/08
and 36.1 percent in 2008/09 when about 62 million people were below the poverty line (GoP,
2008).
In 2008, the Report of a UN Inter Agency Assessment Mission found that food security in
Pakistan in 2007/08 had significantly worsened because of food price hike. The total number of
households falling into this category was estimated to be seven million households or about 45
million people in 2008. Based on the information, poverty level in 2009 appears to be in the range
of 3035 percent. Poverty estimates for 2010 period are not available, but there is no real change
in economic situation. Rather the severe flood in 2010 has pushed many non-poor households
into poverty and numerous poor households are likely to have been pushed into an extreme
poverty condition. It has disproportionately affected the poorest regions of Pakistan, southern
Punjab and rural Sindh where deprivation levels are high and the infrastructure is poor. The
majority of the population in these regions is highly dependent on crop income with less
diversification in their sources of incomes (Arif et al., 2010). Thus, it is likely that the recent rise
in poverty, as started in 2008, has continued to 2010.
Historically Pakistan has not witnessed a secular decline in poverty. Rather, the poverty levels
have fluctuated considerably. This has also been the case for the last decade when first the
country witnessed a decline in poverty between 2000 and 2006 period. Later, because of both the
high inflation and slow economic growth, poverty levels are likely to have reversed and the
poverty headcount ratio in 2010 could be as high as in 2001.
3.2.

Poverty Across the Provinces

Although, the Household Income Expenditure Surveys are claimed to be representative at the
province level, the official agencies have generally avoided the estimation of poverty at the
province level probably because of political reasons. The poor provinces or regions may demand
more resources to arrest poverty in their regions. Moreover, explanation of large variations in
poverty levels across provinces over a short period remains a challenge. The province-level
poverty estimates from independent sources are available until the 2004/05 period and are
reported in Table 3.2, which shows that poverty declined in all four provinces between 2000/01
4

Economic Stabilization with a Human Face, October 2008.

and 2004/05. However, there is a great deal of variation across the provinces in terms of
percentage decline. Rural Sindh has shown a huge reduction in poverty, from 48.3 percent in
2000/01 to 28.9 percent in 2004/05, a decline of about 20 percentage points. This substantial
decline in poverty in rural Sindh reversed the ranking across provinces. Sindh rural was the
poorest region in 2000/01, which is turned out to be the least poor region across the country in
2004/05. World Bank (2004) attributes the highest volatility for Sindh to the severe drought in
2000/01 and exceptionally high agriculture growth in 2004/05. However, Anwar (2006) links this
variation in rural Sindh over a short period with the data problems at the province level. The
decline in rural poverty in Punjab was marginal, while in other two provinces, KPK and
Baluchistan, it was quite small. In urban Sindh, poverty declined from 20.7 percent in 2000/01 to
13.8 percent in 2004/05. Urban poverty also declined in other provinces but the rate of decline
was lower than the decline in Sindh (Table 3.2).
Table 3.2: Poverty Incidence Across the Provinces, 1998/99, 2000/01 and 2004/05
Overall
Province

1998/99

Urban areas

Rural areas

2000/01

2004/05

1998/99

2000/01

2004/05

1998/99

2000/01

2004/05

World Bank (2006)

Punjab

29.8

30.7

29.5

23.7

23.0

21.2

32.2

33.8

33.4

Sindh

26.2

37.5

22.4

15.3

20.7

13.8

34.5

48.3

28.9

NWFP

40.8

42.3

39.3

26.1

30.0

26.1

43.3

44.4

41.9

Baluchistan

22.1

37.2

32.9

25.2

27.4

21.5

21.6

39.3

35.8

Punjab

31.6

32.2

29.7

24.2

23.2

20.6

34.6

35.8

33.9

Sindh

26.0

35.3

22.4

15.6

20.1

14.3

34.0

45.0

28.4

NWFP

41.3

41.3

38.9

27.1

29.0

26.5

43.7

43.4

41.4

Baluchistan

21.6

35.5

33.1

22.9

26.2

22.4

21.3

37.5

35.9

Anwar (2006)

It appears from the province level estimates that the national level decline in poverty between the
2000/01 and 2004/05 period was primarily due to substantial decline in Sindh and Baluchistan
provinces. It is important to note that the highest and persistent levels of poverty are registered for
KPK. Based on the official methodology, Cheema (2005) has estimated province-wise poverty
levels for the 1992/932000/01 period and found the cyclical nature of poverty in Sindh than in
other provinces. It also suggests vulnerability of rural Sindh population.
3.3

Trends in Inequality

Two measures are commonly used to examine levels and trends in inequality: Gini-coefficient
and income or consumption share by quintiles e.g. the bottom 20 percent. Table 3.3 shows the
Gini-coefficients and consumption quintiles for the 2000/2006 period based on three nationally
representative household survey datasets (PIHS, HIES and PSLM). The inequality data after the

Table 3.3: Pakistan: Gini-Coefficient and Consumption Shares by Quintiles

PIHS 2000/01

HIES 2004/05

PSLM 2005/06

Urban

Rural

Overall

Urban

Rural

Overall

Urban

Rural

Overall

0.32

0.24

0.28

0.34

0.25

0.30

0.35

0.25

0.30

Gini-coefficient

Consumption Share by Quintiles

Quintile 1

5.3

12.8

10.1

4.8

12.6

9.5

4.5

13.5

9.6

Quintile 2

8.1

16.9

13.7

7.6

17.1

13.2

8.2

16.8

13.1

Quintile 3

12.1

19.5

16.8

11.6

19.7

16.4

11.1

20.1

16.2

Quintile 4

19.4

22.4

21.3

18.3

23

21.4

17.8

23

20.8

39.4

58.4

26.6

40.3

4.15

12.98

1.97

4.2

Quintile 5
55.1
28.4
38
57.7
27.6
Ratio of Highest
10.4
2.22
3.76
12.02
2.19
to Lowest
Source: Economic Survey, Government of Pakistan, 2007-08

2005/06 period are not available. The Gini values show an overall increase in consumption
inequality between 2000/01 and 2004/05 while during the next period of 2004/05-2005/06 the
Gini coefficients did not change. This pattern has been witnessed in urban as well as rural areas.
The last row of Table 3.3 also reveals a similar trend where the ratio of richest group (quintile 5)
to the poorest group (quintile 1) shows a rising gap during the 2000/01-2005/06 period. However,
the gap between the rich and poor increased in urban areas, while it declined in the rural areas.
Overall, it appears from the inequality information that during the period when poverty declined
Table 3.4: Pakistan: Ratio of Highest Quintile to Lowest Quintile

Literacy (Age 10 & above)

2.08

2.17

2.41

1.69

1.76

1.95

Overall
%
change
in
disparity
-0.19

Adult Literacy (Age 15 & above)

2.11

2.23

2.52

1.89

1.93

2.22

-0.12

Gross Enrollment Rates

Primary Level

1.77

1.98

1.55

1.52

1.65

-0.17

Middle Level

2.84

3.47

3.6

2.28

2.91

3.04

-0.16

Matric Level

3.96

6.36

5.8

2.5

5.33

4.33

-0.25

Primary Level

2.15

2.04

2.25

1.62

1.56

1.73

-0.23

Middle Level

4.4

3.67

4.57

2.35

3.56

3.27

-0.28

8.5

7.67

2.5

6.67

-0.35

1.58

1.53

1.76

1.25

1.19

1.25

-0.29

2.36

2.44

2.95

1.87

1.73

-0.32

3.75

4.2

3.05

2.18

3.42

-0.19

PIHS 2000/01
Selected Indicators

Urban

Rural

Overall

Urban

Rural

Overall

Net Enrolment Rates

Matric Level
Immunization (Children 12-23
months)
Women using Pre-natal Care

Women Receiving Post-natal care

PSLM 2004/05

Source: Economic Survey, Government of Pakistan, 2007/08

overall as well as in rural and urban areas the gap between rich and poor widened. It indicates that
the benefits of growth during the high growth period (2000-06) were relatively higher for the rich
than for the poor.
Inequality has many dimensions i.e. inequality in educational opportunities, inequality in health
and other amenities of life. Table 3.4 shows a comparative picture on seven social indicators of
bottom 20 percent population to top 20 percent population at the national as well as regional level
for the 2000-05 period. Unlike the Gini-coefficient and consumption quintiles, the non-income
inequality in terms of access to various social services has been improved faster for the poor
(bottom 20 percent) in urban as well as rural areas during 2000/01 and 2004/05. As shown by the
last column, the gap between rich and poor has been narrowed appreciable at the national level in
the net enrollment rate in matriculation level, use of pre-natal care by women and child
immunization rate. However, overall the Pakistani society is marked by high both income (or
consumption) inequality and non-income inequality.
3.4

A Comparison of Poverty and Inequality in Pakistan with Selected Asian Countries

The past 20 years have seen substantial progress in many aspects of human development in East
and Southeast Asian countries. There has been progress not only in improving health and
education indicators and raising income, but also in expanding peoples power to select leaders,
influence public decisions and sharing knowledge. However, these years have also seen
increasing inequalityboth within and across countries. Countries with less human development
tend to have greater inequality in more dimensionsand thus larger losses in human
development (HDR, 2010).
For comparison of poverty and inequality, in addition to Pakistan, five Asian countries have been
selected: China, India, Malaysia, Indonesia and Thailand. To give the comparison a proper
context, data on GDP growth and inflation are also presented in Table 3.5. All the selected
Table 3.5: Rates of Economic Growth and Inflation in Selected Asian Countries, 2001-2009
2001
2002
2003
2004
2005
2006
2007
2008
Real GDP Growth (%)
India
5.2
3.8
8.4
8.3
9.3
9.4
9.6
5.1
China
8.3
9.1
10
10.1
11.3
12.7
14.2
9.6
Indonesia
3.6
4.5
4.8
5
5.7
5.5
6.3
6
Malaysia
0.5
5.4
5.8
6.8
5.3
5.8
6.5
4.7
Pakistan
2
2
4.8
7.4
7.7
6.2
5.7
1.6
Thailand
2.2
5.3
7.1
6.3
4.6
5.1
4.9
2.5
Inflation (%) (Based on Consumer Price Index)
3.7
4.4
3.8
3.8
4.2
5.8
6.4
8.4
India
0.7
-0.8
1.2
3.9
1.8
1.5
4.8
5.9
China
11.5
11.9
6.6
6.2
10.5
13.1
6.3
10.1
Indonesia
1.4
1.8
1.0
1.5
3.0
3.6
2.0
5.4
Malaysia
3.1
3.3
2.9
7.4
9.1
7.9
7.6
20.3
Pakistan
1.6
0.7
1.8
2.8
4.5
4.6
2.2
5.5
Thailand
Source: World Development Indicator, 2011

2009
7.7
9.1
4.5
-1.7
3.6
-2.2
10.9
-0.7
6.4
0.6
13.6
-0.8

countries have witnessed a fast economic growth in terms of real GDP during the last decade;
however, there are relatively larger swings in Pakistan GDP growth than the other countries
except Thailand. The last four years have been challenging for all the economies across the world
in terms of global financial crises, and hike in food and oil prices. However, India, China and
Indonesia have maintained a moderate growth in all recent years. The second important indicator
shows high inflation in Pakistan, India and Indonesia, especially after the mid-2000s. In Pakistan
inflation hovered at more than 20 percent in 2008/09 and it is still in double digit. The other three
economies (China, Malaysia and Thailand) have experienced relatively low inflation rates.
With regard to poverty, a direct comparison of Pakistan with the selected Asian countries (China,
India, Malaysia, Indonesia and Thailand) is not easy as the official poverty methodologies of all
these countries are not consistent to each other. The estimates of poverty are highly sensitive to
the choice of poverty line, its underlying methodology, the threshold level of calorific
requirements, the determinants of the scale of household, spatial and regional prices or
consumption patterns. There is no recent statistics available over these countries; however, the
Economic and Social Survey of Asia and Pacific (ESCAP), 2010 has provided the statistics of
poverty and inequality for all the selected countries including Pakistan except Malaysia.5 For
Malaysia, the data from Economic Planning Unit are used. As shown in Table 3.6, all the selected
five Asian countries (China, India, Malaysia, Indonesia and Thailand) and Pakistan have made
significant progress in reducing their headcount poverty rates. The median average poverty rates
in the all six countries declined from 47.5 percent in 1990 to 18.7 percent in the mid-2000s. The
decline in poverty rate was sharpest in China, Indonesia, Malaysia and Thailand (Table 3.6). The
official statistics of these countries also have revealed the similar trends of poverty during the
current decade. For example, both China and India have succeeded to reduce their headcount
poverty rates in both urban and rural areas since 1980s.6 A similar trend can be seen in Malaysia
where around half of the countrys households were living below the national poverty line up to
Table 3.6: Headcount Poverty Rates in Selected Asian Countries, 1990-2005
Country
Period
Initial
China (rural)
1990-2005
74.1
China (Urban)
1990-2005
23.4
India (rural)
1990-2005
55.6
India (urban)
1990-2005
47.5
Indonesia (rural)
1990-2005
70.5
Indonesia (urban)
1990-2005
62
Malaysia*
1990-2007
17.1
Malaysia (Urban)*
1990-2007
7.5
Malaysia (Rural)*
1990-2007
21.8
Pakistan
1990-2005
64.7
Thailand
1990-2005
17.2
Average (median)
47.5
Source: UN Economic and Social Survey of Asia and Pacific (ESCAP), 2010
*Source: Economic Planning Unit, Malaysia

5
6

Final
26.1
1.7
43.8
36.2
24.0
18.7
3.6
2.0
7.1
22.6
0.4
18.7

According to ESCAP, a poor is defined as individuals consuming less than $1.25 (adjusted by PPP) per day.
For China, see National Bureau of Statistics, China, September, 2004. For India, see SAARC Report, 2007/08.

1970. In the following three and a half decades, rapid economic growth and structural changes
have transformed Malaysia into a prosperous, urban, and industrialized economy. By the end of
the century, Malaysias poverty rate had fallen below 10 percent and in 2007 to less than 5 per
cent (UNDP, 2008).7 Indonesias poverty fell significantly during 197696. In 1998, the poverty
incidence shot up due to the 1997 Asian financial crisis. The poverty incidence increased from
16.7 percent in 2005 to about 17.8 percent in 2006 due to the surge in rice prices (World Bank,
2006b). The incidence resumed a downward trend when the rice prices subsidized and the safety
nets were put in place. In 2008, the poverty incidence was counted as 15.4 percent, which is still
far from the ambitious target of 8.2 percent set for 2009 in Indonesia's Mid-Term National
Development Plan 20042009 (Heriawan, 2008).
One common characteristic among the selected countries and Pakistan is that the poverty is
largely a rural phenomenon. Urban poverty is almost non-existence in China and Malaysia. For
India, Indonesia and Pakistan, higher rural poverty persists but relatively with less gap than the
former twos. However, no uni-directional movement of headcount ratio has been observed in
Pakistan while comparing it with the other selected countries. The five selected countries have
witnessed a decline in poverty over last two decades, while in Pakistan, poverty based on the
official line has been fluctuated since 1990. The other selected countries noticed a decline in
poverty in both urban and rural areas; whereas in Pakistan, it declined mainly in urban areas, the
rural poverty remained at the high level.
3.5

Comparison of Inequality

All selected Asian countries have enjoyed respectable growth during the last quarter century;
however, inequality remains an issue. Table 3.7 shows the Gini-coefficient and the ratio of the
consumption or income share of the top 10 percent to the bottom 10 percent of the population
among the selected six East and South Asian countries. Gini-coefficients show that both India and
Indonesia witnessed a higher inequality, while it declined in other countries (China, Malaysia and
Thailand) including Pakistan. There is more reduction in the value of Gini-coefficient in Malaysia
as compared to the other countries. Across the region, there is higher inequality in rural areas of
China, while India and Indonesia have more inequality in urban areas. As discussed earlier,
Pakistan also has more inequality in its urban areas. The ESCAP report (2010) shows that
inequality rose in both rural and urban areas of China, India and Indonesia.
The ratio of the bottom 10 percent to top 10 percent also indicates the presence of inequality in all
the selected countries. Since the household surveys differ in method and type of data collection
across the countries, the cross-country comparisons should be made with caution. A crosscomparison in Table 3.7 shows that during the selected period (initial and final), the share of
bottom 10 percent population in total income or consumption has improved in China, Malaysia,
Pakistan and Thailand; whereas it declined for India and Indonesia. In India, the overall
inequality appears to be static since the mid-1980s; both poverty and inequality declined in urban
and rural areas during the pre-reform period (1983-94). After the post reform period (1993-2005),
the country has had a faster growth; however, this faster growth could not be translated into faster
7

UNDP, 2008, Malaysia, Measuring Poverty and Inequality.

Table 3.7: Gini-Coefficient, Inequality in Income or Expenditure in Selected Countries

Indicators

China

India

Indonesia

Malaysia

Pakistan

Thailand

2001-07

1999-07

2002-07

1997-07

1998-07

2000-07

Initial Period
Poorest 10%

1.8

3.9

3.6

1.7

3.7

2.5

Richest 10%

33.1

27.4

28.5

38.4

28.3

33.8

Ratio of Richest

18.4 a

7b

7.8 b

22.1a

7.6 b

13.4 b

Gini Index (overall)

44.7

32.5

34.3

49.2

33

43.2

Final Period
Poorest 10%

2.4

3.6

2.6

3.9

2.6

Richest 10%

31.4

31.1

32.3

28.5

26.5

33.7

Ratio of Richest

13.2 b

8.6 b

10.8 b

11 a

6.7 b

13.1 b

41.5
36.8
39.4
37.9
31.2
42.5
Gini Index (overall)
a. income shares by percentiles of population, ranked by per capita income.
b .expenditure shares by percentiles of population, ranked by per capita expenditure.
Note: The value of Human Development Index (HDI) have been calculated from life expectancy at birth, mean
years of schooling, expected years of schooling, gross national income (GNI) per capita
Source: Human Development Reports, various editions, UNDP.

reduction in poverty, suggesting that the overall distribution has worsened at the lower tail
(Osmani, 2008). There is rising disparity across the households and regions in terms of
consumption, income, asset holding as well. The social hierarchy system (Hindu Varna system) is
the root cause of this social and economic inequality (Hirashima, 2009).
3.6

Status of Achieving Poverty-Related MDG Targets in Pakistan

The Government of Pakistan has endorsed the Millennium Development Goals (MDGs) and has
set the target of halving poverty from its 1990/91 level of 26.1 percent to 13 percent by 2015.
This commitment of government has been fully reflected in its MTDF (2005-10), PRSP-II (200910) and Vision 2030. MTDF and PRSP targets have been aligned with the MDGs. The poverty
related goal has been measured in Pakistan by three indicators: reduction in headcount ratio,
reduction in the proportion of underweight children of age 5 and reduction in the proportion of
population below minimum level of dietary energy consumption (Table 3.8).

Indicators

Table 3.8 : Pakistan: Millennium Development Goal related to Poverty

MTDF
MDG
1990/91 2005/06
Target
Target2015
2009/10

Current Status
(2008-09)

Proportion of population below the

caloric based food plus non-food
poverty line

26.1

23.3

21

13

Lag (Worsened
since 2006)

Prevalence of underweight children

under 5 years of age

40

38

28

<20

Lag (Worsened
since 2006)

25

n/a

15

13

Lag (Worsened
since 2006)

Proportion of population below

minimum level of dietary energy
consumption
Source: GoP, 2010.

10

The country was on the track to achieve MDG poverty related targets up to 2006 when a sharp
reduction in poverty was witnessed during the 2000-2006 period in both rural and urban areas.
However, at present, the ground realities and official estimates reveal that it is difficult to achieve
the goals of PRSP and MTDF by 2010 and MDGs targets by 2015. First, in 1990/91, the base
year for the MDGs, the incidence of poverty was 26 percent, which, because of low growth
episodes, increased to 34.5 percent in 2000/01. The sharp increase in poverty of about 9
percentage points occurred between 1996/97 and 2000/01 period. The reduction in poverty by
more than 11 percentage points between the 2000/01 and 2005/06 period has only offset the
earlier rise in poverty.
Second, though no recent poverty numbers are available, as discussed earlier, the economy has
lost its growth momentum since 2008 and poverty is likely to have increased. Furthermore, the
most recent catastrophic floods led to huge financial and life losses by affecting about 20 million
population directly and much larger number of population indirectly.
The MDG 1 also deals with the prevalence of underweight children and the population below the
minimum dietary energy consumption levels. Both these indicators are also linked to the overall
poverty situation. Pakistan is also lagging in these indicators (Table 3.8); therefore, it is most
likely that the MTDF and MDG target for the Goal 1 (reduction in hunger and poverty) will not
be met. High sustained economic growth is required for achieving the target of reduction in
poverty, according to the MDG Report 2010 (GoP, 2010).
3.7

Poverty-Inequality Nexus

All the East and Southeast Asian economies have succeeded in reducing poverty, but inequality
remains an issue in all these countries except Malaysia. A similar paradoxical situation is present
in Pakistan where it is hard to find out a relationship between poverty and inequality. During the
first half of last decade (2000-2005), both the consumption and income inequality moved in a
direction opposite to changes in overall poverty inequality increased when poverty declined
during the 2000-2005 period. Gini-coefficient shows a rise in inequality in both urban and rural
areas, while the headcount ratio shows a decline in poverty in both urban and rural areas.
However, the consumption share of top 20 percent and bottom 20 percent population, which
measure the gap between rich and poor, shows that overall inequality increased primarily due to
its rise in urban areas while it declined in rural areas. It indicates an uneven growth in
consumption by quintile. In other words, consumption increased faster for top 20 percent of the
population (richest) as compared to the growth rate of bottom 20 percent (poorest).
A similar situation was found during the 1990s, when overall consumption inequality increased
between 1992/93 and 1998/99(FBS, 2001; World Bank, 2002 and Anwar, 2005). During this
period, the urban inequality rose while the poverty in urban areas remained almost the same; the
rural inequality declined while poverty rose in rural areas. Between 1998/99 and 2001/02, the
inequality has a negative association with poverty as poverty rose in this period in both urban and
rural areas, while inequality declined in terms of Gini-coefficient and the ratio of top 20 percent
to bottom 20 percent (Table 3.9).

11

Table 3.9. Pakistan: Gini-Coefficient by Regions and Overall, 1992/93 - 2005/06

FBS (2001)
World Bank (2002)
Anwar (2005)

Year
Overall
1992-93
1993-94
1998-99
2001-02*
2005-06*
Rural areas
1992-93
1993-94
1998-99
2001-02*
2005-06*

0.2680
0.2709
0.3019
0.2752
0.3018

0.276
0.276
0.296
-

0.3937
0.3864

0.2389
0.2345
0.2521
0.2367
0.2462

0.252
0.246
0.251
-

0.3668
0.3647
0.3796
0.3762
-

Urban areas
1992-93
0.3170
1993-94
0.3070
1998-99
0.3596
2001-02*
0.3227
2005-06*
0.3490
*Based on Economic Survey of Pakistan

0.316
0.302
0.353
-

0.3970
0.3685
0.4510
0.4615
-

3.8

0.4187
0.4129
-

Growth-Poverty-Inequality Nexus

The rise in inequality weakens the poverty reduction effect of economic growth. Income
inequality and poverty affect each other directly and indirectly through their link with economic
growth.8 As shown in Figure 3.1, some of these links can be explored separately, but often ones
influence causes an indirect effect on the other. For instance, inequality can indirectly influence
poverty as inequality affects growth and growth in turn influences poverty. Small changes in
income distribution can have a large effect on poverty (Jamal, 2006). The cross-country studies
have shown that stable inequality within country over time is not sufficient to make a significant
difference in poverty reduction (Deininger and Squire, 1998). Moreover, greater initial income
inequality reduces future growth even after controlling for initial levels of GDP and human
capital (Bridsall, et al. 1995). Thus, low inequality can benefit the poor in two ways: by
increasing overall growth and average incomes and by letting them more share in that growth
(Knowles, 2001).
The relationship between growth, poverty and inequality is complex and multi-dimensional, and
this complexity holds in Pakistan as well as other developing countries of the region. The recent
and past trends of growth, poverty and inequality in Pakistan show that the average growth rate
during the 1960s was 6.8 percent per annum (Figure 3.2); however, both poverty and income
disparities rose during this period as this growth was mainly due to easy access to foreign aid,
8

Knowledge about the links between non-income inequality and poverty remains very limited. The studies that do exist
generally focus on the effect of non-income inequality on income rather than other dimensions of poverty and suggest
that income inequality also acts as a proxy for asset inequality.

12

Figure 3.1: Relationship between Inequality, Poverty and Growth

Inequality

Poverty

Growth

c
Source: Naschold (2002).

exchange rate was kept overvalued and this growth promoted industrial rent-seeking elite only.
The decade of 1970s witnessed a sharp decline in economic growth, recoded as only 4.8 percent
per annum; however, urban poverty and inequality declined during this period. Again, the high
growth performance was observed during the 1980s (6.5 percent on average). Although, growth
in the agriculture sector remained sluggish (around 3.6 percent), the industrial sector posted a
healthy average annual growth of more than 8 percent. The services sector also grew strongly in
the 1980s, led by ownership of dwellings, transportation, storage and communication and
wholesale and retail trade. The inflow of foreign remittances increased sharply during the 1980s
(GoP, 2009). Both the rural and urban poverty declined from 30.6 percent in 1980 (25.9 percent
in urban and 32.5 percent in rural areas) to 22.1 percent in 1988 (18.6 percent in urban and 24.6
percent in rural areas). However, inequality did not decrease rather it witnessed a mild increase.
Figure 3.2: Pakistan: Real GDP Growth, 1960-2010
(%, average)
8

6.8
4.8

6.5

6.2

4.6
3

4
2
0
1960s

1970s

1980s

1990s

2001-06

2007-10

The growth performance of Pakistan during the 1990s was not encouraging; rather it is shown as
the lost decade. Beside political instability, many other factors contributed in the low economic
performance, including deteriorating law and order, economic sanctions in the wake of nuclear
testing, persistent drought conditions, and infrastructure bottlenecks such as inadequate power
supply with frequent power outages in the industrial areas, and lack of public facilities at optimal
levels (Haq et al., 2007). The persistence of large fiscal and current account deficits and the

13

associated buildup of public and external debt emerged as the major source of macroeconomic
imbalances during the 1990s (Din, 2007). As discussed earlier, that both poverty and inequality
increased during 1990/91 and 1998/99 period, while inequality moved to opposite direction of
poverty during 1998-2001 when poverty rose and inequality declined.
During the first six years of 2000s when the Government of Pakistan launched its PRSP
programme, the growth performance was impressive, about 6.2 percent per annum on average,
matching the growth of 1980s. Fiscal deficit was reduced and debt ratios witnessed an
improvement with stable exchange rate and rising foreign reserves. As discussed earlier, the
poverty declined by 12 percentage points in five years (2000/01 and 2005/06). However, Pakistan
could not succeed in reducing inequality during the fast growth periods when poverty reduced
sharply. It suggests that growth may take much longer period to trickle down to the poorest of the
poor.
4.

Government Policies/Initiatives for Reducing Poverty and Inequality

4.1

Government Past Policies

Pakistan has a long history of poverty reduction policies including the Social Action Program of
the 1990s, which did not bring about the desired change in social indicators. The government
took a serious view of the rise in poverty during the 1990s, and launched the Interim Poverty
Reduction Strategy Paper (IPRSP) in November 2001 focusing attention on the primary objective
of reducing poverty and restoring economic stability. The full PRSP that was launched in
December 2003 for three years outlined a well-structured strategy for poverty reduction, with four
pillars addressing different aspects of poverty: high economic growth; governance and
consolidating devolution; investing in human capital; and bringing the poor, vulnerable and
backward regions into mainstream of development, and to make marked progress in reducing
existing inequalities. To ensure the availability of resources, the government was under obligation
to protect PRSP expenditures at around 4 percent of the GDP.
For the revival of economic growth, the PRSP-I (2003-06) identified five major areas, namely,
agriculture, small and medium enterprises (SMEs), housing and construction, information
technology and telecommunication and exports. It is well established that poverty is highly
conditioned by the governance factors. To improve the governance, several steps were initiated in
the PRSP-I including the devolution of power to the grass roots level and decentralization of
administrative and financial authority. The PRSP-1 also focused on education, health, nutrition,
population programs, water supply and sanitation, employment and gender related reforms. To
transfer income to the poor, several targeted programmes including Zakat, Bait-ul-Mal and
microcredit were also part of the PRSP-I.
The PRSP-I envisages that all these measures will help revive economic growth and will reduce
poverty in the medium-term. Results point to the right direction. The reforms led to improved
economic indicators, moving real GDP growth from 3.1 percent in 2001/02 to 9.0 percent in
2004/05 surpassing PRSP targets for the said years and maintaining a striking average growth rate

14

of 7.0 percent over the four years period (2003/04 2006/07). As reported earlier, poverty
reduced sharply during the PRSP-I period.
After the completion of PRSP-I, PRSP-II was launched for the period of 2008-12.The Strategy is
built upon nine pillars: (i) Macroeconomic Stability and Real Sector Growth; (ii) Protecting the
Poor and the Vulnerable; (iii) Increasing Productivity and Value Addition in Agriculture; (iv)
Integrated Energy Development Programme; (v) Making Industry Internationally Competitive;
(vi) Human Development for the 21st Century; (vii) Removing Infrastructure Bottlenecks through
Public Private Partnerships; (viii) Capital and Finance for Development; and (ix) Governance for
a Just and Fair System.
Targeting the poor and vulnerable, which has been integral component of both PRSP-I and PRSPII, includes some narrowly targeted interventions of the government to transfer benefits directly
to the poor. However, the extent of benefits to the poor from targeted programs has always been
in some doubt. Few programs have been reviewed here. The amounts transferred under these
programmes and their beneficiaries are given in Table 4.1.
Table 4.1: Pakistan: Direct Transfers and Beneficiaries
Social Protection

2008/09
Expenditures
Beneficiaries
(Rs. million)
(000)

2009/10
Expenditures
Beneficiaries
(Rs. million)
(000)

Budgetary Transfers
BISP

15,800

1,760

32,000

2,290

PBM (all Programmes)

3,432

1,159

2,261

2,110

Punjab Sasti Roti

1,900

8,000

Zakat (all Programmes)

2,877

1,085

2,874

1,289

EOBI

5,787

290

6,442

310

WWF

2,087

2,432

Microfinance

28,669

63
1,939,050
(loans)

70
1,966,457
(loans)

Total
(excluding microfinance)

31,880

Non-Budgetary Transfers

4,357

33,775
54,010

6,070

Source: PRSP, Annual Progress Report, 2010, Finance Division

Benazir Income Support Programme (BISP)

With a view to cushion the sharp rise in oil and food prices, the BISP was launched in 2008 to
provide cash assistance to the identified vulnerable and enabling them to exit the vicious cycle of
poverty in the shape of the cash grant of Rs. 1,000 per month. This strategy also includes
imparting training to one member of each vulnerable family to sustain it. This programme has
aimed to cover almost 15 percent of the total population or 40 percent of the poor (GoP, 2010).
Punjab Food Support Scheme (PFSS)
Like BISP, PFSS was initiated by the Government of Punjab in 2008 to provide food stamps for
the poorest households with a cash grant of Rs. 1,000 per month per household. This programme

15

aims to target those households that do not have a bread earner such as widows, orphans and
destitute, chronically sick and disabled persons, elderly persons who have been abandoned by
their family and the poorest of the poor segment of the society. So far, about Rs. 21.6 billion have
been disbursed among the 1.8 million families residing in Punjab province (GoP, 2010a).
Pakistan Bait-ul-Mal (PBM)
Pakistan BaitulMal (PBM) disburses more to the destitute, needy, widows, orphans, invalids
and infirm irrespective of their gender, caste, creed or race. PBM provides assistance under
different programmes and schemes such as Food Support Programme (FSP), Individual Financial
Assistance (IFA), Institutional Rehabilitation through Civil Society Wing (CSW), National
Center for Rehabilitation of Child Labour (NCRCL), Vocational Training Institutes/ Dastkari
Schools (VTIs) and many others. PBM disbursed relatively less amount in 2009/10 as compared
to 2008/09 with a decline in number of beneficiaries by 22.8 percent (Table 4.1). The decline in
disbursements and number of beneficiaries is caused by the merger of Food Support Scheme, a
major component of Pakistan Bait-ulMal into Benazir Income Support Programme since 2009.
Zakat
Zakat provides financial assistance such as Guzara Allowance, Educational Stipends, Health
Care, Social Welfare/ Rehabilitation, Eid Grants, and Marriage Assistance through Regular Zakat
Programme and other Zakat Programmes and National Level Schemes. A slight decrease in Zakat
disbursements and a significant increase in beneficiaries were noticed in 2009/10 compared to
2008/09 (Table 4.1).
Microfinance
Microfinance is one of the major targeted interventions to address poverty by enabling the poor to
become self-employed. Microfinance comprises microcredit, microsavings and microinsurance.
Loan portfolios of the institutions like National Bank of Pakistan, first Microfinance Bank,
Khushhali Bank, First Women Bank, Pakistan Poverty Alleviation Fund, NRSP and Provincial
RSPs play an important role in augmenting governments strive for poverty alleviation (GoP,
2010a). Poverty targeting is intrinsic in these programs because it is commonly argued that the
affluent would not find the smaller sized loans befitting to their social standing. Only poor will
opt for becoming its members because microcredit programs are designed to cater only their
needs. The small loans are also better suited to the repayment capacities of the poor. Progress of
the microfinance sector in Pakistan as given in Table 4.1 for 2008/09 and 2009/10 shows an
upward trend both in terms of active borrowers as well as disbursed amount.
4.2

Diagnostic Analysis of Binding Constraints to Reducing Poverty and Inequality

Pakistan has not experienced a secular decline in poverty for a longer period, it has rather
fluctuated overtime. The growth, poverty and inequality nexus in the past could not work in right
direction to achieve high growth with a reduction in both poverty and inequality. The rise in
inequality has weakened the relationship between growth and poverty in Pakistan. The poor and
vulnerable population has generally been at disadvantage to reap the benefit of high economic
growth. In addition to the current economic crunches of inflation and unsustainable current

16

account and fiscal deficits, the following are the major barriers for sustained growth and poverty
and inequality reduction.
4.2.1.

Law & Order and Governance

The rising militancy during the last few years has adversely affected every Pakistani by creating
an overall uncertainly which led to capital flight, lower investment, and decline in FDI. It has also
limited the government capacity to spend on pro-poor expenditures due to a massive spending on
anti-terrorism campaign during the last four years. The institutional dimensions of governance
uncover a negative and significant association between rule of law and poverty (Haq et al., 2007).
At present, the state of governance in Pakistan is a serious impediment in the way of growth and
poverty reduction efforts. Global Competitiveness Index (GCI) is a comprehensive measure of a
nations competitiveness based on 12 indicators: Pakistans overall ranking deteriorated in last
few years; it was 91 out of 125 countries in 2004/05 and it went up to 123 out of 139 countries in
2010/11. As shown in Table 4.2, the problematic factors for doing business in Pakistan are
corruption, government instability/coups, policy instability, inflation, inefficient government
bureaucracy, and crime and theft. However, Pakistan has significantly improved in judicial
independence. Corruption has been adversely influencing the economic activities and resource
management. The latest transparency survey (2009) assigns Pakistan a score of 2.4 out of 10 and
ranks it 139th out of 180 countries.
Table 4.2: Pakistan: Governance Indicators, 2010
Indicators

Index

Judicial independence

74/139

Irregular payments and bribes

117/139

Property rights

107/139

Favoritism in decisions of government officials

87/139

Business cost of terrorism

138/139

Organized crime

127/139

Source: Global Competitiveness Report: 2010-11

4.2.2.

Education, Technology and Health

At the macro level, the share of high technology intensity product in Pakistan is small. As per
Global Competitiveness Report 2010/11, Pakistan ranks 76th on the innovation index out of 139
countries, reflecting a poor level of innovation. Pakistan is hardly spending its 2 percent of GDP
on education (World Economic Forum, 2010).
At the micro level, the incidences of poverty are highly linked with the literacy and educational
attainment of household heads. In the Pakistan Poverty Assessment (PPA), education was found
to be the most significant factor distinguishing the poor from the non-poor. These educational
differences also explain the poverty gaps between the rural and urban areas, consistent with the
idea that literacy is likely to have higher returns in urban areas (Jafri, 1999 and World Bank

17

2002). Education and skill levels are directly related to employment. The poor usually have low
levels of skill and can only find employment in low-paid jobs.
Health has commonly been related to the incidences of poverty and change in poverty status
(Hussain, 2003). Unfortunately, the Government of Pakistan has not been successful in allocating
sufficient resources for the health sector, as it is stagnant on only 0.6 percent of GDP. Most of the
poor households suffer from ill health and are forced to bear the high cost of medical treatment.
Illness is often a catalyst in pushing households deeper into poverty and, thus, ill health and
poverty are linked in a vicious cycle.
4.2.3.

Landlessness, Farm Assets and Tenure Patterns

The ownership of land is highly unequal in Pakistan, which is one of the major barriers to poverty
and inequality reduction in rural areas. Less than half of all rural households own any agricultural
land, while the top 2.5 percent of households account for over 40 percent of all land owned
(Gazdar 2004; World Bank 2002). Within the rural areas, Malik (2005) found relatively higher
land inequality in poor districts located in the cotton-wheat belts of southern Punjab and Sindh.
Land is often sold to cover urgent consumption needs, marriage expenditure, and health
expenditure. This depletion of productive assets has an adverse impact on the poor in terms of
their future stream of income, and reduces their probability of escaping poverty (Hussain, 2003).
Gazdar (2004) also observed the unequal distribution of farm asset ownership (other than of land)
among cultivating households. Even though the incidence of sharecropping has declined over
time, there are still many rural households that cultivate land as share-tenants and poverty is
higher among them (Anwar, et. al. 2005; SPDC 2004; and World Bank, 2002).
4.2.4.

Power Structures in Rural Areas

The civil and military bureaucracy, political and religious forces, landed rural elites, and caste,
biraderi (clan), and ethnicity are among the most important pillars of the prevailing power
structure in Pakistan (Hooper and Hamid, 2003). The highest and persistent levels of poverty
occur in those rural areas of Pakistan which are traditionally considered feudal, such as rural
Sindh, southern Punjab, and the tribal areas of Khyber Pakthunkhawa (KPK) and Balochistan. In
rural areas, landed elites have a decisive influence not only on the social and economic life of
residents, but also on local, as well as central and provincial decision-making power. Size of
landholding is regarded as directly proportionate to power, and the landed elites in Pakistan enjoy
more power than its Indian counterpart. The dependency of the poor on local power structures
takes a variety of forms. Distortions in the input and output markets functioning against the poor
tend to generate poverty in rural areas (Hussain, 2003). Tenants as well as small farmers who
cultivate their own land, generally have to pay relatively high prices for inputs while receiving
relatively low prices for outputs as compared to large farmers. At the same time, the lack of
access to formal credit markets often forces poor tenants to borrow from their landlord. This
generates a form of bonded labor and tenants are sometime obliged to work on their landlords
farm at less than market wage rates or even without wages (Arif, 2004; and Hussain, 2003).
Landlords may also exert control over watercourses, which influences their relationship with their

18

tenants because it provides the former with absolute control over cultivation (Hooper and Hamid,
2003).
4.2.5.

Doing Business in Pakistan

The World Bank report of Doing Business 2011 shows that doing business in Pakistan is quite
difficult, the rank of Pakistan for ease of doing business is 83 out of 183 (World Bank, 2011).9
The cost of starting business is significantly above those observed in South East and East Asian
countries with a rank of 85th out of 183 countries. Similarly, in case of Enforcing Contract cost
is also very high in Pakistan. It also ranked lower in terms of registering property in 2011. Getting
credit has also become more difficult in Pakistan; if the government does not introduce reforms
particularly in employing worker, paying taxes, and enforcing contract, then it would not
attract investment, which is necessary for high growth and poverty reduction.
4.2.6.

Poor Infrastructure

Qayyum et al. (2007) consider that quality of infrastructure in Pakistan is not a binding constraint
as indicated by Global Competitiveness report 2006/07 that is 3.4 and is equivalent to that of
China (a high growth performer), and is better than that of Indonesia and India.10 However, the
recent Pakistan score declined to 2.8 as compared to India with 3.5, Indonesia with 3.6 and China
with 4.4.
4.2.7.

Regional Inequality in Public Provision and Infrastructure

Public provision of social services plays important role in the capabilities development and leads
to decline in income poverty. Similarly, social overhead capital is a necessary input in the
structure of production and poverty reduction (Hirschman, 1958). If inequality between provinces
and districts rises above a certain threshold, it can trigger a violent conflict which, in turn, can
lead to decades of reduced growth and rising poverty (World Bank, 2006c).
As shown in Table 4.3, there is higher inequality across the provinces in terms of physical and
social infrastructure. The Punjab province has better ranking, while the two provinces, KPK and
Baluchistan are poor by all infrastructure indicators. Even within Punjab and Sindh, the rural
Table 4.3: Pakistan: Infrastructure by Provinces
Physical Infrastructure
Distance to
Soling
Piped
Province
Metal road<1 Electricity
street
Drain
water
Overall Punjab
80.0
47.0
66.0
58.0
9.0
Overall Sindh
67.0
10.0
30.0
23.0
7.0
Overall KPK
38.0
34.0
29.0
19.0
20.0
Overall Baluchistan
20.0
12.0
8.0
7.0
9.0
Source: MOUZA statistics, 2008

Soft Infrastructure
Educatio
Health
n Ins.
Ins.
34.0
30.5
37.5
27.3
33.3
24.5
22.3
11.3

There are 183 countries included in Doing Business Report (2011), and if best rank in doing business is one and worst
rank is 183th. So 83th shows that Pakistan lies in the middle of the world in doing business.
10
General Infrastructure (1= underdeveloped, 7=as extensive and efficient as the worlds best) Score for other countries:
Indonesia (2.5), India (3.3), China (3.4), Thailand (5.0), Korea (5.1), Taiwan (5.4), Malaysia (5.7), and Hong Kong
(6.4).

19

Sindh and southern Punjab have poor level of access to physical and social infrastructure as
compared to the northern and central Punjab. These infrastructural differences across the regions
explain the poverty and inequality differences as the regions with poor level of infrastructure have
comparatively less social and economic integration in terms of diversified resources, human
capital, and access to jobs in armed forces (Arif et al., 2011). The recent flood has also affected
the poorest regions of Pakistan, southern Punjab and rural Sindh and has pushed many non-poor
households into poor category and many poor stuck into long-term poverty (Arif et al., 2010).
4.2.8.

Limitations in Social Protection and Social Safety Net Programmes

The Government of Pakistan has been allocating a fair amount for social safety net programmes.
All these programmes directly intervene to transfer resources to the marginalized segment of the
society so that they can stand on their own two feet and become economically self-sufficient.
However, the efficient utilization of these funds by targeting the poor and vulnerable is a debated
topic in Pakistan. Moreover, the transfer programmes are not sufficient to meet the demand of the
poor.
4.3.

Government Medium-Term Policies and Plans

The Medium-Term Development Framework (2005-10) and PRSP-II (+2008-11) have given the
medium-term policies and plans in the light of long-term development framework of Vision 2030.
Both the MTDF and PRSP advance the agenda for pro-poor economic growth by allocating
adequate resources for sustainable human development where the targets have been aligned in the
line of MDGs. To fulfill this commitment, the government has settled the issue of distribution of
resources among the provinces by freeing the resources toward provinces in 2010. It will enable
the provinces to meet their obligations by raising spending on both social and economic sectors
and creating opportunities for the deprived and vulnerable peoples.
A summary of the macroeconomic targets is given in Table 4.4. The economy is projected to
grow between 7.2 percent and 7.5 percent by 2010/11, supported by strong growth in agriculture,
Table 4.4: Pakistan: Macroeconomic Indicators/ Targets (PRSP-II)
Macroeconomic Indicators (Base case Scenario)

Items
Real GDP Growth (%)
Agriculture
Manufacturing
Inflation (CPI based)
Investment (% of GDP)
National Saving (% of GDP)
Trend in Public Finance
Fiscal Deficit (Rs. billion)
Public Debt ( % of GDP)
Trend in Balance of Payments
Worker Remittances (S million)
Current Account ( % of GDP)
External Debt ( % of GDP
Export Growth (%)
Import Growth (%)

2005/06
6.6
2.5
8.6
7.9
20
15.6

2006/07
7
4.5
10.5
6.5
20.5
16.1

2007/08
7.2
4.4
11.2
5.5
21
17

2008/09
7.1
4.5
11.8
5
21.7
17.9

2009/10
7.3
4.3
11.7
5
22.2
18.6

2010/11
7.5
4.4
12.1
5
22.8
19.4

-45.6
56

36.5
50.6

80
46.4

140.5
43.3

209.4
40.1

4,600
-4.4
28.9
13.8
31.4

5,500
-4.4
27
10
11

6,200
-4
25.5
12
10

6,400
-3.8
24.3
13
10.5

6,700
-3.6
23.1
14
11

6,950
-3.4
21.9
15
11

Source: Poverty Reduction Strategy Paper-II, 2008-12

20

manufacturing and services sectors. In order to achieve these growth targets, the overall projected
investment is 21 percent to 22.8 percent of the GDP. National saving is targeted as 17 percent to
19.4 percent of GDP for the same period and current account deficit is in the range of 3.4 percent
to 4 percent of GDP. Fiscal development is considered the key element of obtaining the stability.
The overall budget deficit is targeted to be reduced from current level of 4.2 percent of GDP to
3.3 percent of GDP by 2010/11. On the external side, the projected trade gap is in the range of $911 billion and current account deficit in the range of $ 6-7 billion.
The PRSP has a rolling strategy, which identifies the required resources in according to national
objectives and in the context of fast changing global economic developments. Table 4.5 shows
the projected government expenditure on 17 budgetary pro-poor sectors under 5 broad headings
for 2010/11 2012/13 period. According to the Fiscal Responsibility and Debt Limitation Act
(FRDLA), 2005, the social and poverty related expenditures are not to be reduced below 4.5
Table 4.5: Pakistan: Projected PRSP Budgetary Expenditures (2010/11 - 2012/13)
2010/11
2011/12
2012/13
Rs million
% of GDP
Rs million
% of GDP
Rs million
% of GDP
Expenditure
Development
347,649
2.20
436,049
2.46
554,165
2.78
Current
701,039
4.43
859,482
4.85
1,060,813
5.33
Total
1,048,688
6.62
1,295,531
7.31
1,614,978
8.12
Market Access and Community Services
Roads, Highways &
75,426
0.48
97,003
0.55
125,341
0.63
Bridges
Water Supply &
13,407
0.08
16,492
0.09
20,384
0.10
Sanitation
Human Development
Education
348,782
2.20
471,338
2.66
639,956
3.22
Health
88,244
0.56
126,563
0.71
182,378
0.92
Population Planning
5,087
0.03
5,746
0.03
6,521
0.03
Rural Development
Agriculture
132,360
0.84
161,343
0.91
197,599
0.99
Land Reclamation
3,869
0.02
4,759
0.03
5,882
0.03
Rural Development
13,356
0.08
15,982
0.09
19,215
0.10
Rural Electrification
19,096
0.12
22,423
0.13
26,454
0.13
(People Works
Programme-II)
Safety
Nets
Subsidies
178,343
1.13
178,343
1.01
178,343
0.90
Social Security &
93,197
0.59
104,225
0.59
117,106
0.59
Welfare
Benazir Income
59,654
0.38
66,713
0.38
74,957
0.38
Support Programme
Others*
33,542
0.21
37,512
0.21
42,148
0.21
Governance
Administration of
7,930
0.05
9,312
0.05
10,986
0.06
Justice
Law & Order (Current
41,116
0.26
39,084
0.22
37,327
0.19
& Development)
Total PRSP
1,048,688
6.62
1,295,531
7.31
1,614,978
8.12
*This includes (i) Labour Welfare Measures; (ii) Social Welfare Measures; (iii) Welfare of Pakistanis Abroad;
(iv) Population Welfare Measures; (v) Others (Distribution of Winter clothes); (vi) BISP; (vii) PPAF; and (viii)
Pakistan Bait-ul-Mal (other than Food Support).
Source: PRSP-II, Finance, Division

21

percent of GDP in any given year. Further, budgetary allocations for health and education will be
doubled as a percentage of GDP during the next ten years ending in June 2013, hence further
endorsing the significance of tracking social sectors. In accordance with PRSPs MTEF, pro-poor
expenditure projections for water supply and sanitation will also increase during the PRSP-II
period from 0.07 percent of GDP in 2008/09 to 0.08 percent in 2010/11 and 0.10 in 2011/12.
4.4.

Main Challenges/Issues/Risks to Medium-Term Outlook

During the last four years, the international and domestic economic scenario has significantly
threatened the current and future macroeconomic stability. The fiscal year 2007/08 has caused
turmoil for Pakistans economy with several political and economic events, both on domestic and
external fronts, occurring unexpectedly. The country suffered a series of shocks since the eruption
of the judicial crisis in March 2007. The then government went into policy inaction, delaying
important decisions that were needed to face these challenges. Root causes of macroeconomic
instability included delay in passing the effect of the oil price hike to the consumers, resulting in a
very high budget deficit, which was financed by excessive borrowing from the central bank. A
critic analysis of the macro targets as reported in Table 4.4 shows that the country remained off
the track during the first four years of MTDF. The country Report of MDG, 2010 has also
declared that the economy is not able to achieve the MTDF, PRSP-II and MDG goals. The
government is facing the following challenges that may further bind the government capacity to
achieve the MTDF and MDG targets:

Pakistans macroeconomic environment does not appear stable since 2008. This is one of the
major binding constraints to the future growth of Pakistan. The economy achieved a growth
rate of 6.8 percent, close to the target of 7.1 percent for the first three years of the MTDF.
However, a poor growth performance has been observed in the manufacturing and agriculture
sectors during the last four years, which was the focus of the MTDF growth strategy (GoP,
2010). As shown in Table 4.6, the country is among the four worst countries of the world in
terms of macroeconomic environment and inflation, the most important indicators for poverty
and inequality eradication. The high double-digit inflation has limited the ability of poor
households to improve their well-being with limited resources (or income). The recent energy
and water crises have also badly affected the overall macro atmosphere.
Table 4.6: Pakistan: Macroeconomic Indicators, 2010
Overall Macro Environment Index
Inflation

133/139
137/139

Country Credit Rating

125/139

Quality of Electricity Supply

128/139

Source: Global Competitiveness Report: 2010-11

The last decade also show a rising gap between investment and saving. After rising from 16.5
percent of GDP in 2000/01 to 21 percent in 2002/03, national saving rates have declined
since 2003/04. In 2009/10, national saving remained only13.8 of the GDP, which shows the
saving rate is not sustainable. Similarly, investment rate is also low (16.6 percent for
2009/10) as compared to the other countries in the region. Since 2004/05, the fiscal deficit

22

and current account deficit are also rising. Another misfortune is the stagnant development
expenditures which, on average, are low (3.5 percent of GDP) during the current decade
compared to the 1980s and 1990s. After launching the MTDF and PRSP-II, the proportion of
development expenditure, by and large, declined, meanwhile the current expenditure rose.

The UNDP and Ministry of Finance have prepared a joint report for the Millennium
Development Goals (MDGs) Costing in (2007)11 for three social sectors education, health
and water and sanitation to achieve the MDGs.12 The gaps for each activity have been
reported for the entire country. As shown in Table 4.7, the allocation of resources under
PRSP is not sufficient to meet the MDG targets. The government is already facing the
financial constraints as the PRSP data show that relatively fewer amounts have been spent
than the projected.
Table 4.7: Pakistan: Proposed PRSP Allocations, MDG Costing Estimates and Resource Gap
(2009-11)
Sector

PRSP Allocations
(Rs million)

MDG Costing Estimates

(Rs million)

Resource Gap
(Rs million)

Education
804,950
880,261
-75,311
Health
194,295
305,759
-111,464
Water supply &sanitation
33,484
172,268
-138,784
Total
1,032,729
1,358,288
-325,559
Source: Estimating the Cost to achieve MDGs in Pakistan, UNDP & Finance Division, Islamabad (2007)
& PRSP Secretariat, Finance Division, Government of Pakistan.

The government is facing severe issues of revenue generation and is highly dependent on
borrowing from the central bank and from external resources including the IMF. The intense
borrowing from the central bank may force a reversal in current tight monetary policy stance
of the central bank with adverse implications for inflation, particularly the food inflation,
which has eroded the purchasing power of poor. Similarly, the government has to remove a
number of subsidies under the IMF Standby Agreement (SBA) at the wrong time.

The external financial flows also exhibit instability by worsening the trade balances due to
weak export base with higher imports. Pakistan's exports are dominated by textiles and
clothing and the rising input costs in recent years has eroded Pakistan's competitiveness.
Global competitive pressure is posing major challenges for developing countries, for which
our main exporting sectors such as textiles and clothing are not fully prepared. The rising
international oil prices have also threatened the balance of payments position with
depreciation in exchange rate. A comprehensive approach is required to improve export
competitiveness.

One important aspect that has severely affected the development is the role of Pakistan in the
War on Terror. It has sustained immense socio-economic costs by diverting resources from

11

Estimating the Cost to achieve MDGs in Pakistan UNDP & Finance Division, Islamabad (2007).
The initial costing parameters were determined through a consultative process during December 2005 to August
2006. However, assumptions, including the financial prices, made over two years remain valid. Expenditure incurred in
2007/08 has been updated with current GDP at market cost as a result of which future projections have been readjusted.
12

23

public development to law enforcement. Besides massive human losses resettlement

suffering; it has contributed to capital flight, and limited the FDI and other investment
opportunities particularly in FATA and KPK. The estimated cost of the War on Terror to
Pakistan was around Rs. 678 billion in 2008/09 which has led to massive unemployment
especially in the affected regions (Table 4.8).
Table 4.8: Cost of War on Terror to Pakistan (Rs. billion)
2004/05

2005/06

2006/07

2007/08

2008/09

Direct Cost

67.1

78.1

82.5

108.5

114.0

Indirect Cost*

192.0

222.7

278.4

375.8

563.8

Total

259.1

300.8

360.9

484.4

677.8

* On account of loss of exports, foreign investment, privatization, industrial output, tax collection, etc.
Source: Finance Division, Government of Pakistan, September, 2008.

4.5.

Role of Donors in Poverty and Inequality Reduction Efforts

As discussed earlier, Pakistan has witnessed healthy economic growth during the periods when
foreign inflows were higher i.e. 1960s, 1980s and during the first decade of current century.
During the last 6 years, Pakistan has faced two biggest disasters of the world in terms of the
population affected, areas, human losses and infrastructure losses: earthquake in 2005 and floods
in July-August 2010. In both the disasters, the foreign donors including international community,
international institutions and NGOs actively participated in affected areas by financially and
materially. With the assistance of local community and government, these donors developed
several clusters in various fields i.e. agriculture under FAO, camp coordination/management,
protection, emergency shelter under UNHCR, community restoration under UNDP, education
under UNICEF/Save the children, health under WHO, food, information management, logistic
under WFP and nutrition water, sanitation and hygienic under UNICEF. Some donors
participated only in the emergency relief; however, several are still performing to restore the
livelihood of these poor including: on-farm livelihoods, shelter, community restoration,
education, health, restoration of infrastructure and public utilities.
According to the Constitution of Pakistan, the government is responsible to improve the standard
of living of its people. However, the magnitude of available resources is too limited to achieve the
national and MDG targets. At present, the government is catching the foreign assistance to
overcome the saving-investment gap, balance of payment constraints and to overcome the
structural weakness of the economy i.e. poor skills, shortage of capital, power crisis and poverty
(GoP, 2009).
As detailed in Section 3, the government of Pakistan has launched a comprehensive strategy, the
PRSP and MTDF to reduce poverty and inequality by targeting the poor especially in rural areas.
The central voyage of PRSP is based on investing on those activities and programs, which
directly and indirectly benefit the poor population. Therefore, a number of donors including
World Bank, Asian Development Bank, Department for International Development (DFID),

24

INGAD, UNDP, UNFPA, ILO, UNICEF, WHO, JICA, CIDA, USAID, EU, GTZ, NORAD are
actively the part of PRSP in policy designing, implementation, and evaluation (GoP, 2003).
Several donors are chairing and co-chairing various sectors to improve the welfare of the poor i.e.
Water and Sanitation Sector Donor Coordination Group (WSDCG) co-chaired by DFID and
UNICEF.
As shown in Table 4.9, the commitments of foreign economic assistance (excluding Bonds and
IMF) amounted to $39,786 million from 1999-00 to 2009-10. Grants were 21 percent and loans
were 79 percent of the total commitments. Over this period, the bilateral commitments consituted
about 38 percent of the total commitments with the highest commitments were from USA, China,
Japan, Saudi Arabia and UK, while the rest 62 percent were multilateral commitments with
highest commitments were from AsDB, World Bank and, and the Islamic Development Bank
(IDB). The non-project aid commitment was about $20,812 million, which mainly has been
stretched from IDB, IDPs and Tokyo Pledges for Afghan Refugees Relief Assistance,
Commodity Aid, Food Aid, Programme Loans/Budgetary Support, and Short-Term Credits. The
rest project aid includes commitments for the Earthquake Rehabilitation & Reconstruction. The
disbursements of foreign economic assistance, excluding Bonds and IMF, amounted to $31,368
million with 20 percent share of grants and 80 percent share of loans during the corresponding
period (GoP, 2009a).
Table 4.9. Pakistan: Committed and Disbursed Foreign Assistance ($ million)
Commitments of Foreign Assistance
Year
Grant
Loan
Total
1999-00
371.8
1,008.5
1,380.3
2000-01
247.7
1,388.7
1,636.4
2001-02
922.3
2,677.7
3,599.9
2002-03
441.3
1,352.6
1,794.0
2003-04
405
2,070.0
2,475.0
2004-05
945.7
2,282.2
3,227.9
2005-06
1,426.7
3,079.8
4,506.5
2006-07
635.3
3,648.4
4,283.7
2007-08
576.1
3,174.9
3,751.0
2008-09
609.9
5,778.3
6,388.1
2009-10
1,606.4
5,137.0
6,743.5
Total
8,188.2
31,598.0
39,786.3
Source: EAD, Year Book (2009)

Disbursement of Foreign Aid

Grant
Loan
Total
292
1,458
1,750
203
1,882
2,085
1,002
1,753
2,755
401
1,520
1,921
335
1,046
1,381
506
2,216
2,722
1,068
2,291
3,359
681
2,700
3,381
574
3,085
3,659
575
4,113
4,688
648
3,019
3,667
6,285
25,083
31,368

4.5.1. Donor-Wise Disbursements

Table 4.10 shows that during the last two years, July 2008 to June 2010 period, the total disbursed
amount from multilateral sources was higher than the bilateral sources with 70 percent share of
multilateral and 30 percent share of bilateral sources, respectively. Out of the total bilateral
amount, 43.7 were grants and the rest 53.6 percent were loans. In the bilateral group, major
disbursements were from China ($782.1 million), USA ($614 million), Saudi Arabia ($479.2
million), UK ($286 million) and Japan ($214.5 million). Multilateral agencies disbursing over
$100 million were ADB, IDA, World Bank and IDB.

25

Table 4.10: Pakistan: Source and Donor-Wise Disbursements During 2008-10 ($ million)
Financing Source
Donor
Grant
Loan
Total
USA
613.95
613.95
Saudi Arabia
0.15
479.03
479.18
China
19.73
762.32
782.05
U.K.
286.01
286.01
Japan
127.06
87.39
214.45
Germany
30.25
50.98
81.23
Canada
10.7
10.7
Bilateral
Kuwait
42.15
42.15
Norway
5.46
5.46
Korea
0.3
0.3
Switzerland
0.05
0.05
France
0.86
0.86
Turkey
10
10
Australia
0.22
0.22
Bilateral Total
1,103.58
1,423.03
2,526.61
ADB
33.55
2,477.7
2,511.25
IDA
8.64
1,548.45
1,557.09
IDB [Short Term]
1,225.23
1,225.23
IDB
210.68
210.68
IBRD
4.66
177.4
181.96
Multilateral
IFAD
39.31
39.31
W.F.P
33.52
33.52
EU
28.14
28.14
U.N.H.C.R
4.9
4.9
UNDP
1.11
1.11
OPEC
10.32
10.32
Multilateral Total
114.52
5,689.09
5,803.51
Grand Total
1,218.1
7,112.12
8,330.12
Source: EAD, Year Book, 2008 and 2009

4.5.2.

Sector-Wise Disbursements of Project aid

During the past two years, the sectoral-wise project aid shows that an amount of $2,056 million
was disbursed in 15 different sectors with grants amounting to $465.3 million and loans
amounting to $1,591 million (Table 4.11). Sectors claiming more than $50 million were power,
Table 4.11. Pakistan: Sector Wise Disbursements of Project Aid during 2008-10 ($ million)
Sector
Grant
Loan
Total
Power
3.3
498.37
501.57
Transport & Communication
26.7
524.97
551.57
Rural Development & Poverty Reduction
21.31
159.38
180.69
Governance, Research & Statistics
127.93
91.01
218.94
Health & Nutrition
42.06
69.39
111.45
Water
52.69
83.19
135.88
Agriculture
2.99
56.75
59.74
Physical Planning & Housing
30.1
41.03
71.13
Education & Training
92.81
15.04
107.75
Science & Technology
0
21.7
21.7
Social Welfare
1.4
23.5
24.9
Environment
4.6
4.23
8.83
Population welfare
56.4
0
56.4
Women Development
3.04
0
3.04
Industry & Production
0
2.36
2.36
Grand Total
465.33
1,590.92
2,055.95
Source: EAD, Year Book, 2008 and 2009

26

transport & communication, rural development & poverty reduction, governance, research and
statistics, health and nutrition, water, agriculture, physical planning and housing, education and
training and population welfare. The majority of these sectors are directly and indirectly related to
poverty reduction efforts.
The economy of Pakistan has witnessed higher capital inflows in the shape of grants and loans
during the current decade. As of June 30, 2010, the total public debt stood at Rs. 8,894 billion
with a growth rate of 16.6 percent and 60.6 percent of GDP. The rising public debt especially the
external debt is limiting the government capacity to carry on its development expenditures when
the government has to repay a sufficient amount in the form of principal and interest rate. As
shown in Table 4.12, the debt servicing of external loans increased during 2005/06 2009/10
period. It also reveals the inability of the government to repay the debt as the rolling amount has
also risen during this period.
Table 4.12. Pakistan's External Debt Servicing ($ million)
Years

Amount
Rolled
1,300

Total

200506

Actual
Amount Paid
2,894

200607

2,869

1,300

4,169

200708

3,134

1,200

4,334

200809

4,728

1,600

6,328

200910

5,641

1,723

7,364

201011*

1,669

500

2,169

4,194

*JulySeptember 2010
Source: State Bank of Pakistan

4.6.

Policy Recommendations for Fixing Binding Constraints

To ensure equal distribution of resources, Sens formulation of inclusive growth needs to be

brought into the mainstream in the sense of human, economic, social and political freedom.
Economic growth is necessary to support the economic development (Osmani, 2008). Besides
generating economic opportunities, inclusive growth ensures equal access of opportunities among
the various segments of a society (Ali and Zhuang, 2007).
Hence, a development strategy based on the inclusive growth concept has two major pillars: one
is to create and expand economic opportunities through high and sustained growth; and the other
is to broaden access to opportunities for all members of a society. Three ingredients should be
met to achieve these two pillars of inclusive growth, which include; maximize economic
opportunities, ensure sustained economic growth to create jobs and opportunities, and ensure
equal access to economic opportunities (ADB, 2010).
The following necessary initiatives are required to overcome the binding constraints related to
poverty and inequality:

A major barrier to reduce poverty and inequality is the lack of effective participation of poor
in public development programs. There is a need to include the poor in all the development
projects by social mobilization and community developments (Hirashima, 2009). It will not

27

only balance the power structure especially in the rural areas but also will ensure the
participation of poor.

Sound macroeconomic system with stable inflation is prerequisite to eradicate poverty and
inequality. For this purpose, fiscal policy and monetary policy play important role. Through
fiscal policy, fiscal deficit and debt burden can be reduced, and the level and quality of public
investment programmes can be increased. Appendix Table 1 looks at the kind of economic
activities that are pro-poor.

One of the major reasons of ongoing inflation is the lack of governance. A strong monitoring
and evaluation mechanism is prerequisite to protect the rule of law so that the government
should efficiently spend its limited resources on pro-poor sectors.

Agriculture sector employs almost half of the labor force, supports nearly two-thirds of
merchandise exports, and serves as an important source of employment and income in rural
areas where majority of the poor live. However, over the last three decades, it is highly
dependent on major crops and weather conditions. More research, development and resources
are required to improve the irrigation system, agriculture productivity and diversified crops.
There is a need of much intervention in the areas of horticulture and livestock to diversify the
farmers resources. Productivity gains in the livestock sector are especially important for propoor rural income growth since the distribution of livestock in rural Pakistan is more
equitable than the distribution of land (World Bank, 2006a).

The majority of the poor are in the rural non-farm sector, which requires many targeted
policies to improve this sectors productivity. A special development in terms of physical and
social infrastructure is required, especially in those areas, which are comparatively deprived
i.e. rural Sindh and Southern Punjab. Other important appraises to remove poverty in nonfarm rural areas include improving market linkages and developing SMEs. The capacity of
local government should be enhanced at priority basis for better planning, efficient use of
resources, sound monitoring and evaluation, include the people in non-farm enterprises by
public private partnerships (PPP) and sustainable rural and social development.

Public provision of social service plays important role in achieving the goal of human
development and poverty reduction. Both health and education have a close association with
poverty level and poverty dynamics. These two sectors require strong efforts to improve to
reap the ongoing demographic dividends. The Government of Pakistan has recently
introduced a transfer income scheme to benefit the poor. As part of this scheme, health
insurance for the poor may be introduced. The high quality education in rural areas,
particularly the technical education is necessary in this regard (Birthal et al., 2010; and
Kurosaki, 2006).

The majority of the poverty related studies in Pakistan has focused on the policies related to
land, employment and social safety net programs. Well said by Haq et al., 2007 that the
dependency of the poor on any form of assistance e.g. social safety nets can lead to their
social as well as economic exclusion. However, for the self-help to happen there must be an
opportunity. Rural to urban migration could be a way out of poverty toward the self-help.

28

City is an opportunity for the poor. History has shown that poverty is eliminated in merchant
cities (Haque and Nayab, 2006). These merchant cities provide opportunities to the poor from
the rural hinterland when the land is unable to support those (Haq et al., 2007).

Finally, the demographic factors i.e. household size and dependency ratio should also be
viewed for the policy purpose in the context of on-going demographic transition, which
refers to the change from a situation of high fertility and high mortality to one of low
fertility and low mortality. This transition brings about sizeable changes in the age
distribution of the population; the proportion of children declines, that of the elderly
cohort increases modestly and, most importantly, that of adults of working-age increases
sharply. Thus, the demographic transition presents the economy with a demographic
gift in the form of a surge in the relative size of the working-age population. There is
convincing evidence that Pakistan has entered in the demographic bonus phase; fertility
decline since the late 1980s has led to declining trend in child dependency and rising
trend in working age population. This is right time for Pakistan to pursue the small family
norm, particularly in rural areas. It will lead to low dependency ratio, more household
savings and reduction in poverty (Arif et al., 2011).

5.

Identification of Focused Areas for MDBs Interventions in Reducing Poverty and

Inequality Over the Medium-Term

5.1

Identification of Vulnerable and Poor Regions

It has been discussed earlier that poverty in Pakistan is concentrated in rural areas. For poverty
alleviation initiatives, these areas deserve to be targeted. However, the rural population, which
constitutes approximately two-thirds of the total population, is widely spread and there are certain
regions and zones within rural areas where poverty levels have consistently been higher than
levels in other regions. The main aim of this section is to identify these regions or areas for the
Group interventions of the MDBs.
Several studies have attempted to identify the poor and vulnerable regions. These studies can be
grouped into three categories in terms of methods used for the identification. Firstly, the rural
areas have been classified into nine regions or zones by Pickney (1989) based on Kharif crops
because wheat is the predominant crop in Rabi season virtually in all areas of the country. These
zones are named as rice/wheat Punjab, mixed Punjab, cotton/wheat Punjab, barani Punjab, lowintensity Punjab, cotton/wheat Sindh, rice/other Sindh, NWFP except D.I. Khan, Baluchistan
except Nasirabad. Several studies have so far been conducted to estimate poverty at these zones
or region levels (Malik 1992; Qureshi and Arif, 1999; Irfan, 2005; Amjad et al., 2007). The
common feature of these studies is that they are based on micro (or household level) datasets,
carried out during the last two decades.13 The major similarity in the findings of all these studies
is the lowest levels of poverty for barani Punjab, consisting of currently five northern districts of
the province namely Rawalpindi, Jhelum, Chakwal, Attock and Islamabad. The identified poor
regions in Punjab are cotton/wheat and low intensity zones consisting of seven districts namely
13

These data sets may not be representative at the agro-climatic zone level.

29

Rajanpur, D.G. Khan, Muzaffargarh, Rahim Yar Khan, Bahawalpur, Bahawalnagar, Lodhran,
Vehari, Layya, and Bhkkar. Most of these districts are situated in south and west south Punjab. In
Sindh, the cotton/wheat zone has commonly been identified as the poor region. Rural areas of the
remaining two provinces, KPK and Baluchistan, are considered two separate zones and are
among the poor regions as well. Under this regional/zonal classification of rural areas South and
West Punjab, cotton/wheat belt of Sindh and rural areas of KPK and Baluchistan are among the
poor and vulnerable regions.
Secondly, Cheema (2010) has used poverty mapping technique to rank districts, and recently,
Azhar (2011) has applied this technique to rank tehsils, the administrative units lower than
districts. The findings are not different from the findings based on the zonal/regional
classification. In Punjab, districts located in its southern part are identified as the poorest districts
including Lodhran, Vehari, Bahawalpur, Rajanpur, Rahim Yar Khan and Muzaffargarh. In Sindh
province, Badin, Shikarpur, Thatta, Dadu and Larkana are identified as the poorest districts. In
KPK province, Malakand, Batgram, Kohistan, Bonair, Upper Dir and Shangla are the poorest
districts while identified poorest districts in Baluchistan province are Lasbella, Sibbi, Pishin, Jhal
Magsi and Chagi. Thirdly, Jamal, et al. (2003) and Haq et al. (2010) have, respectively, applied
the quality of life and socio-economic criteria to rank districts and their findings are similar to the
studies that have ranked them according to their poverty status.
Based on this brief review of the regional work on poverty, it is concluded that all rural areas of
Pakistan need to be targeted for poverty reduction programs. However, for region specific
interventions, the southern districts of Punjab, cotton/wheat and wheat/rice belts and all rural
areas of Sindh, Baluchistan and KPK are identified as the poorest regions of the country. These
areas are also poor in physical infrastructure and access to education and health services.
Moreover, they are not well integrated with the urban setting, as is the case in relatively better-off
regions such as barani Punjab.
5.2

Identification of Vulnerable and Poor Groups

Two types of programs are common for poverty reduction interventions: universally targeted
programs and narrowly targeted programmes. The benefits of universally targeted programs
such as provision of education and health services reach to both the poor and non-poor
population. Under the narrowly targeted programs, efforts are made to transfer the benefits to the
poor only. All income transfer programs designed for the poor come under the narrowly targeted
category. The poverty situation of rural population demands for a universally targeted approach to
improve the wellbeing of households. However, it is also true that not all rural inhabitants are
poor. For targeted interventions, there is a need to identify the poor. A considerable literature
exists in Pakistan that has identified the poor segment of the population, based on both
quantitative and qualitative research. This literature has identified the following groups as the
poorest:
Landless households: Poverty incidence is considerably higher among the landless households
than among the landowners. Within the landowner category, the poverty incidence gradually
declines with an increase in the size of land ownership. However, even small landowners seem to
be better off than the landless rural households. Since the poverty is high among the landless

30

households and almost half of the rural households are in this category, rural poverty concentrates
in these households.
Sharecroppers and small landowners: Cultivation on sharecropping is not uncommon in rural
Pakistan. Sharecroppers cultivate the land of others and get their specified share in a crop.
Generally, they do cultivation on a small piece of land, which is not sufficient for their livelihood.
Hence they are vulnerable and among the poorest in rural areas. Although, small farmers (or
landowners) are usually economically better off than the landless households or sharecroppers,
the incidence of poverty is also high among the small landowners who cultivate some land on
sharecropping as well.
Agriculture workers: Agriculture workers have been identified as the poorest group in rural
areas. They work in the farms of other households usually as daily wage earners. Their wages are
low and they do not get work in all four seasons.
Construction workers: These workers are engaged in rural construction industry, where again
wages are low and work is not available for the whole year. Their work does not provide sources
sufficient to escape poverty.
Female-headed households: Around 6-8 percent of households in Pakistan are headed by
women. The incidence of poverty in these households has not been found higher than the
incidence among male-headed households. One likely reason is that male heads of some of these
households are employed outside their place of residence within the country or abroad. Their
earnings are sufficient for their livelihood. However, widows who head their households are
usually among the poorest. This is one of the preferred groups in Pakistan for zakat distribution.
Large households: Household size increases the risk of remaining in poverty. High dependency
ratio is also associated with long-term poverty. Households having high dependency ratios
deserve for targeted interventions. It is likely that these households are among the landless
households, agriculture workers or construction workers, as discussed above.
Zakat recipients: Although, the empirical evidence suggests a leakage of zakat funds to the
non-poor, there is emerging census that majority of the zakat receivers are among the poorest
of the poor. It is not difficult to identify these persons or households in rural areas.
5.3

Islamic Microfinance for Poverty Reduction

The thrust of economic policy, as outlined in PRSP-II and MTDF, has been to transform the slow
growth and financially constrained economy to a higher growth and relatively self-reliant
economy. However, the Government of Pakistan continues to fund measures to target the poor
directly and to provide a social safety net to protect against adverse shocks. Micro financing is
one of these measures. It seems appropriate here to outline the functioning of microfinance in
Pakistan. The PRSP-II has provided the following information: The Microfinance Ordinance
2001 defines a microfinance institution (MFI) as a company that accepts deposits from the public
for providing microfinance services. MFIs in Pakistan include Microfinance Banks (MFBs)
regulated by the State Bank of Pakistan, in addition to some NGOs, Rural Support Programs
(RSPs) and Commercial Financial Institutions (CFIs). The NGOs operate as microfinance

31

institutions as well as those running microfinance operations as part of their multi-dimensional

program. Specially, Kashf, Sindh Agriculture and Forestry Workers Coordination Organization
(SAFWCO), Akhuwat, Orangi Pilot Project, and Asasah are operating as MFIs. Damen and
Taraqee Foundation and Sungi are also providing microfinance services as a part of their overall
integrated development services. Pakistan Poverty Alleviation Fund (PPAF) is an apex
organization and operates through RSPs and NGOs. RSPs are running microfinance operations as
part of their multi-dimensional rural development programmes. The CFIs are financial institutions
in the mainstream financial sector, providing microfinance services as a separate function within
the broader organizational context.
Like in other parts of the developing world, microfinance in Pakistan provides microcredit, micro
savings and micro insurance. This type of capital and financial support to the poor help them in
expanding their choices and mitigating potential risks of poverty and social exclusions.
Microcredit in Pakistan has seen growth in terms of all indicators and in all directions particularly
in terms of outreach of the credit program. There are 1,613 branches of the credit services to the
poor and the active borrowers are around two million. However, the two major issues with the
microcredit in Pakistan are that their outreach is not adequate. Among more than 45 million poor
households, only 2 million have access to it. More importantly, microcredit services generally
exclude the poorest of the poor because they lack assets necessary to have access to these
services. These services meet the credit need of population around the poverty line and charge
interest rate much higher than the normal banking rates. A considerable proportion of the needy
person may not approach MFIs for credit because of the riba or interest in such loans.
This is the point where Islamic banking can contribute in Pakistan in poverty reduction. Islamic
banking system is concerned with much more than just refraining from charging interest (Dusuki,
2008). It is a system that aims at making a positive contribution to the fulfillment of the socioeconomic objectives of Islamic society inscribed in the objectives of Shariah. As business entity
established within the ambit of Shariah, Islamic banks are expected to be guided by an Islamic
economic objectives, among others, to ensure that wealth is fairly circulated among as many
hands as possible without causing any harm to those who acquired it lawfully. Hence, the issue of
financing the poor via microfinance initiative is not alien to Islamic banking; instead, it is a
natural outlook that should transpire in the operation of Islamic institutions, especially those
claiming to be based on the principles of Shariah (Dusuki, 2008).
Islamic banking system exists in Pakistan. A separate Islamic Banking Department was
established in the State Bank of Pakistan in 2003. By 2007, six licensed Islamic banks and 12
conventional banks with more than 330 branches were operating compared with one bank with 10
branches in 2003. Islamic banking services are available in 50 cities in all four provinces.
Pakistan can increasingly share the advantages of international best practices in adopting Islamic
finance and capture a large share of the market because of Shariah compliance. The main aim of
Islamic banking initiative in Pakistan is its promotion as a parallel banking system, comparable to
and compatible with the conventional banking system.
However, the Islamic banks in Pakistan are not providing microfinance services. A review of the
literature indicates that the notable Islamic microfinance institutions in Pakistan are Akhuwat and

32

Islamic Relief. According to the report of Allen & Overy (2009), Akhuwat provides small
interest-free charitable loans (Qard al-hasan) with an administration fee of 5 percent in the spirit
of Islamic brotherhood. All activities revolve around the mosques and involve close interaction
with the community. Islamic Relief disburses Murabaha based financing to individuals based on
combination of personal guarantors, group savings accounts, co-signers and community
recommendations to ensure repayment. Repayment levels are in the range of 95-99 percent.
Islamic Relief has made arrangements to deliver the Murabaha financing to borrowers business
ventures. It has a plan of expansion of its existing programs.
The outreach of these two Islamic microfinance service providers is very limited in Pakistan. The
MDBs can take lead in Pakistan by providing these services to the poor. Like in other parts of the
developing world, the poorest and destitute are usually excluded for providing them the
microfinance services. They are left for the transfer income programs such as zakat. The MDBs
can establish a model Islamic Microfinance Institution (IsMFI), where in addition to conventional
beneficiaries; the poorest and destitute are given the opportunity to improve their well-being.
Obaidullah (2008) has prepared a composite model of Islamic Finance. He has described 11
activities in the model. Through these activities, an IsMFI Program identifies carefully both the
poorest of the poor and destitute that are economically inactive and economically active. It directs
a part of funds towards meeting the basic needs of the economically inactive (or destitute) and
provides them necessary training. After training, financing can be provided by using a
combination of for-profit debt-based modes such as Bai-Muajjal, Ijara, Salam or Istisna or
equity-based modes such as Mudaraba or Mmusharaka or declining Musharaka. These types of
financing can help promote entrepreneurship amongst the poor and subsequently alleviate
poverty.
6.

Employment Situation in Pakistan

6.1.

An Overview of Employment Situation in Pakistan

Pakistan is the sixth most populous country in the world with an estimated population of 180
million and an annual growth rate of 2.05 percent. Pakistan is the 10th largest country in the world
according to the size of the labour force. The latest official statistics based on the Labour Force
Survey of Pakistan (2008/09) shows that the total labour force volume is 53.72 million with an
annual growth rate of 3.7 percent. Rural areas have almost more than double share in the total
employment, which is primarily due to the absorption of employment in the agriculture sector
(GoP, 2009). This section presents an overview of employment situation, measured by four
indicators: labour force participation rates, unemployment rates, sectoral share in employment
and employment to population ratio. The particular focus is on rural/urban differentials and
gender dimension of employment.
The labour force participation rates have witnessed an increase of 2.1 percentage points during
the last decade. Female participation in the labour market has gradually increased. However, it is
still very low, around 22 percent. Overall, the youth have a lower participation rate than the adult
population, but their participation especially of the young women has gradually increased (Table
6.1).

33

Table 6.1. Pakistan: Labour Force Participation Rates and Unemployment Rates for Adult and Youth
(%)
Change b/w
2000 & final
2000/01 2001/02 2003/04 2005/06 2006/07
2007/08 2008/09
(percentage
point)
Labour Force Participation Rate (overall)
Overall
50.4
50.5
50.7
53
52.5
52.5
+2.1
Male
83.2
82.7
82.7
84
83.1
82.4
-0.08
Female
16.3
16.2
18
21.1
21.3
21.8
+5.5
Labour Force Participation Rate for Youth (15-24)
Overall
40.5
43.4
43.6
45.9
44.2
+3.7
Male
69.3
70.2
70.5
72.2
69.2
-0.1
Female
10.2
14.8
16.1
18.6
18.4
+8.2
Unemployment Rates (%)
Overall
6
7.8
8.3
7.6
6.2
5.2
5.2
-0.8
Male
5.5
6.2
6.2
5.2
4.2
4.3
-1.1
Female
15.8
16.4
12.9
9.6
8.6
8.5
-7.3
Rural
6.9
7.5
6.7
5.3
4.7
4.7
4.7
-2.2
Urban
9.9
9.8
9.7
8
6.6
8.3
7.1
-2.8
Unemployment Rate for Youth (15-24)
Overall
13.3
13.4
11.7
8.6
7.5
-5.9
Male
11.1
12
11
8.4
7.1
-4.0
Female
29.3
20.5
14.9
9.6
8.9
-20.4
Urban
16.8
16.1
15
11.8
10.5
-6.3
Rural
11.7
12.1
10.1
7.2
6.1
-5.6
Source: GOP, 2009; PET, 2008; 2009

The overall unemployment rate increased from 6 percent in 2000/01 to 8.3 percent in 2003/04.
However, it declined during the next four years to 5.2 percent. During this period, the economy
witnessed comparatively high growth and poverty reduced sharply. In 2008/09, the
unemployment level remained unchanged, 5.2 percent (Table 6.1). However, the estimates based
on CIA fact book shows the rising trends in unemployment rates during last three years.
Table 6.1 shows that the unemployment rates dropped considerably among females and in urban
areas compared to the male and rural areas, respectively. Youth unemployment levels are higher
than the overall unemployment rate. Among the youth, female and rural inhabitants have faced
the unemployment level higher than their counterparts. Overall, the youth unemployment rate has
dropped sharply from 13.3 percent in 2000/01 to 7.5 percent in 2006/07. This drop in
unemployment level is especially high for females, 20.4 percentage points (Table 6.1)
Table 6.2 breakdowns the total employed labour force in three sectors, which are agriculture,
industry (manufacturing and construction) and services. Agriculture is the largest sector in terms
of employment provision. However, its share in total employment declined by 2.7 percentage
points during the last decade, with more decline among the males (6.1 percentage points),
probably due to changes in the agrarian structure including a decline in sharecropping and
increased mechanization in the agriculture sector. The services sector has the second largest
share in employment (35 percent), followed by the industrial sector with about 20 percent share.
These both sectors have witnessed a modest increase in their share in total employment. Table 6.2
shows that a shift of labour from agriculture to either industry or services sector. This shift is

34

Table 6.2. Pakistan: Share of Employed Labour Force in Various Sectors (15+)
Change 2000 to
2000/01 2001/02 2003/04 2005/06 2006/07
2007/08 2008/09
2008
(percentage point)
Share of Agriculture in Total Employment
Overall
47.8
41.1
41.8
41.6
42.0
44.6
45.1
-2.7
Male
43.4
37.2
37.0
35.6
35.0
36.9
37.3
-6.1
Female
73.7
64.5
66.6
67.7
71.4
75.0
74.0
0.3
Share of Industry in Total Employment
Overall
18.2
21.0
20.6
21.2
21.4
19.3
19.6
1.4
Male
19.8
22.0
21.7
22.7
23.5
21.1
21.6
1.8
Female
8.4
14.8
14.9
15.1
12.6
12.2
12.3
3.9
Share of Services in Total Employment
Overall
34.0
37.9
37.6
37.2
36.6
36.1
35.3
1.3
Male
36.8
40.8
41.3
41.7
41.5
42.0
41.1
4.3
female
17.9
20.7
18.5
17.2
16.0
12.8
13.7
-4.2
Source: PET, 2008; GoP, 2009

primarily among the male workers. It is worth noting that a large proportion of female employed
labour force work as unpaid helpers.
The employment-population ratio, which expresses the number of people in employment as a
percentage of the population, is a good indicator to analyze the ability of an economy to absorb its
labour with the passage of time.14 Table 6.3 shows this ratio as 49.8 percent in 2007/08. The
Table 6.3: Employment-to-Population Ratio among Adults and Youth in Pakistan
2000/01

2001/02

2003/04

2005/06

Employment-to-Population Ratio in Pakistan for Adult

Overall
46.8
46.5
47.0
49.7
Male
78.6
77.6
77.6
79.6
Female
13.7
13.6
15.6
19.0
Employment-to-Population Ratio in South Asia for Adult
Overall
58.0
57.3
56.7
56.7
Male
80.0
78.8
78.4
78.2
Female
34.0
34.4
33.8
34.0
Youth Employment-to-Population Ratio
Overall
35.1
37.6
38.5
42.0
Male
61.6
61.8
62.7
66.1
Female
7.2
11.8
13.7
16.8
Youth Employment-to-Population Ratio in South Asia
Overall
43.3
43.1
42.5
42.6
Male
59.3
58.5
57.8
57.6
Female
26.1
26.4
26.0
26.3
Source: PET, 2008, ILO, 2009
14

2006/07

2007/08

Change 2000 and

2008
(percentage points)

49.8
79.6
19.4

49.9
79.1
19.9

+ 3.1
+ 0.5
+ 6.2

40.9
64.2
16.8

+ 5.8
+ 2.6
+ 9.6

It should be emphasized that there is no single correct employment-to-population ratio for adults or for youth, and a
fuller assessment of the level and development of these ratios should be made in conjunction with other labour market
indicators (ILO, 2009).

35

employment-to-population ratio among females is very low, only 20 percent, as compared to

male ratio, around 79 percent. The male ratio is similar or even higher to the ratio for South Asia.
However, the female ratio is much lower than the South Asian average of 19.4 percent. It is
encouraging that employment-to-population ratio among women has improved by more than six
percentage points and the gap between male and female ratios has reduced. For youth, the
employment-to-population ratio increased by almost 5.8 percentage points during the last decade,
and has almost converged with the average ratio of South Asia (Table 6.3). This convergence is
primarily driven by the change in participation of youth women in the labour market as the
female youth employment-population ratio increased from the very low level of 7.3 percent in
2000/01 to 16.8 per cent in 2006/07.

6.2.

Comparison of Unemployment Rate in Pakistan with Selected Asian countries

The recent global financial crisis soared the global unemployment rates with severe labour market
distress: falling employment-population ratios, increases in vulnerable forms of employment,
stagnant labour productivity growth, and rising discouragement particularly among youth. The
ILO Global Employment Trend Report, 2011 shows that across the regions, East Asian (China,
Korea) economies rebounded strong come back after the financial crisis with an estimated 9.8
percent growth rate the highest rate of growth among the worlds regions. It led to a decline in
unemployment rate to 4.1 percent in 2010 from 4.4 percent in 2009. However, the youth
unemployment remains a challenge in this region.
The South-East Asia and the Pacific region was heavily affected by the crisis, as it is highly
dependent on foreign trade and investment. The region grew by a mere 1.5 percent in 2009.
However, Malaysias economy grew by 6.7 percent in 2010 compared to -1.7 percent in 2009 and
Thailands economy grew by 7.5 percent compared to -2.2 percent in 2009. Despite the strong
recovery, only a small decline of unemployment rate has been observed in this region; from 5.2
percent in 2009 to 5.1 percent in 2010. Young women and men in the region continue to face
significant challenges in securing decent and productive jobs. The south Asian region was less
affected by the crisis due to its less reliance on exports, and this region has resumed rapid
economic growth in 2010 except Maldives, Nepal and Pakistan. The regions unemployment rate
has been fairly stable; 4.3 to 4.5 percent during 2007-10 period. Across the region as a whole,
young people are 3.5 times more likely than adults to be unemployed, with a youth
unemployment rate of 9.5 per cent in 2010 (ILO, 2011).
Table 6.4 gives a comparative picture of unemployment rates and employment-population ratios
of Pakistan and other five selected countries, China, Indonesia, Malaysia, Thailand, and India.
Both Pakistan and India have almost closer unemployment rates during the last decade with a
mean of 8.7 - 8.9 percent per annum on average. In both countries, a similar trend in
unemployment rates has also prevailed; it declined during the first half of the decade and started
to increase during the last 2-3 years. At the beginning of the last decade, unemployment rate was
high in China and Indonesia compared to Malaysia and Thailand. However, all these four
economies succeeded to reduce their unemployment rates; highest decline was observed in China
with 5.8 percentage points, followed by Indonesia with 3 percentage points decline, Thailand with
1.7 percentage points decline and Malaysia with 0.3 percentage point declined (Table 6.4). Youth

36

unemployment rates are lower in Pakistan than the other South Asian countries and slightly
higher than the East Asia (PET, 2008).
Most economies have employment-to-population ratios in the range of 55 to 75 percent. Both
China and Malaysia have comparatively better employment-population ratio compared to the
other economies (Table 6.4). In Pakistan, the ratio is comparatively low (52 percent). However,
Pakistan has observed a 4.5 percentage points rise in employment-population ratio during the last
decade while it declined in China and India.
One primary concern throughout the South Asia is the less participation of women in the labour
market. Table 6.4 shows that both India and Pakistan have comparatively less employmentpopulation ratio than the other four countries (China, Indonesia, Malaysia and Thailand)
Table 6.4: Unemployment Rates and Employment-Population Ratio of Selective Asian Countries
2001 2002
200 2004 2005
2006 2007
2008 2009
2010
2011
3
Pakistan
Unemploym
7.8
7.7
8.3
6.6
6.5
5.6
7.4
14.0
15.0
ent Rate
Employment-population
ratio, 15+ (%)
Female
13.2
13.4
14.2 15.5
16.8
18.8
19.0
19.8
Male
78.3
78.0
77.7 78.2
78.6
80.2
80.9
81.3
Total
47.0
46.9
47.0 47.9
48.7
50.5
51.0
51.5
China
Unemploym
10.1
9.8
9.0
4.2
4.0
4.0
4.3
4.3
ent
Rate
Employment-population
ratio, 15+ (%)
Female
69.2
68.8
68.5 68.1
67.8
67.7
67.6
67.2
Male
77.6
77.1
76.6 76.0
75.5
75.2
75.2
74.6
Total
73.5
73.1
72.6 72.1
71.7
71.5
71.5
71.0
India
Unemploym
8.8
9.5
9.2
8.9
7.8
7.2
6.8
10.7
10.8
ent Rate
Employment-population
ratio, 15+ (%)
Female
32.8
32.7
32.7 32.1
32.4
32.7
32.3
32.4
Male
78.9
78.9
78.8 78.1
77.7
77.4
77.5
77.4
Total
56.6
56.5
56.5 55.8
55.7
55.7
55.5
55.6
Indonesia
Unemploym
10.6
8.7
9.2
11.8
12.5
9.1
8.4
8.1
7.1
ent Rate
Employment-population
ratio, 15+ (%)
Female
45.0
43.4
43.0 43.2
42.6
42.1
43.9
44.0
Male
78.6
78.4
78.5 78.3
77.3
77.5
79.0
80.0
Total
61.6
60.7
60.6 60.5
59.8
59.6
61.3
61.8
Malaysia
Unemploym
3.8
3.6
3.0
3.6
3.5
3.2
3.3
3.7
3.5
ent Rate
Employment-population
ratio, 15+ (%)
Female
42.3
42.3
42.3 42.3
42.3
42.4
42.8
43.2
Male
78.1
78.0
77.8 77.7
77.6
77.5
77.5
77.4
Total
60.4
60.4
60.2 60.2
60.1
60.1
60.3
60.5
Thailand
Unemploym
2.9
2.2
1.5
1.8
2.1
1.4
1.4
1.5
1.2
ent Rate
Employment-population
ratio, 15+ (%)
Female
64.7
65.2
65.4 65.4
65.9
65.0
64.8
64.5
Male
79.5
79.8
79.6 79.8
79.5
79.5
79.2
78.8
Total
71.8
72.3
72.3 72.4
72.5
72.0
71.8
71.5
Source: CIA World Fact Book (various issues)

37

throughout the decade; it remains very low in Pakistan compared to India and other selected
countries.
Labour markets must have the flexibility to shift workers from one economic activity to another
rapidly and at low cost, and to allow for wage fluctuations without much social disruption.
Efficient labour markets must also ensure a clear relationship between worker incentives and their
efforts, as well as equity in the business environment between women and men (GCI, 2010). As
shown in Table 6.5, as compared to the five selected economies, Pakistan is behind in various
labour market efficiency indicators except the hiring and firing practices. It suggests that Pakistan
still requires many policies and programmes to ensure efficiency, promote equal opportunities for
men and women and to obtain decent and productive work in conditions of freedom, equity,
security, and human dignity. An efficient and flexible labour market is prerequisite to extract the
maximum gains from the economy.
Table 6.5: Ranking of Labour Market Efficiency in Selected Asian Countries in 2010 (out of 139 countries)
Efficiency Indicators
Cooperation in labor-employer relations

Pakistan

China

India

Indonesia

Malaysia

Thailand

58
56
78
62
15
37
23
92

49
61
77
89
61
34
128
108

47
98
100
38
20
27
109
95

16
44
18
50
6
28
111
99

34
90
25
31
29
38
57
96

104
Flexibility of wage determination
104
Rigidity of employment
110
Hiring and firing practices
51
Pay and productivity
93
Brain drain
68
Female participation in labor force
137
Secondary education enrollment rate
125
Source: Global Competitive Index Report, 2010

Table 6.6 shows that Pakistan has succeeded in reducing the dependency ratio over the last two
decades; however, it is still high as compared to other selected countries, almost double to the
China. Another downside of Pakistans labour market is the high share of the informal sector,
which almost absorbs two-third of the total employed labour force. Compared to Indonesia,
Malaysia and Thailand, Pakistan has a very low absorption of females in the formal sector
employment. Table 6.6 shows that the proportion of vulnerable employment is higher in both
Pakistan and Indonesia than in other countries.
Table 6.6: Demographic Trends and Decent Work Issues in Selected Asian Countries
Dependency Ratio
Formal Employment
Vulnerable Employment
(per 100 people
(2000-2008)
(2000-2008)
ages 1564)
Country
Ratio of
Ratio of
(% of total
(% of total
female
1990
2010
female
employment)
Employment)
to male
to male rates
rates
Pakistan
89.2
68.6
38.2
0.59
61.8
1.29
China
51.2
39.1
India
71.5
55.6
Indonesia
65.6
48.7
36.9
0.81
63.1
1.13
Malaysia
69.7
51.3
77.6
1.02
22.3
0.93
Thailand
53.0
41.2
46.6
0.90
53.3
Source: Human Development Report, 2010

38

6.3.

Status of Achieving Employment Related MDGs

Regarding the labour market development, the initial MDGs only covered the gender equality in
the labour market under its Goal 3. However, recognizing the importance of decent and
productive work for all to address poverty and hunger, the UN revised the MDGs in 2007 and the
employment efficiency has been included for all countries. The New MDG target (1B) is
Achieve full and productive employment and decent work for all, including women and young
people. This target contains the following four indicators specifically and directly relating to
employment issues;

Growth rate of labour productivity (GDP per person employed);

Employment-to-population ratio;

Proportion of employed people living below the poverty line; and

Proportion of own-account and contributing family workers in total employment

(vulnerable employment rate).

As mentioned in ILO report (2009), these employment indicators are designed to:
a. Provide relevant and robust measures of progress towards the new target of MDGs;
b. Be clear and straightforward to interpret and provide a basis for international comparison;
c. Be relevant and link to national-level country monitoring systems;
d. Be based on ILO international standards, recommendations and best practice in labour
statistics, information and analysis; and
e. Be constructed from well-established data sources, which enable consistent measurement
over time.
The Pakistan MDG country report 2010 enfolds the old MDG target, which is to promote gender
equality and women empowerment by ensuring employment in the non-agriculture sector. Table
6.7 shows that womens share in non-agriculture employment has increased from 8 percent in
1990 to 10.6 percent in 2008. However, this share in 2008 is much below the targets of both
MTDF (12 percent) and MDG (14 percent). The progress to achieve this target for MTDF and
for MDG is very slow and it is likely that it would not be achieved by 2015 (GoP, 2010).
Table 6.7: Pakistan: MDG Indicator of Women Share in Non-Agriculture Employment
MTDF
Indicator
1990
20001
2004
2005
2006
2007
2008
Target
2009/10
Share of women in
wage employment
8.07
9.65
10.11
10.93
10.53
9.89
10.64
12
in the nonagricultural sector
Source: GoP, 2010

MDG
Target
2015
14

Regarding the new four targets set by the UN in 2007, the first target, which is related to
employment-population ratio, has already been discussed. This ratio has steadily increased over
the 2000-08 period, especially for females. It reflects the generation of more employment
opportunities in the country, although gender gap exists.

39

The second revised MDG indicator is about the vulnerable employment. The indicator of
vulnerable employment is based on the status of employment indicator that distinguishes between
three broad categories of employment. These are: (a) wage and salaried workers also known as
employees); (b) self-employed workers that include self-employed workers with employees
(employers), self-employed workers without employees (own-account workers) and members of
producers cooperatives; and (c) contributing family workers (also known as unpaid family
workers). As shown in Table 6.8, the share of vulnerable employment decreased by 2.5 and 1.9
Table 6.8: Vulnerable Employment in Adults and Youth

Adult (15+)
Both Sexes
Males
Females
Youth (15-24)
Both Sexes
Males
Females
Source: PET, 2008

1999-00

2001-02

63.1
62.5
66.7

60.0
60.1
59.1

2006-07

Change 1999-00 to
2006-07
(percentage point)

60.4
57.5
73.0

60.6
57.3
74.6

-2.5
-5.2
7.9

59.1
56.4
70.4

58.1
54.9
71.1

-1.9
-5.3
+12.0

2003-04

2005-06

58.7
58.1
62.6

60.6
59.0
68.4

55.8
55.5
57.3

59.1
57.5
66.2

percentage points in adults and in youth during 1999-2006 period. At the same time, vulnerable
employment of adult females and youth females increased by 7.9 and 12 percentage points,
suggesting more vulnerability among the female labour force.
The third revised MDG indicator is about the working poor who can be estimated for Pakistan by
combining the statistical information on employment and poverty, collected from the same
households. A big challenge to calculate the working poor is the requirement of the nationally
representative datasets. The two nationally representative datasets; Labour Force Survey (LFS)
2005/2006 and Household Integrated Economic Survey (HIES) 2005/2006 were conducted in the
same years, but differ over the employment-population ratios. In the absence of sound micro data,
the ILO has calculated the share of working poor, based on assumptions on the correlation
between poverty and employment. As shown in Table 6.9, Pakistan has a lower percentage of
working poor compared to overall south Asia in 1996 and 2006. Overall, working poverty
declined in both Pakistan and South Asia.
Table 6.9: Pakistan: Working Poor Estimates (%)
1996

2006

Pakistan
US$ 1 day

13.4

8.7

US$ 1 day

71.4

58.8

US$ 1 day

55.9

34.6

US$ 1 day

91.7

80.7

South Asia

Source: ILO, Working Poverty Model, October 2007, Geneva

40

The fourth revised indicator is about the labour productivity, which is measured as the annual
change in gross domestic product (GDP) per person employed. Overall, Pakistan has improved its
per hour labour productivity during the 1999-2006 period. A sectoral view in Table 6.10 shows a
positive trend of labour productivity in agriculture, manufacturing and social services sectors,
while a declining productivity trend has been observed in the mining, electricity, gas and water,
construction, wholesales and retailer, transport and communication and finance related sectors.
Table 6.10. Pakistan: Labour Productivity Per Hour Worked, by Sectors (constant factor cost in PRs.)
(15+)
1999-00
2001-02
2003-04
2005-06
2006-07
National
44.3
43.2
45.9
48.0
50.3
Agriculture
24.8
26.7
26.6
28.1
28.9
Mining
1389.3
1421.7
1855.0
1129.6
1084.1
Manufacturing
56.5
49.6
56.8
63.4
67.1
Electricity, gas and water
250.7
157.9
249.6
155.8
140.1
Construction
19.5
17.4
15.7
17.2
18.4
Wholesale and retail trade
50.1
45.3
48.0
47.2
49.1
Transport and communication
84.9
70.7
73.7
68.3
75.2
Finance
360.2
314.6
248.7
317.7
337.3
Social Services
49.6
45.9
50.1
53.5
55.7
Source: PET, 2008

Overall, all the four revised MDG indicators show positive developments in Pakistan, but also
highlight some challenges. A considerable proportion of the employed labour force is in
vulnerable employment, and one out of eight of the employed belongs to the working poor. This
situation calls for policies to increase the creation of decent employment, and to translate
economic growth into better labour market outcomes. Productivity is the key, and investments
need to be made to sustain healthy productivity growth rates (ILO, 2009).
6.4.

Growth-Employment-Poverty-Inequality Nexus

The poor people mostly derive their income from work whether they are subsistence farmers,
salaried workers, or self-employed. There is a broad consensus in the literature that economic
growth would be only effective to reduce poverty if it improves the quality of jobs and the access
to modest earning opportunities for the poor (Hull, 2009). Studies have shown that the sectoral
pattern of growth is more effective for poverty reduction and employment opportunities: Loayza
and Raddatz (2006) found that growth in unskilled intensive sectors contributes to poverty
reduction; Satchi and Temple (2006) found that growth in agriculture may increase poverty while
growth in the urban sectors may cause it to fall. The study of World Bank (2005a) on 14
countries, which experienced the pro-poor growth in 1990s, shows that the access to non-farm
rural employment and informal urban employment emerged, as important factors to reduce
poverty in some, but not all, while Coxhead and Warr (1995) found that an increase in
agricultural productivity would reduce poverty.
Labour markets in middle and low income countries are highly segmented, with wage differential
and employment conditions across the sectors. In contrast to basic neoclassical models of
equalization of wages, these markets have limited mobility from less productive to more

41

productive jobs and weak bargaining power of the workers.15 Lewis (1954) took it as a dual
labour market in which workers who were unable to obtain jobs in the formal sector took up work
in unregulated informal sector. As shown in Figure 6.1, women are more likely to be in the less
productive jobs, mainly concentrated in the informal sector in many developing countries (Chen
et al., 2005). A variety of barriers including institutional barriers, legal barriers (weak
enforcement of property rights), geographical barriers (poor infrastructure connecting urban and
rural areas) or barriers due to discrimination based on ethnicity, race or gender, make it difficult,
particularly for the poor to participate in the productive jobs sectors (Leonardi, 1998).
Figure 6.1: Segmentation of Informal Employment
Average Earning
High

Mainly men
Employers
Regular Wage Workers
Own Account Workers

Women and men

Casual Wage Workers

Mostly Women
Industrial and agricultural outworkers/home workers

Low
Source: Modified the Model of Chen et al. (2005)

It has been shown earlier that during 2001-06 period, the high economic growth in Pakistan not
only mounted the labour force participation rates but also created employment opportunities,
especially for women. The growth in labour force participation and employment rates rose at a
constant pace with 2.6 percent per annum on average during 2001-05 period. The unemployment
increased during the first half of the decade and then it started to decline. However,
unemployment on average remained high in the range of 67.6 percent (Table 6.11).

15

Dickens and Lang,1986; Knight and Yueh, 2004;Avirgan et al., 2005; Fields, 2004

42

Table 6.11: Growth, Employment, and Poverty in Pakistan

Indicator
GDP growth rate

196369
7.20

197176
4.80

197687
6.70

198792
4.80

199298
4.20

199801
3.20

200105*
6.02

Labor force growth rate

1.70

3.50

2.50

1.90

3.60

2.50

2.60

Employment growth
rate

1.50

3.40

2.50

1.50

3.40

1.60

2.60

0.98
2.1
2.6
3.1
4.7
1.99
2.6
3.1
4.7
5.9
40.2
46.5
30.7
17.3
25.7
Poverty Incidence
46.5
30.7
17.3
22.4
32.6
Source: Extended the study of Kemal, (2004)
*The numbers from the last column has been taken from GoP (2009), PET (2008)

5.9
8.3
30.6
32.1

6
7.6
34.1
22.3

Unemployment rate

Several questions come out especially when the labour market outcome indicators such as labour
force participation, employment participation and unemployment rates in Pakistan are viewed in
the context of economic growth and poverty trends. Has the economic growth not benefited the
poor by raising their mobility and productivity across the sectors? Is employment-intensive or
productivity-intensive growth more important for poverty reduction? Has this growth not
improved the quality of jobs and access to modest earning opportunities for the poor? An attempt
has been made here to link this unemployment dilemma with poverty and growth.
First, although poverty declined during the high growth period (2001-05), the proportion of
vulnerable population remained constant one-fifth of the total population. Meanwhile,
inequality also rose significantly. The bottom 20 percent were not much benefited from the high
growth.
Second, the fast growth during 2001-06 was mainly capital intensive in which the capital
accumulation and labor expansion are the steady sources of growth (World Bank, 2006; and Din,
2006). However, the expansion of labour is not sufficient without viewing the sectoral patterns of
growth and quality of jobs. About half of the total employed labour force is engaged in the
agriculture sector; but the growth in the agriculture sector remained low (3.88 percent per annum
on average) than the overall growth (Table 6.11) and this agriculture growth witnessed high
fluctuations during 2001-05 period. The industrial and services sectors grew by 9.9 percent and
6.2 percent per annum on average, respectively, during this period. However, the employment
growth in manufacturing was lower than its overall growth. It is not considered as pro-poor
growth (Haider, 2010). Poverty in Pakistan is mainly a rural phenomenon. The poor are less
educated and low skilled (Haq 2005). They have comparatively less benefited from the capitalintensive growth (Kemal, 2004).
Third, the LFS 2008/09 shows that about half of the Pakistans labor force is illiterate and is
dependent on the informal economy. A brief detail in forthcoming Section shows that the share of
informal sector employment is rising: it accounts for 72 percent of adult employment and 79
percent of youth employment. This increase in informal sector employment reflects the general
slackening of the labour market (Amjad, 2005).
Fourth, the distribution of employed labour force in various sectors also reveals the segmentation
of the labour market with limited mobility from the lower wage jobs (agriculture sector) to the

43

high wage jobs (industrial and services sectors) especially in females. It suggests the inability of
the poor to obtain jobs in the formal sector due to a number of barriers including institutional
barriers, educational barriers, infrastructural barriers, regional barriers and violence and
exploitation barriers as highlighted by a number of studies.16
Fifth, the recent demographic dividend shows the rising share of female and youth in the total
population. Female population was estimated at 78 million out of the total 161 million in 2008
and youth constituted 20 percent of the total population. The SBP (2004) shows that the
employment generation in Pakistan has not kept pace with the increase in population. Another
recent study shows the rising job-mismatch phenomenon among young graduates and wage
penalties due to rising demand and supply gaps (Farooq, 2011).
Sixth, productive and remunerative employment is the most effective means of reducing poverty
(Pasha and Palanivel, 2003). However, in view of the concentration of workers in the low-paid
informal sector as discussed above, employment alone may not provide a guaranteed means of
escaping poverty. Malik (2005) shows that real wages have declined for regular/agricultural
workers and increased marginally for casual workers.
Finally, the quality of jobs and the access to modest earning opportunities for the poor is
prerequisite to reduce poverty. However, as detailed earlier, the various indicators related to
decent work highlight some important challenges to Pakistani labour market in recent years
including the rising vulnerability for female and youth, rising vulnerability in the agriculture
sector, decline in labor productivity and the prevalence of bonded labour, primarily in the
informal sectors (ILO, 2008).
Based on above discussion, it can be argued that the growth alone is not sufficient until the
quality of jobs is improved and the access to modest earning opportunities for the poor are
enhanced. Growth that results in increased employment opportunities in less productive jobs
sector may not be enough to alleviate poverty. To achieve the desired targets, there is a need of
policy and programmes, which enhance the agricultural productivity and enhance mobility of the
poor across sectors by removing the barriers to movement of more productive jobs. The recent
rising trends in poverty can only be arrested if enough productive and remunerative jobs are
created, and this is possible only if investment levels are increased.
7.

Government Policies/Initiatives for Increasing Employment

7.1.

Government Past Policies and Programmes

Pakistan has so far launched six labour polices in 1955, 1959, 1969, 1972, 2002 and 2010. All
these policies laid-down the parameters for the growth of trade unionism, the protection of
workers rights, the settlement of industrial disputes and redressal of workers grievances. The
basic aim of all plans and policies was to accelerate pro-poor economic growth by creating new
job opportunities and skill development of the poorest of the poor. The poor and vulnerable have
also been directly targeted by social safety net programmes. During 2002-10 period, around 7016

Jafri, 2004; Amjad, 2005; Amjad, et al., 2008; and Hull, 2009.

44

80 percent of the PRSP budget has been spent on only three sectors: human development, rural
development and social safety nets. As poverty is a rural phenomenon, the PRSP strategy
revolves around the promotion of rural development by community development, raising
agricultural productivity as well as the rural non-farm economy. All these policies and programs
were designed for poverty reduction but through employment creation. The 2010 Labour Policy
raised the minimum wage from PRs. 6,000 to PRs. 7,000 per month.
The microfinance is one of the major targeted interventions to address poverty and
unemployment by enabling the poor to become self-employed. Perhaps, at present there is no
other large scale development in Pakistan, which would provide capital and financial support to
the poor by expanding their choices and mitigating potential risks of poverty and social exclusion.
Microfinance provides micro credit, micro savings, and micro insurance (Table 7.1). The SME
bank was established to provide financial assistance for SMEs. Up to December 2009, it has
financed 8,299 SMEs with an amount of Rs. 9,510 million to 40,891 beneficiaries. The Khushali
Bank is also providing loans up to Rs. 30,000 to unemployed people to set up their business. Up
to December 2009, it has disbursed loans amounting to Rs. 22,481 million to over 2 million
beneficiaries. Under the Presidents Rozgar scheme, the National Bank is also providing loan up
to Rs. 100,000 for five years maturity.
Table 7.1: Active Borrowers, Active Savers and Active Policy Holders by Peer Group
Micro-credit
Details

Micro-Saving

Micro-Insurance

Active
Borrowers

Value
(Rs. million)

Active
Savers

Value
(Rs. million)

Policy
Holders

Sum
insured
(Rs. million)

2008/09
(July 1- June 30)

1,782,239

20,319

2,153,538

6,893

2,085,395

29,414

2009/10
(July 1- June 30)

1,975,820

25,082

2,834,916

9,566

3,813,594

53,704

Increase/decrease
(%)

10.86

23.44

31.64

38.78

82.87

82.58

Source: Pakistan Microfinance Network (PMN), Islamabad

Beside the previous briefed policies, the salient features of some government policies are as
follow:

National Tripartite Forum on Employment and Skills was jointly organized by the Labour
and Manpower Division of the Ministry of Labour, Manpower and Overseas Pakistanis
(MLMOP) and the ILO in April, 2006 to provide a platform to examine the employment and
labour market challenges as well as the formulation and implementation of polices to ensure
an efficient labour market and generate decent work for all (PET, 2007).

With the collaboration of UNDP and ILO, Labour Market Information and Analysis (LMIA)
Unit was established in 2006 to provide up-to-date and timely information to ensure decent
employment formulation. LMIA is a necessary input for monitoring these polices, as well as

45

for the envisaged reforms of the technical and vocational education and training (TVET)
system.

TVET is the central pillar of human resource development policies to overcome the low
education and skill levels. For this purpose, the National Vocational and Technical Education
Commission (NAVTEC) have been established in 2006 to strengthen the vocational and
technical education. NAVTEC is giving Rs. 2,000 per month to each trainee during the
training period. At present, about 1,522 technical institutes with an enrollment of 314,188 are
working in the country. It has the plan to produce one million skilled labour per year.

National Internship Program (NIP) was launched in 2007 to provide internship to educated
youth who have completed 16 years of education. Besides providing them the opportunity to
have practical experience or working in government institutions and corporation of one year,
this program is providing stipend of Rs. 10,000 per month to more than 20,000 young
graduates per annum on average.

The information technology has vast potential to deal with educated unemployment. The
development of IT and telecom sector has created thousands of employment opportunities for
the educated youth. An allocation of Rs. 3.3 billion has been retained for this sector in
2009/10.

In order to develop skilled labour force, the government has established five Skill
Development Councils (SDCs) one each at Islamabad, Lahore, Karachi, Peshawar and
Quetta. The SDCs provides the skill development training as according the geographic
market demands. So far, it has provided training to 46,674 workers.

Pakistan has adopted an active strategy to promote overseas employment. A separate overseas
Pakistani Division has been developed to facilitate overseas workers and boosting the
overseas employment in the Gulf countries and gradually expanding the flows to the nontraditional destinations. In recent years, the government has signed the MOUs with the Korea,
UAE and Libya to export manpower.

7.2.

Diagnostic Analysis of Binding Constraints to Reducing Unemployment

As poverty and employment are highly correlated, a number of binding constraints are also linked
with the labour market concerns. A number of constraints have also been discussed earlier. By
avoiding the repetition, a summary of few binding constraints related to the labour market has
been discussed in this section.

The growth in the real sector is not stable in Pakistan. The high economic growth spells have
mainly been influenced by the foreign shocks, and when these shocks disappeared, the
growth started to decline. It happened during 1960s, 1980s and during the first decade of this
millennium. The high growth during 2000-07 period was largely capital-intensive growth; it
expanded the employment opportunities but with fewer opportunities. Without strengthening
the real sector growth, it would be impossible to reduce unemployment and poverty.

Pakistan witnessed a higher and rising level of investment during the first half of the last
decade. However, the deteriorated law and order situation and rising crime rates during the

46

recent years have created an overall uncertainty, which has badly affected the confidence of
local and foreign investors. The high corruption, controversial property issues and other
business related matters have made it costly to do business in Pakistan (World Economic
Forum, 2011).

Despite the recent economic developments, the share of rural labour force more or less
remained the same. Majority of them are mainly connected with the agriculture sector.
Having low levels of education and skills, this majority is unable to get adjustment in the
formal sector. Without developing the non-farm rural economy, it would be difficult to
overcome the unemployment issues.

The regional differences over social and physical infrastructure are also responsible to
increase inequality and wage penalties. The high poverty regions i.e. the rural areas of
southern Punjab and Sindh have comparatively less social and infrastructural services, access
to industrial and services sectors and overseas employment. With poor rural-urban linkages,
they are facing a number of barriers to move to urban areas for better future.

The share of employment in the informal sector of the economy accounts for more than twothird of the total adult and more than three-fourth of the youth (Table 7.2). It suggests the
limited creation of decent jobs when the labour force is growing rapidly and might becoming
problematic especially for those peoples who lack the necessary skills or social networks to
find a proper job. This group is increasingly becoming the part of informal economy.
Table 7.2: Pakistan: Share of Employment in the Informal Sector of the Economy

1999/00

Age 15+
Overall
65.0
Male
65.0
Female
63.9
Youth (15-24)
Overall
74.8
Male
75.1
Female
71.0
Source: PET, 2009

2006/07

Change
between
1999/00 and
2007/08
(percentage
points)

2001/02

2003/04

2005/06

2007/08

63.8
64.1
60.8

69.4
69.9
64.5

72.3
72.2
73.0

71.5
71.6
69.9

72.4
72.4
71.7

+7.4
+7.4
+7.7

71.9
72.2
69.8

78.0
78.5
74.0

79.9
79.6
81.8

78.8
78.7
79.0

+4.0
+3.7
+8.0

The recent demographic transition with the rising share of youth presents the economy
with a demographic gift in the form of a surge in the relative size of the working age
population. However, the rising unemployment rates among the youth highlights the
rising gap between the demand and supply with limited absorptive capacity of the labour
market. The recent official statistics also highlights the severe challenges and disadvantages
to youth in the labour market with rising waiting periods, long working hours, inadequate
work and wage penalties. It would be a great threat if appropriate measures are not taken
to absorb this massive influx.

47

Another challenge is over-regulation of labour market in terms of weak government and trade
union polices. It has led to high risk of firing the workers and the rising trend to employ
workers on contractual basis. Pakistan ranks at 78th position on the difficulty of hiring
index, which is lower than the OECD and South Asia. Only 15 percent of the Pakistani
firms have sponsored On-the-Job Training (OJT) to their employees (World Bank, 2006c).
On the other hand, the informal sector is completely unregulated where even the minimum
wage is not always applied.

Knowledge and skills are the driving forces of economic growth and social development.
However, at present one-third of the youth are illiterate. Another meager picture is the
declining number of young women and men in the labour force with formal vocational
training. It seems that Pakistan has been trapped in vicious circle where education is not
providing the right skills as demanded by the labour market. As briefed earlier, the
educational system is facing a lot of heterogeneity over course curriculum, research, teaching
and infrastructure quality across the regions and across the universities. The return to
education has a declining trend in Pakistan, which implies that the country has failed to
produce high demand for education that resulted in low rate of return to education (Hausman
et. al. 2005 and Qayyum et. al. 2007). Moreover, there is no mechanism to provide the
complete assessment of the labour market in terms of required skill.

Another imperfection is the control of politicians, feudals, industrialists, bureaucracy and

influentials over the job opportunities. A capable educated person with distinction but without
any sfarish17 may not be successful in finding decent work in the labour market.

7.3.

Government Medium-Term Policies and Plans Related to Employment

A major focus of both the MTDF (2005-10) and PRSP is to enhance the efficiency of rural and
urban areas with a view of improving the quality of social and living standards, especially in rural
areas. The MTDF (2005-10) has aimed to generate new job opportunities of 6.97 million over the
framework period by focusing on: stimulating growth of employment-intensive sectors
particularly agriculture, livestock, SMEs, telecommunications and IT services, housing and
construction, and natural resources; direct interventions for employment generation especially for
the young; capturing the growing international market for overseas migration; and an integrated
approach to meets the skill needs of the country and overseas markets (GoP, 2008a). The
Government of Pakistan has taken a number of following policy initiatives related to labour
market, which include;

Pakistan has completed the ratification of all Fundamental Human Rights Conventions in
2006. Further, the 2006 Labour Inspection Policy, 2006 Labour Protection Policy and the
draft Employment and Services Conditions Act have also been launched.

To get the feedback from the labour market, the Labour Market Information and Analysis
(LMIA) was launched in 2006 with the collaboration of UNDP and ILO. It is a medium- and

17

Sfarish, a local language word which means that an individual get job on the basis of some political or bureaucracy
influence or he/she pay bribe also to get the job.

48

long-term policy in which the progress has been made to establish the LMIA units at the
provincial level. LMIA will help to address the further labour and employment challenges. A
second phase of LMIA has been developed into a comprehensive five year UNDP program,
the MDG-driven Poverty Policy Package (MP3). It will produce quality information and
analysis by enhancing the capacity of LMIA and Federal Bureau of Statistics, which would
further informs pro-poor, decent work and skills development policies. The collaboration
bodies are FBS and skill bodies at the national and sectoral level i.e. National Vocational &
Technical Education Commission (NAVTEC), Technical Education and Vocational Training
Authority (TVETA), and Skill Development Council (SDCs) (PET, 2007).

NAVTEC has recently released a vision on skills called: Skilling Pakistan: A Vision for the
National Skills Strategy, 2008-12. This document highlights the strategies to address the skill
shortages in Pakistan. Like LMIA, the efforts are ongoing to develop similar type institutions
at the provincial level. At present, TVETA is working in two provinces, Punjab and Sindh.

Regarding the export of manpower, the National Migration Policy, 2008 and Labour Policy,
2010 aim to provide incentives to overseas employment promoters by improving their
performance. Pakistan Embassies abroad will be asked to extend necessary co-operation to
the delegations of Overseas Employment Promotors (OEPs) when they visit the labour
importing countries for procurement of manpower demands so that they may be able to
procure maximum demands for Pakistani labour.

In August 2007, the government has released the Vision 2030, a comprehensive strategy to
create employment through rapid and sustainable development in a resource constrained
economy by developing knowledge inputs.

7.4.

Main Challenges/Issues//Risks to Medium-Term Outlook Regarding Employment

In the context of the ongoing demographic transition and the past fast growth spell, it can be
argued that the macroeconomic growth during 2000-07 period was uneven in Pakistan as this
growth has been witnessed despite the poor human development indicators. However, it has
created employment opportunities but concerns of poor and illiterate labour force remained the
same to get modest earning opportunities. It also seems that the labour market is not keeping pace
with the growing population as the new job seekers are facing more issues to obtain a job with
rising job search periods, more job mismatch issues and getting inferior jobs. The followings are
some key challenges to ensure sufficient job opportunities and solve the decent work related
issues:

A major challenge in medium-term government programs is the poor projection of targets.

Theoretically, all the policies and programmers have highlighted pleasant policies and
strategies to meet the challenges. However, in practice, the country has been lagging to all
the medium- and long-term key targets as set by MTDF, PRSP and MDGs. As claimed by the
GoP (2008a) the MTDF envisaged the creation of 6.97 million employment opportunities
over the Framework period, against a total addition to the labour force of 5.55 million.
Therefore, the labour demand will be greater than the supply and the unemployment rate will
be reduced to 3.27 percent in 2009/10. Contrary to this projection, the official statistics

49

shows that during the MTDF framework, the labour force has witnessed an addition of 9.94
million and 9.45 million new jobs have been created.

Since 2008, the economy has faced severe macroeconomic challenges with rising inflation,
poor growth especially in the real sector, rising unemployment, unstable current account
deficit and rising debt burdens. At present, the government is facing severe hurdles to sustain
the ongoing pro-poor development expenditures due to growing fiscal deficits. Without
macroeconomic stability especially the growth in the agriculture and manufacturing sectors, it
would be just a daydream to ensure sufficient employment generation for the job seekers. The
MTDF has targeted to lower the unemployment to 4 percent during 2009/10. However, the
unemployment level in 2008/09 period was 5.2 percent. Independent sources put the
unemployment in double digit.

The worsening law and order situation, rising political uncertainty and corruption have made
it costly to do business in Pakistan. As discussed earlier, out of 139 countries, Pakistan is
among the worst 7 countries where the overall macroeconomic environment is sluggish. The
severe power and electricity shortages have badly affected all the sectors of the economy.

A decline in investment and saving rates has been witnessed during the recent period. In
2006/07, national saving and investment rates were 17.4 and 22.5 percent of the GDP, which
declined to 16.6 percent and 13.8 percent in 2009/10, respectively. The double-digit inflation
since 2008 has also badly affected the saving rates. The high oil prices combing with the
commodity inflation is generating the stagflation.

All the government policies and programmes aim to generate employment opportunities in
rural areas by promoting rural farm and non-farm economy, social and physical infrastructure
and better education facilities. However, there are higher and rising inequalities across the
regions where the government development spending is also negatively skewed to the
deprived regions. These poor regions are still deprived in terms of social and physical
infrastructure and industrial setup and overseas employment opportunities. In the absence of
rural-urban linkages and diversified resources, they have no option except to adopt the low
paying jobs.

Another issue is the capacity of the labour market to generate sufficient employment
opportunities. Both the females and youth are still facing high unemployment rates. Though
the recent statistics show the rising females share in the labour market; it is mainly in the
form of unpaid family helper mainly female (GoP, 2008a).

Pakistan has witnessed an increase in the placement of its workers abroad for employment.
Middle East is the favourite destination for majority of the poor and middle class Pakistanis.
However, these labour markets are crowded at present with a massive flow from other South
Asian and East Asian countries. Serious efforts are required to keep a reasonable share in the
Middle East labour market and find new avenues for employment.

7.5.

Role of Donors in Increasing Employment

As outlined earlier, a number of international agencies, countries and NGOs are assisting the
Government of Pakistan in its medium- and long-term development programs i.e. PRSP and

50

MTDF to eradicate poverty by ensuring equal opportunities for the various segments of the
society. In the line of ILOs country Decent Work Program (DWCP), 2005, the MTDF has
addressed issues related to employment creation (Labour and Employment Policies), poverty
reduction (Poverty Reduction Strategy Papers) and human resource development (Skilling
Pakistan).
As reported earlier, a National Tripartite Forum on Employment and Skills was jointly organised
by the Labour and Manpower Division of the Ministry of Labour, Manpower and Overseas
Pakistanis (MLMOP) and the ILO in 2006 to examine the labour market challenges and policy
formulation. Both the ILO and UNDP have assisted the Government of Pakistan to establish the
Labour Market Information System (LMIS) to provide update and timely information about the
labour market. At present, the LMIA is working and serving as an input to formulate the
monitoring of labour and employment policies to ensure the decent work. Recent initiatives are as
follows:

During the 2010 floods, the ILO had launched the cash for work programme to provide
quick employment opportunities in various flood-affected areas. During the relief period, the
youth was involved to clean and sterilize the camps, establish sanitation facilities in the
camps and clear debris from market places, roads and local infrastructure18.

Both the ILO and Canadian International Development Agency (CIDA) have launched
Promoting Gender Equality for Decent Employment (GE4DE), a five year project from 2010 to
2015 with three distinct but integrated components:19 strengthening national mechanisms to
promote equal employment opportunities for women by enhancing their knowledge and
skill; enhancing skills and employability of 6,300 poor women in rural and urban areas of
selected districts using the ILOs Training for Rural Economic Empowerment (TREE)
methodology; and strengthening the capacity of media to raise awareness on issues related to
working women.

Under the One-UN Programme, Expanded Funding Window (EFW) has been launched by UN
(January 2010-December 2010) to promote the principles of social justice and decent work
agenda in the following three main areas; agriculture, rural development and poverty
reduction, environment and education.20

A joint project Towards Gender Parity in Pakistan Project (TGP) is ongoing (July 2009December 2011) with the collaboration of ILO and 14 other UN agencies. This project aims to
ensure equal access to decent work and productive employment for women and men to move
them out of poverty.

A five year plan over the period of April 2008 - April 2013 has been launched by European
Community (EC) contributing to the Government of Pakistans efforts to eliminate child
labour, including its worst forms (WFCL). It will contribute to the execution of the

18

http://www.ilo.org/islamabad/whatwedo/projects/lang--en/index.htm
http://www.ilo.org/islamabad/whatwedo/projects/lang--en/WCMS_125575/index.htm
20
http://www.ilo.org/islamabad/whatwedo/projects/lang--en/WCMS_143204/index.htm
19

51

Governments National Policy and Plan of Action to Combat Child Labour, mainly the
National Time Bound Programme (2008-2016) - its medium-term plan for combating the
worst forms of child labour.21

The Government of Netherlands had initiated a three year project (March 2007 - April 2010)
to promote the elimination of bonded labour in Pakistan.22

Under the Women Employment Concerns and Working Conditions (WEC-PK) project (20052010), the Canadian International Development Agency (CIDA) has been assisting the
government to attain the MDG goal by promoting gender equality and empowerment and the
reduction of poverty in the country.23

With the assistance of European Commission, the four UN agencies including ILO, FAO,
UNDP and UNIDO have assisted the Government of Pakistan to promote community-based
livelihoods over the period 2006-09. Under this initiative, 9,100 men and women were
trained in construction and other non-farm skills; and 147 kilometers of rural link roads
rehabilitated through labour-based technologies.24

During 2003-2008, ILO implemented its flagship Project of Support to the National Timebound Programme on the Elimination of Worst Forms of Child Labour (TBP Project). It was
a major project that made both policy level and community level interventions to build
capacity of ILOs tri-partite constituents on the issue of Worst Forms of Child Labour
(WFCL).25

The US Department of Labour (USDoL) has provided the training in Mardan, Malakand
and Attock in NWFP and Punjab under the Training for Rural Economic Empowerment
(TREE) approach during September 2002 - September 2007.26

7.6.

Policy Recommendations for Fixing Binding Constraints

Pakistan is a vibrant society and has been blessed with enormous natural and human resources.
Unfortunately, it remained vulnerable to efficiently utilize its resources. The following necessary
initiatives are required to enhance the employment generation opportunities in the country;

Much effort from the government side is required to eliminate the issues related to bad
governance including corruption, tax theft by the elite class, favouritism decisions by
government officials etc.

A stable macroeconomic system is prerequisite to generate sufficient employment

opportunities especially for the poor. Through fiscal policy, the government should raise its
capacity to generate enough resources to pursue its development programmes. The monetary

21

http://www.ilo.org/islamabad/whatwedo/projects/lang--en/WCMS_143210/index.htm
http://www.ilo.org/islamabad/whatwedo/projects/lang--en/WCMS_125694/index.htm
23
http://www.ilo.org/islamabad/whatwedo/projects/lang--en/WCMS_125695/index.htm
24
http://www.ilo.org/islamabad/whatwedo/projects/lang--en/WCMS_143181/index.htm
25
http://www.ilo.org/islamabad/whatwedo/projects/lang--en/WCMS_126014/index.htm
26
http://www.ilo.org/islamabad/whatwedo/projects/lang--en/WCMS_143156/index.htm
22

52

policy can be used to stabilize the prices and real interest rate, so that saving is encouraged
(World Bank, 2006).

As Hull (2009) suggested, there is a need to identify the sectoral behaviour of growth for
poverty reduction and employment generation by identifying the more productive and less
productive sectors. The more productive sectors should be followed by employmentintensive growth policies while the less productive sectors should be targeted by productivityintensive growth policies. In parallel, there is a need of policies, which enhance the mobility
of the poor toward the productive sectors by cutting off the geographic, infrastructural,
educational and cultural barriers.

The pro-poor policies and macroeconomic stability is insufficient without the micro-level
reforms by including the private sector. In this way, the government should act as a facilitator
rather than regulator. The SMEs development especially in the rural areas will create
employment opportunities.

Supportive physical and social infrastructure is necessary to develop better rural-urban

linkages and better integration across the regions. A special effort is required to overcome the
regional inequalities by investing more on infrastructure, development of SMEs and
establishing industrial zones in the deprived regions i.e. rural Sindh, southern Punjab etc.

Agriculture has been playing and can play a significant role in employment generation and
economic growth of Pakistan. A better farm technology and productivity gains in the
livestock sector are highly important for pro-poor rural income growth and employment
generation (World Bank, 2006).

The human development is the crucial constituent for employment generation and poverty
reduction. The history of Pakistan suggests that a major failure to achieve the economic
targets is the lack of a sound educational system. At present, the educational system is not
matching with the labour market requirements as it is providing education in those
disciplines, which are relatively less demanded in the labour market. A sound occupationalspecific education would ensure the matching jobs, self-employment opportunities and
employment activation polices i.e. microfinance, rural development, promotion of SMEs etc.

There is a need to increase access to overseas employment by bringing the poor regions under
the official recruitment network. Credit facilities to finance overseas migration may also be
given to poor households in poor regions (Amjad et al., 2008).

8.

Identification of Focused Areas for MDBs Interventions in Employment Generation

Over the Medium-Term (2012-2015)

8.1

Possibilities of Poverty Reduction Through SMEs Development by Employment

Creation

Micro enterprises serve as one of the primary vehicles for income generation and poverty
reduction particularly in developing countries where the very poor are more constrained in their
economic choices by the market environment, lack of infrastructure, and insufficient sources of

53

affordable credit (Menon and Rodgers, 2011). Policy measures targeting these constraints can
make self-employment more productive, thus facilitating the move toward poverty reduction. The
expansion of non-farm employment, including self-employment, is directly associated with a
decline in rural poverty. The expansion of non-farm employment is pro-poor, and it puts upward
pressure on agriculture wages, which further facilitates rural poverty reduction (Menon and
Rodgers, 2011).
In Pakistan, SMEs account for about 95 percent of all 3.2 million business enterprises. They
contribute 30 percent to the GDP, account for around one-fourth of export earnings, and provide
about 80 percent of the nations jobs. One more structural fact, however, is that the SMEs in
Pakistan are in general less efficient than larger firms. There is a need to remove the main
constraints that restrict the growth of SMEs so that these enterprises can expand and reap the
benefits of economies of scale.
In Pakistan, banks provide only 7-8 percent of the total funding requirements of SMEs. Access to
finance is the single most important impediments to its growth. Thus, a key area of policy
intervention is the provision of small-scale loans through microfinance and rural banks. Poor
households can improve their ability through greater access to credit to withstand shocks to
consumption and production. In developing countries, opportunities in the paid labour market for
women are scarce. Financing self-employment opportunities with sources of credit can be
especially important for women. Access to credit through micro financing has aided in poverty
reduction in India and Bangladesh by providing a diverse range of financial services to the poor
and the disenfranchised (Menon and Rodgers, 2011).
In Pakistan, poverty is concentrated in rural areas among the landless, small farmers,
sharecroppers, agriculture workers and construction workers. There are limited job opportunities
in the rural non-farm sector. The rural poor have no choice but continue working with low wages
in poor conditions. A gradual shift of labour from agriculture to services and manufacturing
sectors has been observed. This shifting can hardly help them improve their well-being because
of low human capital and lack of resources to become self-employed. The financial assistance of
the rural poor to start their small businesses in rural areas or in small towns can go a long way to
generate employment and reduce poverty in Pakistan. The MDBs needs to work with the
Government of Pakistan for the SMEs development because all recent development plans and
poverty reduction strategies have included the SME as a priority sector to create job opportunities
and reduce poverty.
8.2.

Vocational Training

The terms technical and vocational training are sometimes used synonymously. However, as per
present practice, the term technical education refers to post-secondary courses of study and
practical training aimed at preparation of technicians to work as supervisory staff. The term
vocational training refers to lower level education and training for the preparation of skilled or
semi-skilled workers in various trades and it does not enhance their level with respect to general
education.

54

The National Vocational and Technical Education Commission (NAVTEC) was established in
2006. It is a regulatory and coordinating body for skill development and establishment of skill
standard. The NAVTEC has prepared a strategy for the 2008-12 period. At present, technical
education and vocational training programs are administered by a number of federal, provincial
and private agencies. Thus government vocational institutes are administered by the provincial
education department, technical training centres; vocational training centres and apprenticeship
training centres are administered by the provincial labour departments; apprenticeship training
under the apprenticeship training ordinance is administered by the provincial directorates of
manpower and training in establishments employing 50 or more workers. Finally, On-the-Job
Training within industries and training is also impacted by the small industries
departments/corporations and private technical and vocational institutions. A Technical Education
and Vocational Training Authority (TEVTA) has been established in Punjab and all the
departments dealing with technical and vocational training have been placed under it.
The Ministry of Labour and Manpower has established five Skill Development Councils (SDCs)
one each at Islamabad, Karachi, Lahore, Peshawar and Quetta. The SDCs assess the training
needs of their geographical areas, prioritize them based on market demand and facilitate training
of workers through training provision in the public and private sectors.
The provincial directorates of manpower and training and the National Training Bureau in the
Ministry of Labour and the Federal Ministry of Education through its directorates of technical
education are running colleges of technologies, polytechnics, mono-technics and commerce
colleges offering vocational and commercial training. The Ministry of Science and Technology,
through the National Institute of Science and Technical Education (NISTE), also imparts science
and technical education including training of teachers, curriculum development, research and
development and coordination of science and technical activities at national and international
levels.
The present enrolment in TEVT institutions is 105,000, which corresponds to only 1.4 percent of
numbers in age group 14-15 years, with another 115,000 engaged in tertiary level diploma and
certificate programs, compared with over 326,000 enrolled in programs for bachelor and above.
The present capacity of the government departments and agencies is insufficient to impart the
vocational training. The first constraint is financial, because it affects the quality of education
and hands-on skill imparted to trainees. Collaboration with the private sector remains a major
option for the government, if the nature of the relationship with business and industry is properly
tuned; otherwise there is a danger of alternating between bureaucrat-industry relationships, which
are either too stand-offish or could lead to conflicts of interest. MDBs can play a role by
supporting financially the private sector for establishment and operation of vocational education
and training institutions. However, standards and quality benchmarks will need to be regulated
irrespective of who runs the institutions. The priority should be to establish new institutes to
increase enrolment opportunities for youth.
8.3.

Islamic Microfinance for Employment Generation

Several models for SME development through Islamic microfinance have recently been proposed
(Hassan, 2008; and FARZ, 2011). For employment generation in Pakistan, it makes sense to link

55

Islamic microfinance services with the vocational training institutes by providing their graduates
these services. Graduates from one particular area can organize themselves into groups with
mutual guarantee. IsMFIs can provide them finances using a combination of different modes
including Bai-Muajjal, Ijaraor equity based modes such as Mudaraba or Musharaka. Group
members can be encouraged to save under appropriate micro saving schemes. Group members
can also be encouraged to form an Islamic Fund to provide micro-insurance against unforeseen
risks and uncertainties resulting in loss of livelihood. Thus, the linking vocational training
institutes with the IsMFIs can be an effective way to promote self-employment among the youth
and reduce poverty.
FARZ foundation, an IsMFI, has given the concept of SME village to produce, pack and export
different products like dairy, vegetable, leather, embroidery, fruit, poultry, garments, jewelry etc.
to the local, national and international markets. This model SME village would consist of a
minimum 500 skilled and productive households. It will be a SME community. For employment
generation and poverty reduction, MDBs can start in Pakistan a pilot project to develop SME
villages using the Islamic microfinance services.

Activity
Agriculture

Industry

Appendix Table 1: Pro-Poor Economic Activities

Employment
Entrepreneurship
Opportunities
Opportunities
Historically the largest Given land consolidation
employer but over the possibilities,
limited
independence period and opportunities for poor
in the foreseeable future entrepreneurship
will lose jobs. Cannot
look to agriculture for
employment.
As technology improves, No opportunity for the
capital labor ratios are poor.
increasing. The era of vast
armies of labor working on
assembly lines is over.

Retail

Large
employment
opportunities.

Construction

Large
employment
opportunities for poor if
substantial large scale
construction of a modern
kind is allowed
Large
employment
opportunities. Hotels and
entertainment centers can
be large employers.
Considerable

Leisure

Community
Source: Haq et al., 2007

If
small
scale
opportunities are allowed
that can offer substantial
opportunities for the
poor.
Limited entrepreneurship

Yes. Small restaurants

and shops can be
supported
by
this
industry.
Limited

56

Current State in
Pakistan
Low productivity given
government
regulation,
property rights and land
tenure arrangements.

The most pampered sector

in Pakistan. Continued
recipient of subsidies and
protection. Hence a means
of transfer from the rich to
the poor.
Retail is totally penalized
by policy.

Archaic
zoning
laws
prohibit
serious
construction

Zoning
laws
and
fundamentalism prohibit
this.
Policy not favorable

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