Income inequality and poverty in Pakistan

Income distribution in Pakistan is more uneven in terms of the way it is distributed among the country’s citizens

Shahid Javed Burki March 27, 2023
The writer is a former caretaker finance minister and served as vice-president at the World Bank

In the article today, I will write about how I read Pakistan’s more than 75-year history covering economic, social and political developments. I will deploy some theoretical advances to speculate the directions in which the country seems to be headed in the near term. The focus will be on the widening income gap between the very rich and the very poor. Data collected and published by the UN show income distribution in Pakistan to be more uneven in terms of the way it is distributed among the country’s citizens. The UN uses two measures for estimating income inequality: the ratio of incomes of the lowest and the richest segments of the population and estimates of what is called the Gini coefficient.

By all measures, Pakistan performs poorly compared to other South Asian nations. For it, the ratio of the average income of the poorest 10% of the population to the richest 10% is 6.5. In other words, the average income for the richest is more than 16 times the average for the poorest. The ratio is 7.5% for Bangladesh, 8.6% for India and 11.1% for Sri Lanka. The ratio of the average incomes of the poorest 20% of the population to the richest 20% is 4.8% for Pakistan and Bangladesh, 5.5% for India and 6.8% for Sri Lanka. Gini coefficient — a measure frequently used to indicate the extent of inequality — is the worst for Pakistan: 29.6 as against 32.4 for Bangladesh, 35.7 for India and 38 for the world as a whole.

Why has Pakistan fallen so far behind the rest of South Asia? The question has a long answer but the one that is the most obvious is the absence of public policy aimed at improving income distribution. This is the case in particular in more recent times. In the earlier periods of Pakistan’s almost 76-year long history, those responsible for making public policy twice made it their business to improve the lot off the poorer segments of the population. First, Field Marsha Ayub Khan who governed the country for 11 years, for 1958 to 1969, and then Zulfikar Ali Bhutto who was in power for almost six years, from 1971 to 1977, the state got engaged with some diligence in improving the lives of the poor. Ayub Khan’s focus was on the rural poor while Bhutto took steps to help the poor in urban areas.

Called the high yielding varieties, or HYVs, new wheat plants were imported from Mexico while the Philippines was the source of high yielding rice during the Ayub period. The military president got directly involved in bringing the HYV technology to Pakistan. He invited the agricultural scientist, Norman Borlaug, to visit Pakistan. The scientist went around the country and met thousands of wheat growers and told them how to introduce the high yielding wheat into their farms. He was awarded the Nobel Peace for the work he did in Pakistan.

The Ayub Khan government used the multi-tiered system of local governance to introduce HYV’s into the country. It had come to be called the system of Basic Democracies, or BDs, which had directly elected ‘Union Councilors’ at the base. These representatives of the people had access to counterpart funds generated from the sale of wheat given as aid to Pakistan by the US. Washington was appealed to provide help when there were serious declines in the output of the two food grain crops and the Pakistani government feared that the country might be visited by a famine. Pakistan then was divided into two provinces: East and West Pakistan. Each launched Rural Works Program financed by the sale of wheat and rice received from America. The result of these efforts was what in history is called ‘Pakistan’s green revolution’.

The second time the government got involved in closing the income gap between the very rich and the very poor was when Bhutto led his newly formed Pakistan People’s Party, the PPP, to power. Bhutto focused on the urban poor and took several initiatives to improve the lives of urban workers. These workers were encouraged to form unions which negotiated better working conditions. Not convinced that private owners of industries and commercial and financial enterprises would go on to adopt the measures introduced by his government, the prime minister went on to nationalise large privately owned companies. In the second phase of nationalisation, the Bhutto administration brought small wheat and rice mills under government control. Pakistani economic historians have yet to determine whether the measures adopted by Bhutto helped the poor and narrowed the income gap. In my own work on the Bhutto period that appeared in the form of a book published in 1980 by London’s Macmillan under the title, Pakistan Under Bhutto, I argued that Bhutto’s two nationalisations erased the momentum that Ayub Khan had introduced in the economy. In several books written by American scholars in the 1970s, Pakistan was presented as the model of economic and social development other developing countries would do well to follow. Today, Pakistan is considered a failing state.

What needs to be done to address the visible income gap in the country? When I visit Pakistan, I am struck by how well the rich live and how much suffering there is for the people at the lower end of the income distribution scale. That said, Pakistan does not have the kind of poverty, crowding and filth that one can’t help notice on visits to India. A recent well-received book by a French economist examined the data running over several decades and covering several countries and reached the conclusion that the return on capital is higher than the rate of growth of the economy. He suggests that the state must intervene to tax the owners of capital and make transfers to the poorer segments of the population through programmes of income transfers as well as government efforts to bring better education and health care to common people.

Adopting these findings to Pakistan would mean the government’s deep involvement in taxing the rich and raising resources for the public sector to help those whose incomes are low. Pakistan is one of the countries where both the rates of personal and government savings are extremely low. Tax to GDP ratio must be increased for the government to spend on programmes of social welfare. It is only by making these kinds of efforts that Pakistan will succeed in narrowing the income gap between the very rich and the very poor.

Published in The Express Tribune, March 27th , 2023.

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