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April 16, 2021

Poverty, growth, & inequality

Business

April 16, 2021

LAHORE: Reducing poverty is impossible without strong economic growth as it leads to human development, which, in turn, promotes the same. That makes both interdependent.

The measure to which growth eradicates poverty is contingent upon the extent to which the poor take part in the growth process and share in its proceeds.

The impact of GDP growth on the incomes of the lowest 40 percent earners differs in developed and developing economies. The increases in the incomes of lower 40 percent earners are almost proportionate to the average national growth in developed economies. However in developing economies marred with governance issues the poorer segments of society experience lower increase in incomes than the average national growth. This is called the trickle down impact. This trickle down impact looks more pronounced if the GDP growth is high. The income inequality might increase in such cases; but income itself is an indicator of welfare because it cumulatively increases the purchasing power of the poor; and addresses some of its educational and health concerns.

If the GDP growth is at par or less than the population growth even the trickle down impact is denied to the poor. Most of the developed economies register an annual population growth of less than one percent. For those countries even 1.5 to 2 percent growth does increase the incomes of the poorer segments but in developing countries like Pakistan where the population growth is higher than 2 percent the trickle down impact would not be felt at 2-3 percent GDP growth.

Without growth or low growth the poor are impacted more than the affluent. The downtrodden are forced to further lower their living standards. This could take them much below poverty level as no growth means that not even a fraction of inflation could be covered because incomes remain either stagnant or decline. Equitable growth is a dream that does not seem achievable in near future. To achieve this income the poor must increase by a very high percentage than the affluent. Inequality would widen even if the economy grows by seven percent and the incomes of rich and poor also increase by the same percentage. In such a case income of a worker drawing minimum wage of Rs17,000 would increase by Rs1,190 to Rs18190.

A member of the affluent segment earning Rs100,000 will find the income increase by Rs7,000 to 107000. The inequality in income would widen but the poor would still see their incomes increasing.

The first condition to achieve equitable growth is that there should first be growth in the economy. To reduce inequality the state would be required to formulate fair and transparent policies that provide equal opportunities to all at least in education and health. Unfortunately the GDP growth has remained pathetic during the last three years (including three months period of caretaker government). The average growth has been less than the population growth.

The poor saw their incomes decline and expenses increase because of high inflation. Besides food rates the tariffs of power and gas have increased sharply.

There are many factors that are under the control of the state that deny the poor fair share in growth. This includes financial depth in the system and financial openness. Moreover the policies that triggered inflation and disturbed the budget balance also impact the poor’s share in growth. Level of trade openness, measures of internal and external conflicts, and civil liberties also determine the potential of the poor to take due share in growth.

The high unemployment that Pakistan is experiencing today is tragic. Entrepreneurs are concerned over the aggregate output loss. But more than economic loss is the personal and emotional cost to the unemployed who have no social protection in this country. There is no question unemployment is a product of capitalism where the workers no more needed are laid off. In agricultural farms there is no redundancy. Families share the diminishing incomes because of close social bonds.

Similar comradeship is needed in industries where instead of firing say 25 percent of the workers because of low productivity the shifts should be curtailed by 25 percent to six hours and salaries proportionately adjusted. This would put pressure on the family budget of all workers but at least all of them would have some earning.

Otherwise the retained workers would retain 100 percent earning and 25 percent of the workers given marching orders get nothing. There is no doubt each worker has fixed costs, like house rent, school fee, transport fare that would remain unchanged.

In testing times the workers must make compromises to accommodate each other. This is also good for the manufacturing sector as they would not have to look for a skilled workforce when good times return. There may be some crucial jobs where reduction in duty hours may not be possible. The workers should go ahead with the sponsors in such few instances.