IMPACT OF GLOBALIZATION ON POVERTY: CASE STUDY OF PAKISTAN

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1 Romain Pison Prof. Kamal NYU 03/20/06 NYU-G-RP-A1 IMPACT OF GLOBALIZATION ON POVERTY: CASE STUDY OF PAKISTAN INTRODUCTION The purpose of this paper is to examine the effect of globalization in Pakistan on the poor and other disadvantaged groups. The focus is thus to be done on how globalization is efficient on poverty reduction in Pakistan. Does globalization, taken as an on-going process of economic integration, help to reduce poverty in a developing country like Pakistan? What are the effective mechanisms that work, those that do not? How is it possible to enable a positive environment in Pakistan for globalization? Which key factors would encourage positive outcomes? These questions will lead the structure of this paper. A short description of the current situation in Pakistan will present different effects of globalization on poverty; then, an analysis will explain the major issues, and point out opportunities, before concluding. FACTS Globalization is mainly understood as an economic process, in which countries open their markets and get benefits from trade in commodities, goods, services, capital, and even labor, and of opportunities for new investments and markets, as well as technological change 1. But even if the present purpose is not to give general definitions of globalization, it is important to specify here the multiple dimensions of the term. Indeed, globalization also conveys to economic, social, cultural and political connotations. It is merely a process of rapid integration 2 that includes different aspects and lead to economic growth. In fact, globalization is usually driven by a push towards the liberalization of trade and investment regime, but social transformations accompany these changes. An open trade regime increases welfare and 1 Torres, R (2001) 2 Ibidem.

2 income by allocating resources in production and consumption through reorienting resources to areas of comparative advantage 3. It minimizes the incentive for engaging in inefficient activities associated with protection of domestic inputs, and it also encourages a certain form a social openness, merely because of trade necessity. In this context, Pakistan has attempted to open up its economy to enable foreign investment and better export and trade. This impulse of liberalization came in the 1970 s, period during which Pakistanis economy was weak, and exports almost inexistent. Structural adjustments programs, mainly provided by the International Monetary Fund (IMF), have been set up on this purpose. The objectives of these adjustments were to be achieved thanks to policy reforms in financial, trade, industry, agriculture, and energy sector. Patterns of key factors, represented in figure 1, were pointed out 4. Globalization, coming externally and considered as a given from the market forces, was in a first stage driven thanks to international policies, related to four main topics: international trade, financial integration, international labor flows, and technical changes. These westerndeveloped notions were key elements supposed to enable economic growth. Nevertheless, domestic 3 Tilat Anwar, Employment and Poverty: A case study of Pakistan 4 Ishrat Husain, Impact of globalization in Pakistan Figure 1: Structural Adjustments in Pakistan policies and measures were required in order to link economic growth to effective poverty reduction: social safety nets, poverty targeted interventions, and investments in human developments. It is very difficult, even for experts, to precisely assess the impacts of globalization and the structural changes that accompanied such a liberalization of the Pakistanis economy. Indeed, one may focus on short-term results or, on the contrary, on long-term outcomes. Furthermore, the assertion that poverty tends to decrease with economic growth 5 needs to be taken 5 Fields, 1989

3 into account and enables to distinguish different trends, including the most recent one that underlines a great growth (+8.4% in ) 6. Within the long run, however, it is mainly recognized that the general incidence of poverty in Pakistan has increased during the decade of 1990s, period during which liberalization was the greatest 7. According to this study, poverty had doubled from 17.4% in to 32.6% in Many social indicators that compose the Human Development Index (HDI), such as infant mortality rate and access to water, point out the worsening of the situation within the two past decades. Pakistan has only been ranked 135 out of 177 countries for the HDI 8 in 2005, result to be compared to rank 142 obtained in Secondly, as a consequence of an unexpected and fast liberalization of markets, poverty increased more in urban than in rural areas 9. This is particularly true for the education field, for which combined gross enrolment ratio for primary, secondary and tertiary schools is 48.4%, but only 17.3% in rural areas 10. That also means that even in cities, that are the heart of 6 Le Monde, Bilan du Monde 2006, L Atlas de 173 Pays, Hors Serie 7 Ahmad, E. and S. Ludlow, (1989), Growth, Poverty and Inequality in Pakistan, Pakistan Development Review 8 Human Development Report 2005, UNDP 9 Anwar (1996), Amjad and Kemal (1997), Macroeconomic Policies and their Impact on Poverty Alleviation in Pakistan, Pakistan Development Review, 36:1, (Spring) 10 Human Development Report 2005, UNDP growth provided by industrial production, people strive to live at subsistence level in Pakistan. Criterion retained defines poverty line as 2550 calories minimum per day per person. In these conditions, more than one third 11 of Pakistanis do not have enough income to meet minimum nutritional requirement. Adult literacy rate was 48.6% in 2005, and did not increase substantially in the past years. 65.6% of the Pakistanis population still leaves with less than $2 a day. Only 54% of people have access to improved sanitation 12. These results have not improved, and point out the critical situation that the poorest part of the population faces. Despite increase in growth rate of output, trade and Foreign Direct Investment, i.e. benefits from globalization at the global level for the whole economy, growth of employment did not occur. The unemployment rate, increased from an average of 3.5% during to 5.7% during , went up further to 6.7 percent in , according to official statistics presented in table Ahmad, Mustaq (1992), Choice of a norm of Poverty Threshold and Extent of Poverty in Pakistan, mimeo, Ministry of Finance, Islamabad 12 Human Development Report 2005, UNDP 13 Pakistan Economic Survey

4 Table 1: Unemployment in Pakistan However, globalization had not only negative impacts on poverty and social welfare. The literacy rate can be taken as an example, increasing from 25% in 1980 to 49% in The number of universities has increased from 4 to 25 and there are an equal number of private universities, including specialized management, engineering, and medical universities. There is now a large potential for professionals in every field to study abroad and meet international standards. This enables professionals to start their own business, and thus creates jobs and prevents wages from declining. In 1947, female education was virtually unheard of, except in a few big cities and their vicinities. Today, there are hundreds of thousands of female teachers in the country, including the rural areas. Female primary and secondary enrolment rates have moved up 23- and 27-fold, respectively 14. Women professionals were once the rare exception; now they are the norm in almost every field, although not in all parts of the country. Structural adjustments in Pakistan led to such positive outcomes in social welfare, but mainly did not encourage growth. These reforms have been criticized in Pakistan for seeking excessive reduction in aggregate demand which was imposed by the IMF, and has for consequences a contraction in tradable outputs and declining living standards for the poor and led to a general increase of poverty, as previously illustrated. ANALYSIS What are the mechanisms required to enable a positive environment for constructive globalization? What measures did not work in Pakistan and what else should be put in place internally to make globalization a reality for the poor? The need for greater transparency and accountability in regulating the financial sectors, restricting the reach of state intervention, and improving the delivery of basic services, such as health 14 Pakistan Economic Survey

5 care and education are high on the list 15. One of the major problems of economic development in Pakistan has been the expenditure by states in unproductive areas with corresponding cuts in spending in essential areas. A large share of the central Government expenditure has been financed by foreign aid. Public expenditure shows that in general, an increase is indicated in the size of consumption expenditure. However, annual growth in Government consumption has gone down on average since Even recent reports 17 describe a tendency to minimize central Government expenditure for development. Only 1% of Gross Development Product (GDP) was spent for health in 2004, to be compared to the 4.4% of GDP spent for military purpose. Further, political interference, lacks of transparency in public expenditure management and weak institutional capacity have also affected the quality of public expenditure. Average growth rate thus fell, inflation accelerated and unemployment reached its highest level. The structural reforms including privatization, cut in subsidies, employment restraint in the public sector, increases in sale taxes and frequent devaluation were not well managed and have eventually reduced the real 15 Siddiqui, R. and A. R. Kemal (2002) Poverty inducing or poverty reducing? A CGE-based analysis of foreign capital inflows in Pakistan, DFID project paper. 16 Pakistan Economic Survey 17 Le Monde, Bilan du Monde 2006, L Atlas de 173 Pays, Hors Serie income of the most vulnerable groups of the population. However, economic history of Pakistan shows that great growth, before liberalization of markets, contributed to a decline of poverty in the country. Liberalization did not provide the payoffs expected partly because of the emphasis of the IMF on fiscal compression 18. In order to revive the economy and make globalization more effective for the poor, focus should be put on improving growth thanks to the following: Promoting small-medium enterprises in order to diversify the country s industrial base and provide bilateral ties for exports; Encouraging foreign investment in oil and gas, two major domains to explore further in Pakistan; Investing in information technology as India did, to export promotion; Increasing expenditure on development and social services; Focusing and spending on infrastructures to create rural-urban linkages and reach the poorest areas; Stressing on education and health at the local level; 18 IMF (1986), Fund Supported Programs, Fiscal Policy and Income Distribution, Occasional Paper No.46

6 Switching agriculture to higher value added products progressively; Diminishing the level and dispersal of tariff rates; Stabilizing economy through sound fiscal policies and committed governance 19 ; Overlaying all the above opportunities, another challenge for Pakistan to derive benefits from globalization beyond immediate financial results is to upgrade its human development. This has been an area in which investments have not been made. Unlike other countries in the region which have moved to middle category of the HDI, Pakistan continues to remain stuck in the low category. More recently, Pakistan has realized that exclusive dependence on public sector institutions to deliver the basic social services is risky and jeopardizes the whole system. Public-private-community partnership is now being recognized and practiced as another mode for delivery of these services. The devolution of financial and administrative powers to local governments is expected to enhance the effectiveness, out reach and access of basic services at the grass roots level. In this sense, international experience, through globalization of norms and standards, can help the country to develop medium term plans, as well as adopting mechanisms for enhanced capacity at the local level. Eventually, Pakistan has to make some political and policy choices. The questions are about reforming the country and provide incentives to get the opportunities provided by globalization for the larger benefit of growth and poverty reduction or about remaining insulated from these forces and become marginalized in the process. Except Afghanistan, Cuba, North Korea and Myanmar there are very few countries in the world that have made a choice in favor of insulation and deliberate withdrawal. Pakistan needs to position itself for challenges of globalization, and not wait for an external and western-thought solution. A World Bank study 20 shows that 24 developing countries that increased their integration into the world economy over two decades ending in the late 1990s achieved higher growth in incomes, longer life expectancy, and better schooling. In these integrating countries, some 3 billion people enjoyed an average 5 percent growth in income per capita in the 1990s compared to 2 percent in rich countries. People saw their wages rise and the number of people in poverty declined. 19 Harrison, A.and Revenga, A. (1998), Labour Markets, Foreign Investment and Trade Policy reform in J. Nash and W. Takacs, (eds) Trade Policy Reform: Lessons and Implications, The World Bank, Washington, D.C. 20 World Bank: Reducing Poverty and Sustaining Growth: A Global Exchange, (2003)

7 CONCLUSION Globalization must be apprehended as a positive force for development and poverty reduction, but should not be taken as an acquis. Developed countries and international financial bodies may take specific measures to make globalization more favorable to developing countries that have no experience of such a powerful economic tool. At the same time, developing countries such as Pakistan need additional institutions and reforms in order to benefit from globalization and liberalization of markets; the past two decades showed that Pakistan did not engage sufficiently externally but also internally to link globalization and growth. Poverty did not decrease during the past twenty years in Pakistan, at least until The general increase of larger flows of exports and imports did not provide on itself benefits for the poorest. Poverty ratio as well as many social welfare indicators point out a general degradation of the social situation in Pakistan. Structural adjustments have been set up but have not been combined with investments in social fields. The effectiveness of the government in providing sound regulatory structures for the private sector, including the promotion of competition and regulation of private infrastructure as well as the effective provision of public services or the framework for such services are key elements that Pakistan should follow. The most recent figures show that Pakistan invests more in development. Budget allocated for development for 2006 (25% of total budget) is for the first time superior to the military budget (20% of total budget) 21. Projects that consist in decreasing tariffs for certain added value product imports, as well as tax cuts for small-medium enterprises are both measures that should provide a good basis for further investment and development. By enabling a favorable investment climate, Pakistan should be able to ensure that poor people participate in globalization and benefit from it. It is possible to make globalization and growth pro-poor, and close Pakistan s neighbors can be appropriate examples. Action that has been done in Pakistan for education is critical, but there is also a need for social protection measures and decentralization process, in order to ensure that people in all regions of Pakistan are connected to the global economy. These are tough challenges, but the recent progress made in the country convinces that it is well within reach. 21 Le Monde, Bilan du Monde 2006, L Atlas de 173 Pays, Hors Serie