Growth, Poverty
and Income
Distribution
Navigating the Economic Landscape: Growth,
Poverty, and Income Dynamics in Pakistan
12/16/2023
Contents
Introduction .................................................................................................................................... 3
What is a growth of a country? ...................................................................................................... 3
Growth may be influenced by a number of things: .................................................................... 3
Enhanced Production: ............................................................................................................. 3
Investment: ............................................................................................................................. 3
Innovation and Technology: ................................................................................................... 3
Commercial Activity and Globalization: .................................................................................. 3
Growth in Pakistan .......................................................................................................................... 4
Development Patterns over the Years:....................................................................................... 4
Early Decades: ......................................................................................................................... 4
1970s and 1980s: .................................................................................................................... 4
1990s ....................................................................................................................................... 4
Early 2000s .............................................................................................................................. 4
Recent Years: .......................................................................................................................... 4
Factors Affecting Development: ................................................................................................. 4
1.
Agriculture: ................................................................................................................... 4
2.
Industry and Services:................................................................................................... 5
3.
Population: ................................................................................................................... 5
4.
Policy Changes: ............................................................................................................. 5
Obstacles to Development: ........................................................................................................ 5
1.
Energy Crisis:................................................................................................................. 5
2.
Political Instability: ....................................................................................................... 5
3.
Security Concerns: ........................................................................................................ 5
1
4.
Technology and Administration: .................................................................................. 5
Poverty in Pakistan.......................................................................................................................... 5
Income Inequality in Pakistan: ........................................................................................................ 6
Measuring Inequality: ..................................................................................................................... 6
Size distribution: ..................................................................................................................... 6
Quintile & Decile: .................................................................................................................... 7
The Lorenz Curve .................................................................................................................... 8
Gini Coefficients: ................................................................................................................... 10
Functional Distributions: ....................................................................................................... 11
Measuring Absolute Poverty: ....................................................................................................... 12
Kuznets’s Inverted-U Hypothesis .................................................................................................. 12
Conclusion: .................................................................................................................................... 13
2
Introduction
Raising the average person's standard of living is the main goal of economic development, and
mere economic growth is insufficient to achieve this goal. This is thus because increases in the
standard of life for the average person are determined by both growth and income distribution.
Unfortunately, as poverty increased in the 1990s, research priorities switched from improving
income distribution to estimating the percentage of the poor and advocating for policymakers
to lower the percentage of the people living in poverty.
What is a growth of a country?
A nation's economic expansion and the gradual rise in its Gross Domestic Product (GDP) are
commonly referred to as its growth. GDP calculates the total worth of all products and services
produced inside a nation's boundaries over a given time frame, often quarter or year.
An important measure of a country's overall economic progress and health is its rate of
economic growth. It denotes a rise in the nation's output and income, paving the way for
advancements in infrastructure, technology, and general citizen well-being in addition to higher
living standards.
Growth may be influenced by a number of things:
Enhanced Production:
Economic growth can be promoted by an increase in the output of goods and services in
industries such as manufacturing, services, and agriculture.
Investment:
By raising productivity and efficiency, capital expenditures in infrastructure, technology, and
human resources can promote growth.
Innovation and Technology:
By opening up new markets for businesses, industries, and goods, technological and innovative
advancements frequently result in higher productivity and economic growth.
Commercial Activity and Globalization:
By expanding exports, bringing in foreign investment, and opening up new markets,
engagement in globalization and international commerce can promote growth.
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Growth in Pakistan
Over the years, Pakistan's economic development has encountered ups and downs. Numerous
variables have impacted the growth progress, such as internal obstacles, global economic
conditions, shifts in demographics, and governmental reforms.
Development Patterns over the Years:
Early Decades:
Pakistan's growth rates were comparatively high in the first few decades following its
independence (1947), primarily due to agricultural and a small amount of industrial
development.
1970s and 1980s:
Growth was impeded by political unrest, hostilities, and poor economic management
throughout this time. The economy was badly harmed by ineffective policies and the
nationalization of industries.
1990s:
In an effort to promote growth, the 1990s saw the implementation of several economic
reforms, including as trade liberalization, privatization, and deregulatory measures. While some
improvements resulted from these measures, growth was uneven.
Early 2000s:
Due to increased investment, a stable currency rate, and the expansion of specific industries,
Pakistan saw periods of modest growth starting in the early 2000s, with average growth of
about 4-6%.
Recent Years:
Pakistan's economy has begun to revive, but because of a number of internal and external
issues, it has remained somewhat unstable. The COVID-19 epidemic had a major effect on
economy around the world, including Pakistan's, which changed the country's growth
trajectory. Pakistan's expansion of GDP recovered to approximately 3.9% in the 2020–2021
fiscal years following a decline in the preceding fiscal year as a result of the outbreak.
Factors Affecting Development:
1. Agriculture:
With a sizable workforce employed, agriculture continues to play a major role in
Pakistan's economy. However, its potential for growth has been hampered by its
reliance on antiquated farming methods and susceptibility to the effects of climate
change.
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2. Industry and Services:
The manufacturing, textile, and service sectors all make major economic contributions.
Nonetheless, expansion in these sectors has been limited by infrastructure constraints
and energy shortages.
3. Population:
Pakistan's population is expanding quickly, which brings with it both opportunities and
concerns. A sizable young population may be able to support economic expansion if
they are given access to sufficient training, career possibilities, and education.
4. Policy Changes:
Growth has been impacted by recurring policy changes that have been implemented to
solve structural problems, enhance the business climate, and draw in foreign
investment.
Obstacles to Development:
1. Energy Crisis:
Prolonged energy scarcity has been a significant barrier to the expansion of industry
and the stability of the economy.
2. Political Instability:
At times, political unpredictability, governmental transitions, and inconsistent policies
have hampered economic development and discouraged international investment.
3. Security Concerns:
Especially in some areas of the nation, security problems and regional instability have
undermined investor trust and impeded economic activity.
4. Technology and Administration:
Growth and investment have been hampered by insufficient facilities, corruption, and
administration problems.
Poverty in Pakistan
Poverty in Pakistan is a complex issue that is embedded in the socio-economic structures of the
country. While the country has made progress in terms of economic growth, a large part of the
population still suffers from poverty.
A significant segment of the Pakistani populace is impoverished. Although precise numbers are
unknown, a number of surveys suggest that a sizeable portion of the populace struggles to pay
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for necessities including food, housing, healthcare, and education due to financial difficulty.
Rural areas, home to the majority of Pakistan’s population, are at a higher risk of poverty due to
a variety of reasons.
Lack of access to education continues the cycle of poverty, as many children are unable to go to
school or drop out early, thus limiting their future opportunities.
Health disparities are further compounded by limited access to healthcare and poor sanitation,
which contribute to health-related issues, particularly among marginalized communities.
Inadequate employment opportunities in rural and urban areas lead to unemployment and low
incomes, which trap families in poverty.
Natural disasters such as floods, droughts, and economic instability add an extra layer of
hardship to those already on the edge.
Government initiatives such as the Benazir income support program aim to provide financial
support to the most vulnerable people, but broader and sustained efforts are needed in terms
of education reform, access to healthcare, job opportunities, and infrastructure development
for all Pakistanis.
Income Inequality in Pakistan:
Since poverty and income inequality are Pakistan's most obvious problems, we should pay close
attention to their quantification and study. While the Basic Needs Approach can be used to
quantify poverty, the Gini coefficient and household income shares can be used to measure
economic disparity. Studies on the prevalence of poverty can also be conducted using
headcount, income gap ratio, and FGT index. Trends in asset distribution and employment can
be examined in order to assess the direct and indirect effects of different factors on the
distribution of income and poverty.
Measuring Inequality:
For analytical and methodological reasons, economists typically differentiate between two
main measures of income distribution: the proportional factor share distribution of income,
also known as the functional or personal distribution of income, and the personal or size
distribution of income.
Size distribution:
It merely addresses the total revenue received by each individual or household. It makes no
difference how that income was obtained. It doesn't matter if each person's income comes
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exclusively from their job or from other sources like interest, profits, rent, gifts, or inheritance—
what counts is how much each makes. Furthermore, the income's locational (rural or urban)
and vocational (such as manufacturing, services, commerce, or agriculture) sources are
disregarded.
Quintile & Decile:
For this reason, economists and sociologists prefer to first categorize all individuals according to
increasing personal incomes before dividing the entire population into discrete sizes or groups.
The standard procedure is to use climbing income levels to split the population into successive
quintiles (fifths) or deciles (tenths).
Quintile: a percentage of any number equal to 20%. There would be five equal-sized groupings
in a population divided into quintiles.
Decile: 10% of any numerical amount; ten equal numerical groupings would result from dividing
a population into deciles.
A hypothetical but generally average
income distribution for a developing
nation is shown in Table 5.1. The twenty
people in this table, who together
represent the whole population of the
nation, are arranged from the lowest
income (0.8 units) to the highest income
(15.0 units) in ascending order of annual
personal income.
The sum of all entries in column 2 is the
total or national income of all persons,
which equals 100 units. The population
is divided into quintiles of four people
each in column 3.
On the income scale, the bottom 20% of the population is represented by the first quintile. Merely
5% of the total national revenue, or five money units, are given to this group. People in the second
\
quintile,
those in numbers five through eight, get 9% of the overall income. In contrast, just 14% of
income goes to the bottom 40% of the population, which consists of quintiles 1 and 2.However,
51% of the overall income goes to the wealthiest 20% of the population, or the fifth quintile.
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The ratio of the earnings earned by the top 20% and bottom 40% of the population is a widely
used indicator of income inequality that can be obtained from column 3. This ratio has
frequently been employed as a gauge of the level of inequality between high- and low-income
groups in a nation. It is commonly referred to as a Kuznets ratio after Nobel winner Simon
Kuznets. This inequality ratio in our example is 51 divided by 14, or roughly 3.64 disparities in
income the unequal allocation of the nation's total income among its households.
The Lorenz Curve
In economics, the Lorenz curve is a graphical depiction that shows how wealth or income is
distributed throughout a population. It shows how money or income is distributed over time
across people or families in a particular community. The curve is represented on a graph with
two axes: the vertical axis shows the cumulative share of total wealth or income held by that
percentage of the population, and the horizontal axis shows the cumulative proportion of the
population, ranked from lowest to richest.
The Lorenz curve would coincide with the line of perfect equality in a situation where every
person or household has the same amount of wealth or income. In this scenario, the poorest
10% of the population would own 10% of the total wealth or income; the poorest 20% would
hold 20%, and so on.
The curve, which depicts income or wealth inequality within a society, actually usually rests
below the line of perfect equality. The degree of inequality increases with the distance between
the Lorenz curve and the line of complete equality. The degree of inequality is shown by the
curve's shape and distance from the line: the more bent the curve is away from the equality
line, the more unequal the situation is.
The Lorenz curve is frequently utilized in conjunction with the Gini coefficient, a numerical
indicator that is obtained from the Lorenz curve. The Lorenz curve's degree of inequality is
measured by the Gini coefficient, which offers a single figure for comparing the distribution of
wealth or income among various populations or over time.
8
For instance, column 4 shows that just 1.8% of the total income goes to the two poorest
people, who make up the bottom 10% of the population.
The two richest people, who make up the top 10%, receive 28.5% of the total. Lastly, to find out
what the top 5% earns, we would split the population into 20 equal groups of people (each
group consisting of all 20 persons in our example), then figure out what proportion of the
overall income the top group receives. Table 5.1 shows that the twentieth person, or the top
5% of the population, gets 15% of the income, which is a larger percentage than the combined
shares of the lowest 40%.
Using the decile data from Table 5.1, we have plotted this Lorenz curve in Figure 5.1. Put
otherwise, we have split the ten equal segments of the horizontal and vertical axes into each of
9
the ten decile groupings. Just 1.8% of the total income goes to the poorest 10% of the
population, 5% goes to the lowest 20%, and so on for each of the remaining eight cumulative
decile categories, as indicated by points A and B. It should be noted that at this halfway point,
only 19.8% of the total income is actually being received by 50% of the population.
The degree of inequality reflected increases with the Lorenz line's curvature away from the
diagonal, or line of complete equality. The Lorenz curve would be congruent with the bottom
horizontal and right-hand vertical axes in the extreme case of perfect inequality, which is a
scenario in which one individual receives the entire national income and everyone else receives
nothing. As no nation has perfect inequality or complete equality in its income distribution,
Figure 5.1's Lorenz curves for various nations will all sit somewhere to the right of the diagonal.
The Lorenz curve will bend more and be closer to the bottom horizontal axis the larger the
degree of inequality. Figure 5.2 displays two typical distributions: Figure 5.2a depicts a
distribution that is more equal than the other, while Figure 5.2b shows a distribution that is
more uneven.
Gini Coefficients:
A statistical tool for estimating the level of wealth or income inequality within a given
population or nation is the Gini coefficient. It comes from the Lorenz curve, which shows the
distribution of wealth or income graphically. The Gini coefficient can be expressed as a number
between 0 and 1 (or, alternatively, as 0 and 100 multiplied by 100); where perfect equality is
represented by the number 0, which means that every person or household has the same
amount of wealth or income. Maximum inequality is represented as 1 (or 100%); meaning that
one person or household has all the wealth or income and everyone else has none.
The area below the line of perfect equality is compared to the area between the Lorenz curve
and the line of perfect equality, which is a diagonal line, to determine the Gini coefficient.
In mathematical terms, the formula for the Gini coefficient is the ratio of the entire area below
the line of perfect equality to the area between the Lorenz curve and the line of perfect
equality. A numerical indicator of income or wealth disparity, this ratio can be expressed as a
decimal or percentage.
A lower Gini coefficient denotes a more equitable distribution, while a higher Gini coefficient
suggests greater inequality, implying that a smaller percentage of the population has a bigger
amount of income or wealth.
Economists, decision-makers, and researchers frequently use the Gini coefficient to compare
the distribution of wealth or income across various nations, regions, or demographic groupings.
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This tool helps shed light on societal inequality and informs policy decisions that aim to close
gaps and advance more equitable outcomes.
Functional Distributions:
The functional or factor share distribution of income, which is the second commonly used
measure of income distribution among economists, aims to explain what portion of the total
national revenue goes to each of the three components of production (land, labor, and capital).
The theory of functional income distribution does not view individuals as distinct entities;
rather, it looks at the percentage that labor as a whole receives and compares it to the
percentages of total income that are distributed as rent, interest, and profit (i.e., the returns to
land and financial and physical capital).
Take a simplified economy, for example, in which the entire national income is $1,000 and is
allocated as follows: Labor Income (Wages): $60 and capital income (in profit): $400
The functional distribution of income in this case demonstrates that wages (labor) account for
60% of the total national income, with profits (capital) making up the remaining 40%. This
breakdown shows how income is distributed between individuals who own or invest in capital
(e.g., business owners, shareholders, or investors) and those who provide labor to the
production process (e.g., workers).
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Measuring Absolute Poverty:
The state of not being able to meet one's basic needs for clothing, food, and shelter, or only just
managing to do so. We identified the number of individuals who lack the means to meet their
most basic requirements as the measure of absolute poverty. They are calculated as the total
population that makes less than an international poverty line, which is a predetermined
minimum amount of actual income. This line, which defines poverty as anyone living on less
than $1.25 per day or $2 per day in PPP currencies, transcends national boundaries, is
independent of the level of national per capita income, and accounts for varying price levels.
1.
2.
3.
4.
Headcount ratio
Total poverty gap (TPG)
Normalized poverty Gap
Multidimensional Poverty Index
Kuznets’s Inverted-U Hypothesis
A graph that shows how a nation's income distribution equity and per capita income is relate to
one another. According to Simon Kuznets, the distribution of income will often get worse
during the early phases of economic expansion before improving later. The "inverted-U"
Kuznets curve was named after this observation because, in some of the cases that Kuznets
studied, a longitudinal (time-series) plot of changes in the income distribution—as measured,
for example, by the Gini coefficient—seemed to trace out an inverted U-shaped curve when per
capita GNI expanded, as shown in Figure 5.10.
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Conclusion:
In Pakistan, eliminating poverty and income disparity necessitates a comprehensive plan that
takes into account a number of interrelated factors. Important projects include making large
investments in education to guarantee quality and accessibility for all, creating a wide range of
jobs outside of agriculture, bolstering social safety nets to offer immediate assistance to the
most vulnerable, and enacting land reforms to address disparities in the agricultural industry.
Progressive taxation strategies, greater governance to combat corruption, and advancing
women's empowerment via better access to economic and educational opportunities are all
equally important. Development of the infrastructure, especially in rural regions, and
guaranteeing accesses to reasonably priced healthcare are also essential. To promote
sustainable development, create more equitable opportunities, and uplift marginalized
communities—all of which will ultimately lead to a more inclusive and prosperous Pakistan—
coordinated efforts in line with the Sustainable Development Goals, involving the government,
civil society, private sector, and international collaboration, are essential.as well as financial
prospects.
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