WHAT IS POVERTYPoverty is a condition in which a person or community is deprived of, or lacks the essentialsfor a minimum standard of well-being and

life. Since poverty is understood in many senses,these essentials may be material resources such as food, safe drinking water, and shelter, or they may be social resources such as access to information, education, health care, socialstatus, political power, or the opportunity to develop meaningful connections with other people in society.Poverty may also be defined in relative terms. In this view income disparities or wealthdisparities are seen as an indicator of poverty and the condition of poverty is linked toquestions of scarcity and distribution of resources and power.The definition and measurement of poverty have evolved over time. The periodic changes inthe definition stem from the variation both across time and space in the description of whatconstitutes socio-economic well-being. The ability of meeting the costs of minimumnutritional requirements is the most important component of the basic needs approach tothe measurement of poverty. This definition has been strengthened by including socio-economic indicators of well being such as high rates of morbidity and mortality, prevalenceof malnutrition, illiteracy, high infant and maternal mortality rates. Most elements of theseaspects of poverty are based mainly on economic considerations. Consequently, many of these indicators are quantifiable. Recently, the definition of poverty has been further broadened. New definitions incorporate problems of self-esteem, vulnerability to internal andexternal risks, exclusion from the development process and lack of social capital. The newadditions to the definition of poverty capture the qualitative aspect of socio-economic well being. These definitions also influence the design of pro-poor policies for economic growth, public expenditures, safety net programs and tools for assessing the impact of programs and projects on poverty reduction.Generally poverty is a result of many and often mutually reinforcing factors including lack of productive resources to generate material wealth, illiteracy, prevalence of diseases, naturalcalamities such as floods, drought and manmade calamities such as wars. With increasingurbanization expected in the coming decades, the number of poor in urban areas, mainly the unemployed and those engaged in the informal sector, will grow faster and thus turn povertyinto an urban nightmare from the currently observed rural phenomena.At the international level, an unequal economic and political partnership, as reflected inunfavourable terms of trade and other transactions for developing countries is also a major cause of poverty in developing countries. Some causes of poverty are not direct, for example,traditions and norms which hinder effective resource utilization and participation in incomegenerating activities. Map of world poverty by country, showing percentage of population living on less than 1 dollar per day. The percentage of the world's population living on less than $1 per day has halved in twentyyears. However, most of this improvement has occurred in East and South Asia. The graphshows the 1981-2001 period.

GLOBAL EXPERIENCE It has now become abundantly clear that accelerated growth per-se isnecessary but not sufficient condition for bringing about sustainablepoverty reduction. There are other complementary factors which have toaccompany higher growth. The most important of these is investment inhuman development education, training, literacy, health, drinking water,nutrition, population planning. Countries which have neglected humandevelopment may achieve some spurt in growth and poverty reduction fora short period of time but these gains will not last long. Growth togetherwith investment in human development offers a much better chance foralleviating poverty. But even then, some segments of population living inremote, isolated areas and marginalized lands or living without anytangible assets other than their labor may require targeted interventionsby the government to create opportunities for them to earn livelihood. Ithas also become apparent that in every country there would be highlyvulnerable groups who would need social protection and social safetynets. Thus if a country is able to put together these four factors accelerated growth, investment in human development, targeted povertyinterventions and social protection the probability of achieving reductionin the incidence of poverty becomes quite high. INTRODUCTION Pakistan's development had a promising start after Independence. Helped by large externalresources Pakistan has been one of the worlds largest recipients of official developmentassistance since 1950. The country was able to grow at slightly over 2 percent per capita,tripling per-capita incomes between 1950 and 1999 and yielding substantial declines in poverty. While this is an achievement compared to many stagnating low income economies, itis much below what other developing countries, such as those in East Asia, were able toachieve, and below Pakistans potential. More seriously perhaps, pervasive and deep problems of governance, growing public spending on defense and other unproductive programs, and insufficient focus on human development eroded the countrys institutions,weakened economic management, and created an increasingly unfavorable investmentclimate. In the 1990s, these problems were compounded by external shocks and exacerbationof governance problems. Most of the decade was lost in stop and go stabilization reform programs which deteriorated further an investment climate already weakened by a turbulentand uncertain political environment, ambiguous government commitment to free markets anderosion of accountability and integrity in the major institutions of the state.Of particular concern is the fact that Pakistans social indicators remain below those incountries at similar levels of income. Internal differences in poverty and human developmenthave also persisted over time, or widened among regions, between rural and urban areas, and between women and men. Pakistans social indicators, including infant mortality, lifeexpectancy,

female primary and secondary enrollment are today among the lowest in theworld. A major effort started in the early 1990s to improve public sector social service provision through an 8-year long effort called the Social Action Program (SAP), in partfinanced by external development agencies, which has so far been unable to achieve itstargets on a number of focus areas.Over the past half century, poverty remains widespread in the developing world, More than1.2 billion people live on less than $1 per day at purchasing power parity, and more than 2.8 billion almost half the worlds -population- live on less than $2 a day. These impoverished people often suffer from under nutrition and poor health, have little or no literacy, live inenvironmentally degraded areas, have little political voice, and attempt to earn a meagreliving on small and marginal farms or in dilapidated urban slums. The development requires a higher GNP and a faster growth rate is obvious. The basic issue, however, is not only how tomake GNP grow but also who would make it grow, the few or the many. If it were the rich, itwould most likely be appropriated by them, and poverty, and inequality would continue toworsen. But if it were generated by the many, they would be its principal beneficiaries andthe fruit of economic growth would be shared more evenly. Thus many developing countiesthat had experienced relatively high rates of economic growth by historical standardsdiscovered that such growth brought little in the way of significant benefits to their poor as,many of the world great people had said. No society and can surely be flourishing and happy,of which by far the greater part of the numbers are poor and miserable.Social welfare depends positively on the level of per capita income but negatively on povertyand the level of inequality.The problem of absolute poverty is obvious. No civilized people can feel satisfied with a stateof affairs in which their fellow being live in conditions of such absolute human misery, whichis probably why every major religion has emphasized upon the importance of working for poverty alleviation and is at least one of the reasons why international developmentassistance has the universal support of every nation like Pakistan, having population of 138million people, its economy has been expanding at a per capita rate of about 1.6% a year during the past decade. Nevertheless, Pakistan bears burdens common to many developingnations a large (138 million) and rapidly growing (2.5 %) population,- a highly stratified andtraditional society, inadequate social and health services with military spending in 1994 morethan twice as high as spending on health and education combined, high infant mortality(91 per 1000) and illiteracy rates ( 50% for men and 76% for women ), a primary school dropoutrate of 63% compared with a South Asia average of 50%, a sizeable portion of the populationliving in poverty, an estimated 12 million children (half under the age of 10) working under near slavery conditions, a growing radical Islamist movement, and a rapidly deterioratingurban and rural environment.Pakistan has experienced considerable environmental damage. Much of its forests have beendestroyed for firewood, and the rate of deforestation in Pakistan since 1980, (almost 3% per year) is one of the highest in the world. The soil is rapidly eroding, water supplies are beingdepleted, and the process of desertification is moving inexorably forward. This decliningnatural resource base is beginning to lead to agricultural problems, and the natural environment itself must struggle to support the large population. Agriculture currentlyaccounts for about 26% of Pakistans GDP and occupies almost 55% of its workforce.The fight against poverty represents the greatest challenge of our times.

Considerable progress has nevertheless been made in different parts of the world in reducing poverty. The proportion of people living in extreme poverty on global level fell from 28 percent in 1990 to21 percent in 2001 (on the basis of $1 a day). In absolute numbers the reduction during the period was 130 million with most of it coming from China. In Sub-Saharan Africa, theabsolute number of poor actually increased by 100 million during the period. The Central andEastern Europe and the CIS also witnessed a dramatic increase in poverty. While incidence of poverty declined in South Asia; Latin America and the Middle East witnessed no change.The recent trends in global and regional poverty clearly suggest one thing and that is, thatrapid economic growth over a prolonged period is essential for poverty reduction. At themacro level, economic growth implies greater availability of public resources to improve thequantity and quality of education, health and other services. At the micro level, economicgrowth creates employment opportunities, increases the income of the people and thereforereduces poverty. Many developing countries have succeeded in boosting growth for a short period. But only those that have achieved higher economic growth over a long period haveseen a lasting reduction in poverty East Asia and China are classic examples of lastingreduction in poverty. One thing is also clear from the evidence of East Asia and China thatgrowth does not come automatically. It requires policies that will promote growth.Macroeconomic stability is therefore, key to a sustained high economic growth. Althoughextreme poverty on global level has declined, the gap between the rich and poor countries isincreasing, even when developing countries are growing at a faster pace than developed ones perhaps due to the large income gaps at the initial level. In a world of six billion people,one billion have 80 percent of the income and five billion have less than 20 percent. Thisissue of global imbalance is at the core of the challenge to scale up poverty reduction.In Pakistan, Poverty Reduction Strategy was launched by the government in 2001 in responseto the rising trend in poverty during 1990s. It consisted of the following five elements: Accelerating economic growth and maintaining macroeconomic stability, Investing in human capital, Augmenting targeted interventions; Expanding social safety nets; and Improving governance.The net outcome of interactions among these five elements would be the expected reductionin transitory and chronic poverty on a sustained basis. The reduction in poverty andimprovement in social indicators and living conditions of the

society are being monitoredfrequently through large- scale household surveys in order to gauge their progress in meetingthe targets set by Pakistan for achieving the seven UN Millennium Development Goals by2015.The revival of strong growth, and doubling of real public spending over the last six years,after the stagnation of a decade, has expanded employment, resulted in some increase in realwages, and reduced poverty incidence. The extent of reduction in poverty incidence over 2001-05 is a matter of some debate but there is little disagreement that poverty has declinedin recent years.This is hardly surprising considering especially the strong agricultural growth in 2004-05.The more interesting question is why has poverty reduction not shown a clear downwardtrend since 1990.Obviously greater progress in poverty alleviation would have been possible but for theinherent inequalities promoted by the existing power and asset structures, a tax system thatdoes not generate sufficient revenue to fund poverty programs adequately and a labour market that has yet to fully exploit opportunities offered by labour intensive exports.Rural poverty and growing differences in income between rural and urban areas are a matter of growing concern. According to government numbers, the rural poverty incidence in 2004-05 was at 28 per cent was almost double the rate of urban poverty. Surely the high incidenceof rural poverty in a bumper crop year cannot be the basis of much satisfaction.Government pro- poor spending, though still low, has increased in recent years to 4.5 per cent of GDP as fiscal space has opened up and progress on some rural programs such as ruralelectrification and girls' education is impressive. Increased pace of social spending hasimproved gross enrolment ratios and reduced gender differences.But net primary enrolment rate of 60 percent in 2004-05 means that 40 per cent of the primary school cohort were not in school. The overall education spending is still less than 2 per cent of GDP and quality and governance issues in public education remain huge. At thesame time, the government must be given credit for turning its urgent attention to higher education and skills gap and developing cogent plans.Reducing poverty incidence and increasing the access of the poor to basic public services inthe rural areas is, however, only one dimension of Pakistan's distribution problems which arereflected in growing income inequalities and regional differences.It seems that the current high growth is deepening inequalities more dramatically than wasthe case in the earlier high growth periods of 1960s and 1980s because the growth of incomesof the relatively well to do is being fuelled greatly by extraordinary booms in the real estateand stock market.There is not even a modest capture of the windfall profits because of a total absence of capitalgains taxation. USA, even after the tax cuts of recent years, has a 15 per cent capital gains taxrate. More generally the income taxation of the well to do has yet to become effective.As mentioned above, the economic rents in the private sector have not disappeared. Though itis difficult to quantify the impact of this factor, it does exacerbate income disparities.Containing of income and consumption disparities as well as steady reduction in povertyespecially rural poverty needs to be built in more explicitly as an integral part of the futureeconomic strategy because clearly the issue of the distribution of growth benefits hasassumed more urgency with economic liberalisation and greater role for the private sector.The distribution problems have distinct dimensions in rural and urban areas, with poverty being much more of a problem in rural areas and growing income disparities much more of a problem in urban areas. In rural areas the share of consumption of the highest quintile to the

lowest quintile was only two only 2.2 in 2004-05 and had changed little since 200001.But as mentioned above, rural poverty is widespread and nearly 80 per cent of Pakistan's poor live rural areas. In contrast urban areas account for little over 20 per cent of the poor. But inurban areas consumption disparities are huge and growing. In 2004-05 the share of consumption of the highest quintile to the lowest quintile in urban areas was over 12 timesand had grown from 10.4 in a short period of four years.Some of the ways in which Pakistan's policy approaches to the twin issues of poverty andincome distribution might be strengthened are discussed in the next section. POVERTY DIAGNOSTICSPoverty in Pakistan , is a major economic issue. Nearly one-quarter of the population isclassified poor as of October 2006. The declining trend on poverty in the country seen duringthe 1970s and 1980s was reversed in the 1990s by poor Federal policies and rampantcorruption.. This phenomenon has been referred to as the "Poverty Bomb. The government of Pakistan has prepared an "Interim Poverty reduction Strategy Paper" that suggest guidelinesto reduce poverty in the country. According to the world bank, the program has had tangiblesuccess, with the World Bank stating that poverty has fallen by 5 percent since 2000.As of 2006, Pakistan's Human Development Index is 0.539, higher than that of nearbyBangladesh (0.530), which was formerly a part of Pakistan, but lower than that of neighboring India (0.611).Incidences of poverty in Pakistan rose from 2226% in the Fiscal Year 1991 to 3235% in theFiscal Year 1999. They have subsequently fallen to 25-28% according to the reports of theWorld Bank and UN Development Program reports.These reports contradict the claims made by the Government of Pakistan that the poverty rates are only 23.1%.Poverty has remained stagnant in the 1990s. National poverty head-count rate changed from29.3 percent in 1993. 94 to 32.2 percent in 1998-99 according to calculations based on thecalorie-based poverty line used by the Federal Bureau of Statistics (FBS), and from 28.6 percent to 32.6 percent over the same period (head-count in 1990-91 was 34 percent)according to calculations based on the basic needbased poverty line used by the World Bank.While urban poverty has fallen, rural poverty has shown little improvement between 1990-91and 1998-99 according to either calculation, which implies a widening of the rural-urban gapover the 1990s. This is of particular concern because 71 percent of Pakistanis live in ruralareas. The incidence of rural poverty is closely associated with lack of ownership of agricultural land. The poor are also less able to diversify their agricultural production and arethus more susceptible to economic shocks. As in other South Asian countries, large familysizes, low level of educational attainment and outcomes in health constrain the poors abilityto get out of poverty. Gender differences remain substantial in all measurable outcomes, particularly in education and health. TRENDS IN POVERTY AFTER 1990/91 Assessing trends in poverty after 1990/91 is difficult because no data on the distribution of household consumption (or income) are available at this time. In the three-year period from1990/91 to 1993/94, the annual rate of increase of private per capita consumption in realterms was about 3 percent according to the national accounts. If the household distribution of consumption had remained unchanged after 1990/91, growth of private per capitaconsumption at this rate would have resulted in a decline in poverty (as per the

previousreference poverty line). Poverty incidence could have declined quite a bit, because in 1990/91there were many households below but in the vicinity of the poverty line. The limited dataavailable on wages of unskilled workers suggest that these wages may have increasedsomewhat, in real terms but not significantly, after 1990/91; in fact, wages of unskilledconstruction workers in Karachi appear to have declined (World Bank 1995). However, it isdifficult to hypothesize that income distribution since 1990/91 remained unchanged.The geographic disaggregation of consumption poverty estimates is constrained by therelatively small sample size and design of existing household surveys. Disaggregation is possible at the provincial level, and for urban and rural areas within each province for 1990/91 and 1991. It is also possible to disaggregate the estimates for rural Punjab, whichaccount for well over half of all rural observations, into "south" and "north". The relevantestimates of poverty incidence based on the reference poverty line are presented in Table 2.5from the two most recent surveys namely, the HIES 1990/91 and the Pakistan IntegratedHousehold Surveys (PIHS) 1991 (World Bank 1995). Nationwide, the estimates of poverty incidence from the HIES and the PIHS are close (34 percent and 31.6 percent, respectively), and they show higher poverty in rural areas, althoughthe difference is less for PIHS estimates. About 74 percent of the poor live in rural areas.Punjab as a whole has considerably more poverty than Sindh. Rural South Punjab has anextremely high incidence of poverty of close to 50 percent. This is much higher than theincidence of poverty in rural North Punjab (26&shyp;32 percent), and in rural Sindh as well(31& 36 percent). Depending on the survey used, the incidence of poverty in rural NorthPunjab is either about the same (HIES) or much lower (PIHS) than the incidence of povertyin rural Sindh. Estimates for the two smaller provinces show large inconsistencies between the two sources.The HIES shows NWFP as being poorer than the national average with 40 percent povertyincidence, while the PIHS yields an estimate of just 20 percent. The reverse is true for Balochistan, with the HIES showing a very low poverty incidence of 22 percent, while thePIHS yields an estimate of 41 percent. Further research is needed to ascertain the povertyrankings of these provinces between themselves and relative to the other provinces.In another study , estimates of poverty (rural and urban) have been made for Pakistan as awhole and for various provinces. These estimates are based on different poverty lines for theyears 1984/85, 1987/88, and 1990/91. Because of a lower poverty line, the percentage of poor people is much lower than in the World Bank estimation. Also, changes in the incidenceof poverty over time are different between the two sets of estimates. In the World Bank estimates, there is a consistent decline in the incidence of poverty for Pakistan as a whole between 1984/85 and 1990/91. In the Naseem et al. study, there is a decline in the incidenceof poverty between 1984/85 and 1987/88, following a similar trend as in the World Bank study; but between 1987/88 and 1990/91, decline continues until 1990/91 according to theWorld Bank, whereas in the Naseem et al. study, there is an increase in the incidence of poverty between 1987/88 and 1990/91.As between regions, there are also differences in the movement over time in the incidence of poverty. While it declined consistently in Punjab and Balochistan, there is an increase in theincidence of poverty over time in two other provinces. This is true not only for all overall poverty indexes, but also for the rural and urban areas separately. Poverty in Pakistan 1984-85 to 1990-91

CHARACTERISTICS OF THE POOR An attempt is made in to relate the incidence of poverty to the employment profile as well asto an asset profile of the households. All households are classified into four broad categories:agricultural, wage earners outside agriculture, self-employed outside agriculture, and aresidual "other". Agricultural households were further classified by their access to land:owner cultivators, tenants, and agricultural laborers. Nonagricultural wage earners wereclassified into "white collar," skilled/semi-skilled, and casual/manual workers. White collar workers were mainly employed in regular and secure jobs in the formal sector. Theskilled/semi-skilled category included production workers and tradesmen such as plumbersand electricians. Casual/manual workers were involved in largely unskilled and casuallaboring jobs with low rates of pay and insecure employment. The self-employed wereclassified by the asset value of their enterprises.Poverty headcounts correspond well with level of asset holdings within both the wage-earner and self-employed groups. White collar workers have the lowest incidence of poverty (22.1 percent) among the wage earners, which is very close to that of the self-employed with assetsworth Rs 10,000 or more. The skilled/semi-skilled workers have a higher incidence (28.1 percent), and casual/manual laborers higher still (38.3 percent). The self-employed are aneven more diverse category, within which ownership of capital appears to make all thedifference, though there are probably other correlated factors at work including humancapital. Those with assets valued at under Rs 1,000 had the highest incidence of povertyamong all groups (51.2 percent). This group, which comprises about 9 percent of the urbansample, are worse off than even casual laborers. The results indicate the importance of bothhuman and physical capital in determining the incidence of poverty.In the rural sample, 64 percent of the households are classified as agriculturists, with owner cultivators as the largest group (36.6 percent). Tenants, with 13.6 percent of the rural sample,have a high incidence (43.8 percent). Agricultural laborers, who constituted 7 percent of therural sample, were even worse off. Among the nonagricultural rural households, casualworkers have the highest incidence (45.1 percent) as do self-employed with less than Rs1,000 in assets (46.3 percent). The incidence of poverty among wage earner and self-employed households is remarkably similar in urban and rural areas. PERFORMANCE DURING THE LAST FOUR YEARS Pakistans growth performance over the last four years is enviable in many respects.

Soundmacroeconomic policies and implementation of structural reforms in almost all sectors of theeconomy have transformed Pakistan into a stable and resurgent economy in recent years. Thereal GDP has grown at an average rate of over 7.5 percent per annum during the last threeyears (2003/04 to 2005/06). With population growing at an average rate of 1.9 percent per annum, the real per capita income has grown at an average rate of 5.6 percent per annum.The strong economic growth is bound to create employment opportunities and thereforereduce unemployment. The evidence provided by the Labor Force Survey 2005 (First twoquarters) clearly supports the fact that economic growth has created employmentopportunities. Since 2003-04 and until the first half of 2005-06, 5.82 million new jobs have been created as against an average job creation of 1.0 1.2 million per annum. Consequently,unemployment rate which stood at 8.3 percent in 2001-02 declined to 7.7 percent in 2003-04and stood at 6.5 percent during July December 2005. The rising pace of job creation is bound to increase the income levels of the people.In recent years the role of remittances in reducing poverty has been widely acknowledged.Remittances allow families to maintain or increase expenditure on basic consumption,housing, education, and small-business formation. Total remittances inflows since 2001-02and until 2005-06 have amounted over $ 19 billion or Rs.1129 billion. Such a massive inflowof remittances particularly towards the rural or semi-urban areas of Pakistan must havehelped loosen the budget constraints of their recipients, allowing them to increaseconsumption of both durables and non-durables, on human capital accumulation (through both education and health care), and on real estate. To the extent that the poorer sections of society depend on remittances for their basic consumption needs, increased flow of remittances would be associated with reduction in poverty.Although, growth is necessary but it is not sufficient to make any significant dent to poverty.Realizing this fact the government had launched a directed program under the title of PovertyRelated and Social Sector Program some five years ago. Over the last five years thegovernment has spent Rs.1332 billion on poverty-related and social sector program to cater to the needs of poor and vulnerable sections of the society. Such a huge spending on targeted program is bound to make a significant dent to poverty.The latest estimate of inflation - adjusted poverty line is Rs.878.64 per adult equivalent per month up from Rs.723.40 in 2001. Headcount ratio, i.e., percentage of population living below the poverty line has fallen from 34.46 percent in 2001 to 23.9 percent in 2004-05, adecline of 10.6 percentage points. In absolute numbers the count of poor persons has fallenfrom 49.23 million in 2001 to 36.45 million in 2004-05. The percentage of population living below the poverty line in rural areas has declined from 39.26 percent to 28.10 percent whilethose in urban areas, has declined from 22.69 percent 14.9 percent. In other words, rural poverty has declined by 11.16 percentage points and urban poverty is reduced by 7.79 percentage points. Consumption inequality increased marginally during the period. Thesefindings are consistent with the developments on economic scene that have taken place inPakistan since 2000-01. A strong growth in economy, rise in per capita income, a large inflowof remittances and massive spending on poverty-related and social sector programs wereexpected to reduce poverty in Pakistan. COMPARISONSPoverty Status 2001 and 2004-05: Survey Evidence

Table 1 gives a comparative snapshot of poverty status during 2001 and 2005. The latestestimate of inflation adjusted poverty line is Rs.878.64 per adult equivalent per month upfrom Rs.723.40 in 2001. Headcount ratio, i.e., percentage of population living below the poverty line has fallen from 34.46 percent in 2001 to 23.9 percent in 2004-05, a decline of 10.6 percentage points. In absolute numbers the count of poor persons has fallen from 49.23million in 2001 to 36.45 million in 2004-05. The percentage of population living below the poverty line in rural areas has declined from 39.26 percent to 28.10 percent while those inurban areas, has declined from 22.69 percent 14.9 percent. In other words, rural poverty hasdeclined by 11.16 percentage points and urban poverty is reduced by 7.79 percentage points.The other two indicators, poverty gap and severity of poverty are aggregate measures of spread of the poor below the poverty line, i.e., they aggregate the distance (proximity or remoteness) of all poor individuals from the poverty line. A lower value indicates that most of the poor are bunched around the poverty line. In line with the improvement in headcount, both the poverty gap and severity of poverty has also declined substantially in the country.These findings are consistent with the developments on economic scene that have taken placesince 2000- 01. A strong growth in economy, rise in per capita income, a large inflow of remittances and massive spending on poverty-related and social sector programs wereexpected to reduce poverty in Pakistan. Table 1: Poverty Indicators 2001 and 2004-05. The estimation of poverty line enables the policy makers to further identify and group the population into various poverty bands such as extremely poor, vulnerable and non-poor etc.Table 2 presents a comparative profile of 2001 and 2004-05 for the six groups. While the percentage of population classified as extremely poor remain almost identical in the two periods, the proportion of ultra poor and poor have declined appreciably. At the higher end,the percentage of quasi non-poor and non-poor in the economy increased notably. Table 2: Comparative Poverty Profile 2001 and 2004-05Percentage of Population Detailed analysis of the consumption patterns of the population grouped by quintiles providesstrong evidence in support of the observed reduction in poverty levels between 2001 and2004-05. Table 3 compares mean and median of real monthly consumption expenditure per adult equivalent of the 2 periods. Overall, the growth in real mean expenditure of the population from Rs.1004 to Rs.1171 is 16.6 percent. The growth in real mean expenditure of top 20% percent population at 22 percent is nearly 2 times that of the bottom 20%. Thecloseness of mean and median values across the bottom 0% of the population indicates thatconsumption expenditures are bell-shaped normally distributed around the mean and medianof each quintiles. Only the top 20% of the population exhibit greater skewness inconsumption behavior as mean and median consumption expenditures are different.

Table 3: Consumption Expenditure between PIHS 2000-01 and PSLM 2004-05 at the Pricesof 2001. Comparing the share of major food and non-food items in total expenditure across the 2 points in time provides another perspective on the stability of consumption behavior andreliability of the data. Table 4 gives the percentage expenditure share of major items in themonthly per adult equivalent expenditure. Notable increase in shares between the two periodsis observed in transport category and other miscellaneous expenditure, e.g., email, internetetc. The share of medical expenses and education record a marginal decline from 2001 level.In case of education, this may reflect substitution by households of own expenditure with that provided by the government via up scaling and better targeting of expenditures on educationin PRSP. Table 4: Percentage of per adult equivalent monthly consumption expenditure by commodity group.

Table 5 compares the growth rate in per adult equivalent monthly consumption expenditureon few commodity groups of bottom 20% with the top 20% of the population for the year 2001 and 2004-05. Except for the negative growth in medical care expenses of the richest20%, all other commodity groups indicate a lower and in some cases, i.e., education,clothing, and personal care, a negative growth rate for the poorest 20% during the period. Amarginal negative growth in clothing and items of personal care may reflect cheaper importsfrom China, while in case of education, increased expenditure on education by thegovernment may have substituted household own expenditure on education. The highestgrowth (50.4 %) for the poorest 20% occurred in the transport and traveling expenses. Table 5: Comparison of per adult equivalent monthly consumption expenditure between PIHS 2000-01 and HIES 2004-05 at 2001 prices by commodity group and quintile.

GOVERNMENTS POVERTY ALLEVIATION POLICIES Eradication of poverty and reduction in inequalities of income and non-income indicators isone of the crucial pillars of Vision 2030. A society that is educated, healthy, and is mostlynot-poor and equitable, will be resilient to shocks, and would be the best basis and guaranteeof a well-functioning knowledge economy.Another important aspect of the poverty reduction strategy is employment generation for the poor. In this regard, expenditures on roads and highways, the most labor-intensive sector,constitute the major share in community services. These expenditures are projected to rise byalmost seven times in 2006-07 as compared to 2001-02, representing an average growth rateof more than 50 percent.The governments commitment towards sustained expenditures on propoor sectors isreflected in the Fiscal Responsibility and Debt Limitation Act promulgated in 2005. Under this law, social and poverty related expenditures are not to be reduced below 4.5 percent of the GDP in any given year and budgetary allocations to health and education will be doubledfrom the existing level in terms of percentage of Gross Domestic Product during the next tenyears. Expenditures on pro-poor sectors in 2004-05, at 4.85 percent of GDP was well abovethe requirement under this Law. Pro-poor expenditure is projected to be 5.02 percent of GDPin 2005-06 and 5.25 percent of GDP in 2006-07.The strategy going forward as enshrined in the Poverty Reduction Strategy Paper for themedium-term (2006/07 2008/09) aims at forging a broad-based alliance with civil society inthe quest to alleviate poverty and accelerate development. The complex and multi-dimensional nature of poverty warrants that strategies for poverty reduction encompass plansfor rapid pro-poor economic growth, sound macroeconomic management, structural reforms,and social inclusion. The strategy is being enriched by the on-going process of dialogue withcivil society and the poor.The strategy places considerable emphasis on taking advantage of the opportunities offered by globalization. Pakistans Poverty Reduction Strategy is underpinned by the followingconsiderations: Continuing to ensure macro-economic stability and sustained high and broadbasedeconomic growth by taking advantage of the opportunities offered by globalization,while at the same time unleashing the potential of domestic commerce, reducinginequalities and maximizing employment generation Directing public policy debate towards the needs of the poor Bringing about an effective transformation of society, by forging partnerships andalliances with civil society and the private sector

Understanding the nature of poverty, and using that as a guide for all public actions Empowering the people, especially the women and the most deprived, by increasingaccess to factors of production, particularly land and credit.Given the significant resources required to fund the Poverty Reduction Strategy (PRS), theGovernment has prioritized the PRS through the Medium Term Expenditure Framework (MTEF), which has been used to inform the budget.Four pillared strategy for poverty reduction in Pakistan: 1.Macroeconomic Stabilization and resumption of growth: The first pillar of this strategy is macroeconomic stabilization and resumption of growth. By1999, the public debt of Pakistan had become unsustainable, public debt servicing preemptedmore than half of the revenues, and external and domestic debt exceeded the countrys GDP.The country had faced a full payments crisis in 1998, investor confidence in the economy wasat lowest ebb, links with international financial community were disrupted, and the reserveswere so low that the country was at the brink of default. This situation had to be rectified anda credible economic program had to be put in place to get the economy out of the crisis and back on the track. The results of this effort three years later are obvious to every one.Inflation is less than 4 percent, fiscal deficit has been brought down to 5 percent, externaldebt indicators have improved, public debt servicing has declined, domestic interest rateshave reached all time low, exchange rate is stable and appreciating, exports are growing at annual rate of 16 percent, tax revenues have exceeded their targets, and foreign reserves aretouching about $ 12 billion or almost a years imports. This all round and broad basedimprovement in macroeconomic indicators has led to up-gradation of countrys credit rating.Macroeconomic stabilization is the foundation upon which resumption of economic growthcan take place. 2.Improved Governance: The second pillar of the strategy is improved governance. The key ingredient of thegovernance agenda is the devolution plan whereby administrative, functional and financialresponsibilities for delivery of social services are delegated to the district governments.Demand-driven development projects will be planned and executed by the direct beneficiaries rather than thrust upon them by the government agencies working from theProvincial and Federal headquarters in splendid isolation. The other practices which have been adopted are accountability, transparency, predictability and level playing field for all the players. Discretionary powers have been curtailed and rules and regulations are enforced.Merit-based appointments have become the norm and even Assistant Sub Inspectors of Policeare selected through Public Service Commission. NoSRO has been issued to favor one single individual or group to the disadvantage of others.Civil Service, Police and Judicial reforms have been initiated but will take a long time tocome to fruition. 3.Structural Reforms:

Structural reforms form the third pillar of the strategy. Broad based reforms in taxadministration, trade liberalization, financial sector and privatization form the core. In taxadministration, Central Board of Revenue is being restructured, tax net and tax base are beingwidened and the direct contact between tax collector and tax payer is being eliminated. Tradeliberalization has resulted in tariff rationalization, removal of various restrictions fromexports and imports and deregulation. Financial sector reforms have already resulted in asound and healthy banking system, a buoyant stock market, a growing corporate debt market,a streamlined non banking financial institution structure and strengthening of supervision andregulation. Privatization process has been provided a legal framework under whichtransactions take place in an open and transparent manner. Public Corporations and bankswere sold during the last three years and Rs 36 billion realized as the proceeds. Unlike the past, none of the transaction was challenged in the courts of law and the market confidence inthe process is quite high. Those who argue that we are selling blue chip public sector companies should realize that these companies have been causing an annual budgetary loss of Rs 100 billion. Is it justifiable to keep 100,000 persons employed in these Corporations whilethe rest of the population suffers from lack of budgetary resources for basic necessities suchas education, health, drinking water etc.? 4.Poverty Targeted Interventions: The fourth pillar of the strategy is poverty targeted interventions. The prominent among themare Education Sector Reforms, Health for all, Population planning, Zakat, Khushali programfor employment generation and works program, Food Support program and Khushali Bank.While Education, health and population planning cover the entire population the other interventions are targeted at the poor. Zakat program has been revamped to provide financialgrants to the beneficiaries to start small enterprise or other income generating activities. FoodSupport program is aimed at subsidized wheat flour to those below a certain threshold of monthly income. Khushali program is allocated to the local governments to create andimprove physical infrastructure and also generate employment. Khushali Bank is a microfinance institution which provides small loans to the poor under supervised group guaranteescheme. All these initiatives have begun to take shape in the last one or two years and it willtake some time before they start yielding dividends.The PRSP process has been completely aligned with the Millennium Development Goals(MDGs) and the Medium Term Development Framework (MTDF). While the MTDF provides a framework for translating the VISION 2030 into action during the period 2005-10; its emphasis is on sustained long term growth. The PRSP on the other hand presents thestrategy to ensure that the growth is broad-based and leads to effective poverty reduction. Thedetailed policies related to growth promotion are presented in the MTDF, while the PRSPtakes those interventions as given and focuses on the package of interventions required toensure that the sustained high growth is translated into effective poverty reduction; and the poor and marginalized are protected. In this regard, the following sub-strategies will be at thecore of the Poverty Reduction Strategy of the Government. They will form part of the PRSP-2 currently under finalization, which will become operational from next fiscal year. 1. Maximizing the Gains from Globalization

Globalization is a multi-dimensional process which impacts all aspects of life, be iteconomic, social, cultural, or political. For globalization to lead to poverty reduction,domestic enterprises need to be increasingly competitive in the international market. Thisrequires increased efficiency and upgrading skills of the labour force to improve its level of human capital. It requires the enforcement of quality control and standards. For domesticenterprises to be competitive in the global economy, good investment climate is essential, inwhich firms can start up, grow and prosper. 2. Trade Liberalization and Export Promotion The Government has implemented a comprehensive program of trade reforms graduallymoving the economy away from protectionism towards greater trade openness and globaleconomic integration. The Government has been taking a number of defensive trademeasures in the context of WTO to protect the domestic industry against the dumping of cheap and illegal imports.Sustained export performance is a key priority. Towards this end, the Government is makingefforts in the areas of trade facilitation, WTO related issues, export promotion anddiversification, and extension of export promotion zones and industrial clusters. TheGovernments policy will focus on measures to sustain textile exports and promote other sectors that are not yet capable of exporting. The Government is committed to liberalize andderegulate Pakistans trade and widen the export base through further strengthening of industrial activity and strong institutional supply side measures. The trade policy continues tofocus on value addition for sustainable growth in export earnings. 3. Employment Generation and Poverty Reduction Economic growth has been quite robust during the last five years and particularly in thetenure of PRSP-I (2003-06). The growth momentum is likely to continue in the medium-term. In order to maximize the poverty reduction impact of growth it needs to be aligned withan employment strategy that can ensure that growth is broad-based.Certain sectors of the economy are critical for sustained employment generation and growthleading to poverty reduction and improved income distribution. These sectors include, in particular: Agriculture (agro-industry, agri-business and livestock) and water sector development;Small and Medium Enterprises (SMEs); andHousing and construction sector. Nearly 67 percent of the people live in the rural areas and majority of them are dependent onagriculture for their livelihood. Therefore, agriculture will continue to receive highestattention. The rural sector also comprises a large and expanding non-farm sector whereemployment generation is crucial. This also has the beneficial impact of strengthening thefarm and non farm linkages and enhancing growth through the multiplier effect. New jobscan be created by accelerating growth in agriculture and by increasing the area under cultivation, raising crop yields, diversification of cropping patterns, production of high valuecrops such as fruits, vegetables, flowers, etc.Livestock has high potential for job creation and income generation as well. The SME sector has an enormous employment generation potential. This extends to SMEs in both the urbanand rural areas. In order for SMEs to play their due role a comprehensive package of venturecapital, credit, liberalization of controls, technology and skill up-gradation,

marketing andmanagement advisory services is needed. The SMEs in the rural areas are best placed tocreate new job opportunities and for income generation. SMEs can easily be involved in anumber of profitable ventures such as fruit and vegetable processing, dairy and livestock,floriculture, fisheries, transportation of agriculture products and their marketing. The growthstrategy in the MTDF provides for incentives to promote the whole host of crucialrequirements identified above for the promotion of the SMEs.The housing and construction sector has received greater attention for employment creationin both the PRSP-I as well as the MTDF. It has been identified that this sector has linkageswith about 40 building material industries. Moreover, this sector helps to further support theinvestment climate through its overall impact on the economy. Given its strong backgroundand forward linkages and large employment potential effects, this sector is crucial for reducing poverty by generating job opportunities for the poor.Equitable growth requires development and implementation of policies which will positivelyimpact all segments of the society in proportion to their requirements. Employment opportunities need to be created in both rural and urban areas, farm as well as non-farm, andfor men, women and youth. 4. Micro-Finance Microfinance plays a critical role in improving the lives of the poor people. The poor usefinancial services not only for business investment in their micro-enterprises but also toinvest in health and education, to manage household emergencies, and to meet the widevariety of other liquidity needs that they encounter occasionally. Evidence from the millionsof microfinance clients around the world demonstrate that access to financial services enables poor people to increase their household income, build assets and reduce their vulnerability tothe crises that are so much a part of their daily lives.In the context of Pakistan, the use of micro-credit holds importance for both the agriculturaland non agricultural sector. The need for credit is particularly important for poor farmers.Their requirement for agricultural inputs, seeds, fertilizer, pesticide etc. tends to be cyclical asdoes their income. However the two cycles do not always coincide. Rural loans for nonagricultural purposes include such things as micro enterprises in unorganized sectors of ruraleconomy.Realizing the importance of microfinance as a tool of poverty reduction and socialmobilization, the government has accelerated its efforts to establish strong foundations of microfinance in formal sector along with extending support to the informal sector (NGOs) aswell. Khushali Bank (KB) was established as the first specialized microfinance institution in2000 and the Microfinance Institutions (MFI) Ordinance was promulgated in 2001 to providea separate regulatory framework for microfinance institutions. As a result, during the last fiveyears, four specialized microfinance banks (excluding KB) have started operation, whichincludes the First Microfinance Bank Limited (FMFBL) and Tameer Microfinance Banksworking at the national level, the Rozgar Microfinance Bank Limited (RMFBL) and Network Microfinance Banks Limited (NMFBL) which are operating at the district level. In addition,the Pakistan Poverty Alleviation Fund (PPAF) has been working since 1999 as a distributor/wholesaler of credit to the NGOs.