Incidence, Profile and Economic Determinants of Poverty in Pakistan: HIES 2005-0

[a] Department of Economics, University of Sargodha, Sargodha, Pakistan.

*Corresponding author.

Received 11 April 2012; accepted 14 June 2012

Abstract

This study estimates the incidence, profile and economic determinants of poverty in pakistan using the hies data 2005-06. The results show that headcount ratio was about 23 percent in Pakistan. Poverty incidence was more than double in rural area as compared to urban area. Decomposition of poverty into socio-economic characteristics depicts that poverty is higher in those households whose heads are illiterate or have never attended school. It decreases as the level of education increases. It is positively related with the dependency ratio. It is higher in those households who have no access to basic facilities-electricity, gas and telephone. It is the highest in those households whose head’s employment status, sector and occupation is sharecropper, construction and elementary, respectively. Household size is higher in poor families. The results of OLS multiple regression model depict that the poverty incidence is inversely related with age, education and owned land; while it is positively associated with household size. Households who receive foreign remittances or have sewing machine or live stock experience less poverty incidence than those who do not receive or have. At a policy level it is suggested that more investment and development should be focused in agro-based industries. Live stock development can give impetus to the poverty reduction derive. Free education for those who are unable to afford the expenses, with special attention to vocational education should be provided. Broad-based overseas employment strategy should be designed. Family planning should be promoted especially in poor families. Land reforms should be implemented in letter and spirit.

Key words: Poverty incidence; Dependency ratio; Education; Foreign remittances; Sewing machine; Employment sector; Occupation; Employment status; Pakistan

Ahmed Raza Cheema, Maqbool H. Sial (2012). Incidence, Profile and Economic Determinants of Poverty in Pakistan: HIES 2005-06. Management Science and Engineering, 6(2), -0. Available from URL: /index.php/mse/article/view/j.mse.1913035X20120602.3500

DOI: /10.3968/j.mse.1913035X20120602.3500

Introduction

Reducing poverty has been the main objective of policy makers, yet it has attracted more attention since the Millennium Development Goals (MDGs) have been adopted. For the reduction of poverty, its proper estimation is required. Though there are a lot of studies in Pakistan, yet they define poverty line in different ways and cover different time periods. Some studies (Naseem, 1973; Mujahid, 1978; Malik, 1988; Malik, 1991; Ali & Tahir, 1999; Cheema, 2001; Anwar & Qureshi, 2002; FBS., 2001 & 2003; Saboor, 2004; Jamal, 2005; Kakwani, 2006) employ Food Energy Intake (FEI) approach while the others (Gazdar et al., 1994; Ali, 1995; Qureshi & Arif, 2001; World Bank, 2002, 2004 & 2006) use the Cost of Basic Needs (CBN) Approach as a yardstick to estimate poverty. Some studies (Qureshi & Arif, 2001; Anwer, 2006) estimate separate poverty lines for separate HIES data while the others (Nasim, 1973; Alauddine, 1975; Malik, 1991; FBS, 2001 & 2003; Anwar & Qureshi, 2002; World Bank., 2002, 2004 & 2006; Kakwani, 2006) adjust the poverty line by a price index. Of the studies which adjust the poverty line by price index, some studies (Malik, 1988; Kemal & Amjad, 1997; Ali & Tahir, 1999; FBS., 2001 & 2003; Anwar & Qureshi, 2002) adjust it by using CPI, but some studies (World Bank, 2002, 2004 & 2006; Kakwani, 2006; Jan et al., 2008) does the same by TPI. These two price indices have their own merits and demerits. No doubt the CPI is estimated for majority of items, yet it covers only urban areas but not rural areas. Whereas the TPI is concerned, though it is estimated for both rural and urban areas, but it covers only food and fuel items but not non-food and non-fuel items. Thus, there need an index (i.e. composite price index) to be used to inflate or deflate the poverty line that covers both rural and urban areas as well as majority of items. Thus this study uses the composite price index to adjust the poverty line over time. Not only its proper estimation is necessary, but it is also essential to know what the characteristics of the poor and what the determinants of poverty are.

Source: Household Income and Expenditure Survey, 2005-06

Methodology

1.1 Poverty Line

First of all, this study estimates the poverty line by running a log-log ordinary least squares regression using the HIES data 1998-99 to make it consistent with that of Government of Pakistan. It is estimated as under:

In(Y) =a+b* ln (X) +e where Y=perequivalent consumption expenditure per month (food + non food) and X= perequivalent calorie intake per day.

This study takes consumption expenditure as a welfare indicator and employs the calorie-based approach to estimate the poverty line using the Household Income and Expenditure Survey (HIES) data collected by Federal Bureau of Statistics (FBS) for the period 1998-99. Paasche Price Index (PPI) estimated at the primary sampling unit level is used to adjust the price differentials across the regions. Different households differ in size and composition. One household may include moremale members and the other may include more female members while still the other household may include more children. Following FBS (2001) and World Bank (2002) this study uses equivalent scales which give weight 0.8 to individuals who are less than 18 years old and 1 to individuals who are equal to or greater than 18 years old to reach perequivalent so that the expenditures of households be divided by this perequivalent and in this way true welfare levels of individuals is ascertained. These scales were used because they seem very close to the reality.

Requirements of calories are not the same for adults and children as well as males and females. This study adjusts the household size using the nutrient based equivalent scales (1985) developed by Planning Commission, Government of Pakistan (2002). This study estimates poverty line by running log-log ordinary least squares regression using 2350 calories perequivalent as suggested by the Planning Commission, Government of Pakistan. In order to get poverty line for the year 2005-06, the base poverty line was inflated by composite price index which is a combination of consumer price index (CPI) for non-food and non-fuel items and Tornqvist price index (TPI) for food and fuel items. The former index was estimated by Government of Pakistan, while the latter was estimated by this study in the following way.

where W1k and w0k are budget shares of items between the two periods and p1k and p0k are prices in two periods. This index was used in Bangladesh by World Bank (2001).

Linear regressions of logarithm on perequivalent consumption expenditure were estimated on the following variables:

1n(exp) = b0 + b11n(HS) + b2FR + + b3Edu HH + b4Age HH + b5Age2 HH + b6lstk + b7SM + b8Land + b9Land2 + e

H0: b0= b1 = b2 = b3 = b4 = b5 = b6 = b7 = b8 = b9 = 0

H1: Aleast one of betas ≠ 0

Where HS stands for household size; FR stands for foreign remittances; EDUHH stands for Education level of head of household; AgeHH stands for age of head of household; Age2 HH stands for age squared of head of household; lstk stands for live stock; SM stands for Sewing machine.

2. Results and Discussion

2.1 Poverty Estimates

An important and major step in the poverty analysis is the estimation of the limit, shown in terms of the welfare indicator, beyond which the persons are to be regarded as poor. Poverty line means the average consumption expenditure essential for meeting the basic needs in terms of every methodology whether it is cost of basic needs or calorie based approach. Its role is very important in making comparisons, thus achieving the major goal of the analysis of poverty. Absolute poverty line is in fact, monetary amount adjusted for inflation and differences in regional prices. It is called absolute because it is constant over time and across regions (FBS, 2001). The poverty line of Rs. 669 was estimated which is very close to that (i.e. Rs. 670) estimated by government of Pakistan for the year 1998-99. By inflating that poverty line by the composite price index estimated by this study, the poverty line of Rs. 953.63 for the year 2005-06 is derived which is higher than that (i.e., Rs. 944.47) was estimated by government of Pakistan using consumer price index. By employing the former poverty line, poverty estimates for all of the three measures are obtained which are given in the Table 2.1.

2.2.1 Poverty Incidence by Attained Level of Education of Household Head

Education plays an imminent part in lowering the incidence of poverty. There is negative relationship between poverty incidence and educational level of head of household. The higher the level of education, the lower the incidence of poverty is and the lower the education level, the higher the poverty incidence was. It is evident from the Figure 2.1:

Figure 2.1

Incidence of Poverty by Educational Attainment of Head of Household in Pakistan, 2005-06

The figure depicts that poverty incidence is the highest in those households whose head have no education equal to about 33 percent (see Table 2.2). Households whose heads have passed primary have relatively less incidence of poverty than those households whose heads have never attended school equal to around 23 percent (see Table 2.1). Households whose heads have passed matriculation examination have relatively less poverty than those households whose heads are primary passed. Households whose heads have attained higher education (e.g., higher than 10 classes) have around four times less poverty than those household who have never attended the school. The figure also shows that households with same education level who are living in urban areas have lower poverty than those households who are living in rural areas.

2.2.2 Poverty Incidence by Literacy of Household Head

Literate and illiterate are not equal. Households with literate heads have relatively less poverty than households with illiterate head. It is evident from the Figure 2.2.

Figure 2.2

Incidence of Poverty by Literacy of Head of Household in Pakistan, 2005-06

The Figure 2.2 shows that households whose head are illiterate have higher poverty than those households whose heads are literate. Poverty in households with illiterate head is about two times of the poverty incidence among households whose head is literate (see table 3.2). It is also true in rural and urban areas. Households with illiterate head have around two times in rural and about three times in urban area more poverty than those households whose heads are literate.

2.2.3 Incidence of Poverty by Ratio of Dependency

Lower ratio of dependency plays an important role in reducing poverty. Dependency ratio is a ratio of household size to earners.

Figure 2.3

lncidence of Poverty by Dependency Ratio in Pakistan, 2005-06

The Figure 2.3 depicts that there is a positive relationship between incidence of poverty and dependency ratio. As the dependency ratio increases, poverty incidence also increases. This holds true in rural as well as in urban areas. When the ratio of dependency is 1, the poverty incidence is the lowest about 5 percent (see Table 2.2). It is the highest around 26 percent, when the ratio was greater than or equal to 3. It can also be concluded that poverty incidence is negatively related with number of earners.

2.2.4 Incidence of Poverty by Access to Electricity, Gas and Telephone

Electricity, gas and telephone also play an important role in reducing poverty. Incidence of poverty is higher in those household that do not have connection of electricity, gas and telephone than those households that have. It is equally true in rural, urban and overall Pakistan (see Figure 2.4). The incidence of poverty in households that have no connection of electricity and gas is more than double than those households which have (see Table 5.5), whereas the households that have not telephone connections have poverty incidence more than three times than the households that have (see Table 2.2)

Figure 2.4

Lncidence of Poverty by Basic Facility of Housing in Pakistan, 2005-06

2.2.5 Poverty Incidence by Employment Status, Occupation and Industry Employment of Household Head

Households can fall into or escape from poverty depending on earnings from employment. It is therefore, essential to find the relationship between poverty incidence and employment status of the household head. Further it is also useful to find the relationship between incidence of poverty and occupation as well as employment sector of the household head. The Table 2.3 shows the headcount ratio by employment status, occupation and employment sector of household head.

Because the rural areas experiences more severely poverty, so more investment and development should be focused in agro-based industries. Live stock serves as social security for the chronically poor households, Live stock development can give impetus to the poverty reduction derive. Public works programs should be initiated, particularly in rural areas to provide social protection to the poor. Effective safety nets for the poor should be set up and developed. Education is very important factor for the reduction of poverty. Free education for those who are unable to afford the expenses, with special attention to vocational education should be provided. Illiteracy should be reduced. Broad-based overseas employment strategy should be designed, so that foreign remittances could be increased. It would have dual effect; in one place it will improve balance of payment and on the other place it will result in reduction in poverty and inequality. For the reduction of size of household, family planning should be promoted especially in poor families. It has been found that household size gets smaller and smaller as the household gets richer and richer. Land also play important role to reduce poverty. Thus land reforms should be implemented in letter and spirit.

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