Income Inequality: Elite Capture in Pakistan

A recent United Nations report on inequality reveals that the richest 1% in Pakistan take 9% of the national income.  A quick comparison with other South Asian nations shows that 9% income share for the top 1% in Pakistan is lower than 15.8% in Bangladesh and 21.4% in India. These inequalities result mainly from a phenomenon known as "elite capture" that allows a privileged few to take away a disproportionately large slice of public resources such as public funds and land for their benefit. 

Share of Income of Richest 1% in South Asia


Elite Capture:

Elite capture, a global phenomenon,  is a form of corruption. It describes how public resources are exploited by a few privileged individuals and groups to the detriment of the larger population. 

A recently published report by the United Nations Development Program (UNDP) has found that the elite capture in Pakistan adds up to an estimated $17.4 billion - roughly 6% of the country's economy. 

Pakistan's most privileged groups include the corporate sectorfeudal landlordspoliticians and the  military. UN Development Program's NHDR for Pakistan, released last week, focused on issues of inequality in the country of 220 million people. 

Ms. Kanni Wignaraja, assistant secretary-general and regional chief of the UNDP, told Aljazeera that Pakistani leaders have taken the findings of the report “right on” and pledged to focus on prescriptive action. “My hope is that there is strong intent to review things like the current tax and subsidy policies, to look at land and capital access", she added. 

Inequality in Pakistan. Source: UNDP

Income Inequality:

The richest 1% of Pakistanis take 9% of the national income, according to the UNDP report titled "The three Ps of inequality: Power, People, and Policy". It was released on April 6, 2021. Comparison of income inequality in South Asia reveals that the richest 1% in Bangladesh and India claim 15.8% and 21.4% of national income respectively.

In addition to income inequality, the UNDP report describes the inequality of opportunity in terms of access to services, work with dignity and accessibility. It is based on exhaustive statistical analysis at national and provincial levels, and includes new inequality indices for child development, youth, labor and gender. Qualitative research, through focus groups with marginalized communities, has also been undertaken, and the NHDR 2020 Inequality Perception Survey conducted. The NHDR 2020 has been guided by a diverse panel of Advisory Council members, including policy makers, development practitioners, academics, and UN representatives.

Savings, Investments and Exports:

It is generally accepted that the rich save a much bigger portion of income than the middle class and the poor. The effect is strongest among those in the top quintile of the lifetime earnings distribution—they have substantially greater wealth relative to their earnings than those in the bottom 80% of the distribution, according to published research

Lower inequality in Pakistan is reflected in its abysmal domestic savings and investment rate of around 10% of GDP. It shows in Pakistan's lower economic growth rate compared to Bangladesh and India. The distribution of national income in a country is a key socioeconomic variable with broad economic and societal implications. Income inequality and wealth inequality are related because the flow of income determines savings and investments, which in turn determine GDP growth and accumulation of wealth. An economic model offered by Galor and Zeira finds that the effect of rising inequality on GDP per capita is negative in relatively rich countries but positive in poor countries like Pakistan.
Investment as Percentage of GDP Source: State Bank of Pakistan 
 
While Pakistan's per capita income more than doubled from $500 to $1,000 in the ten years 2000 to 2010, the growth has slowed to less than 30% from 2010 to 2020. Faster GDP growth in the decade of 2000-2010 was partly the result of significant increase in Pakistan's savings and investment rates. Meanwhile, rising worker remittances from overseas Pakistanis have been boosting Pakistan national savings rate and helping reduce current account deficits
 
Savings Rate in Pakistan. Source: Dawn


Pakistan's exports doubled from $10 billion to $20 billion in years 2000-2010. In the last decade 2010-2020, the nation's exports have grown only about 25% to $25 billion. Exports have declined in terms of percentage of the country's GDP from 13% to 10% in the most recent decade. 

Pakistan FDI inflows have significantly lagged behind those of the rest of South Asia.

FDI Inflows in Pakistan. Source: World Bank

Pakistan saw rapid economic growth in the 1960s in spite of low domestic savings rate. This can be explained by foreign development aid of as much as 10% of GDP that Pakistan received in that decade. . 

Foreign Aid to Pakistan as Percent of GDP Source: World Bank
 
Summary:
The richest 1% of Pakistanis take away 9% of the national income. Inequality in Pakistan has many dimensions beyond income. The rich enjoy greater access to education, healthcare, financial services, employment and business opportunities. Corporations, feudal landowners, politicians and the military are the most privileged groups with the best opportunities to own businesses, financial assets, farmland and real estate. They capture an estimated $17.4 billion - roughly 6% of the country's economy. Ms. Kanni Wignaraja, assistant secretary-general and regional chief of the UNDP, told Aljazeera that Pakistani leaders have taken the findings of the report “right on” and pledged to focus on prescriptive action. “My hope is that there is strong intent to review things like the current tax and subsidy policies, to look at land and capital access", she added. The policymakers in Pakistan should consider the negative economic implications of any such moves, particularly on savings and investments in the country.  

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Comment by Riaz Haq on April 20, 2021 at 11:19am

ELITE political bargains are informal, relatively stable agreements among national elites about the pecking order of different ethnicities and classes (in our case state institutions too) in accessing economic privileges. This includes their relative access to economic resources and opportunities (eg government expenditures, subsidies and licences, access to state and private capital) and tax burdens.

https://www.dawn.com/news/1619278

Conservative estimates show that the privileges add up annually to nearly Rs370 billion for landed elites, Rs725bn for the corporate sector, Rs600bn for traders and Rs250bn for military elites. This is a total of nearly Rs2 trillion annually for a tiny sliver of the population. In contrast, Pakistan spent only around Rs1.3tr annually in recent years on education, health and other social expenditures to cater to the needs of its masses. Even a chunk of this is siphoned off by the rich.

Comment by Riaz Haq on April 20, 2021 at 11:38am

Inequality and relative saving rates
at the top


by Philipp Lieberknecht, Philip Vermeulen

https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2204.en.pdf

The distribution of national income and wealth are key economic variables with broad economic and societal implications. The recent development of the World Wealth and Income
Database (WID), a large-scale database featuring historical cross-country inequality measures,
allows for a long-term analysis of the relationship between income and wealth inequality. Income inequality and wealth inequality are related because the flow of income determines saving,
which in turn determines the accumulated stock of wealth. A look at French and US data, two
countries with the longest time span of data available, shows that in recent decades the share
of income that goes to the top 1% or the top 10% has been rising. Simultaneously, the share
of wealth owned by the top 1% and top 10% has been rising as well. Remarkably, over the last
century, the top shares of income and wealth have been evolving in broadly similar ways. This
paper provides an analysis of the strong co-movement of income and wealth inequality across
time.

Comment by Riaz Haq on April 20, 2021 at 12:04pm

From World Inequality Database


Top 1% national income share

https://wid.world/world/#sptinc_p99p100_z/WO;PK;IN;BD/last/eu/k/p/y...


World: 19/1%

Pakistan 18.3%

India 21.4%

Bangladesh 15.8%

Top 10% national income share


https://wid.world/world/#sptinc_p90p100_z/WO;PK;IN;BD/last/eu/k/p/y...

World 51.6%

Pakistan 44.6%

India 56.1%

Bangladesh 41.7%

Bottom 40% national income share

https://wid.world/world/#sptinc_p0p40_z/WO;PK;IN;BD/last/eu/k/p/yea...

World 5.9%

Pakistan 13.8%

India 10.4%

Bangladesh 14.1%

Comment by Riaz Haq on April 20, 2021 at 6:38pm

Wealth of India's richest 1% more than 4-times of total for 70% poorest: Oxfam


https://economictimes.indiatimes.com/news/economy/indicators/wealth...

India's richest 1 per cent hold more than four-times the wealth held by 953 million people who make up for the bottom 70 per cent of the country's population, while the total wealth of all Indian billionaires is more than the full-year budget, a new study said on Monday.

Releasing the study 'Time to Care' ahead of the 50th Annual Meeting of the World Economic Forum (WEF), rights group Oxfam also said the world's 2,153 billionaires have more wealth than the 4.6 billion people who make up 60 per cent of the planet's population.

The report flagged that global inequality is shockingly entrenched and vast and the number of billionaires has doubled in the last decade, despite their combined wealth having declined in the last year.

"The gap between rich and poor can't be resolved without deliberate inequality-busting policies, and too few governments are committed to these," said Oxfam India CEO Amitabh Behar, who is here to represent the Oxfam confederation this yea ..

Comment by Riaz Haq on April 21, 2021 at 10:57am

The United States had Rockefellers, JP Morgans, Carnegies, Fords and others who built American business and industry. Japan has Hitachi, Honda, Mitsubishi and other big names credited with building its business and industry. South Korea is home to recognized global giants like Samsung, Hyundai and others. A handful of individuals and families, aided by their governments, have played outsized roles in industrialization and economic growth in most major economies.

https://www.riazhaq.com/2018/05/history-of-pakistans-business-and.html

The captains of business and industry neighboring India are also a few known large families including Ambanis, Birlas, Hindujas, Jindals, Mittals, Tatas, and a few others. They have contributed to economic growth in their country.


Pakistan had the so-called 22 families which began the process of industrialization in 1960s but they were devastated by the 1971 war. What was left of their business and industry was nationalized by the PPP government led by Zulfikar Ali Bhutto in 1970s. Many of these families have since recovered and rebuilt and several new ones have now emerged. Their continued growth and Pakistan's economic progress depend largely on the continuity of business-friendly government policies in future.

Comment by Riaz Haq on April 22, 2021 at 4:40pm

Effect of Workers Remittances on Private Savings Behavior in Pakistan


by Rahila Munir, Maqbool Sial, Ghulam Sarwar and Samina Shaheen


https://www.researchgate.net/publication/227368264_Effect_of_Worker...


The worker remittances are an important component of national savings, increased enormously at the rate of 30 percent per annum during the last eight years (2000-2007) and be around $ 5.5 billion by June, 2007. With higher increase in worker remittances and rate of return on deposits the level of national savings would increase more.

Comment by Riaz Haq on April 22, 2021 at 5:27pm

The rise and rise of remittances
Mohiuddin Aazim

https://www.dawn.com/news/1602001


Remittances remained above the $2 billion mark in December 2020 for the seventh month in a row. In the first half of 2020-21, inflows totalled $14.2bn. The amount was about 25 per cent higher than $11.37bn received in July-Dec 2019.

----------------

But if a reasonable portion of remittances goes towards savings and investment, it will be more helpful and reduce our dependence on external borrowings.

The PTI government is trying to promote such savings and investment by facilitating and incentivising overseas Pakistanis to use their remittances’ accounts for investing in Pakistan’s debt, equity and mortgage markets. Long-term success of this policy, however, depends on close coordination of fiscal and monetary authorities and overall political stability.

Comment by Riaz Haq on May 11, 2021 at 9:11am

How Much Inequality Is Necessary for Growth?
by Fuad Hasanov and Oded Izraeli


https://hbr.org/2012/01/how-much-inequality-is-necessary-for-growth


As the Occupy Wall Street protesters have pointed out, the strong global economic growth of the past few decades (not counting the Great Recession) left a lot of people behind. For example, the U.S. Congressional Budget Office recently reported that from 1979 to 2007 the top 1% of earners more than doubled their share of the nation’s after-tax income.

For decades economists have wondered whether inequality is bad or good for long-term growth. On one hand, entrenched inequality threatens to create an underclass whose members’ inadequate education and low skills leave them with poor prospects for full participation in the economy as earners or consumers. It can cause political instability and thus poses risks to investment and growth. On the other hand, some argue that because inequality puts more resources into the hands of capitalists (as opposed to workers), it promotes savings and investment and catalyzes growth.

To try to answer this question, we examined economic data from 48 U.S. states for the census years from 1960 to 2000. We discovered new evidence that inequality and growth are entwined in complex ways and found that overall, both high and low levels of inequality diminish growth.

We looked at the data through a number of lenses, each based on a different statistical model. Using one lens, we found a hump-shaped relationship between inequality and growth. Raise inequality above the average level in 2000, and growth declines; lower it, and the same thing happens. According to this analysis, inequality at that time was at a sort of optimum level, for lack of a better word.

Using another lens, we found a similarly hump-shaped relationship, but with the hump in a different place. From this perspective, the 2000 level of inequality is good for growth, but a higher level would, to a certain degree, be even better: A moderate rise in inequality—by one standard deviation—would increase annual growth by about 0.6 percentage points.

What are the long-term implications? The gains from rises in inequality are murky: Although our findings suggest that modest increases can generate growth, other data indicate that heightened inequality shortens growth spells and may halt growth. Reducing inequality, though, has clear benefits over time: It strengthens people’s sense that society is fair, improves social cohesion and mobility, and broadens support for growth initiatives. Policies that aim for growth but ignore inequality may ultimately be self-defeating, then, whereas policies that decrease inequality by, say, boosting employment and education have beneficial effects on the human capital that modern economies increasingly need.

Comment by Riaz Haq on May 18, 2021 at 6:50pm

Experts: #Pakistan #economy on solid growth path. Analysts say #GDP growth rate of 5-6% per annum is going to be a ‘new normal’ in next five years. Fed govt will spend as much as PKR 900 billion ($6 billion) for #infrastructure development next FY 21-22. https://tribune.com.pk/story/2300178/economy-on-solid-growth-path-e...

Top government officials, analysts and corporate leaders repose trust in the growing economy and said GDP growth rate of 5-6% per annum is going to be a “new normal” in the next five years amid strong economic indicators of the country, the news- paper said.

"Yes, we have a potential to grow at much higher rate in coming years. The State Bank of Pakistan projects 3% GDP growth in financial year 2020-21 and 4% in 2021-22," State Bank of Pakistan (SBP) Governor Dr Reza Baqir told the daily during an event in Dubai last week.

The newspaper quoted newly appointed Finance Minister Shaukat Tarin as saying that Pakistan would go for an ambitious 6% economic growth target in the next two years as the International Monetary Fund (IMF) showed its willingness to renegotiate tough conditions for a $6 billion loan in the wake of rising coronavirus cases.

"The federal government will earmark as much as Rs900 billion ($6 billion) for development expenditure in the year beginning July. That's the bare minimum we need for a country this size," Tarin said.


According to the report, the IMF had projected 4% GDP growth for Pakistan during fiscal year 2021-22, startingin July. Islamabad is expected to post 1.5% expansion during the current fiscal year ending on June 30 after a rare contraction (-0.4%) last year.

"We have strong economic indicators this year despite the Covid-19 pandemic challenges and this is a good omen for the economy. The government ensures more than Rs2 trillion stimulus to steer the economy out of Covid crisis by supporting the businesses through much-needed liquidity and funds distribution at grass root level," Dr Baqir said.

Elaborating, the central bank governor said SBP offered Rs450 billion liquidityunder Temporary Economic Refinance Facility to private sector to absorb Covid shock while another Rs240 billion provided as working capital to avoid lay-offs and job losses.

"The central bank also offered Rs900 billion cushion to banks to ensure relief to distress businesses in deferment and restructuring of principal payment and mark-up charges. These are some of the measures which helped the economy to bounce back quickly to meet global demand after the lockdown period," Dr Baqir said.

Comment by Riaz Haq on May 21, 2021 at 8:43pm

#Pakistan expects #GDP growth of 3.94% in current FY ending June 2021, almost 2X #IMF, #WorldBank forecasts, despite #COVID19 #pandemic. #agricultural, #industrial & #services sectors are expected to grow at 2.77%, 3.57%, and 4.43%, respectively. #economy https://www.khaleejtimes.com/business/economy/pakistan-bares-394-gd...

Pakistan estimated provisional GDP growth for the 2020-21 financial year at 3.94 per cent, which is almost double the forecasts from the International Monetary Fund (IMF), the planning ministry said on Friday.

In a statement, the ministry attributed higher economic growth to the better performance in the agricultural, industrial and services sectors.

“The provisional growth of GDP for the year 2020-21 has been estimated at 3.94 per cent which is based upon growth estimates of the agricultural, industrial, and services sectors,” the ministry said.

The IMF and World Bank has estimated GDP growth of 1.5 per cent and 1.3 per cent, respectively, as the Covid-19 pandemic forced the government to impose curbs on businesses in order to slow the spread of the infection.

The agricultural, industrial and services sectors are expected to grow at 2.77 per cent, 3.57 per cent, and 4.43 per cent, respectively.

Pakistan’s economy contracted 0.4 per cent during fiscal year 2019-20 due to a worldwide economic slowdown due to the coronavirus pandemic.

Newly-appointed Finance Minister Shaukat Tarin said Pakistan will go for an ambitious six per cent economic growth target in the next two years as the IMF shows its willingness to renegotiate tough conditions for a $6 billion loan in the wake of rising Covid-19 cases. “The federal government will earmark as much as Rs900 billion [$6 billion] for development expenditure in the year beginning July. That’s the bare minimum we need for a country this size,” he said.

Dr Reza Baqir, governor of the State Bank of Pakistan, said the national economy is on the brink of higher growth after key sectors reboubded during the fiscal year ending on June 30.

He attributed the growth to large-scale manufacturing, automobiles, agriculture and other important sectors.

“We have strong economic indicators this year despite the Covid-19 pandemic challenges and this is a good omen for the economy,” Dr Baqir told Khaleej Times in Dubai last week.

Dr Ashfaq Hassan Khan, member of the Economic Advisory Council that is headed by Pakistani Prime Minister Imran Khan, said the economy registered a smart recovery after a 0.4 per cent contraction in the previous financial year. “It is a positive surprise as the economy still facing multiple challenges,” Dr Khan told Khaleej Times on Friday.

“I will atttribute higher economic growth to large-scale manufacturing and agriculture sectors,” Dr Khan elaborated.

“Our main crops wheat, rice and maize helped agriculture to post 2.7 per cent growth, while large-scale manufacturing also recorded strong improvement this financial year,” he added.

Muzammil Aslam, chief executive of Tangent Capital Advisors, said the GDP estimate now revised up at 3.94 per cent, “[has] further room to improve to five per cent once final numbers” come.

“Importantly, Pakistan is gaining food security. All major crops increased from eight to 22 per cent. This will improve the livelihood of masses,” Aslam told Khaleej Times on Friday.

Samiullah Tariq, head of research at Pakistan Kuwait Investment, said the country’s economy has a potential to achieve higher growth in coming years.

He said IT, e-commerce, the Internet and cellular sectors have huge potential to help achieve much higher GDP growth in the next five years.

“High single-digit growth is going to be a new normal in years to come,” he said.

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