Growth and Consumption Inequality in Pakistan

AuthorMUHAMMAD ALI ASAD and MEHBOOB AHMAD

Abstract. In this study an attempt is made to evaluate consumption inequality in Pakistan. This study also deals with the relationship between growth and consumption inequality. The present study covers the period of fifteen years from 1990-91 to 2004-05 using micro data from Household Integrated Economic Surveys (HIES), Conducted by Federal Bureau of Statistics, Government of Pakistan. By developing an axiomatic framework, seven positive and normative inequality measures (Gini-coefficient, Theil Index, Mean Log Deviation, Atkinsion Index, Coefficient of Variation, Deciles Dispersion Ratio and Quintiles Dispersion Ratio) have been estimated. The results show that consumption inequality is not stable, showing wide variation during the years 1990-91 to 2004- 05.

Throughout the period 1990-91 to 2004-05, poorest 20 percent and the middle 60 percent lost their consumption share, whereas the richest 20 percent gained their consumption share significantly in urban and rural sectors along with overall Pakistan. The regression model encompasses the impact of growth on inequality. The experience in Pakistan’s economy shows that consumption inequality has declined with growth whereas it has increased from 1988-89.

I. INTRODUCTION

Economic growth is considered to be the prime goal of an economic policy. As such growth performance of a country has become a major criterion for judging its economic performance. Per capita consumption is held to be the objectively measurable counterpart of economic growth. An increase in per head GDP is supposed to mean an increase in economic growth. However despite substantial increase in per capita consumption of most of the developing countries, problem has aggravated by a very rapid increase in inequality. Inequality is increasing rapidly between the wealthy and poor people. Some people have become big guns but most of the population is becoming poorer.

Like other developing countries, Pakistan has also been facing great challenges to achieve a sustainable economic growth rate. There is instability of the economic system in Pakistan; most of the people have not been able to gain the minimum standard of living. The term ‘inequality’ means simply difference in income/consumption with no regard as to their desirability as a system of reward or undesirability as a scheme running contrary to some ideal of equality.

The relationship between growth and inequality is a moot point to the economists and policy makers of this country. Growth is considered the best course to reduce inequality. According to the Pakistan Economic Survey (1999-2000) there is an innate trade off between economic growth and inequality. Kuznets (1955) investigated that there was an inverted ‘U’ (arch) relationship between growth and inequality. He suggested that the inequality would increase with growth in the beginning, and then decrease at higher levels of growth.

The objectives of this study are to analyze the consumption inequality and to discuss relationship between growth and consumption inequality overall Pakistan including its rural and urban areas from the period of 1990-91 to 2004-05. For this purpose, micro data from “Household Integrated Economic Survey” for the year 1990-91, 1992-93, 1993-94, 1996-97, 1998-99, 2001-02 and 2004-05 has been used.

The study has been organized into five sections. Section 1 presents the introduction of the study. In section 2 different studies have been reviewed related to growth and inequality. Section 3 discusses data source and methods of analysis. Section 4 shows the results and discussion (trend of inequality) from 1990-91 to 2004-05 and in the last section 5 conclusions and recommendations have been drawn.

II. LITERATURE REVIEW

In Pakistan, most of the studies have focused on estimating Gini-coefficient, drawing the Lorenz Curve and sometimes estimating Pareto-Coefficient. Haq (1964), Khandkar (1973), Suleman (1973), Kruijk (1986), Haq (1998), and Ali and Tahir (1999) have presented estimates of Gini-coefficient for Pakistan.

Sen (1974) divided inequality into two broad classes described as objective, or purely statistical measures of dispersion, such as Variance, the Coefficient of Variation, the Lorenz Curve and the Gini-Coefficient. The other class he described as normative of inequality. In the latter class, he emphasized on Atkinson and Atkinson Gini Indices which give results of high significance in any income distribution studies. Besides these broad classes, he also analyzed the detailed account of other simple measures on income distribution encompassing relative merits and demerits of each measure.

Alauddin (1975) computed the Gini-coefficient of real consumption for urban and rural areas. The author found that the rural inequality among households declined over the period 19963-64 to 1969-70. The trend of urban inequality was somewhat different. It increased in 1966-67 and then declined in 1969-70.

Kakwani (1980) developed the concept of the Lorenz Curve technique, which as extended and generalized to study the relationship between the distributions of different economic variables. He identified the problem intersection of Lorenz Curves under some situations thereby ambiguity in the result is surfaced. He also introduced a new Lorenz Curve with the name of Generalized Lorenz Curves; he called it as Concentration Curve.

Ercelawn (1988) studied to evaluate the inferences of change in rural inequality by household income and expenditures for 1971-72 and 1979. His period of study is based only on two HIES surveys containing a gap of 7 years. His results suggested that distribution of income deteriorated noticeably more so than did the distribution of expenditure. He concluded that the economic reforms of the Bhutto’s regime were unsuccessful in improving income distribution.

Ahmed and Ludlow (1989) estimated problem of inequality by using Coefficient of Variation, Logarithmic Variance, Gini-Coefficient, Atkinson Indices and the Lorenz Curves for 1979 and 1984-85. The author used household consumption to measure inequality and found an expansion in rural inequality and decrease in urban inequality over the period.

Jafri and Khattak (1995) got an insight into the structure of inequality by analyzing inter-sectoral disparity on rural and urban basis. They compared inequality changes in urban and rural areas of Pakistan during 1979-1991 by using the Gini-coefficient. They suggested that inequalities decreased both in urban and rural areas during 1979-88 and it increased sharply in 1990-1991 in both the sectors.

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