Poverty Effects & their Solutions

1. POVERTY ALLEVATION Definition:

The poverty alleviation is improvement in the living conditions of people who are already poor in the economy. The aid of poverty reduction is particularly in medical and scientific areas, is essential in providing better lives.

Poverty has historically been accepted as inevitable as non-industrialized economies produced very little and the population grew almost as fast as the economy. Poverty reduction, or poverty alleviation, has been largely as a result of overall economic growth. The dawn of industrial revolution led to high economic growth, eliminating mass poverty in what is now considered the developed world.

Explanation:

Poverty is hunger. Poverty is lack of shelter. Poverty is being sick and not being able to see a doctor. Poverty is not being able to go to school and not knowing how to read. Poverty is not having a job, is fear for the future, living one day at a time. Poverty is losing a child to illness brought about by unclean water. Poverty is powerlessness, lack of representation and freedom.

For many people in developing countries, acute poverty means difficulty making a living, as well as a lack of basic services in education and health. In Pakistan, lack of access to credit, training in income-generating activities, basic social services and infrastructure are critical factors behind the persistence of substantial poverty, especially in under-served rural and urban areas.

Pakistan Poverty Alleviation Fund:

The Pakistan Poverty Alleviation Fund (PPAF) represents an innovative model of public private partnership. Incorporated under section 42 of the company’s act 1984 it follows the regulatory requirements of the Securities and Exchange Commission of Pakistan. Sponsored by the Government of Pakistan and funded by the World Bank and other leading donors the PPAF has on June 26, 2008 a resource base of US$ 1,030.17 million.

Poverty Alleviation / Unemployment / Foreign Debt

As the lead Apex institution of the country wholesaling funds to civil society organizations, the PPAF forms partnerships on the basis of rigorous criteria. Before finalizing partnerships the PPAF ensures that the partners have well targeted community outreach programs that are committed to enhancing the economic welfare and income of the disadvantaged peoples.

Features of PPAF:

There are several unique features the PPAF, the most significant features are:

The establishment of an indigenous autonomous Apex institution with resource backed capability of providing financial and non-financial support to civil society organizations on a long-term basis.

A model public/private sector partnership with the role of government as an enabling facilitator, and predominant role of private sector professionals for policy, strategy, and management.

A dedicated market developer committed to the emergence of professional and sustainable civil society organizations.

The Target populations for the project are poor rural and urban communities, with specific emphasis being placed on gender and empowerment of women.

The PPAF has also enhanced public awareness through community participation. The experiment was so successful that there has not been any default, and the communities are willingly contributing to the infrastructure and training programs of the partner organizations.

History Regarding to PPAF:

To arrest the economic decline, a far-reaching structural adjustment programmed was initiated in mid-1988, involving a liberalization of the exchange rate, prices and trade, along with selected privatizations of government enterprises and other measures designed to arrest the economic decline place the economy on a self-sustaining growth path. These measures began to take effect in 1989 and by late 1991 their results were evident in the form of an end to the long trend downward in the economy. In 1992 real growth was rapid and has been maintained at high levels ever since.

The salutary effects of the economic policy reforms on the poverty problem can be seen in the fact that the share of the population living below the poverty line


dropped from about 75 percent in 1989 to about 43 percent in 1993. These estimates are very approximate but nonetheless are indicative of the basic trend. Furthermore, given the subsequent movements in real wages (see Chapter 35) and the continuing rapid economic growth, which undoubtedly has created new job opportunities at a faster rate than the labor force is expanding; it is very likely that the poverty ratio is lower now than it was in 1993.

Agriculture responded to the opportunities created by the new economic policies with greater alacrity than any other sector. Sugar production has doubled and rice production has tripled, as compared to their levels in 1990. While large farmers have benefitted more than small farmers, all household groups in rural areas have become better off because of greater amounts of employment and higher income levels in agriculture. Today the degree of change in the labor market can be seen by the fact that some sugar estates have recently experienced problems in finding sufficient labor turn out.

Although annual surveys of household incomes are not available, the structural adjustment process probably exacerbated the poverty problem at the outset, since its reforms temporarily increased the inflation rate in a very significant way. But after an 82 percent increase in the consumer price index in 1991, the rate of price increase fell to 14 percent in 1992 and 8 percent in 1993 and has remained relatively low since then.

A comparison of the monthly minimum wage and monthly food costs carried out by GAHEF (1993), covering the period January 1990, to June 1993, showed that the two measures increased by similar amounts until the first quarter of 1992, and thereafter the monthly minimum wage gained considerably on the index of food costs.

This result corroborates the other evidence to the effect that poverty has lessened since it expanded to shockingly high levels in the late 1980s. These results should not lead observers to conclude that the poverty problem has been reduced to unimportance; on the contrary, poverty alleviation still is and should be a principal national priority. Nevertheless, the problem is somewhat less daunting than it was a few years ago.

The Role of World Bank in Pakistan Poverty Alleviation


The World Bank funded Pakistan Poverty Alleviation Fund Project was designed to reduce poverty and empower the rural and urban poor in Pakistan. The project provides access to much-needed microcredit loans and grants for infrastructure and capacity building. As such, the PPAF project aims to help the rural poor in Pakistan get out of a cycle of misery, and get into a virtuous cycle of opportunities.

According to the World Bank Survey Report, poverty remains a serious concern in Pakistan, where the per capita gross national income (GNI) is US $ 520. Poverty rates, which had fallen substantially in the 1980s and early 1990s, started to rise again towards the end of the decade. According to the latest figures, as measured by Pakistan’s poverty line, 32.6 percent of the population is poor. More importantly, differences in income per capita across regions have persisted or widened as have gender gaps in education and health.

High administrative costs and lack of collateral resources have kept traditional financial institutions from supporting small businesses and self-employment in poor areas. As a result, the poor must often rely on money lenders and traders for credit – paying interest rates from 80 to 120 percent per year. Although the government has tried to address the problem, experience in Pakistan - and worldwide - has shown that autonomous, non-governmental institutions can be more effective in reducing poverty by delivering better services to the poor.

To help poor people gain access to resources to earn an income and to develop projects aimed at improving their lives, the Government of Pakistan created the Pakistan Poverty Alleviation Fund (PPAF) as an autonomous body working with local partners to provide loans, grants and technical assistance to the poorest individuals and communities in the country. The PPAF was funded by a US$ 90 million World Bank credit and an endowment of US$ 10 million from the Government of Pakistan in 2000.

Women are poorer than men in Pakistan?

Women and girls in particular have benefited, since they bear a higher share of the burden of poverty because of fewer economic opportunities and lower endowment of land and other income-generating assets.

Traditional development programs have focused on women’s social development, with little focus on the economic empowerment needed to truly improve the situation for women. PPAF focuses on improving the lives of women by ensuring


that community projects and loans responding to their priorities, and designed with their participation, take precedence over others. In this sense, Daiyanand and Sughar are no exception in Nenisaar, a small village in Sindh’s Thar desert, as the majority of the women in the village are, direct or indirect, beneficiaries of the program.

The Structure of PPAF in Pakistan Economy:

As of today, PPAF is working with 56 partner organizations in 96 districts of Pakistan. Total disbursements have crossed the Rs10 billion mark, over 40,000 new community organizations have been formed, the lowest tier of local government in Pakistan more than 8,000 infrastructure schemes have been initiated of which 5,500 stand completed, micro credit lending has exceeded the Rs. 6 billion figure with 100% recoveries, and over 100,000 community members and staff of partner organizations have participated in trainings facilitated by the PPAF.

The Fund is contributing significantly to mitigate affects of drought in Sindh and Balochistan through preparedness programs. After the huge success of one integrated area development program, PPAF has now planned 300 such programs across the country. At the qualitative level PPAF has met the biggest challenge which was to change a deeply entrenched "grant" culture towards a more pragmatic and professional approach among the civil society organizations.

Impact studies carried out by independent observers have shown significant change in the quality of life of PPAF beneficiaries. PPAF envisions itself to be the vanguard of civil society endeavors for achieving a decisive impact on poverty by building human, social and economic capital and moving towards a long term integrated program.

Trends in Poverty Rate in Pakistan:

Year Urban Rural Pakistan


1998-99 20.9 34.7 30.62000-01 22.7 39.3 34.52004-05 14.9 28.1 23.92005-06 13.1 27.0 22.3

World Bank Support for Poverty Alleviation in Pakistan:

Pakistan Social Safety Nets Development Policy Credit: US$ 200 m. The broad objective of the operation is to promote inclusive economic growth. The specific objective is to establish a national social safety net system that is fiscally sustainable and provides the chronic and transient poor with basic income support and access to opportunities for graduating from poverty.

The programmed is being implemented by the Ministry of Finance, Benazir Income Support Programmed secretariat, and the Planning Commission. Financing is disbursed after the completion of agreed key policy actions. Key reform areas include.

Improving the targeting efficiency of the safety nets programmed by establishing a national targeting system to implement the poverty scorecard method through appointment of separate agencies for scorecard data collection and eligibility determination, and undertaking a policy decision on transition of BISP beneficiaries from the old to the new targeting system.

Establishing an effective institutional framework for programmed implementation through development of legal, institutional, and administrative measures for the safety net system.

Enhancing fiscal sustainability and strengthen the fiduciary environment, through ensuring adequate budget allocation for benefit payment and programmed administration consistent with the overall macro-economic framework; and developing a reliable and transparent payment system, through appointing a separate payment agency governed by strong fiduciary and social accountability controls on benefit payments.

New Changes Demand by Donors of Pakistan:


International donor agencies and financial institutions want the new government to introduce 'major changes' in policies to address issues pertaining to poverty alleviation, employment generation, illiteracy and sustained GDP growth. Sources in some donor agencies told Dawn on Monday that if there was increased emphasis on tackling the challenges facing the country then donors could "consider enhanced annual assistance" for Pakistan.

"There is a very large programmed of donors and financial institutions which needs effective implementation by the new prime minister for accelerating the much-needed governance reforms and improving the services relating to health, education, poverty reduction, and population welfare," a source said.

He called upon the new prime minister to go for the overhauling of ministries dealing with economy to achieve desired results. "We can consider additional fiscal assistance, provided the slow reform process is expedited by Mr. Aziz who now enjoys all powers," he said.

Talking to this correspondent, Asian Development Bank's resident representative Marshuk Ali Shah said the country was still facing formidable challenges, including a target of 8 per cent GDP growth rate, improving human development indicators and rehabilitating the social and economic infrastructure.

"Mr. Aziz would have to focus on increasing the Public Sector Development Programmed," he said. "Also," the ADB local chief said, "the new government needs to move to the second generation reforms relating to judiciary, civil service, devolution and police."

He said the new prime minister should pay more attention to effective utilization of funds. "Pakistan needs intense utilization of funds to alleviate poverty and generate more jobs for thousands of educated youth," he said. Another source said time had come to move away from "micro to macro-level reforms" by adopting long- and short-term policies.

2. Unemployment in Pakistan Poverty Alleviation / Unemployment / Foreign Debt

Definition:

Unemployment is the situation where the country is not making full use of its resources. Unemployment occurs when a person is available to work but currently without work. The prevalence of unemployment is usually measured using the unemployment rate, which is defined as the percentage of those in the labor force who are unemployed.

Types of Unemployment:

Voluntary Unemployment Involuntary Unemployment Cyclical Unemployment Structural Unemployment Classical Unemployment Frictional unemployment Hidden Unemployment

Voluntary unemployment is attributed to the individual's decisions, whereas involuntary unemployment exists because of the socio-economic environment (including the market structure, government intervention, and the level of aggregate demand) in which individuals operate. On the other hand, cyclical unemployment, structural unemployment, and classical unemployment, are largely involuntary in nature. However, the existence of structural unemployment may reflect choices made by the unemployed in the past, while classical unemployment may result from the legislative and economic choices made by labor unions and/or political parties.

So in practice, the distinction between voluntary and involuntary unemployment is hard to draw. The clearest cases of involuntary unemployment are those where there are fewer job vacancies than unemployed workers even when wages are allowed to adjust, so that even if all vacancies were to be filled, there would be unemployed


workers. This is the case of cyclical unemployment, for which macroeconomic forces lead to microeconomic unemployment.

Unemployment for Individual:

Unemployed individuals are unable to earn money to meet financial obligations. Failure to pay mortgage payments or to pay rent may lead to homelessness through foreclosure or eviction. Unemployment increases susceptibility to malnutrition, illness, mental stress, and loss of self-esteem, leading to depression.

Causes of Unemployment:

The major causes for unemployment among the poor in Pakistan include a lack of technical skills, little or no education, low income worsened by indebtedness to moneylenders, no career guidance, lack of awareness regarding available jobs, high expectations without commensurate experience, little understanding of work ethics and the weak economy.

Low income can be improved by small enterprise development (SED) activities, entrepreneurial and technical skills, increased financial resources and management skills, and increased participation of women in economic activities providing more income for the family as compared to a single breadwinner.

Political Instability No or low quality of Education Rapid changes in technology Recessions Inflation Disability Undulating business cycles Traditional Changes in the economy Attitude towards employers Willingness to work Perception of employees Employee values Discrimination Factor


Ability to look for employment

Effects of Unemployment:

People have lost their hopes and find ill ways to satisfy their utmost needs. It is anticipated that if no concrete actions are taken against these problems in the coming years, the crime rate will become three times higher than the present. People will become poorer and will lose hope and trust in Government.

Economic Impact

From Okun’s law we know that for every 2% fall in GNP relative to potential GNP, the unemployment rate rises by 1% point. High unemployment is a symptom of waste – for during recessions, when unemployment is high, the economy is not producing up to high level. When economy is not producing sufficiently, we can say that we are unable to use our full resources for production purposes. Economy will not grow as fast as it can if become able to produce at high level.

Social Impact

However, large the cost to economy of unemployment, a recounting of Rupees lost does not adequately convey the human, social and psychological toll that periods of persistent involuntary unemployment bring. Although unemployment has plagued capitalism, the Industrial Revolution, understanding its causes and costs has been possible only with the rise of modern macroeconomic theory. It is apparent that recessions and the associated high unemployment are extremely costly to the economy.

Current Situation in the Pakistan about Employment by Sector (2007-2008)

Sr. No: Sector Total Rural Urban01 Agricultural 44.65 60.94 6.2102 Manufacturing 12.99 8.37 23.89


03 Construction 6.29 6.09 6.7504 Services 13.66 9.96 22.3905 Transport 5.46 4.42 7.9206 Others 0.10 0.03 0.26

Source: Labor Force Survey (2007-2009)

The Unemployed Labor Force rates in Pakistan

Years Population in Millions

Unemployment RateTotal Rural Urban

1999-00 3.08 7.82 6.94 9.922001-02 3.46 8.27 7.55 9.802003-04 3.50 7.69 6.74 9.702005-06 3.10 6.20 5.35 8.042006-07 2.68 5.32 4.72 6.662007-08 2.69 5.20 4.31 8.52

Source: Labor Force Survey (2007-2009)

Suggestions:

Govt. should make efforts to push economic growth process.


Govt. should seriously try to boost exports through broadening the tax base and lowering tariffs.

Govt. should announce a package for the development of agriculture sector. Beside this a number of fiscal and monetary measures should take to attract

industrialists and particularly foreign investment. More Technical and Vocational training facilities should be provided. In this way

unemployed people will get the chance to enhance their skills and become able to earn reasonable income.

With a view to reduce educate unemployment; self-employment scheme should be encouraged in true manners.

Beside this a number of fiscal and monetary measures should take to attract industrialists and particularly foreign investment.

More technical and vocational training facilities should be provided. In this way unemployed people will get the chance to enhance their skills and become able to earn reasonable income.

With a view to reduce educate unemployment; self-employment scheme should be encouraged in true manners.

Conclusion:

In conclusion, another erupting challenge standing before Pakistan is wide-spread unemployment. Thousands of educated graduates are jobless. Hundreds of thousands of unemployed workers are forced to lead their lives below their status. Large scale unemployment has serious effects on the country’s production also. Moreover, the country’s population has drastically increased during recent years. Therefore, every step taken to improve the living standard of common man proves to be futile and ineffective.

3. Debt Issues Definition:


Debt is that which is owed; usually referencing assets owed, but the term can also cover moral obligations and other interactions not requiring money. In the case of assets, debt is a means of using future purchasing power in the present before a summation has been earned.

Some companies and corporations use debt as a part of their overall corporate finance strategy. A debt is created when a creditor agrees to lend a sum of assets to a debtor. In modern society, debt is usually granted with expected repayment; in many cases, plus interest. Historically, debt was responsible for the creation of indentured servants.

Payment of Debt:

Before a debt can be made, both the debtor and the creditor must agree on the manner in which the debt will be repaid, known as the standard of deferred payment. This payment is usually denominated as a sum of money in units of currency, but can sometimes be denominated in terms of goods. Payment can be made in increments over a period of time, or all at once at the end of the loan agreement.

Effects of Debt:

Debt allows people and organizations to do things that they would otherwise not be able, or allowed, to do. Commonly, people in industrialized nations use it to purchase houses, cars and many other things too expensive to buy with cash on hand. Companies also use debt in many ways to leverage the investment made in their assets, "leveraging" the return on their equity.

This leverage, the proportion of debt to equity, is considered important in determining the riskiness of an investment; the more debt per equity, the riskier. For both companies and individuals, this increased risk can lead to poor results, as the cost of servicing the debt can grow beyond the ability to pay due to either external events (income loss) or internal difficulties (poor management of resources).

Arguments against Debt:

Some argue against debt as an instrument and institution, on a personal, family, social, corporate and governmental level. Islam forbids lending with interest even today,


while the Catholic Church allowed it from 1822 onwards, and the Torah states that all debts should be erased every 7 years and every 50 years. Debt will increase through time if it is not repaid faster than it grows through interest. This effect may be termed usury, while the term "usury" in other contexts refers only to an excessive rate of interest, in excess of a reasonable profit for the risk accepted.

In international legal thought, odious debt is debt that is incurred by a regime for purposes that do not serve the interest of the state. Such debts are thus considered by this doctrine to be personal debts of the regime that incurred them and not debts of the state.

In an economy with high interest rates, debt will be more costly to a business than more flexible dividends on equity investment. It may be easier for a struggling business to be financed through equity investment as it may be possible to avoid paying a dividend if times are hard.

Types of Debt:

There are so many types but on the national level economy debts are of only two types

Internal Debt External Debt

Internal debt is the part of a country's debts that is owed to creditors who are citizens of that country. It is a form of fiat creation of money, in

which the government obtains cash not by printing it, but by borrowing it. The money created is in the form of treasury securities or securities borrowed from the central bank. These may be traded but will only rarely be spent on goods and services.

In this way, the expected increase in inflation due to the increase in national wealth is lower than if the government had simply printed the money and increased the more liquid forms of wealth (i.e., the money supply). The internal debt forms a part of the national debt of the country. Its complement is external debt.


Government debt (also known as public debt or national debt) is money (or credit) owed by any level of government; either central government, federal government, municipal government or local government. The annual government deficit, however, refers to the difference between government receipts and spending. As the government draws its income from much of the population, government debt is an indirect debt of the taxpayers. Government debt can be categorized as internal debt, owed to lenders within the country, and external debt, owed to foreign lenders.

Foreign Debt near International Monetary Institutes:

World Bank and IMF hold that “a country can be said to achieve external debt sustainability if it can meet its current and future external debt service obligations in full, without recourse to debt rescheduling or the accumulation of arrears and without compromising growth.” According to these two institutions, external debt sustainability can be obtained by a country “by bringing the net present value (NPV) of external public debt down to about 150 percent of a country’s exports or 250 percent of a country’s revenues.” High external debt is believed to have harmful effects on an economy.

History of Foreign debt in Pakistan Economy:

Like many other countries of the world, Pakistan has accumulated large external debt. Ordinarily, external borrowing is ought to accelerate economic growth especially when domestic financial resources are inadequate and need to be supplemented with funds from abroad. Economic theory also postulates that reasonable levels of borrowing promote economic growth through factor accumulation and productivity growth.

This is because the countries at the initial stages of their development usually tend to have smaller capital stocks and their investment opportunities are limited, which promise high rates of returns in them. It is often argued that if the borrowing countries channel the borrowed funds into productive investments and they enjoy macroeconomic stability, they will be able not only to accelerate their economic growth but also to settle their debt obligations comfortably.


The external debt also has a dark side. Foreign debt does not remain a blessing after it gets accumulated beyond a certain limit.

In fact, too much of debt can dampen growth by hampering investment and productivity growth. The obvious reason is that when greater percentages of reserves (foreign currency) are consumed in meeting debt service, creditworthiness erodes causing reduction in access to external financial resources.

It is known that increase in external debt is invariably accompanied by a concomitant increase in debt-service requirement, which has unfavorable International Research Journal of Finance and Economics - Issue 20 (2008) 133 implications for economic growth and thereby for country’s ability to settle debt and debt-service obligations.

Pakistan’s external debt reached an unprecedented level during the 1990s. The causes of rapid growth in external debt include inept use of borrowed resources in the form of wasteful government spending, and financing of current expenditure, and investing in low priority development projects, and poor implementation of foreign aided projects.

Because of an injudicious utilization of foreign loans debt carrying capacity of the country weakened due to its reduced real revenues and exports, leading ultimately to increase real cost of government borrowing, both domestic and foreign.

Conclusion:

The main focus of this study is to analyze the effect of rising debt on economic growth. The increasing dependency of Pakistan on foreign resources is evident from the magnitude of the debt burden and the accompanying debt-servicing liability.

Pakistan has also resorted to borrowing heavily from foreign and domestic sources to finance its development plans and large fiscal deficits in the past, which


became virtually unsustainable in the late 1980s. Stagnant export and foreign exchange earnings, together with heavy reliance on foreign resources, were the main factors contributing to the worsening of the external debt indicators.

Pakistan’s external debt towards the end of the 1990s reached alarming proportions, which posed a serious danger to the economic future of the country. International Research Journal of Finance and Economics - Issue 20 (2008) 139. This paper has analyzed the dynamic behavior of GDP, debt service, labor and the capital with a view to identifying the long-run and short-run effect of debt service on economic growth of Pakistan for the period 1970-2003.

ADF unit root tests are conducted to establish stationary properties and multiple co integration procedure is employed to identify long-run relationship among the included variables. The long-run relationship shows that debt service affects GDP negatively, whereas capital and labor affect it positively. It is argued that debt service burden has a negative impact on labor and capital productivity, which adversely effects economic growth.

Although co integration implies the presence of Granger causality, it does not necessarily identify the direction of causality between the included variables. This temporal Granger causality can be captured through a VECM. Results from the Granger causality tests indicate that the short-run and long-run causality runs from debt service to GDP, which indicates that debt overhang was operational for the period under review.

Overall, the results of the study suggest that debt overhang is an important factor in overall debt scenario of Pakistan. The high debt burden has stemmed from mismanagement of resources, macroeconomic imbalances and loss of competitiveness in the international market.

The existence of negative relationship between GDP and debt service may indicate the fact that borrowed resources were misallocated or wasted on consumption. The continued negative effects of debt burden on productivity will reduce the country’s ability to service its debt in future.

Excessive debt affects a country’s economic development in a number of ways. Firstly, the large debt service requirements dry up foreign exchange and capital, because they are transferred to lenders to payback principal and interest. A country benefits only


partially from an increase in output or exports because a growing fraction of the increase gets used to service the accrued debt.

Secondly, when the debtor countries are unable to fulfill their debt service obligations promptly, the debtor countries are considered high risk countries and they find it difficult to borrow. As a result, debtor countries have to pay high interest rates to obtain new credit. Thirdly, the accumulation of debt causes a reduction in an economy’s efficiency, since it is difficult to adjust efficaciously to some shocks and international financial fluctuations. Finally, to save more foreign exchange so as to meet debt obligations many debtor countries cut down on imports and restrict trade which leads to poor trade performance.

There is need to improve the competitiveness of the economy in order to improve macro imbalances and to help mobilize the domestic resources so as to lessen economy’s dependence on external debt. Also, provision of a favorable macroeconomic environment is needed to reduce mismanagement so as to promote economic growth.

Further, it is pertinent that a viable monitoring system be put in place that can ensure proper and systematic utilization of the external borrowings for the developmental projects. There is also a need for reducing the external debt, as it will contribute to economic growth by boosting capital accumulation and productivity improvement.

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Poverty Effects & their Solutions

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