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POVERTY REDUCTION STRATEGY OF

ISHRAT HUSAIN
Governor, State Bank of Pakistan
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The biggest development challenge facing Pakistan is how to meet the

millennium development goal of bringing down the incidence of poverty from the

current level of 33 percent to 18 percent by 2015. It may be recalled that by

reaching this goal, we would have only regained the level we had attained in

1988-89. This experience shows that it is quite easy to relapse into higher

incidence of poverty but it is quite an uphill battle to recover the lost ground.

Why do we expect that we would be successful in meeting this goal? What

is the strategy that we are pursuing to achieve this outcome? What are the

underlying policies and institutional changes that will make this happen? Let

me dwell on each of these questions:

First, the trajectory of economic growth rates has resumed its

path from which it was derailed in the decade of the 1990s.

Address delivered at the Seminar on “Challenges Ahead for Pakistan’s

For the last four years, Pakistan’s growth rate has averaged 6 percent –

the threshold rate at which poverty starts declining in the context of Pakistan. The

efforts at sustaining this rate of growth are most likely to bear fruits as what

happened in the three decades between 1960 and 1990. The empirical evidence

from a large cross section of countries also lends support to this hypothesis.

China and India are the two recent examples demonstrating the strong

correlation between higher growth rate and poverty reduction.

It must, however, be emphasized that growth is a necessary but not

sufficient condition for poverty reduction. Growth has to be accompanied by

many other complementary measures and policy actions.

The second element of the strategy is to improve the living standards and

incomes of the rural population, to which most of the poor belong. The most

effective way to do is to enhance agriculture productivity, including livestock. The

main instrument that has been used for this purpose is the easing of credit

constraint and extending commercial bank loans to small farmers. During the last

five years, the bank lending to agriculture particularly small farmers has

multiplied three fold. This has enabled these farmers to purchase fertilizers,

improved seeds, agrochemical, implements, hire tractors and equipment with the

resultant increase in yields per acre and incomes. For example, cotton

production last year jumped from 10 million bales to 15 million bales from the

same area under cultivation. Similarly, wheat production was also higher by 15
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percent while the area remained the same. The coverage of bank lending to

agriculture has been extended to only 15 percent of the households so far. You

can judge for yourself the potential that will be unleashed when the coverage

reaches 50 percent in the next five years. The higher incomes in the rural areas

have already induced demand for consumer goods manufactured locally and

these incomes are also accruing to those at the bottom of the ownership rung.

For meeting the needs of the landless and those without any tangible

assets, the Government has encouraged the formation of microfinance

institutions and also funds for micro credit administered by non-governmental

organizations. Although Pakistan is a late starter in this field, the results so far

are highly encouraging and the recovery rates of microfinance institutions are

quite impressive. More and more women borrowers are being brought into the

fold of these institutions.

In the urban areas, we have a paradoxical situation where large pools of

unemployed educated youth coexist with the huge shortages of skilled labor in

almost all categories. To remove this mismatch, the Government has embarked

on a program of technical and vocational training whereby these educated youth

and others graduating from the schools could be imparted practical training and

apprenticeship in the fields for which there is a heavy demand. The increased

volume of outsourcing services in Pakistan particularly in software applications

and Call Centers is also a potential source of employment for this group of youth.
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As these services expand, the possibilities of absorption of the young entrants to

the labor force would increase.

The third element of the strategy is to focus on human development,

i.e. education, health, water supply, sanitation, nutrition, population and gender.

Some of the new initiatives, such as the ongoing Punjab Education Reform

project, indicate that under the set of right incentives and institutional changes,

the parents are quite willing to send their girls to schools. Even in more

conservative areas such as Tribal agencies and Balochistan, it has been found

that the enrolment of girls does pick up if exclusive-female-schools are opened

with female-only teachers. The MMA Government has taken the lead in

establishing a Medical University and a general University exclusively for female

students. They are also quite keen in spreading the network of girls-only-schools

in the backward rural areas of the NWFP. The removal of gender disparities

particularly access to education is one of the most potent forces for eradicating

poverty and promoting equitable growth and inclusive development. The

successful experiment of the Punjab education project is now being replicated in

other provinces. The good news is that the private sector and not-for-profit

organizations are aggressively expanding the facilities for education and health

care at all levels of service across all geographical boundaries. This trend is

highly ominous in our quest for improving the weak social indicators of the

country.
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Fourth, the Khushal Pakistan Progam (KPP) along with drinking water

supply and village electrification schemes are providing the basic infrastructure

facilities such as farm to market roads, drainage, water tanks, check dams,

culverts and bridges, lining of water courses etc. in the rural areas. The farmers

may increase their productivity but if they find it difficult to market their produce,

this gain will be short lived and dissipated soon and their incentives to produce

more will be destroyed. Thus the KPP, which is a bottom-up demand driven

program in which the communities identify the projects to be undertaken, and

non-governmental organizations, such as the National Rural Support Schemes

execute the projects, is a much better approach than the traditional supply-driven

government department executed projects dictated by the Provincial

headquarters. This does not mean that the local governments which have been

empowered under the Devolution program will be stripped of their responsibilities.

On the contrary, the work of the local governments will be supported and

supplemented by the non-governmental organizations as the magnitude of the

infrastructure deficiencies in the rural areas is enormous.

Fifth, there has been gradual erosion in the capacity of well-

established institutions such as civil service, judiciary and police over time. These

institutions are generally perceived to be no longer competent and efficient nor

impartial in the delivery of basic services to the population. The worst sufferers of

course are the poor who have very little access to these institutions. The reforms

to restructure and reengineer these institutions are extremely critical and unless
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they are reoriented to become responsive and efficient, the delivery of the

services to the poor will remain problematic. The leakages to the non-poor will

remain pervasive and the rich, well-to-do, influentials, and elites will continue to

enjoy the benefits of rationing of services by quantity and the subsidies intended

for the poor. The political and cultural milieu is also unfortunately tilted against

the poor and thus the absence of the countervailing forces makes it difficult to

ensure that the services are delivered to the poor. This is a source of growing

income and regional disparities and the only sure way to remedy the situation is

to overhaul the state institutions. Efforts are underway but the resistance to

change is fierce and the progress is slow. Finally, even after all the above policy

measures are taken, there would always remain a segment of weak and

vulnerable population in any society. This segment has to be supported by social

safety nets and transfers such as Zakat, Baitul Mal and private philanthropy. A

study on private philanthropy in Pakistan shows that individuals and

organizations contribute about $ 1.5 billion annually for various causes but the

Zakat funds and Baitul Mal, if properly administered, can become reliable

sources of targeted transfers and safety nets for the vulnerable group. The

above analysis shows that Pakistan has developed a credible and

comprehensive strategy for poverty reduction. It draws upon its own historical

experience, and of other developing countries and is based on best known

international practices. The challenge now is to implement this strategy in the

face of stiff resistance – implicit and explicit – from those groups who have so far

been beneficiaries of public policy i.e. the rich and well-to-do and the elites. The
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poor have very little voice. How to reconcile the interests of the voiceless poor

while keeping away the rich and the elites from hijacking the fruits of growth is

the single most test for the political and economic leaders of Pakistan in the

coming decade.

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