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Business & Finance

Pakistan’s powerful groups enjoy economic privileges of over $17bn: UNDP Report

  • The report highlights that the poorest and richest Pakistanis live in completely different countries, with literacy levels, health outcomes, and living standards that are poles apart.
  • Pakistan’s tax system does not contribute significantly to reducing inequality in the country due to low share of direct taxation, which is under 20 percent.
Updated 14 Apr 2021

Total privileges enjoyed by Pakistan’s most powerful groups amounted to USD 17.4 billion in 2017–2018, equivalent to 7 percent of the country’s GDP, as the country battles with inequality.

This was highlighted in the UNDP Pakistan’s National Human Development Report (NHDR) 2020 titled ‘The three Ps of inequality: Power, People, and Policy’ written by renowned economist Dr Hafiz A. Pasha. The report highlights that the poorest and richest Pakistanis live in completely different countries, with literacy levels, health outcomes, and living standards that are poles apart.

As per the report, the total privileges enjoyed by Pakistan’s most powerful groups i.e. made up of feudal class, corporate sector, exporters, large scale traders, high net worth individuals, the military establishment and the state-owned enterprises amounted to PKR 2,660 billion or USD 17.4 billion in 2017–2018.

“Equivalent to 7 percent of the country’s GDP, these privileges can be broken down into favourable pricing, lower taxation, and preferential access. The corresponding cost of social protection programmes estimated by Pasha (2019) was PKR 624 billion. Therefore, diverting just 24 percent of these privileges to the poor could double the benefits available to them. To alleviate inequality, redistribution along these lines is a crucial first step,” stated the report.

The report highlighted that Pakistan’s tax system does not contribute significantly to reducing inequality in the country due to the low share of direct taxation, which is under 20 percent. The report stated that in Pakistan the burden of taxes rises gradually with income, making the country’s tax system only mildly progressive.

“In essence, this is because special interest groups have successfully manipulated the system to seek and obtain a host of tax breaks and exemptions. Thus, taxes have played a very limited role in reducing inequality or making income distribution less skewed in favour of the rich,” it stated.

The report revealed that the poorest 1 percent of the population of Pakistan holds only 0.15 percent of national income, compared to the richest 1 percent, which held 9 percent of national income in 2018–2019. “To reduce income inequality, the real per capita income of the poorest 40 percent of Pakistanis must grow at a rate that exceeds the income growth rate of the total population,” stated the report.

The report further analyses inequality in Pakistan using various measures, the Gini coefficient that measures the degree of concentration in a country’s income distribution shows that Pakistan has a Gini coefficient of 30 percent, signalling low inequality overall.

However, the report was of the view that this value may be low due to the Gini coefficient’s lack of sensitivity to the entire income distribution, or because the country’s richest quintiles tend to underreport their income in the Household Integrated Economic Surveys (HIES).

The modified Palma ratio that measures the ratio between the richest 20 percent of the population, also called quintile 5 (Q5), and the poorest 20 percent, called quintile 1 (Q1). Pakistan has a modified Palma ratio of 4.7, meaning that the richest quintile has 4.7 times the income of the poorest quintile.

The Pashum ratio, which is a new and more sensitive measure of inequality specially created for the NHDR 2020, captures the extent of inequality across the entire population distribution, including middle-income groups. Pakistan’s Pashum ratio stands at 0.50, deviating from a value of 0, which would signify perfect equality.

The Pashum ratio also shows that income inequality is relatively less pronounced between the three poorest quintiles, but rises sharply between the country’s two richest quintiles.

Analysing all three measures of inequality reveals that Pakistan has a low to moderate level of income inequality.

Middle class shrink in Pakistan

The NHDR 2020’s analysis shows that the plight of Pakistan’s middle class is worsening. Based on per capita expenditure, only 36 percent of the population was middle class in 2018–2019, down from 42 percent 10 years earlier, highlighted the report.

The pressure of inflation, unemployment among educated workers, and decreasing purchasing power parity is ‘squeezing’ the middle class, so much so that it is pushing them to the bottom of pyramid over time, said the report.

Inequality among Provinces:

The report highlights that inequality within Pakistan’s provinces varies hugely.

Punjab

Punjab is Pakistan most populous province, the richest 20 percent of people in Punjab have a GDP per capita that is 5.2 times greater, and an HDI value that is 1.6 times greater, than the poorest 20 percent. Between 2006 and 2019, the gap between rich and poor increased slightly in Punjab in terms of GDP per capita.

While income inequality has always been high, the province also has relatively high levels of inequality in education, especially in terms of adult literacy.

Sindh

Sindh is Pakistan’s second largest province with respect to population. As per the report, the richest 20 percent of Sindh’s population have a GDP per capita that is 5.3 times greater, and an HDI value that is 1.8 times greater, than the poorest 20 percent.

The province experienced a pronounced increase in income inequality from 2006 to 2016, after which the difference between its richest and poorest quintiles decreased.

Sindh also has high levels of inequality in education, especially in adult literacy. On the other hand, life expectancy seems to be much more equal within Sindh.

Khyber Pakhtunkhwa

Pakistan’s third-largest province in terms of population, Khyber Pakhtunkhwa has experienced substantial human development in recent years, revealed the report.

The richest 20 percent of people in Khyber Pakhtunkhwa have a GDP per capita that is almost four times greater, and an HDI value that is 1.4 times greater, than the poorest 20 percent. Income inequality has been steadily decreasing in the province since 2006. Inequality in human development in the province primarily stems from inequalities in education, followed by income.

Balochistan

Pakistan’s largest province in terms of land mass has the lowest share of the country’s population, and the lowest performance on human development indicators.

As per the report, the richest 20 percent of Balochistan’s population have a GDP per capita that is 3.7 times greater, and an HDI value that is 1.8 times greater, than the poorest 20 percent. Over the years, income inequality in Balochistan has shown no substantial change, but the province faces the most pronounced inequalities in education and living standards in the country.