Employment and Poverty among India's Neighbours

Jun 10th 2003.

It is notable that despite significant differences across the countries of South Asia in terms of size, resource endowment, particular social and political configurations, all of these economies share certain structural characteristics. These include: the presence of a high degree of underemployment; a strong dualism between organized and unorganized sectors, especially in manufacturing, which sometimes (but not always) translates into the dualism between large-scale and small-scale sectors; the continuing significance of agriculture as a major employer; the emergence of services as the largest employers, often as a refuge sector; the involvement of a large share of the workforce in what is essentially low-productivity employment.

But in addition to these, what is more remarkable is the apparent synchronicity of policies and processes across the region, despite very differing social and political pressures. All the economies of the region, for the first few decades after independence, adopted import-substituting industrialization strategies, with the attendant development of some industry and associated dualism in the economy, as well as regulation of much economic activity.

From the 1980s onwards, all of them moved, in varying degrees, to a strategy of development based on export-orientation, liberalization and privatization based on the marketist neoliberal economic paradigm. The process could be said to have started in South Asia with the Sri Lankan government of Jayawardene moving towards liberalization and dismantling of the earlier universal food security system, in the late 1970s and early 1980s.

Subsequently, and more strongly in the early 1990s, all the governments in the region (barring that of Nepal, which had very a different position) went through fairly comprehensive policies of internal liberalisation-reduction of direct state responsibility for a range of goods and services-and privatization.

By the turn of the century, most of the important economies in South Asia had undergone

  • substantial reduction in direct state control in terms of administered prices, regulation of economic activity;
  • privatization of state assets, often in controversial circumstances;

  • rationalization (usually also a euphemism for reduction) of direct and indirect tax rates that became associated with declining tax-GDP ratios;

  • attempts (typically unsuccessful) to reduce fiscal deficits which usually involved cutting back on public productive investment as well as certain types of social expenditure, reducing subsidies to farmers and increasing user charges for public services and utilities;

  • trade liberalization, involving shifts from quantitative restrictions to tariffs and typically sharp reductions in the average rate of tariff protection;

  • financial liberalization involving reductions in directed credit, freeing of interest rate ceilings and other measures that raised the cost of borrowing, including for the government;

  • moving to market determined exchange rates and liberalization of current account transactions;

  • allowing some degree of capital account liberalization, including easing of rules for Foreign Direct Investment, allowing non-residents to hold domestic financial assets and providing easier access to foreign commercial borrowing by domestic firms.

This commonality of policy experience meant in turn that outcomes were also quite similar, despite the very different initial conditions in different economies. Some of these outcomes are discussed in detail below.

The economy of Pakistan     is viewed internationally as having a reasonably good rate of output growth. This perception is more a reflection of the general slowdown in economic growth across the world, than in any improvement in Pakistan's growth performance per se. It is true that for the period 1960–90, Pakistan's growth was high for a low-income country, at around 6 per cent per annum with a 2 per cent variation. However, the 1990s involved a significant deceleration of growth in Pakistan, especially in certain sectors such as manufacturing.

Further, such growth has been associated with very inadequate performance in terms of human development indicators. William Easterly (2001) has argued that Pakistan's pattern is indicative of 'growth without development', because despite its 'respectable' per capita growth over the second half of the twentieth century, the country has 'systematically underperformed' on most social and political indicators, such as education, health, sanitation, fertility, gender equality, corruption, political instability and violence, and democracy. Significantly, such output growth has also been associated with much lower employment growth, at the trend rate of only 2 per cent per annum for the long period of 1960–99.

During the recent years, a number of features of the economic growth process in Pakistan are worth noting. First, is the very high degree of volatility of growth, with very significant fluctuations over the years, and a trend deceleration evident in the 1990s. Second, is that this growth has been based largely on unsustainable public expenditure using a build-up of public debt that has already reached problematic levels. Total debt-servicing (of external and internal debt together) already accounts for more than 71 per cent of current government revenues, and future expansion cannot rely on similar debt-driven public spending alone.

Third, is the very high presence of underemployment or disguised unemployment. The Labour Force Survey data suggest underemployment rates of 13.3 per cent in rural areas and 6.3 per cent in urban areas in the mid-1990s, but these are likely to be underestimates.

Fourth, is the fact that there appears to be relatively less direct relation between growth and employment generation. As Chart 1 indicates, output growth was relatively low in the 1970s. It increased in the 1980s and dropped again in the 1990s. But employment growth followed the opposite pattern, being at its highest at 3 per cent over the 1970s and dropping to 2 per cent in the next two decades. Nomaan Majid (2002) finds a total break between growth and employment in the period after the mid-1980s, and particularly in the period after the imposition of an International Monetary Programme (IMF)-induced Structural Adjustment Programme in 1987–88.

Chart 1 >>

It is apparent that in terms of output growth, manufacturing (Chart 3) was the lead sector over all three periods, and agriculture (Chart 2) contributed progressively less over time. In terms of employment growth, manufacturing led during the low growth phase of the 1970s, and in the 1990s when output growth rates declined once again, employment growth in manufacturing was actually negative.
Chart 2 >> Chart 3 >>

Majid (2000) suggests that the overall break between output and employment therefore seems to be associated more with the manufacturing sector, and that agriculture and construction (Chart 4) may have become residual 'refuge' sectors in the most recent period. This would also explain negative productivity growth in construction in the 1990s.
Char 4 >>

This analysis implies that the manufacturing sector is the key to the explanation of the poor employment performance of the past. Manufacturing in Pakistan, as in most other developing nations, is characterized by a high degree of dualism. There is a large-scale sector that dominates output (producing two-thirds of the value added in manufacturing) but employs only 17 per cent of manufacturing workers, and a small-scale sector that dominates employment (with 83 per cent of the manufacturing workforce) but accounts for only one-third of the manufacturing value added.

The output and employment shares of these two categories have been remarkably stable over time. The small-scale sector operating under major and increasing constraints and with huge disadvantages, has been relatively moribund in the last decade, and shows all the characteristics of a refuge labour sector. Meanwhile, the large-scale sector has been plagued by excess capacity (due to deficient aggregate demand resulting from deflationary structural adjustment policies, and import penetration) as well as by increasing capital intensity and in capital productivity due to newer technologies that have had the effect of reducing labour demand.

So, much as had occurred in India over the same period, investment and output growth in manufacturing in Pakistan tended to be capital-augmenting and labour-displacing. Since manufacturing was the lead sector in employment generation, this then affected the employment possibilities elsewhere in the economy, and explains both the persistence of low-productivity employment in the residual sectors and the low and declining rates of labour force participation in Pakistan.

The significance of deflationary macro-policies in affecting both growth and employment in Pakistan has already been mentioned. A very major and direct role was played in this case by the constraints imposed on public investment. The investment–GDP ratio declined from 17.3 per cent in 1998–89 to 14.7 per cent in 2000–01, and this was entirely due to the collapse in public investment from 8.5 per cent of GDP to 5.6 per cent over the same period.

Private investment, which is strongly interlinked with public investment and expenditure, faced a deficiency of demand as a result, and did not rise to meet the emerging slack. In addition, various other elements of the structural adjustment programme operated to reduce average growth rates, accelerate inflation, and thereby increase unemployment and poverty. The standard package of structural reforms included privatization of public assets, ceilings on wages and employment in the public sector, cuts in subsidies, cuts in development expenditure, including on 'social sectors', increases in user charges for public utilities and services and frequent devaluation.

This last feature also had the unintended consequence of reducing the inflow of remittances from foreign workers, which has been an important source of sustenance of Pakistan's balance of payments. (Anwar 2001). Thus, ironically, the macroeconomic strategy based on Structural Adjustment Programmes imposed and approved by the IMF and World Bank supposedly to change the structure of the economy so as to improve the balance of payments, control inflation and revive growth, had the opposite effects in practice. 

Inadequate employment generation and persistence of low productivity employment in most sectors inevitably feed into and even increase levels of poverty. In Pakistan, there is general agreement that the incidence of poverty has increased over the 1990s, as the combination of deflationary macro-economic measures and de-industrialization following upon trade liberalization has made itself felt. Chart 5 describes the broad trends in poverty measured by the head count ratio.

Chart 5 >>

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