MONETARY

INEQUALITIES IN PAKISTAN

Report
Monetary Inequalities in Pakistan

Submitted By:
Daniyal Zaman
Saad Mumtaz Mian
Ahmed Abdullah
Hamza Yousuf
Saad Khalid

Submitted To:
Miss Farah Syed

The Monetary inequalities in Pakistan is Increasing.

Lahore School of Economics.

November 10, 2015.

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Contents
Acknowledgement........................................................................................................... 4
Abstract.................................................................................................................... 5
Introduction................................................................................................................... 5
Literature Review......................................................................................................... 6
Hypothesis.................................................................................................................. 7
Methodology............................................................................................................ 7
Counter Arguments...................................................................................................... 8
Data Analysis.............................................................................................................. 8
Factors giving rise to Income Inequalities........................................................................10
Consequences of increasing monetary inequality in Pakistan............................................13
Methods to reduce income inequality:.............................................................................14
Conclusion:.............................................................................................................. 15
References:............................................................................................................... 16

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Acknowledgement

Praise to Allah, Lord of the worlds, who enabled us to complete the project and fulfill the required
functionalities. We have taken efforts in this project. However, it would not have been possible
without the kind support and help of our supervisor Farah Syed. We would like to extend our
sincere thanks to her. This all was not possible without her guidance and moral support. Our
supervisor was always there whenever; we needed her help and ideas. We are really thankful to her.
On the eve of completion of this project we would like to express our gratitude to all those who
helped us in the completion of this project. In the end, we would also like to thank all of our friends
for being cooperative throughout the semester.

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Abstract

The subject matter of our study is to determine whether the monetary inequality in Pakistan is
increasing or decreasing. Various studies show that the monetary inequality has increased over
time. The inequality in urban and rural areas is different as calculated by the Gini coefficient.
There are a number of factors which give rise to monetary inequality that include high
unemployment, uneven distribution of asset, biased taxes and poor governance etc. We found
that not only growth but consumption is also an important factor in determining the inequality
and that simple increase in GDP does not diminish the inequality gap. Since it is an alarming
situation for Pakistan (and other countries as well) steps are taken to reduce which include
increasing wage, promoting education, increasing employment and literacy rate, reducing
poverty and improving the tax structure.

Introduction
Monetary inequality is defined as the unequal share of income among different groups of the
society. In todays world economic growth is considered to be the prime goal of every country.
Economic performance of a country is determined by its growth. Increase in per capita GDP is
held to be objectively measurable part of economic growth; the increase in GDP thus means an
increase in economic growth. However the gap between rich and poor is ever increasing, as can
be seen by the variance in lifestyle between the rich, white-collared people (middle class) and the
poor. Despite substantial increase in GDP most of the first world nations the problem of income
inequality is increasing. Some people own 80% of the economy while the rest are getting poorer.
Pakistan is a developing economy so it is facing the same situation as other developing countries;
that is rapid increase in the monetary inequality. Most of the families in Pakistan are living below
the poverty line set by the United Nation.
According to the Pakistan Economic Survey (1999 2000) the rate of inequality has gradually
increased and there is an innate trade-off between economic growth and inequality.
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Kuznets proposed the idea that there is an inverse relationship between the growth and
inequality. He said that the monetary inequality will increase with growth in the initial stage but
then it will decrease at higher levels.

Literature Review

Income disparity is a serious issue for all First World Countries (USA, UK) and Third World
Countries (Pakistan, India). There are various methods which are used to determine the monetary
inequality such as Gini index or Gini coefficient, Lorenz curve etc. Gini coefficient or Gini index
is a widely used method to determine the statistical dispersion of the income distribution of a
nation.
The income disparity is increasing at an alarming rate in Pakistan as evident from a number of
informative studies as conducted by different people.
Alauddin, in 1975, determined the consumption for urban and rural areas. He said that the rural
inequality fluctuated among households over the period of 1960s.The trend of urban inequality
was, however, different for the time rather it increased later in 1970s.
In 1989, Ahmed and Ludlow determined the factors causing inequality. They proposed that
household consumption is an important tool for measuring income inequality and found that in
that period there was expansion in rural areas and minor decrease in urban areas.
In mid 1990s, Jafin and Khattak analyzed inequality structure in different urban and rural
sectors. They concluded that there was rapid increase at that time.
Later in 2004 the relationship between economic growth, inequality and poverty was proposed
which helped in understanding that why the rate of inequality is increasing gradually. The share
that poor and rich get from the economy were also discussed. Poverty Equivalent Growth Rate
(PEGR) showed the benefits poor receive from the economy.

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However, all the studies confirm that income inequality from the year 2000 to 2007 was at its
peak than any other years in the history of Pakistan. Dr Ikramul Haq stated that During
Musharraf-Shaukat and Aziz era, the poors lost their share and the rich gained their share in both
urban and rural areas. (Dr Ikramul Haq; the News, October 30, 2013)

Hypothesis

NULL HYPOTHESIS (Ho): Monetary Inequality is increasing in Pakistan.

ALTERNATIVE HYPOTHESIS (H1): Monetary Inequality is not increasing in Pakistan.

Methodology
Type of Study

Our type of study will be Qualitative as our purpose of study is to determine the increase in
monetary inequality in Pakistan.

Data Collection

The data was collected on the basis of Secondary research method which includes
articles/papers, which conducted research all over Pakistan over a period of time.

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Counter Arguments

Since our research is not based upon the opinions of people, rather on the facts and figures, there
were no such articles/papers or documents that depicted that monetary inequality is decreasing in
Pakistan. Therefore, counter argument cannot be given for anything that never actually
happened.

Data Analysis

Inequality may be measured by either positive inequality measures or normative inequality

measures. The positive measures include Gini coefficient, Mean deviation etc. We mainly
focused on the Gini coefficient or Gini Index because it uses the statistical dispersion to
determine the income distribution of the nation. The rate of inequality according to Gini
coefficient in urban and rural areas of Pakistan is as follows:

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The above graph shows variation in inequality with respect to Gini coefficient in both sectors.
The relationship between Gini coefficient and monetary inequality varies directly. It can be seen
that the rate of inequality was higher in urban areas as compared to rural, in early 2000s.
The Express Tribune stated that the upper-middle class in 2011 was 40% richer than as they were
rich in 2002.

Shares in income of various groups: PAKISTAN

The table shows that the rich poor gap has increased over the years. The rich are getting richer
and the poor are losing their share. The gap is still rising because of different social and political
factors which have negative effects on the society. A recent report (presented in 2010) showed
that more than 75% of the income is distributed among the 20% rich families in Pakistan.

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Factors giving rise to Income Inequalities

The factors causing change in the income distribution can be explored through a model
consisting of Distribution of assets; functional income distribution which is further determined
by societys output, technology, labor, education, employment rate, wage rate etc. In order to
keep the income distribution patterns within the acceptable limits, these factors may be
influenced by major policy initiatives that can be proved helpful in policy formation.

The four main factors that affect income distribution include:

Distribution of assets;
Functional income distribution;
Transfers from other households, government and rest of the world; and
Tax and expenditure structure of the government.

Asset Distribution:
Asset is something which is determined by inheritance, savings, return on investment and
changes in valuation. Assets include land, building, supplies etc. In Pakistan there is uneven
distribution of land and the Gini index of land is nearly 0.60. At the time of independence more
than 50% of Pakistans population was dependent on agriculture and lived in rural areas so the
distribution of land at that time was more than that of urban area. The Income disparity in urban
areas gradually increased over time due to different factors. First, there was multiplication of
assets due to large scale manufacturing and increase in profits abnormally. Second, Increase
number of capitalists who have more power and prestige and have been promoted through land
grants, import and investment. Third, access to credit have been increased for the upper class and
not for the lower class.

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Functional Income Distribution:

The structure of employment, distribution of labor force within various industrial and
occupational groups and income in various industries, all help in the determination of functional
income distribution. If the rate of employment is low, then there will be rise in income inequality
as there is direct relationship between income distribution and employment. The income
inequalities in various groups are associated with the growth of employment, increase in
productivity and changes in the wage and profit rates.

Transfers to the Households:

Transfer income comes from remittances, which are both internal and external and have different
effects on income distribution. Internal remittance is important for poor because households in
the lowest income level receive more than 75% of their total per capita transfer from internal
remittances. External remittances tend to go to those who are relatively better. Adams in 1992
stated that External remittances are an important source of increasing inequality accounting for
between 58-91% of transfer income inequality.

Incidence of Taxes:
Indirect taxes has played an aggressive role in Pakistan. Up to 1988, the consumption of products
on which incidence of taxes were applied, was higher among the richer section of the society.
However, under the structural adjustment and stabilization program, decline in income tax rates
and tariff rationalization has benefited the producers, while the broadening of sales tax has
increased the tax burden on poor class.

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(www.dawn.com/news/1178703)

Consequences of increasing monetary inequality in Pakistan

Monetary inequality has a negative impact on the society. It stifles growth, increases crime rate
and political instability, and decrease health and education opportunities.

Stifles growth:
A high level of economic inequality means a higher level of poverty. Poverty is associated with
increased crime and poor public health, which places burdens on the economy. Wealthy citizens
have more political power than the poor people, which encourages development of inefficient tax
structures skewed in favor of the wealthy.
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Increased crime rate:

There is a positive relation between income inequality and crime rate. Three major factors for the
inequality-crime correlation are:
1) The disadvantaged people may suffer from resentment and hostility as a result of their
economic position or competition over limited job openings.
2) Few means of obtaining resources lawfully exist, even taking punishments into account
illegal methods to obtain something have better returns then obtaining via legal means.
3) The rich poor gap increases crime by reducing law enforcement spending in low-income
areas. Wealthy members of society move to Porsche localities while the less privileged
remain in old areas of the city. Thus rich neighborhoods have more funds for police than
their poorer counterparts.

Decreases Health:
Greater the income inequality gap greater are the sociological implications. Due to a difference
of affordability some people will receive better health care facilities then others, as is evident
from the rising trend of private hospitals and private clinics.

Decrease Education:
Due to unequal distribution of wealth the kids of rich people have access to good quality schools,
whereas kids of struggling families/poor/lower middle class have access to either nothing or only
to limited number of schools. As education determines the job's which in turn decides the income
of the individual and thus the class he would belong to or his/her spending power; this is a
cyclical effect in which a personal and his family gets trapped, thus restricting their upward
mobility.

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Promote Political Instability:

Due to widening monetary inequality the power gets accumulated in the hands of few. The
politically powerful make rules in favour of their vested interests and make themselves superior
to the law whole the common man trapped in the never ending tangles of the system. Injustice
prevails with the same law of the jungle as might is right.

Methods to reduce income inequality:

Inequality in developing countries, including Pakistan, has increased to an unexpected level,
therefore, it has now become important to run campaigns to get people aware of its problems that
a society might face as well as take steps to reduce it. Some of the steps that can be taken
includes:
Increase minimum wage:
Increasing the wages for the lowest paid workers help in reducing the widening income gap. This
does not retard economic growth neither have any effect on employment. As a matter of fact, it
has proven to be useful in increasing the overall income of a nation.

Expanding tax base structure:

Rather than increasing the tax rate, government should increase the tax base structure in order to
take tax from rich and give it to poor rather than taking tax from lower or middle class and
giving it to upper class of the society. The increased taxes ( from rich ) can help support the
working class, especially single parents entering the work force and pull more children out of
poverty.

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Build assets for working families:

Introducing policies which favor higher saving rates and lowering the cost of building assets for
the working and lower-middle class can prove to be effective in reducing income inequality.
Enrolling workers automatically in retirement plans help stabilize the economic conditions of
struggling families.

Investing more in education:

The reason that some people have more wealth than others is basically because of distinctive
jobs and these jobs are only possible to attain when one have a quality education. Investments
should be made in the education sector from primary to university level, to help the underprivileged but potential students to be successful.

Ending residential segregation:

An evident problem in metropolitan cities is that people are segregated on the basis of income.
The upper class moves towards newer better areas usually termed as Porsche localities, while the
struggling families stay in older localities which slowly turns in slums. Segregation with income
correlates with reduced upward mobility, thus the income gap persists. Eliminating segregation
by income can enhance mobility for all.

Conclusion:

All the factors causing inequalities, mentioned above, can be observed in the economy of
Pakistan. Pakistan economy is becoming more of a Capitalist economy in which power is
unevenly distributed and major portion is given to the Elite class or Capitalists of the society.
Due to this fact, important decisions about economic and political stability is made by the
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Capitalist and like Karl Marx said the lower class is being excluded from the society. The
capitalists have created a union in which they feel as the ruling class and are continuously
exploiting the rights of proletarians or the working class. The proletariats have now become
dependent on capitalists, for their livelihood as, they have the land, supplies and a larger portion
of wealth. This has caused an increased in the rich-poor gap, since the independence of Pakistan.
Although at that time the rural inequality was much higher than the urban inequality, but over
time, inequality in urban areas have increased and have become almost 42% more than that of
the rural areas. (The Express Tribune, 2012)
Since no statistical analysis or data was present regarding the decrease in monetary inequality in
Pakistan, so, ultimately it supports our null hypothesis that THE MONETARY INEQUALITY IN
PAKISTAN IS INCREASING.

References:

GROWTH AND CONSUMPTION INEQUALITY IN PAKISTAN

Author(s): MUHAMMAD ALI ASAD and MEHBOOB AHMAD
Source: Pakistan Economic and Social Review, Vol. 49, No. 1 (Summer 2011), pp. 69-89
Published by: Department of Economics, University of the Punjab Stable
URL: http://www.jstor.org/stable/41762424
Accessed:

10-11-2015

09:36

UTC

Ahmad, E. and S. Ludlow (1989), Poverty inequality and growth in Pakistan. The Pakistan
Development Review, Volume 28(4), pp. 83 1-850.

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Ahmad, M. (2000), Estimation of distribution of income using micro data. The Pakistan
Development Review , Volume 39(4), pp. 807-824.

Kakwani, N. (1980), Income Inequality and Poverty. Method of Estimation and Policy
Application. New York: Oxford University Press.
Kakwani, N. (2004), Pro-poor growth: Concepts and measurement. PIDE, 19th Annual
Conference, 13th to 15th January, Islamabad

Kuznets, S. (1955), Economic growth and income inequality. American Economic Review,
Volume 45(1), pp. 1-28

Ahmad, Ehtisham and Ludlow, Stephen (1988), On Changes in Inequality in Pakistan: 197984, No. 13, The Development Economic Research Program, London School of Economics.

Ahmad, Mahboob (2002), Income Inequality among various Occupations/Professions in

Pakistan Estimates based on Household Income Per Capita The Lahore Journal of Economics,
Vol. 7, No.1.

Haq, Rashida (1999) Income Inequality and Economic Welfare: A Decomposition Analysis of
the Household Sector in Pakistan, Research Report Series No. 170, Pakistan Institute of
Development Economics, Islamabad.

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Kuznets, S. 1955, Economic Growth and Income Inequality, American Economic Review,
March.

(www.dawn.com/news/1178703)

(Dr Ikramul Haq; the News, October 30, 2013)

http://tribune.com.pk/story/414810/income-disparity-the-very-uneven-rise-in-pakistani-incomes/
(By Farooq Tirmizi
Published: July 30, 2012 )

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