Lecture 13

(HDI lecture continued)

 How to measure poverty? Because there is a dispute. Some people were in favor of decade
of development (1958-1968) and some were against it. Those who are in favor they say
that during this time period there was economic development and economic prosperity and
poverty reduced in Pakistan. In order to understand the actual situation, poverty is being
measured.
 How economic prosperity can be measured? Through UN parameters of HDI and HPI.
 How economist define poverty or economic well-being of society? Through absolute and
relative poverty. In absolute poverty, we calculate number of poor and in relative poverty,
we see distribution of income. How income is evenly or unevenly distributed? If there is
an economy where there are no poor still there will be relative poverty due to different
income levels.
 In absolute poverty, we see earnings of people and then define who is poor and who is not
poor. (Head count ratio etc.)
 Functional Distribution of Income
 We see Share of total national income that each of the FOP receives.
 We categorize factors of productions in this case. Let’s say there are four FOP; land, labor,
capital, entrepreneurship and then we see how income is distributed among these FOPs.
 Usually how the poor will contribute in the economy or production process? Do they (poor)
contributor their entrepreneur skills or they contribute with land, capital or service? Usually
poor contribute through their labor.
 In this case we see contribution of whole population not only poor.
 How we see size distribution of income in this case? Firstly, we will generally see there
are how many FOPs and how much each Fop is getting? E.g. if there are four FOPs land
labor capital and entrepreneurship. And any one or two get larger portion of income and
you belong to that FOP that probably means that you are rich. E.g. if in overall distribution
of income the share of labor is 5%, land is 10%, capital is 60% and entrepreneur skills is
25%. This shows that income distribution is in favor of capitalists. Then we will see how
much of population contributes in Fops? E.g. if we say that 60% of population is
contributing in economy through labor, 20% is contributing through their entrepreneur
skill, 15% are through their lands and 5% are through their capital. This shows that income
is unevenly distributed. Capitalists they are 5% of the population and they get 60% share
in National Income. Labors are the largest portion of population but they get the smallest
portion in NI.
 We see distribution of income from 2 angles. Through one angle we see how the income
is distributed among overall population (size distribution, GINI coefficient, Lorenz curve).
Through second angle we see income distribution among various FOPs (functional
distribution of income)
 Chapter: 06
(Continued)
 From 1958-1968 whether the poverty was increased or decreased? If we analyze the decade
of development. In those 10 years (58-68), in Pakistan number of poor who were living
below poverty line, their number had decline. Total poverty gap reduced, average poverty
gap reduced, size distribution of income became more even, Lorenz curve it became closer
to the line of equality, Value of GINI coefficient reduced. These six parameters show an
improvement in Pakistan’s economy. E.g. in 1963, value of GINI coefficient in Pakistan
was 0.386 and in 1970 value was 0.336 (the more the value is closer to zero means the
income distribution is becoming more even).
 PPP emerged in this time era and all the slogans used by political parties (roti, kapra,
makan, slogans related to elevation of poverty etc.) gained popularity. Although all the
parameters were showing improvement (the living standard of people relatively improved
and no of poor reduced), still the slogans got popularity because there was deterioration in
one parameter of functional distribution of income. In Pakistan in those years all other
parameter reduced but functional distribution of income became more uneven in favor of
capitalists, land owners and entrepreneurs. And it was against labor. Why this happened?
It was intentional. REASON. When there is political government in Pakistan then the
advisors of government are usually politicians. While in military governments the advisors
are mostly technocrats. In Ayub Khan’s era, the economic advisors of government were
alumni of Harvard University. They were known as Harvard advisory group. They had
their policy to deliberately make distribution of income uneven in favor of capitalists, land
owners or entrepreneurs (Trickledown Effect).
 Capitalist invest only when he sees profit and if there is not profit then he will not invest.
1. So if you have made such policies in which capitalist think that the profit of
investing has increased so he will invest more money due to which there will be
more businesses and there will be more production of goods and services. For this
they will need more FOPs. So more employment opportunities will be created. Due
to which those who were previously unemployed they would get employment. As
they would get employment then their earnings would increase and people who are
living below poverty line, they would come out of poverty. Previously, their share
in National Income was very low, now their share would increase.
2. If a business would start. If in an economy some economic activity would start,
there will be multiplier’s effect. When there is change in any component of
aggregate expenditure/ GDP expenditure (GDP = L + I + G + NX). E.g. Investment
has increased by $100 million so in GDP the increase will be not of $100 million.
The increase will be of multiple of $100 million. Why? Because that $100 million
will have multiplier’s effect. This effect will be in a way that e.g. if government
starts constructing a new road and for that they need to spend $40 million. So,
government expenditure has increased due to which GDP would not increase by
$40 million but by its multiple. Some of the money from $40 million will go to
contractor, some will go to labor, suppliers, transporters, drivers etc. So $40 million
 will be distributed among all these people. This means that the income of
contractor, labor, suppliers, transporters, drivers etc. has increased. When their
income would increase, their marginal propensity to consume (if a person’s
income increases by Rs. 1 then from how much his consumption will increase?)
Let’s say if a person’s income has increased by Rs. 1 and he consumes 70% of it
and saves 30% of it. This means that when this $40 million will be distributed then
its 70% ($28 million) will be spent. E.g. when he earning of these people will
increase they will spend more money on food, education, house, cars, clothes etc.
this means that in a country the demand for all these things will increase. That $28
million will go to the suppliers of all these things (food, education, house, cars,
clothes etc.). So the earning of all these suppliers will also increase. When their
income will increase, they will also spend money in the economy due to which their
demand will increase and the process will go on. So there would be a trickledown
effect. Due to a construction project, there are a lot of industries to which it will
impact. Due to this project contactors, engineers, suppliers of home appliances,
carpenters, suppliers of cement and bricks etc. will get employment. So there will
be a trickledown effect.
 For some time the distribution of income will be uneven. Since, you are attracting investors,
so you have increased their profit margins, reduced their taxes, provision of credit on
concessionary basis has increased, such policies are made due to which investment has
become more easy etc. so initially distribution of income will be uneven in favor of
investors to attract them so that they invest more and more money in the economy. When
more money will be invested, more employment will be created and there would be
trickledown effect. So overall in longer time period poverty will reduce and ultimately a
time will come when income distribution will become even.
 Similarly in agriculture there was elite farmer strategy. Why? Because the Harvard
advisory group was making such policies so that the investment increase and economic
activity starts in the sector. When the economic activity will increase, economy may come
out of poverty.
 How there was inequality?
At the end of those 10 years, there were 44 individuals or group of companies (Monopoly
Houses) in Pakistan who controlled 77% of manufacturing of Pakistan. Out of 17 Banks,
7 major banks were, directly or indirectly, controlled by those 44 individuals or group of
companies. Those 7 Banks were so big that 60% of total deposit of Pakistan was with those
7 Banks. Pakistan industrial credit and Investment Corporation, its 65% loans were with
these 44 monopoly houses. This shows that overall size distribution of income became
more even but functional distribution of income became deliberately uneven.
 The impact of all this was that somehow those people (44 monopoly houses) became more
prominent. When they became prominent then Bhutto took political advantage of this and
made his party. There were 2 blocks at that time (capitalist and communist) and Ayub
Khan’s policies were capitalist policies. At that time, the thought was that in communist
countries, mazdoorun ki hakumat huti hai, the farms are not being distributed they all
remain with government and then government spend all the resources on the society. So
people used to get fascinated by this idea and they wanted to become a communist country.
Bhutto used these sentiments and made his party whose basic purpose was to empower the
poor. The slogans started from the fact that distribution of income is unequal, the policies
of government are for very few people, only rich is getting benefit not poor. So we will
empower poor people and due to this slogan PPP got popularity and in the elections of
1972, PPP won.