BS (H) Economics Research Report

Determents of poverty in PAKISTAN

By
ALI USMAN UZAIR
Roll no 4601
2013-GCUF-00225
BS(H) Students (Economics)

Session: 2013-2017

Supervisor: Name Signature

Supervisor: Dr.Rizwan Yasaeen

Department of Economic
Government University Faisalabad,
Abstract
This article discussion about the effect of macroeconomics variable on the poverty
in Pakistan. The six variable are used in this research paper. Two model are to check the effect.
Methodology: Auto regressive Distributed Lag technique applied. Finding: In first model I
check the effect of government expenditure, budget deficit and exchange rate. the exchange rate,
budget deficit and government expenditure shows negative relationship with poverty in Pakistan.
in the second model check the impact of unemployment, remittance, and foreign direct investment
on poverty. Remittance, foreign direct investment and un employment shows positive effect on
poverty in Pakistan. in this variable one variable is which is foreign direct investment.

Key words: Poverty, budget deficit, exchange rate, unemployment.

Introduction

People used the word poverty in the narrower sense of low income. Poverty is a state in which one
lacks certain amount of money. which include social and political elements. Absolute poverty
means lack of resource to meet basic needs such as food, cloth and shelter. But relative poverty
means we are unable to live or maintain standard of life as compare to developed nations. poverty
in Pakistan has risen dramatically. the government is depending on IMF and world bank so our per
capta income very low that causes a worse situation. Pakistan has also very high birthrate it also
causes poverty. According to united nation development program report 20 million people are
living below poverty line in Pakistan. Corruption and political instabilities such as law and order
and military operations or rapid changes in government effects the development programs and
poverty is increasing our resource allocation is not maintaining Pakistan major cities and urban
centers estimated 1.2 million street children. This includes beggars and scavengers who are very
young. Another reason of poverty is feudal landholding system the landlords exploit the resources
so the poor remains the poor. According to the nurkse a country is poor because it is poor. Women
in Pakistan suffer from poverty of opportunities throughout their life Mads set by 189 numbers
contains are set the target of reducing the poverty rate. We need to buy term planning and five-
year development program to reduce poverty. According to Labor Government (1997) of UK the
word 'poverty' was generally used as an all-encompassing term to explain the situations where
people lack many of the resources that are available to the average citizen. According to Ravallian
and Bidani, (1994) Assessment of absolute poverty treats all the households of the universe at a
consistent poverty line, same consumption level and living standard, irrespective of time and place,
resulting in an inconsistent poverty profile According to Ahmed and Donoghue (2010)The
reduction in poverty and progress toward the achievement of the Millennium Development Goals
were to some extent attributable to the unprecedented increase in poverty-related public spending
that was possible due to the increased fiscal space available to the federal government during this
period. Zaidi (1992) The proponent of the concept of relative poverty assert that the position of
the individual relation to order to member of the society. with degree of satisfaction determents
whether poor or not.

Literature Review
Hayhder and Sadiq (2010) examined the determents of poverty in Pakistan. Cross sectional study
was conducted over time period 2001-2002 and 2004-2005. Explanatory variables used in this
study were education, marital status, employment, house hold characteristic, head of house hold.
Surveys data were used which conducted by federal bureau of statistic Multinomial logit model
was used to find out the results. The finding showed that poverty was decreases between 2001 to
2004 because of emphasis on educational policies to improved it. Employment significantly related
to the poverty when employment level increased it decreases poverty level.

Cheema (2005) reported short authentic profile of poverty in Pakistan and a significant
contribution on the literature Pakistan the study of profile proves that measurement of poverty
increase with time the reduction of poverty can be happened by social spending on education,
health and capital, the data was truly based on panel data collected from rural area of Pakistan.

Raza and Sial (2012) analyzed an incidence profile and economic determents of Poverty. OLS
model was run to finding out the report. which stated that poverty is inversely related to Age,
Education own land .it is related to house hold which received foreign remittance. Poverty and
education level are inversely related to each other. they calculated head count ratio 23 percent in
Pakistan.

M Afzal and Ehsan (2012) analyzed relationship among education, poverty, and economic growth
in Pakistan. The study based on time series data (1971-2010) in Pakistan. They used education,
GDP, poverty and physical capital as variable. Data was taken from various issue of Pakistan
economic survey, FBS and annual report of stat bank of Pakistan. ARDL model confirmed
relationship between long run and short run which depicted that poverty and economic growth are
inversely related to each other.

Sarwer and Noman (2011) examined the impact of education in poverty reduction. The source of
data was household integrated economic survey 1998-99 And 2001-02. It stated the being poor is
depended and education level, gender, and experience were explanatory variable. A logit model
was estimated base of data. it concluded that experience and education achievement is negatively
related to poverty incidence in both years

A Geda (Aug 2001) examined determents of poverty at house hold level in Kenya. poverty was
depended on level of Education, house size and agriculture. collect from the differ areas of Kenya.
the logit model technique used to determine it. The result stated that increasing productivity in
Agriculture, Education, level decrees poverty. the education and fertility are negatively co-Related.

Kurosaki (2003) reported a study was conducted over two period panel dataset (300 households)
collected from the North- West Frontier Province (NWFP) to finding the vulnerability to risk as
impotence of dynamic poverty. The study was found that sample households are subject to high
transient poverty in terms of income, and that the dynamically vulnerable group includes
households led by aged individuals, those with little land, and without regular remittance receipts.
Although the IFPRI data provide useful insights into poverty, this studies were based on a small
rural of the districts.

Catrinescu et al. (2009) examined that Remittances, Institutions and Economic Growth. The data
on remittances was collected from the World Bank’s World Development Indicators (WDI)
database. The main result of remittances showed have a positive and statistically significant effect
on growth in five out of nine of these specifications. remittances helped in economic growth only
in a condition if good economic policies are made that increase growth. Utilization of remittances
always benefit the economy as it fosters development whether remitted money is invested in
purchasing land and building it will give rise to demand of products and services in long run.

Chaudhary et al. (1995) identified the relationship of budget deficit, supply of money and inflation
in Pakistan. Excessive government expenditure leads to budget deficit but some argued that budget
deficit is not due to excess of government expenditure. it is due to illogical use of government
budget e.g. large expenditure on collection of taxes. Consistent increase in budget deficit due to
these factors had a bad impact on economy and it gives rise to borrowing from other countries.

(Hendin, 2012) determined the relationship of macroeconomic variables and poverty in United
States. He studied that exchange rate must be considered in studying this relationship as decrease
in exchange rate of united states made its product cheaper for foreign countries so foreigners will
prefer to import from US in spite of purchasing from their own country this will increase demand
of US product. Hence in this way employment would increase in US and would eradicated the
poverty from country.

Qureshi and Arif (2001) examined the incidence of poverty for the period from 1998 to 1999 using
two methods, a calories intake approach and a basic needs approach. Poverty differentials across
urban and rural areas were also examined within different socio-economic groups. The main data
source used in this study is the house- hold survey carried out by the MIMAP (Micro Impact of
Macroeconomic Adjustment Policies) project of the PIDE3 named “the 1998-99 Pakistan Socio-
economic Survey” (PSES). They suggest that particularly schooling and employment creation are
important factors that must be addressed for reducing poverty.

Jamal (2005) analyzed in Search of Poverty Predictors: The Case of Urban and Rural Pakistan.
The main objective of this research was to provide correlates of household consumption or poverty
using the current household survey. The estimated coefficients and their weights may be used to
suggest poverty incidence from light monitoring survey such as Core Welfare Indicator
Questionnaire (CWIQ). The CWIQ survey method essentially collected simple welfare indicators
from a large segment of population and were not made to measure income, consumption or
expenditure. The paper estimated consumption functions separately for urban and rural areas.
These functions were estimated with the help of non-monetary correlates of consumption and
applied to estimate poverty at provincial and district level. According to the predictions,
approximately 33 percent of people were poor during 2001-02. Rural poverty in this time had
increased with an annual growth rate of 3.1 percent, while this percentage was about 7 in the type
of urban poverty incidence.

Sekhampu (2013) The study reported here used household level data to determine determinants of
household poverty in a South Africa Township. lowing poverty need to find factors that were
strictly linked with poverty and that could be effected by policy changes. A Logistic regression
was estimated based on this data with the economic status (that is poor and non-poor) as the
dependent variable and a set of demographic variables as the explanatory variables. The results
depicted that household size, age and the employment status of the household head clearly
explained the changes in the likelihood of being poor. The age and employment status of the
household head minuses the chance of being poor, besides it household size is linked with a
positive increase chance of being poor.

Awan and Iqbal (2010) examined on Determinants of Urban Poverty: The Case of Medium Sized
City in Pakistan Poverty concluded that generally based upon primary data at household level.
For this study, primary data is collected under the joint survey ‘analyzing of Poverty in Sargodha
City’ by the Pakistan Institute of Development Economics (PIDE) Islamabad, and the University
of Sargodha (UOS) Sargodha in May 2008. Results told that employment in public sector,
investment in human capital and leads to public amenities reduce poverty while employment in
informal sector, greater household size and female represented households increased poverty.

Bogale et al (2005) Determinants of poverty in rural Ethiopia. examined the determinants of rural
poverty1 in Ethiopia. Their study was based on information accumulated from a three-round
survey of 149 rural households in three districts of Ethiopia during the 1999/2000 cropping season.
The FGT poverty index (index proposed by Foster, Greer and Thorbecke) is employed to analyzed
the extent and severity of rural poverty. It showed that nearly 40% of the sample households
survived under poverty line with an approximated poverty blank of of 0.047. The binary logit
estimated thrown light on factors behind the emphasizing of poverty. Our researches examined
that increased targeting devices can be a meaning full instrument in erasing poverty, particularly
to access the poorest of the poor.

Geda et al (2005) techniques leaded to erase poverty acquired to find factors that were strictly
along with poverty and that were ready to change by policy This article used household level data
collected in 1994 to determine probable determinants of poverty status, employing both binomial
and polychotomous logit models. The study told that poverty status is must included with the level
of education, household size and associating in agricultural activity, both in rural and urban areas.
In general, those factors that were closely linked with total poverty ac- cording to the binomial
model were also needed in the ordered-logit model, but they show to be even more important in
competing maximum poverty.

Research gap

Unit root test:

A test of stationarity or non- stationarity that has become widely popular

over the past several years is the unit root test. We used unit root test to check the stationarity of
the variables and after it we are capable to decide which model is suitable for the data. Results of
unit root test are some variables unit root at 1st difference or some at level. By these results of Unit
root test, we select auto regression distributed lag model which we apply for the required.

Results of ADF for unit root test .

Variables Stationary result Stationary result

(at level) (ist difference)

T -Statistic Prob.* T-Statistic Prob.*

Poverty -8.908966 0.0000

Govt exp -4.674240 0.0011

Unemployment -3.767436 0.0094

ER -3.503930 0.0196

BD -4.614689 0.0013

FDI -3.168768 0.034

this result shows poverty is stationary at level with t-statistic value (-8.908966) and significant at
1%,5%,10% at level of significant. Govt EXP is stationary at first difference with t statistics value
(-4.674240) and significant at 1%,5%,10% at level at significant. UNM is stationary at first
difference with t statistics value (-3.767436) and significant at 1%,5%,10% at level at
significant.ER is stationary at first difference with t statistics value (-3.503930) and significant at
1%,5%,10% at level at significant.BD is stationary at first difference with t statistics value (-
4.614689) and significant at 1%,5%,10% at level at significant. FDI is stationary at first difference
with t statistics value (-3.168768) and significant at ,5%,10% at level at significant.

Research methodology:
In this paper six variable are used to find out the impact on poverty.
The data of all variable is taken from word bank indicator. The data collected from these source
is time series that exist 26 observations from 1990 to 2015. SPSS used to get missing value of
head count ratio. Which is not available.

The measurement units of variables and variables mention below.

1) poverty that is measured in head count ratio. (head count ratio at$1.90 a day (2011 PPP)
2) Government expenditure measured in percentage of GDP. (GE)
3) Foreign direct investment measured in percentage of GDP. (FDI)
4) Exchange rate in term of American dollar. (ER)
5) Remittance in term of million us dollar. (REM)
6) Unemployment measure in percentage that are unemployed. (UNM).
7) Budget deficit measured in percent of GDP.

functional form 1:
P = f (GE, EX, BD)
POV = Poverty measured in head count ratio GE = Government expenditure in percentage of
GDP BD = Budget deficit in percentage of GDp. Exchange rate in term of dollar μ = standard
error term

Mathematical form 2:
p = f (REM, UNM, FDI)

Econometric model 1:
 In this model impacts of government expenditure, budget deficit and exchange
rate on poverty is determined. The empirical equation is:
POV = βo + β1GE + β2BD + β3 EX + μi

Econometric model 2:
Remittance have a strong impact on poverty we study this effect
theoretically as well as empirically. This study will help in understanding the effects of
remittances and FDI on poverty.
POV = βo + β1REM + β2UNM + β3FDI + μi (2)
POV = measure of Poverty (Poverty head count ratio), REM = measure of remittance measured
in us dollars. FDI in term of us dollar.

Table no 1: The results of model 1

Variables Coefficients Std. Error t-Statistic Prob.*
POVERTY(-1) -1.060091 0.334619 -3.168055 0.0339
POVERTY(-2) -0.305397 0.314870 -0.969912 0.3870
POVERTY(-3) 0.193309 0.315525 0.612657 0.5732
POVERTY(-4) 0.270802 0.209208 1.294415 0.2652
D(GOVTEXP) -0.653666 0.629443 -1.038484 0.3577
D(GOVTEXP(-1)) -4.144603 0.855456 -4.844902 0.0084
D(GOVTEXP(-2)) -2.816285 1.301710 -2.163528 0.0965
D(GOVTEXP(-3)) -2.620464 1.306519 -2.005684 0.1154
D(BUDGETDEFICIT) -0.890489 0.470104 -1.894238 0.1311
(D(BUDGETDEFICIT(-
1)) 1.074325 0.355900 3.018618 0.0392
D(BUDGETDEFICIT(-
2)) 2.380330 0.512839 4.641481 0.0097
D(BUDGETDEFICIT(-
3)) 1.261262 0.668266 1.887365 0.1322
D(BUDGETDEFICIT(-
4)) 0.459766 0.533551 0.861710 0.4374
D(EXCHANGERATE) -0.407917 0.243143 -1.677680 0.1687
D(EXCHANGERATE(-
1)) -0.001386 0.318082 -0.004356 0.9967
D(EXCHANGERATE(-
2)) 0.358529 0.296831 1.207857 0.2936
c 35.73242 13.01650 2.745164 0.0516

Results:
 The results of 1 lag of poverty are statically significant at 1% ,5% and 10% level of
significance. if we increase 1% in the first lag poverty it reduces 1.06% in current year poverty.
The second lag of poverty insignificant and it has negative relationship with current year poverty.
The third lag also insignificant at any level of significance.it has positive relation with current year
poverty. The forth lag also insignificant it is positively related to current year poverty. The
government expenditure of current year is insignificant at any level of significance. It is negatively
related current year poverty. The first lag of government expenditure is significant at 1%, 5% and
10% level of significance. if we increase 1 dollar in first lag of government expenditure it will
decrease 4.14% in poverty. The second lag of government expenditure is significant at 10% level
of significance. If we increase 1% in second lag of government, it will decrease 2.81% in poverty
this year. The third lag of government expenditure is statically insignificant at any level of
significance. And it negatively related with poverty. The current year budget deficit is statically
insignificant at any level. It is negatively related poverty. The first lag of budget deficit statically
significant at 5%,10% level of significance. if we increase 1 dollar in budget deficit 1.07% in
poverty. The second lag of it statically significant at 1%,5% and10% level of significance. If we
increase 1 dollar in second lag of budget deficit it will increase 2.38% in poverty. The third and
fourth lag of budget deficit are insignificant at any level of signifance.it is positively related to
poverty. The current year of exchange rate is statically insignificant an ant level of significance. it
is negatively related with poverty. The first lag and second lag of exchange rate is insignificant at
any level of significance. It is negatively related with poverty. second leg of exchange rate is
positively related with poverty.

The results of model 2: Table no 2

Variable Coefficient Std. Error t-Statistic Prob.*

POVERTY(-1) -1.166814 0.083376 -13.99465 0.0454
POVERTY(-2) -0.688924 0.078134 -8.817226 0.0719
POVERTY(-3) -0.273413 0.044991 -6.077051 0.1038
POVERTY(-4) -0.075313 0.046086 -1.634179 0.3496
D(REMITTANCE) 0.003479 0.000252 13.82402 0.0460
D(REMITTANCE(-1)) 0.002768 0.000405 6.842493 0.0924
D(REMITTANCE(-2)) -0.002072 0.000381 -5.435849 0.1158
D(REMITTANCE(-3)) -0.004135 0.000424 -9.759855 0.0650
D(REMITTANCE(-4)) -0.001145 0.000371 -3.086313 0.1995
D(UNEMPLOYMENT) 8.930937 0.732993 12.18421 0.0521
 D(UNEMPLOYMENT(-
1)) 7.151695 0.487208 14.67893 0.0433
D(UNEMPLOYMENT(-
2)) 4.131821 0.482121 8.570084 0.0739
D(UNEMPLOYMENT(-
3)) 3.462099 0.264721 13.07829 0.0486
D(UNEMPLOYMENT(-
4)) 7.651548 0.440421 17.37324 0.0366
D(FDI) 8.706599 0.812151 10.72042 0.0592
D(FDI(-1)) 1.159955 0.456487 2.541047 0.2387
D(FDI(-2)) 8.827278 0.610576 14.45730 0.0440
D(FDI(-3)) 6.746467 0.652585 10.33807 0.0614
D(FDI(-4)) 8.965954 0.952210 9.415941 0.0674
c 55.41546 3.255117 17.02411 0.0374

The first lag of poverty is statically significant at 5% and 10% level of significance, if we increase
1% in the first lag of poverty it will reduce 1.16%%in this year poverty.by remaining other variable
constant. The second lag of poverty is statically significant at 10% level of significance, if we
increase 1% in the second lag of poverty. it will reduce 0.68%% in this year poverty.by remaining
other variable constant. The third lag of poverty is statically insignificant at any level of
significance. There is negative relationship between third lag and this year poverty. The third lag
of poverty is statically insignificant at any level of significance. There is negative relationship
between third lag and this year poverty.by remaining other variable constant. This year remittance
is statically significant at 5% and 10% level of significance, if we increase 1% dollar in remittance
it will increase 0.003%% in poverty. The first lag of remittance is statically significant at 10%
level of significance, if we increase 1% in the first lag of remittance it will increase 0.03% in this
year poverty. The second lag of remittance is statically insignificant at any level of significance,
there is negative relationship between second lag of remittance and poverty. The third lag of
remittance is statically significant at 10% level of significance, if we increase 1% in the third lag
of remittance it will reduce 0.004% in this year poverty. The forth lag of remittance is statically
insignificant at any level of significance, there is negative relationship between 4ourth lag of
remittance and poverty. The unemployment is statically significant at 10% level of significance. if
increase 1% in unemployment .it will increase 8.9% in poverty. The first lag of unemployment is
statically significant at 5% and 10% level of significance. if increase 1% in the first lag
unemployment .it will increase 7.15% in poverty. The second lag of unemployment is statically
significant at 10% level of significance. if increase 1% in the second lag unemployment .it will
increase 4.1% in poverty. The third lag of unemployment is statically significant at 5% and 10%
level of significance. if increase 1% in the third lag unemployment .it will increase 3.4% in poverty.
The fourth lag of unemployment is statically significant at 5% and 10% level of significance. If
increase 1% in the fourth lag unemployment .it will increase 7.6% in poverty.FDI is statically
significant at 10/% level of significance. if increase 1 dollar in FDI it will increase 8.7% in poverty.
The first lag of FDI is statically insignificant at any level of significance. there is positive
relationship between first lag of FDI and poverty. The second lag of FDI is statically significance
at 5% and 10% level of significance. if increase 1 dollar in FDI it will increase 8.8% in poverty.
The third lag of FDI is statically in significant at 10 %level of significance. if increase 1 dollar in
FDI it will increase 6.74% in poverty. The fourth lag of FDI is statically significant at 10% in
significant at any level of significance. if increase 1 dollar in FDI it will increase 8.9% in poverty.

 References :
1. Hayhder and Sadiq (2010): Determinants of Poverty in Pakistan.
2. Cheema (2005): Incidence, Profile and Economic Determinants of Poverty in Pakistan:
HIES 2005-06.
3. Raza and Sial (2012): Incidence, Profile and Economic Determinants of Poverty in
Pakistan: HIES 2005-06.
4. M Afzal and Ehsan (2012): Relationship among Education, Poverty and Economic Growth
in Pakistan: An Econometric Analysis. Journal of Elementary Education Vol.22, No. 1
pp.23-45
5. Sarwer et al. (2011): Impact of education on poverty reduction.
6. A Geda (Aug 2001): DETERMINANTS OF POVERTY IN KENYA: A HOUSEHOLD
LEVEL ANALYSIS.
7. Kurosaki (2003): Measurement of Chronic and Transient Poverty: Theory and Application
to PakistanCatrinescu et al. (2009).
8. Chaudhary et al. (1995): Money Supply, Deficit, and Inflation in Pakistan*.
9. Geda et al (2005): Determinants of Poverty in Kenya: A Household Level Analysis.
10. Bogale et al (2005): Determinants of poverty in rural Ethiopia.
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145-153 (2013).
12. Jamal (2005): In Search of Poverty Predictors: The Case of Urban and Rural Pakistan .
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– Is This Time Different? Proceedings of the National Conference On Undergraduate
Research (NCUR) 2012 Weber State University, Utah March 29-31, 2012.
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PAPER SERIES NO. 5.
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in Pakistan. PIDE Working Papers 2010: 60.
16. Catrinescu et al. (2009): Remittances, institutions and economic growth.