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Review of the previous lecture

At the macro level, economic growth implies greater availability of public


resources to improve the quantity and quality of education, health and other
services.

At the micro level, economic growth creates employment opportunities,


increases the income of the people and therefore, reduces poverty.

Poverty is generally defined as lack of command over resources to satisfy


basic needs, mainly food, shelter and clothing. This approach is basically an
income approach as it measures the degree of lowness of income or
consumption in the society.

Review of the previous lecture

A relative poverty line is set at around 50% of the average per capita income
of the country.

The subjective poverty line refers to that level of income at which people
feels that their income is just equal to the minimum income required to meet
end need.

The absolute poverty line is defined as a minimum socially acceptable level


of income or consumption used to distinguish the poor from non-poor.

Lecture 27

Part I : Poverty
Part II: Five Debates Over Macroeconomic Policy
Instructor: Prof.Dr.Qaisar Abbas
Course code: ECO 400

Lecture 27

Part I
Poverty

Part I Lecture Outline

1. Methodologies used in Pakistan


2. Poverty reduction strategy
3. Various indicators

Methodology used in Pakistan


After two days of extensive consultation organized by the Planning
Commission with all the experts on poverty in Pakistan in 2001 a consensus
was emerged on the methodology to be followed in Pakistan.
These include:
Calorie intake approach
2350 calories per adult equivalence
Consumption basked that includes food and non-food items (50% food
+ 50% non-food)
Nutrition based adult equivalence scale with 0.8 weight for person less
than 18 years old and 1.0 far all other individuals
Poverty line be updated by using CPI-based inflation

Calories Intake
Calories Intake: Poverty Lines Used in the region
Country
Pakistan
India
Bangladesh
Sri Lanka
China
Vietnam
Philippines
Thailand
Indonesia
Nepal
* Adult equivalent
(1985, 2002)

National

Rural

Urban

2350*
2112
2250*
2150
2100
2000
1978
2100
2250*

2350*
2400
2112
2000
2250*

2350*
2100
2112
2000
2250*

Source: GOP

Poverty Reduction Strategy followed by Pakistan

Real GDP grew at an average rate of 7% p.a in the last


five years
Barring two years real GDP grew at an average rate of 3.8% p.a. in the
1990s

Unemployment Declined as growth accelerated

Pace of Job Creation Increased: 11.8 million jobs


created in six and a half years
Labour Force
Survey

Employment
(in millions)

Number of New
Employment
(in millions)

FY 97

34.13

FY 00

36.32

2.19

FY 02

38.88

2.56

FY 04

42.00

3.12

FY 06

46.94

4.94

FY 07

47.65

0.71

FY 08

49.09

1.44

FY 09

50.79

1.70

Social Sector and Poverty Related Expenditure


(Rs. In Bln)
01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09
Community
Services

11.0

Human
Development

90.7 105.8 134.1 155.8 217.9 231.8 256.8 329.4

Rural
Development

24.3

34.2

44.5

59.7

78.5 101.8 151.5 136.0

Safety Nets

11.0

15.4

17

11.4

36.1

18.8

Governance

33.0

38.5

41.8

50.5

6.8

7.2

Total

167.3 208.8 261.3 316.2 402.9 436.2 1042 977.3

as % of GDP

3.8

16.6

4.3

28.5

4.6

41.7

4.8

63.6

4.9

76.6

4.9

Source: Policy Wing, Finance Division

104.5 121.8

435.2 276.1
94

97

114

7.46

Poverty Indicators 1998-99, 2000-01, 2004-05 & 2005-06


Headcount
98-99 00-01 04-05 05-06 07-08
Pakistan

30.6

34.46 23.90

22.3

17.2

Urban

20.9

22.69 14.90

13.1

10.1

Rural

34.7

39.26 28.10

27.0

20.6

Poverty Line *

723.40 878.64 944.47 1133

* Rs. per adult equivalent per month.


Source: CRPRID/Planning
Division
In absolute numbers, 13.0 million people were
brought out of poverty

How Serious is Poverty in Pakistan (% of population)

Comparison of Living Conditions: 1998-2004-05


Major Indicators

Housing units with one room (%)


Housing units with 2 4 rooms (%)
Housing units with 5 & more rooms (%)
Owned Housing units (%)
Electricity [(as source of lighting (%)]
Gas [(as cooking fuel (%)]
Major source of Drinking Water
(Tap Water)

CENSUS
(1998)

PSLM
(2004-05)

PSLM
(2006-07)

38.1
55.0
6.6
81.2
70.5
20.2

24.2
68.7
7.1
86.6
83.9
29.5

24.3
69.1
6.6
85.9
86.6
30.0

26.0

34.0

36.0

Source: FBS

Comparison of Selected Social Indicators %

Literacy and Adult Literacy

Health Indicators

Unequal States

Summary of Part I: Poverty


As growth accelerated, unemployment and poverty have declined.
Over 13 million people were brought out of poverty during 2001-08.
13.5 million jobs were created in 7 years.
Unemployment rate decline from 8.3 percent in 2001-02 to 5.2
percent 2007-08.
Living conditions of the people have also improved.
Inequality increased only marginally during 2001 and 2006 but
declined in 2007-08
Pakistan is one of the least unequal countries in the world.
Consistency and continuity in policies will sustain economic growth
and further reduce poverty.

Lecture 27

Part II
Five Debates Over Macroeconomic
Policy

Five Debates over Macroeconomic Policy

1.

Should monetary and fiscal policymakers try to stabilize the economy?

2.

Should monetary policy be made by rule rather than by discretion?

3.

Should the central bank aim for zero inflation?

4.

Should the government balance its budget?

5.

Should the tax laws be reformed to encourage saving?

Five Debates over Macroeconomic Policy

Debate I
Should monetary and fiscal policymakers try to stabilize the
economy?

Pro: Policymakers should try to stabilize the economy

The economy is inherently unstable, and left on its own will fluctuate.

Policy can manage aggregate demand in order to offset this inherent


instability and reduce the severity of economic fluctuations.

There is no reason for society to suffer through the booms and busts of the
business cycle.

Monetary and fiscal policy can stabilize aggregate demand and, thereby,
production and employment.

Con: Policymakers should not try to stabilize the


economy

Monetary policy affects the economy with long and unpredictable lags
between the need to act and the time that it takes for these policies to work.

Many studies indicate that changes in monetary policy have little effect on
aggregate demand until about six months after the change is made.

Fiscal policy works with a lag because of the long political process that
governs changes in spending and taxes.

It can take years to propose, pass, and implement a major change in fiscal
policy.

All too often policymakers can inadvertently exacerbate rather than mitigate
the magnitude of economic fluctuations.

It might be desirable if policy makers could eliminate all economic


fluctuations, but this is not a realistic goal.

Five Debates over Macroeconomic Policy

Debate II
Should monetary policy be made by rule rather than by discretion?

Pro: Monetary policy should be made by rule

Discretionary monetary policy can suffer from incompetence and abuse of


power.

To the extent that central bankers ally themselves with politicians,


discretionary policy can lead to economic fluctuations that reflect the electoral
calendarthe political business cycle.

There may be a discrepancy between what policymakers say they will do and
what they actually docalled time inconsistency of policy.

Because policymakers are so often time inconsistent, people are skeptical


when central bankers announce their intentions to reduce the rate of inflation.

Committing the Fed to a moderate and steady growth of the money supply
would limit incompetence, abuse of power, and time inconsistency.

Con: Monetary policy should not be made by rule

An important advantage of discretionary monetary policy is its flexibility.

Inflexible policies will limit the ability of policymakers to respond to changing


economic circumstances.

The alleged problems with discretion and abuse of power are largely
hypothetical.

Also, the importance of the political business cycle is far from clear.

Five Debates over Macroeconomic Policy

Debate III
Should the central bank aim for zero inflation?

Pro: The central bank should aim for zero inflation

Inflation confers no benefit to society, but it imposes several real costs.


Shoeleather costs
Menu costs
Increased variability of relative prices
Unintended changes in tax liabilities
Confusion and inconvenience
Arbitrary redistribution of wealth

Reducing inflation is a policy with temporary costs and permanent benefits.

Once the disinflationary recession is over, the benefits of zero inflation


would persist.

Con: The central bank should not aim for zero inflation

Zero inflation is probably unattainable, and to get there involves output,


unemployment, and social costs that are too high.

Policymakers can reduce many of the costs of inflation without actually


reducing inflation.

Five Debates over Macroeconomic Policy

Debate IV
Should fiscal policymakers reduce the government debt?

Pro: The government should balance its budget

Budget deficits impose an unjustifiable burden on future generations by


raising their taxes and lowering their incomes.

When the debts and accumulated interest come due, future taxpayers will
face a difficult choice:
They can pay higher taxes, enjoy less government spending, or both.

By shifting the cost of current government benefits to future generations,


there is a bias against future taxpayers.

Deficits reduce national saving, leading to a smaller stock of capital, which


reduces productivity and growth.

Con: The government should not balance its budget

The problem with the deficit is often exaggerated.

The transfer of debt to the future may be justified because some


government purchases produce benefits well into the future.

The government debt can continue to rise because population growth and
technological progress increase the nations ability to pay the interest on the
debt.

Five Debates over Macroeconomic Policy

Debate V
Should the tax laws be reformed to encourage saving?

Pro: Tax laws should be reformed to encourage saving

A nations saving rate is a key determinant of its long-run economic


prosperity.

A nations productive capability is determined largely by how much it saves


and invests for the future.

When the saving rate is higher, more resources are available for investment
in new plant and equipment.

The U.S. tax system discourages saving in many ways, such as by heavily
taxing the income from capital and by reducing benefits for those who have
accumulated wealth.

Pro: Tax laws should be reformed to encourage saving

The consequences of high capital income tax policies are reduced saving,
reduced capital accumulation, lower labor productivity, and reduced
economic growth.

An alternative to current tax policies advocated by many economists is a


consumption tax.
tax

With a consumption tax, a household pays taxes based on what it spends


not on what it earns.
Income that is saved is exempt from taxation until the saving is later
withdrawn and spent on consumption goods.

Con: Tax laws should not be reformed to encourage


saving

Many of the changes in tax laws to stimulate saving would primarily benefit
the wealthy.
High-income households save a higher fraction of their income than lowincome households.
Any tax change that favors people who save will also tend to favor
people with high incomes.

Reducing the tax burden on the wealthy would lead to a less egalitarian
society.

This would also force the government to raise the tax burden on the poor.

Raising public saving by eliminating the governments budget deficit would


provide a more direct and equitable way to increase national saving.

Summary of Part II: Five Debates Over Macroeconomic


Policy

Advocates of active monetary and fiscal policy view the economy as


inherently unstable and believe policy can be used to offset this inherent
instability.

Critics of active policy emphasize that policy affects the economy with a lag
and our ability to forecast future economic conditions is poor, both of which
can lead to policy being destabilizing.

Advocates of rules for monetary policy argue that discretionary policy can
suffer from incompetence, abuse of power, and time inconsistency.

Critics of rules for monetary policy argue that discretionary policy is more
flexible in responding to economic circumstances.

Summary of Part II: Five Debates Over Macroeconomic


Policy

Advocates of a zero-inflation target emphasize that inflation has many costs


and few if any benefits.

Critics of a zero-inflation target claim that moderate inflation imposes only


small costs on society, whereas the recession necessary to reduce inflation
is quite costly.

Advocates of reducing the government debt argue that the debt imposes a
burden on future generations by raising their taxes and lowering their
incomes.

Critics of reducing the government debt argue that the debt is only one
small piece of fiscal policy.

Summary of Part II: Five Debates Over Macroeconomic


Policy

Advocates of tax incentives for saving point out that our society discourages
saving in many ways such as taxing income from capital and reducing
benefits for those who have accumulated wealth.

Critics of tax incentives argue that many proposed changes to stimulate


saving would primarily benefit the wealthy and also might have only a small
effect on private saving.