Structural Adjustment and Poverty: The Case of Pakistan

Abstract

Despite the external shocks in the 1980s, the economy continued to grow at a respectable rate. However, increasing internal and external imbalances caused an economic crisis in 1988 and lead to an implementation of a medium term structural adjustment programme within the framework of the IMF and the World Bank. Neither theory nor existing evidence gives a conclusive verdict about the effects of adjustment policies on poverty. Hence, the paper examines the actual changes in absolute poverty during the period of adjustment. The actual changes in the distribution have been examined from two comparable household income and expenditure surveys (HIES) for 1987-88 and 1990-91, spanning the period of adjustment. Evidence suggests that the stylised facts of structural adjustment policies are consistent with actual changes in the absolute poverty. The first order stochastic dominance test suggests that not only the absolute poverty incidence but also the intensity and severity of poverty increased significantly by all poverty lines and poverty measures over the period of adjustment. Structural adjustment created new poor in urban areas amongst the low income groups (mainly Clerical and Sales workers) whose real wages were eroded over the period. Poverty also increased unambiguously among self-employed (smallholders in the informal sector) and unemployed who seems to have been affected adversely by the overall economic contraction. Though, the government has the priority to achieve the fiscal balance, it should seek to ameliorate the most distressing cost arising in the short run. Excessive reliance on demand management in scale or speed is counter-productive for adjustment. Adjustment strategies need to account for the trade-off between shortterm gains and long-term benefits foregone.