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    Understanding Poverty in Pakistan: Trends, Challenges, and Solutions – By: Kiran Mahbood

    Understanding Poverty in Pakistan: Trends, Challenges, and Solutions – By: Kiran Mahbood


    Poverty remains a persistent challenge for developing nations, with Pakistan being no exception. Over the last three decades, despite economic growth, the proportion of poor people has increased, reflecting a global trend. In 1960, the income gap between the richest and poorest nations was stark, with the wealthiest 20% earning 30 times more than the poorest 20%.

    Defining Poverty

    Defined by the International Labour Organization as the inability to meet basic needs, poverty manifests in various forms, including absolute poverty where individuals lack essentials like food, water, shelter, and relative poverty where they can’t maintain a minimal standard of living within their society.

    Extent of Poverty in Pakistan

    In Pakistan, poverty is a multifaceted issue, affecting both urban and rural areas. According to the 2014-2015 Economic Survey, approximately 34% of the population lives below the food poverty line. Factors contributing to this include high levels of unemployment, inflation, and budget deficits. In rural areas, poverty rates are significantly higher, with limited access to education, healthcare, and employment opportunities.

    Determinants of Poverty

    Numerous studies have examined the determinants of poverty in Pakistan. Huma and Imran (2014) found a positive correlation between unemployment and poverty, while Danish (2013) highlighted the role of governance, corruption, and health in poverty dynamics. Javid et al. (2012) emphasized the impact of inflation on poverty, showing a significant relationship.

    Study Objectives

    To address poverty effectively, it’s essential to understand its determinants. Therefore, this study investigates the relationship between poverty and various factors: government expenditure, budget deficit, unemployment rate, inflation rate, and exchange rate.

    Data and Methodology

    Data Variable

    The responsible factor of poverty plays main role in the reduction of poverty in developing countries like Pakistan. In this thesis we used five variables to check their effect on poverty in Pakistan. For these variable, the data is collected from (WDI) and Economic Survey of Pakistan. The time series data is used which consists of 19 observation from 1995 to 2013. The variables and their measurements are given below:

    1. Poverty is measured in head count ratio (POV)

    2. Government Expenditure is measured in percentage of GDP.

    3. Budget Deficit is calculated in millions of rupees.

    4. Unemployment rate

    5. Inflation Rate.

    6. Exchange rate in term of US dollar


    This study will use the ordinary Least Square (OLS) method to investigate the degree of relationship as well as path of relationship (positive or negative) for these variable.

    Economic Theory or Estimated Sign

    1. Government Expenditure is measured in percentage of GDP. The economic theory suggests that government expenditure and poverty for expected sign is negative because increase in spending by agriculture side improve the crops growth in developing countries as most of the population reside in rural area whose source of earning is agriculture. Poverty will decrease as a result.

    2. Budget Deficit is calculated in million (RS). The economic theory suggests that between budget deficit and poverty, there is negative correlation because increase in taxes and expenditure decreases private investment. When spendings are reduce as a result poverty increases.

    3. Unemployment Rate that calculated sign is increase in unemployment as result it will increase poverty so the economic theory suggest a positive sign is calculated for co-efficient

    4. Inflation is also the main problem to increase poverty so when inflation increase in a country, it leads to decrease in the consumption of the people when consumption decrease it decrease the aggregate demand means that standard of living of people is low. Poverty increases so the economic theory suggests that positive sign is expected for inflation and poverty

    5. Exchange Rate The economic theory suggest that exchange rate and poverty have negative correlation because of variation in exchange rate indirectly effect poverty.

    Econometric Model

    In this study we will use multiple regression approaches to explore the relationship between the dependent and independent variables. Through OLS approach we will estimate the co-efficient of the independent variable.

    POV = f (GE, BD, UNE, INFR, ExR) (1)

    In the above model:

    POV = Poverty is measured in head count ratio (POV GE= Government expenditure is measured in percentage of GDP BD = Budget deficit Budget Deficit is calculated in millions of rupees UNE = unemployment rate INFR = Inflation rate ExR= Exchange rate in term of US dollar

    Now the econometrics model are below:

    POV=β0 + β1BD + β3 UNER + β4 INFR + β5ExR+E (2)

    Findings and Recommendations

    We found the relationship between poverty and government expenditure, budget deficit have negative or inverse relation with poverty while unemployment have positive relation with poverty. Because the fiscal policies have a direct effect on government expenditure when the spending of government increase through subsidies and through development spending on road schools and hospital, the employment increases in economy and income of the people and spending of people rises as result poverty reduced. In other words if the government spending increase than government revenue in the specific year it represent a fiscal deficit. The budget deficit and poverty have negative relationship and significant relation in Pakistan. It means govt. is either involved in development projects or subsidies due to which unemployment decreases. It leads to poverty reduction due to subsidized prices of goods, decreasing poverty. It also declines because the inflation and poverty have positive relationship. If the budget deficit occurs due to productive work like social welfare then it reduces poverty, otherwise unproductive sector such as defense expenditure cannot help in reducing the poverty.

    The exchange rate and poverty in negative relationship and significantly impact on the model coefficient. Falling of currency in term of other currency may be good for those people who earn foreign exchange but for the whole economy, its effect is increasing inflation. When inflation occurs due to currency devaluation the firms buy input at high cost from other countries so prices of the goods increase and poverty increases. The exchange rate is considered a variable which effect the poverty while inflation is another factor which increases poverty.

    When the general price level increases the people purchasing power or consumption decrease which lead to decrease in aggregate demand and also decrease in standard of living of the people. As result it increases poverty always positive relationship with poverty. The govt. needs to make strong policies to reduce poverty and do productive work which can help us to eliminate poverty. The govt. needs to improve the agriculture sector and productivity because large population of the country lives in rural area and its earns from agriculture sector. The govt. should introduce transparency and provide better health facilities and provide facilities to poor people through social welfare and impose taxes on rich people and help the poor people. The govt. also needs to provide job opportunities and introduce micro financing in rural area and provide free education and help poor people.

    The fact is there are a lot of problem which effect the poverty but we used time series data and took five variables and ran multiple regression models which showed 90% variation in poverty in Pakistan. So in the model unemployment is insignificant and it has no effect on poverty but with other variables it lead to a significant effect on poverty.


    Over the last two decades, poverty has declined from 61.6% in 1998-99 to 21.5% in 2018-19 in Pakistan. Whereas poverty has decreased from 47.4% to 10.7% in urban areas and from 67.5% to 27.


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