Pakistan’s Key Challenges: Lowest per capita income in South Asia and highest out-of-school children in the world

Pakistan stands at a critical juncture as its current economic model grapples with an alarming paradox: the nation boasts the lowest per capita income in South Asia while simultaneously holding the unfortunate distinction of having the highest number of out-of-school children in the world.

The World Bank, in a candid assessment, emphasizes that the nation is on the brink of a severe crisis, with a significant portion of its population living below the poverty line.

Highest number of out-of-school children

The country also grapples with a staggering 20.3 million out-of-school children, the highest number in the world. The existing growth model has led to recurrent balance of payments crises, resulting in painful contractions in the economy, reduced certainty, and decreased investments.

World Bank urges Bold Policy Shifts to tackle Poverty and Economic Crisis

In a stark warning, the World Bank has pointed out that Pakistan is teetering on the brink of a severe crisis, with 40% of its population living below the poverty line. The root causes of this dire situation are attributed to elite capture and “Policy decisions are heavily influenced by strong vested interests, including those of military, political and business leaders,” according to the report titled ‘Reforms For a Brighter Future: Time to Decideʼ. This revelation comes as Pakistan approaches a new election cycle, emphasizing the urgency of decisive action for a brighter future.

The economy is currently sustained by a short-term IMF program, inflation is at record highs, the rupee has depreciated sharply, while foreign exchange reserves remain at uncomfortably low levels.

The World Bankʼs warning underscores that while international lenders and development partners can offer advice and financing based on global experiences, the critical choices and course corrections must come from within the country itself.

Glimmer of hope

However, there is a glimmer of hope. Countries like India, Indonesia, and Vietnam, which have experienced sustainable economic growth, made crucial decisions during times of crisis and overcame similar challenges. Najy Benhassine, the Country Director for the World Bank in Pakistan, has suggested that this may be Pakistan’s moment to pivot its policies.

Highlighting Pakistanʼs ongoing human resource and economic crisis, he said the nation of 240 million economic hardships, including inflation, rising electricity prices, climate shocks, and insufficient resources for development and climate adaptation.

Silent human capital crisis

Pakistan is also grappling with a “silent” human capital crisis, characterized by high child stunting rates, poor learning outcomes, and elevated child mortality. “It is also facing a ‘silent’ human capital crisis: abnormally high child stunting rates, low learning outcomes, and high child mortality,” Najy said.

Alarmingly, the once-promising economic model of Pakistan is no longer effective in reducing poverty, and the gains made until 2018 have been reversed.

According to the World Bank, Pakistan’s poverty rate for those earning $3.20 per day declined to 34.3% by 2018 but has since risen to 39.4%. Additionally, over 12.5 million more people have fallen below the poverty line, defined as those earning less than $3.65 per day.

Pakistan's real per capita growth 2000-2020 compared with regional countries
Pakistan’s real per capita growth 2000-2020 compared with regional countries. (Image Credit: World Bank)

The World Bankʼs data also reveals that Pakistanʼs average real per capita growth rate between 2000 and 2020 was a meager 1.7% which is far below the South Asian average of 4%. Consequently, Pakistan’s per capita income has fallen to one of the lowest levels in the region, a stark contrast to its status in the 1980s.

Recommendations

To address these challenges, the World Bank proposes an ambitious agenda. This includes enhancing revenue mobilization to 22% of GDP compared to the current 9-10%, immediate taxation of properties and agriculture to recover 3% of GDP, and reducing expenditures through reforms by 1.3% in the short term and 2.1% in the medium term. The funds generated should be directed towards critical areas such as health, education, and sanitation.

The World Bank also emphasizes the need to curtail the governmentʼs reliance on high-interest bank borrowing for deficit financing. This can be achieved by reducing the governmentʼs presence in public sector entities, many of which are loss-making and drain public resources.

Furthermore, the bank advocates for a shift from underfunded, inefficient, and fragmented service delivery and social protection systems to a coordinated, efficient, and well-funded approach. This shift should prioritize the most vulnerable, aiming to reduce child stunting rates and improve learning outcomes, especially for girls. Additionally, the bank calls for a move away from wasteful and inflexible public expenditures towards targeted investments in public services, infrastructure, and climate adaptation.

Najy Benhassine stresseed the importance of wider stakeholder support for implementing these policy shifts within the first year of the new government’s term. These actions are seen as the foundation for a brighter future in Pakistan, one that can lift millions out of poverty and set the country on a sustainable growth trajectory.

Critical policy shifts

World Bank report has suggested these critical policy shifts to move beyond the current low equilibrium towards sustainable and inclusive economic development and poverty reduction.

Pakistan must move:

  • From underfunded, inefficient, and fragmented service delivery and social protection systems towards coordinated, efficient, and adequately financed service delivery, targeting the most vulnerable.
  • From wasteful and rigid public expenditures towards tightly prioritized public spending that supports growth and development, including climate adaptation.
  • From a narrow, distortive, and inequitable tax system towards a system that is broad-based, efficient, progressive, and equitable.
  • From a protected, stagnant, and unproductive economy with a large state presence towards a dynamic open economy driven by private investment and exports.
  • From agriculture sector policy settings that lock farmers into a low-value, low-productivity farming system towards a market-driven, productive agricultural system that is resilient to climate change impacts.
  • From energy sector policies that drive high energy costs, environmental harms, and unsustainable accumulation of debt towards efficient, sustainable, and resilient generation and distribution, based on accurate price signals and strengthened private participation
  • From a public sector that is inefficient, often ineffective, and vulnerable to capture by vested interests towards accountable, efficient, and transparent government.
World Bank suggested these policy shifts in its report “Reforms For a Brighter Future: Time to Decide” launched in Islamabad, Pakistan. (Image Credit: World Bank)
World Bank suggested these policy shifts in its report “Reforms For a Brighter Future: Time to Decide” launched in Islamabad, Pakistan. (Image Credit: World Bank)

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