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Agricultural Income Growth and Determinants of Rural Income Poverty in Pakistan¹

Opening Statement by
M. Ali Shah
Country Director
Pakistan Resident Mission
Asian Development Bank

Innovative Development Strategies (IDS) Pvt.Ltd, Islamabad, Pakistan.
25 November 2004

Distinguished Participants:

The workshop organized today by the DFID, ADB, and Government of Pakistan, will provide an excellent platform for shaping our further collaboration in this important area. It will also provide a significant forum in our goal to gain a better understanding of income poverty, and vulnerability in Pakistan, the constraints and opportunities facing the poor, and the development of policies to address income poverty. On behalf of the Asian Development Bank (ADB), I would like to take this opportunity to briefly comment on the significance of agricultural income growth and its relationship with rural poverty in Pakistan.

Despite recent good macroeconomic performance, Pakistan continues to have high levels of poverty. Poverty estimates of 2000-2001, indicate that around one third of the population lives at or below the poverty line, with poverty being concentrated in rural areas. Available international literature indicates a strong and clear-cut relationship between agricultural growth and poverty reduction. The agricultural sector is a major determinant of the overall economic growth and well being in Pakistan, contributing 23 percent of total GDP; employing 42% of the total employed labor force; and accounting for nearly 9 percent of the country's export earnings. Thus, high agricultural growth is essential for significant poverty reduction in Pakistan.

However, in addition to the direct impact of agriculture growth on poverty reduction, there is also a much larger indirect effect through the linkages between agriculture and non-farm growth in rural areas. Non-farm growth is closely linked with agricultural growth since peasant farmers spend a large portion of their incremental income on locally produced non-agricultural goods thus generating employment and incomes in the adjoining areas. The increased demand for non-farm goods leads to a much larger increase in employment, which is a key vehicle for poverty reduction. Available information also points to the increasing importance of non-farm incomes for rural households. The five major sources of income in rural Pakistan are wages/salaries, transfer income, crop income, rental income and livestock income. Livestock is a particularly important source of income for the poor with a majority of poor households, especially the landless and small landowners, dependent on this sector.

In the light of increasingly limited income generating opportunities in the on-farm sector, poor households are increasingly turning to the non-farm sector as a key source of livelihood. In addition, there appears to be a higher incidence of vulnerability to falling into and remaining in poverty, among households which are dependent solely on agriculture. Rural areas that are well connected with the urban areas seem to be more prosperous, in part because the lack of employment opportunities in rural areas results either in labor reallocation or migration. In both cases, human capital plays a positive and significant role and the poorest of the poor neither possess the human capital nor have the resources to migrate. This vulnerable group needs special attention.

Pakistan's Poverty Reduction Strategy Paper outlines four pillars for accelerating growth and reducing poverty. Pillar One focuses on accelerating economic growth, pillar Two on improving governance and devolution, Pillar Three on investing in human capital, and Pillar Four on targeting the poor and vulnerable. Pillars One and Four focus on generating employment, especially in the rural areas, small and medium industries and micro-finance. There are also very strong linkages between income poverty and the other two PRSP Pillars. For example, access to justice, successful devolution, increasing the human capital of the poor, and ensuring effective safety nets are also central factors for increasing the incomes of poor people.

The ADB is engaged in a number of directly relevant initiatives in these areas. The ADB Barani program will work on income poverty in poorer rain fed areas in central and northern Punjab. The ADB is also providing technical assistance in a detailed study of the high levels of chronic and transitory rural poverty in Pakistan through a TA titled 'Determinants & Drivers of Poverty Reduction & ADB's Contribution in Rural Pakistan', in order to identify appropriate policy and implementation measures that could reduce rural such poverty on a sustained basis. Another initiative is ADB's Balochistan Rural Development and Drought Mitigation Project, which aims to reduce the incidence of rural poverty in Balochistan through economic and social interventions that lead to increased rural incomes, create jobs, and reduced resource and environmental degradation.

To increase incomes of poor households and build social capital, the ADB is funding a Micro-Finance Sector Development Program. As part of its objective to efficiently provide financial and social services to the poor, the ADB assisted with the establishment of the Khushali Bank, a public-private enterprise in partnership with NGOs, under this program. The ADB is also engaged in several rural development projects such as the Malakand, Federally Administered Tribal Areas, Bahawalpur, and Dera Ghazi Khan Rural Development Projects, to enhance household incomes, particularly for the smallholder and tenant farmers, and the landless. The ADB Access to Justice Program is implementing legal and judicial reforms, which will improve dispute resolution and court performance.

As our collective work in this area proceeds, it will be important to identify influential stakeholders and seek mechanisms for consensus building. Lastly, it is important to ensure that we capture and build on relevant international experience on increasing the incomes of the poor and that we continue to learn and innovate our work programs during implementation.

Thank you!