Staying Still: Pakistan's Inequality Problem

Reducing inequality is one way to weaken dynastic control. But little progress has been made in years.

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Last week’s newsletter shared details about how dynasties control Pakistan’s political economy. To weaken the control of these dynasties, I wrote that the goal “must be to promote pro-poor parties and make efforts to organize people around a progressive economic agenda.”

This agenda would, in my view, generate income growth for poorer segments of society, leading to reduced income equality, a more equitable distribution of wealth, and over time greater political participation and influence from segments of society that currently operate on the margins of Pakistan’s political economy.

I dug into household income data to better understand what the economic opportunity gap looks like in Pakistan. Using household income survey data, I compared the income gap between 2005 and 2019.

How do I define the income gap? It is the income a household in a particular quintile makes as a percentage of the highest-earning households, i.e. those in the fifth quintile.

Pakistan has not made much progress in closing the income gap.

In 2005, urban households in Pakistan, on average, made the following income per month:

  • First Quintile (1Q — poorest households): Rs. 6,203

  • Second Quintile (2Q): Rs. 7,239

  • Third Quintile (3Q): Rs. 8,549

  • Fourth Quintile (4Q): Rs. 10,462

  • Fifth Quintile (5Q): Rs. 19,233

This is what each quintile made in income as a percentage of the fifth quintile’s income:

  • First Quintile (1Q — poorest households): 32.3 percent

  • Second Quintile (2Q): 37.6 percent

  • Third Quintile (3Q): 44.4 percent

  • Fourth Quintile (4Q): 54.4 percent

By 2019, the income gap had barely budged and only marginal gains were made, as shown in the chart below. The income gap was and remains significant, with the 4th quintile households making almost half of what the highest-income earning households make in urban parts of the country:

The income gap for rural households in Pakistan was relatively narrower:

  • First Quintile (1Q — poorest households): 43 percent

  • Second Quintile (2Q): 52 percent

  • Third Quintile (3Q): 56.1 percent

  • Fourth Quintile (4Q): 65.4 percent

Like urban households, the gap has barely budged, as shown below:

But this data does not tell the full story and I decided to measure what happened across provinces. What I found was fascinating, as the data showed that households in Urban KPK made significant gains in terms of closing the income gap, while other regions did not fare as well.

The table below shows the shift in the income gap from 2005 to 2019. For example, a change of +4 for Punjab - Rural 3Q means that an average third quintile rural household in Punjab was making 52% of the average fifth quintile rural household’s income in the province in 2015, and by 2019 the same household was making 56% of the fifth quintile household’s income.

At the table shows, Rural Sindh, Rural Balochistan, and Urban Balochistan performed rather poorly, with all four quintiles experiencing a widening income gap in the categories — as measured against the fifth quartile in each region. Punjab, on the other hand, was a mixed bag.

I also looked at data to understand what has led to a dramatic closing of the income gap in urban KPK, and one reason could be the increased flow of remittances to these households (KPK households rely on foreign remittances for 10-15 percent of household income; other provinces do not even come close).

Generating growth lower-income households is vital for growth, stability, and progress.

This analysis reinforces the fact that Pakistan has not made strides in generating equitable economic growth and opportunities for underprivileged segments of society.

This data also shows that the income gap remains significant, particularly in the most populated parts of the country, Sindh and Punjab. Put this in context: there is a lack of good public education and healthcare options for poorer households, the rich do not pay a fair share of taxes — a significant proportion of annual taxes are collected through indirect means, making it a regressive system — and richer households also have generational wealth stashed away in plots and other assets.

Meaning that the system is stacked against those with less privilege and the income gap shows you that this system has barely budged in the last decade and a half.

It also reinforces the fact that a political economy captured by powerful elite, ruling through dynasties, does not seem to have an incentive to generate equitable growth. KPK, a province with a relatively less dynastic political economy, has made the greatest strides in closing the income gap. This is not a mere coincidence - even after excluding foreign remittances from household incomes across Pakistan, KPK stands out in terms of both income gains and closing the income gap.

All of this means that pro-poor, progressive economic policies are critical for Pakistan’s economic stability and progress. The shame, however, is that none of the leading parties have an incentive to push this agenda, given that they are beneficiaries of the status quo.