PER CAPITA INCOME - A FUNDAMENTAL INDICATOR

FOZIA AROOJ (fozia.arooj@hotmail.com)
Sep 29 - Oct 12, 2008

The per capita income has crossed 'psychological barrier' and touched $1,085 during the outgoing fiscal year 2007-08 against $878 in the last financial year. Pakistan's per capita real GDP has risen at a faster pace in real terms during the last six years i.e. 4.5% per annum on average in rupee terms. The per capita income in dollar term has grown at an average rate of 13.5% per annum during the last six years rising from $ 586 in 2002-03 to $ 1085 in 2007-08. The main factor responsible for the sharp rise in per capita income include four fold increase in the inflows of workers' remittances and acceleration in real GDP growth in the previous years.

These rosy figures of per capita income are not the real picture. As a matter of fact due to high inflation in 2007-08, the GDP calculated at market prices showed an increase of 20% over the previous year, while at constant prices (of 1999-2000), the GDP growth moved up only by 5.8%. Similarly, the per capita income at current prices had gone up by 17.1% to reach $1,085, whereas on the basis of constant prices of 1999-2000, the per capita income increased by only 4.4%. According to government figures per capita income is improving and the headcount index of poverty has seen a decline of more than ten percentage points over the following four years. However these figures are disputed by many independent analysts and international donor agencies. However, the gap between rural and urban poverty incidence has not seen any reduction, with the headcount index for rural areas roughly twice that of urban Pakistan.

GLOBAL OUTLOOK:

The number of people living on $2 a day has grown to over one billion in South Asia in recent years from 821 million in 1981. This demonstrates how little the latest macro economic growth has trickled down to the poor in this "poorest region of the world". South Asia's share in the global income is just 7% while one-fifth of the world's population and 43% of the world's poor live here, the "Human Development in South Asia 2006. An estimated 437 million South Asians live below $1 a day, while 80% of the region's population survives on less than $2 a day. The per capita income of $594 in the region is lower than Sub-Saharan Africa's $601 and far below the developing countries' average of $1,502.

PAKISTAN SCENARIO:

As stated in the Pakistan Economic Survey, one of the redeeming features in fiscal year 2007-08 when the economy was faced with multiple challenges was that the per capita income moved up from $926 to $1,085. A study of the national income accounts, however, shows that the higher inflation rate of 10.3% as measured by the CPI had played a significant role in pushing up both the GDP and the per capita income for 2007-08. To work out the per capita income for a particular year, the gross domestic product (GDP) is calculated at current market prices, which includes the element of annual inflation. The per capita income appears impressive largely because of the higher inflation rate during the year 2007-08. Had the inflation rate been moderate, the increase in the per capita income would, also, have been modest, at best.

This miscalculation leads to two disastrous results. One is that poor are being betrayed by telling that their income is improving. And secondly they are being pushed to bear the burden of increased inflation. This number game is just distorting the facts and the poor is getting poorer. In real terms they are not augmenting their income level but miscalculations encourage the government to raise price levels to match the international levels. The per capita income of $1,085 thus loses much of its charm, particularly when we know that the increase is largely inflation-related. The government should aim at bringing down the inflation rate by boosting the production/availability of both the agricultural and industrial products. Only a rapid and sustained growth of the commodities sector, whose performance was lackluster, last year, can help lower inflation.

Another factor contributing towards the manipulation of numbers is the net factor income from abroad which showed a robust growth in last fiscal. If the net factor income from abroad is positive, it adds to the gross national product (GNP) and vice-versa. The per capita income is arrived at by dividing the GNP over the country's population. If the net factor income from abroad is positive , the per capita income works out to be higher. It helped in taking the per capita income from $926 in 2006-07 to 1,085 in 2007-08. The marked increase in the net factor income is attributed to a surge in the income in home remittances which moved up to an all time record of nearly $6.5 billion in last fiscal. Although the increase in the income from home remittances is optimistic but this factor is beyond our control and is not reliable for long. The government should, therefore, make all possible efforts to boost all other sources of national income.

Third element is that the per capita income had been arrived at by converting the figures in the rupee into the dollar, on the basis of an exchange rate of Rs61.30 to a dollar. This is the average exchange rate for the period under review. The slide in the value of rupee vis--vis dollar started only about a couple of months ago and the exchange rate had remained stable during the major part of the year. The average exchange rate for 2007-08 worked out to be considerably better than the present exchange rate of Rs70-71 to a dollar. If the per capita income was calculated on the basis of the current exchange rate of the rupee vis--vis dollar, it would be considerably less.

Besides, the per capita income is calculated in terms of dollar. The World Bank reports the per capita incomes of various countries in its World Development reports in dollars to make them comparable with one another. If the exchange rate is stable, the per capita income keeps growing. However, if the exchange rate depreciates against the dollar, the increase in the GNP may be neutralized due to decline in the value of the national currency. As a result, the per capita income may remain stagnant or it may even show a decline, despite an increase in the GNP. In Pakistan, this has happened many times when the rupee had been on a decline. It would be vital for us to maintain our exchange rate stability.

Ironically, the rupee has depreciated against the dollar by about 15-20% since the beginning of this year, while most of the other world currencies such as the euro, yen, China's yuan and even the Indian rupee had appreciated considerably in recent months against the dollar, due to the poor health of the US economy. The per capita incomes of all these countries would, therefore, gain from their currency's strength against the US dollar, while in case of Pakistan; the case would just be the reverse.

Although the per capita income has moved up to $1,085, our indebtedness has also grown alarmingly during the last few years. While the internal debt nearly doubled from Rs1,576 billion in FY 2000 to Rs3,012 billion in FY 2008, the external debts and liabilities had risen in just one year from $40.48 billion in FY 07 to $45.93 billion in FY 08.