http://www.dawn.com/2006/06/26/ebr15.htm
Doubling per capita income in six years
By Aftab Ahmad
Pakistan has now a per capita income of $847 as compared to $441 in 1999-2000–the year the national accounts were re-based.
After re-basing, the per capita income for 1999-2000 was revised upward 20 per cent, to $526. It went up to $579 in 2002-03, after remaining stagnant for two years.
Since then, per capita income has been increasing and the current level at $847 is nearly 100 per cent higher than the per capita income of $441. In six years (1999-06), the per capita income has almost doubled. It may be interesting to study the factors behind this growth.
The first and the foremost factor in the per capita GNP was, no doubt, the re-basing of the national accounts from 1980-81 to 1999-2000. The exercise was quite normal, since structural changes do take place in an economy over a period of time. New products appear while old ones disappear. It becomes necessary to incorporate such changes in the national accounts to make income estimates realistic. The practice is followed all over the world.
In Pakistan, re-basing exercise was completed and approved in 2003. As a result, many new economic activities as well as products such as courier services, travel agencies, information technology (IT) and mobile phones etc became part of the national accounts. As a result, the size of the GDP in 1999-2000 increased by 19.5 per cent, industries by 18 per cent, agriculture by 18.5 per cent and services by 20.8 per cent, over the old base. Accordingly, the per capita income of $441 – relating to the old base – in 1999-2000 had also to be revised upward to $526.
Another factor behind rapid growth of per capita income was the higher GDP growth in recent years. On an average, the GDP growth has remained around seven per cent during the last four years (2002-03 to 2005-06).
Third, a higher GNP and per capita GNP are partly attributable to ‘net factor income from abroad’ that had remained favourable in recent years despite the higher trade and current account deficits. This favourable development was attributed to higher workers remittances, increase in foreign investment and liberal external assistance. When the net factor income from abroad is positive, it adds to GNP. On the contrary, if the net factor income from abroad is negative or unfavourable, the same is deducted, to arrive at the GNP.
Next, exchange rate stability also played a significant role in taking per capita GNP to the present level. In the past, continuous devaluation of the rupee had kept our per capita income in terms of dollar at a lower level. During the last 6-7 years, however, exchange rate of rupee has shown relative stability, due to which higher GDP growth rates has translated into higher per capita income in dollar terms.
Yet another factor may be the decline in the population growth rate. The population growth has reportedly fallen from three to 1.9 per cent and it is likely to reduce further in the coming years. A slower population growth helps improve the growing per capita GNP
Last but not the least, is the element of inflation. The per capita GNP is calculated by dividing the GNP at ‘current’ factor cost (and not the constant factor cost) with the current population. Thus, the per capita GNP contains the element of inflation together with the element of growth.
From 1999-2000 to 2003-04, the inflation remained at a comparatively lower level (between 3.1 and 4.6 per cent). However, during the last two years, that is, 2004-05 and 2005-06, the inflation rate – as measured by the consumer price index – stood at 9.3 per cent and eight per cent respectively. This higher inflation rate had inter-alia pushed up the per capita income in 2004-05 and 2005-06 to $742 and $847, respectively.
The per capita income in 2005-06 is reported to have increased by more than 14 per cent, which actually includes the inflation rate of eight per cent apart from the GDP growth rate of 6.6 per cent. Per capita incomes for past two years are inflation-driven as well as growth-driven.
To keep the per capita income moving upwards, the correct policy would be to maintain the higher GDP growth, bring down the trade and current account deficits in order to keep the net factor income from abroad on the positive side and ensure exchange rate stability. However, all possible efforts should be made to control inflation, which pushes up the income figure, without adding to the real income of the people.
A word or two about the quality of GDP growth may be appropriate here. In 2005-06, the 6.6 per cent GDP growth rate has been achieved through only a 4.3 per cent rise in the commodity producing sector, while the services sector surged by 8.8 per cent. The finance and insurance had registered an increase of 23 per cent. This pattern of growth may not be very helpful in fighting inflation.
To combat inflation effectively, the government will have to focus on the commodity producing sectors and try to substantially raise the availability of agricultural and industrial products. A situation marked by abundant availability of essential commodities may be of immense help in achieving price stability.