PROSPECTS FOR POVERTY REDUCTION THROUGH NON-FARM EMPLOYMENT

UNCLAS SECTION 01 OF 02 LAHORE 000178

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EAGR EAID ECIN EIND EINV ETRD PGOV PREL PK
SUBJECT: PROSPECTS FOR POVERTY REDUCTION THROUGH NON-FARM EMPLOYMENT
IN SOUTHERN PUNJAB


1. (SBU) Summary: Non-farm employment is vital to help
alleviate poverty in southern Punjab, according to local policy
makers and academic experts. Population growth has vastly
outpaced increases in both agricultural productivity and
non-farm jobs, which resulted in higher poverty rates in
southern Punjab even when the economy as a whole had improved.
Industrial employment available in Pakistan has largely
concentrated on low wage, low value-added, and highly fragmented
sectors, which leaves most manufacturing centers both poor and
vulnerable. Past government emphasis on protecting these
industries and their jobs only served to institutionalize the
deprivation. Pakistan needs an economic growth strategy that
creates formal sector non-farm jobs in order to stabilize
southern Punjab, but the limited education and skills of the
existing workforce severely constrains options for restructuring
the economy. End Summary.

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THE LINK BETWEEN NON-FARM EMPLOYMENT AND RURAL POVERTY
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2. (U) Surplus labor in the agriculture sector was the root of
rural poverty in the country, said Harvard economist Ricardo
Hausmann in a speech to experts gathered at a June 29-30
conference at the Lahore University of Management Sciences
(LUMS). Previous academic research arrived at a similar
conclusion. In spite of years of high economic growth and
substantial international aid flows in the 1990s, rural poverty
in Pakistan increased, particularly in the cotton-wheat belt of
southern Punjab and northern Sindh. A 2004 World Bank report
concluded that "the most likely factor increasing poverty in the
1990s has been the decline in real rural wages" resulting from
the "failure of the non-farm sector to absorb surplus labor."
Other research similarly found that high population growth
combined with a dearth of non-farm employment opportunities had
drowned the region in surplus workers, and as a result wages
collapsed.


3. (U) Much of that excess manpower was applied to farming,
which helped increase total agricultural output; however,
farming practices only changed in labor intensity not methods.
A 2005 ADB report observed, "the highest incidence of poverty is
in zones that rely most on crop incomes... [and] where the
possibility of diversifying incomes in order to manage risk is
limited."

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POLICY FAILURES YIELD "ECONOMIC GROWTH WITHOUT DEVELOPMENT"
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4. (U) Professor Naved Hamid of the Lahore School of Economics
said that for decades "Pakistan had economic growth without
development." Total economic output may have increased, largely
fueled by deficit spending, expansion of the garment and textile
sector, and bringing more land under intense cultivation.
However, government spending was often directed to the military,
or price supports and subsidies, not infrastructure, health, or
education. The garment industry expanded, but still focused on
low-tech, low value-added merchandise. Total farm output
increased, but cropping patterns, irrigation techniques, and
post harvest handling did not materially improve.


5. (U) Echoing the sentiments of many other post contacts, two
Punjab senior civil servants acknowledged at the conference that
political interests secured protection for marginally
competitive industries, thwarting attempts at substantive
changes in industrial development policy. In a recent study for
the ADB, Hausmann concluded that Pakistan consolidated its
export economy around the low-value added garment sector
"space," protected that sector with subsidies and trade
controls, and failed to make any substantial jumps into new,
more sophisticated product spaces. Pakistan has "the lowest
level of export sophistication" of comparable countries, and
"its relative position has worsened over the past 40 years," he
wrote. Long existing structural weaknesses in the country's
economy precipitated the current economic crisis in Pakistan,
and government policy contributed to the problem.

LAHORE 00000178 002 OF 002



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FOREIGN AID'S UNINTENDED CONSEQUENCES
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6. (U) Several speakers at the conference believed that foreign
assistance to the government at previous moments of acute crisis
enabled Pakistan to ignore the structural weaknesses of its own
making. As LUMS Professor Ijaz Nabi put it, "Aid has created a
kind of Dutch Disease" in Pakistan, because it focused on
financial support for the government rather than building
infrastructure. It fuelled unsustainable spending, but not
necessarily on a foundation for future economic growth.

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PK "NEEDS JOBS FOR THE PEOPLE IT HAS, NOT THE PEOPLE IT WISHES
IT HAD"
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7. (U) The economists concluded that short-term policy options
are limited because of the interaction between three workforce
characteristics: a) the lack of basic education, b) the narrow
transferability of skills from the existing industrial base in
the garment and textile sector, and c) the atomized nature of
employment in Pakistan's disorganized and largely informal
economy. Finance Minister Shaukat Tarin argued that
hyper-fragmentation in industry constrained skill development,
discouraged foreign direct investment, and hampered efforts to
improve tax collection. The preponderance of small family-owned
businesses and informal labor created an industrial climate that
was neither transparent nor competitive, he said. Consequently,
Pakistan has become "less skilled" overall according to
Hausmann, a phenomenon that is "almost unique in recent
history." Hausmann expressed skepticism about official visions
for growth of sophisticated economic sectors, and quipped that
the country "needs jobs for the people it has, not the people it
wishes it had."

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COMMENT: BUT HOW DO YOU CREATE GOOD JOBS IN RURAL DISTRICTS?
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8. (SBU) Comment: Academics and policy makers have singled out
the relative decline of non-farm employment in agricultural
districts as a key reason rural Pakistan remains poor. Growth
of industrial employment in the formal sector will diversify the
economy in the countryside and help stabilize the most
vulnerable districts. The challenge lays in how to attract the
right kind of investment, given the realities of the rural
workforce and infrastructure.
CONROY