If we look at the socio economic indicators, Pakistan lags far behind not only from developed world, but also within region – Asia [Table 7].
Table 7: Pakistan's Position against the average of selected Countries
Variables
Mean of
Sample Pakistan Difference from Mean Full Sample
Income Per Capita 8700.6 1947.6 -6753.0
Government Expenditure on Basic Needs--Health and Education 864.9 62.8 -802.2 Gross fixed capital formation per capita 1926.5 353.0 -1573.5
Human Development Index 0.7 0.4 -0.3
Infant Mortality Rate 41.9 87.6 45.7
Asia
Income Per Capita 5278.5 1947.6 -3330.9
Government Expenditure on Basic Needs--Health and Education 308.2 62.8 -245.4 Gross fixed capital formation per capita 1605.8 353.0 -1252.8
12 The test checks a more efficient model against a less efficient
13 We dropped the values of country specific intercept from fixed effect and mean value and the variation around it by country from the table.
Human Development Index 0.7 0.4 -0.3
Infant Mortality Rate 45.4 87.6 42.2
The Table 7 shows that Pakistan’s income per capita is less than the world average by 6753 in PPP dollar. However, difference reduces to half when Pakistan income per capita is compared with average income per capita in Asia. The per capita expenditure on social sector in Pakistan is 1/12th of the world and 1/4th of the average in Asia. Similarly, capital formation is one-fifth and one-third of the level in the world and in Asia respectively. Average level of IMR is same in the world and in Asia but it is higher in Pakistan. Human development is low in Pakistan compared to in the World and Asia.
The decomposition analysis identifies relative contribution of various factors for high IMR, low income per capita and human development. A decomposition analysis14 can be defined as follows.
(9) ZP −Zi =β1i*(XP1 −Xi1)+β2i*(XP2 −Xi2)+ε Where Z = Variable on left hand side (LHS)
X = variables on right hand side (RHS) Z= mean value of Z
X = mean value of X P = Pakistan
i = Asia, World
X’s can be increased to k number of variables on right hand side. The results in Table 8 shows how much difference in IMR is explained by income per capita and government expenditure on social sector(health and education), how much variation in income per capita over mean value is explained by productivity and productive capital. Finally, the contribution of income per capita and capability development (lower IMR) to difference in HD is calculated based on
14 Shehzad (2003)
equation 9.
Table 8: Decomposition of Effects by Factors
Full Sample Asia
Decomposition of Factors on IMR Decomposition of Factors on IMR
IMR LYPC LEXP IMR
Income Per capita
Government Expenditure on social sector
0.74 1.09 0.63 0.66 1.46 -0.38
Decomposition of Factors on Income per
capita Decomposition of Factors on Income per capita
Ypc LIMR LINV Ypc lIMR lINV
-1.50 -0.35 -0.87 -1.00 -0.35 -0.45
Decomposition of Factors on HDI Decomposition of Factors on HDI
HDI LIMR LYPC HDI LIMR LYPC
-0.30 -0.05 -0.15 -0.27 -0.02 -0.16
The results show that in all equations, the contribution of income per capita and productive capital is larger than other variables. The results also show that to achieve the level of average prevailing in the world, Pakistan should increase investment more than expenditure on health and education to the average level in the world.
6. CONCLUSION
The countries are different in their history, culture, resource endowment and political institutions. Hence, they face a different set of problems, opportunities and constraints. They adopt different set of policies to allocate resources for different purposes and arrive at different level of development. The government must choice between different types of expenditures to achieve higher human development, higher capabilities, and higher income.
The paper explores the priority of productive expenditure (accumulation of physical capital) and basic need spending (expenditure on social sector) in human development strategies of the countries. However, it is difficult to assess because of the complex chains of linkages. The study estimates a basic need policy model (Ferroni and Kanbur, 1990) of three equations to
understand these linkages at the macro level. The model is a type of block recursive.
The results show that the effect on basic need satisfaction is indirect at the global level - the higher income per capita leads to higher level of capabilities. The higher level of capabilities lead to higher level of per capita income. Although both improvement in IMR and income per capita positively affect human development, but income per capita play superior role over basic need expenditure at the global level.
Dummy variable approach (additive as well as multiplicative dummy) for various regions, Asia, Africa and ROW, shows that results differ by regions, but main conclusion remains the same that productive expenditure is prioritized in human development strategies. The model is also estimated separately for each region, Asia, Africa and ROW. Although the variation across the regions exists in terms of quantitative impact and significance of the variables but conclusion remains the same. The same conclusion also holds when variation for individual countries is allowed by estimating model by fixed effect and random effect approaches. Random effect approach is selected on the basis of Hausman test. The results show that variation in human development strategies exist across individual countries.
The overall results show that route to human development goes from growth oriented policies to capabilities development that ultimately increases income and led to improve IMR.
Therefore, income as well as public expenditure on social sector is necessary for human development despite income has priority in development strategies. Decomposition analysis shows that Pakistan need to increase expenditure on productive capital (investment) than on education and health to achieve the level prevailing in the region as well as in the world.
The conclusion drawn above is tentative given that model is static and lags in impact of certain variables are not considered in this study. So far, econometric estimation consists of model without and with regional dummies, fixed effect, and random effects approaches estimated by OLS and TSLS methods. The results of the study provide a basis to achieve the goal of human welfare through growth oriented policies. Hence, institutions are important to determine the
level of achievements. Further research would explore the role of institutions. It is also necessary to explore pattern of growth necessary for poverty reduction. In addition, variables such as IMR and Welfare are results of many factors, which have not been included in the analysis due to lack of comparable data availability.
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Appendix I
The model is re estimated separately for three regions namely Asia, Africa, and ROW.
The results are presented in Boxes 2, 3, and 4. The aggregate results for the world are same which are discussed in the main text and reproduced here in Box 1 for comparison. The results show that route to human development goes from growth oriented policies to capabilities development that ultimately increases income, which lead to improving IMR for all regions, but the importance of IMR cannot be denied in terms of capabilities development or improvement in health status that ultimately increase productivity (see Boxes 2-3).
The results show that in Asia, the effect of income per capita on IMR is three times higher than the impact in Africa, (-1.46 and -0.46) [Box 2 and 3]. Contrarily, the effect of expenditure on productive capital on income—elasticity on income per capita with respect to productive capital—is higher for Africa than Asia: 0.79 and 30, respectively. Improvement in health indicator—IMR—leading to increase in labor productivity has no influence income in Africa but has significant impact in Asia. The results show that one percent decline in IMR in Asia increase income per capita by 0.53 percent. Basic need indicator—IMR—has no impact on HD for both regions, Asia and Africa. Though expenditure on productive capital in Africa has higher income generating impact but this income does not translate into higher human development. Contrarily, in Asia, expenditure on productive capital and productivity increase (improvement in IMR) bring significant impact for human development.
The third group of country is largely dominated by medium and high income countries.
The results show that improvement in IMR improves productivity that lead to increase in income per capita by 0.56 percent due to decline in IMR by one percent. On the other hand, one percent increase in investment increase income per capita by 0.42 percent. Further calculations show, that main conclusion remains the same for all regions i.e., income per capita has priority in human development strategies.
Box 1. Development Strategy and Human Development—All countries
Eq no Dependent Variable Variable on right side Coefficients Value t-statistics R2 F N
E αE -0.14 -1.43
Priority in human development strategy determined by EQ8 —αE(γB+γYβB)><βI(γY+γBαY)
Box 2. Development Strategy and Human Development in Asia
Eq no Dependent Variable Variable on right side Coefficients Value t-
statistics R2 F N
Priority in human development strategy determined by EQ8 —αE(γB+γYβB)><βI(γY+γBαY)
Box 3. Development Strategy and Human Development in Africa.
Priority in human development strategy determined by EQ8 —αE(γB+γYβB)><βI(γY+γBαY)
Box 4: Development Strategy and Human Development for Medium and High income Countries
Eq No Dependent Variable
Variable on
right side Coefficients value t-
statistics R2 F N
Priority in human development strategy determined by EQ8 —αE(γB+γYβB)><βI(γY+γBαY)