Creating Fiscal Space for Sustainable Tourism in KPK

By Emun Hafeez

This blog draws upon findings from the policy note, prepared by Consortium for Development Policy Research (CDPR) in collaboration with UK Aid-funded Sustainable Energy and Economic Development (SEED) Programme, titled “Financing Sustainable Tourism in Khyber Pakhtunkhwa: Mobilizing Local Resources” and explores the opportunities and challenges of creating a self-sustaining system of tourism development in the province of Khyber Pakhtunkhwa (KPK). 

Pakistan boasts a myriad of natural marvels and a rich cultural heritage. With mighty mountains and lush green hills in the North to rolling deserts in the South and a plethora of religious and cultural landmarks scattered all over, the country offers much in the way of tourist destinations. Unfortunately, the country had been afflicted with poor internal security for the past two decades but now as the security situation improves, both domestic and international interest n in visiting these picturesque sights has grown, so much so that Pakistan was named the top tourist destination in 2020 by Forbes and Conde Naste Traveler. However, as with any diamond in the rough, it is imperative to invest  time and resources under good governance to reap the full benefits of what nature and history has to offer.

The province of Khyber Pakhtunkhwa has seen an unprecedented increase in tourists in recent years. While this growth has resulted in the creation of economic opportunities and bolstered the hospitality and tourism service sector in the region,  dearth of adequate resources and infrastructure has made it difficult to cater to this massive influx of tourists especially during peak season[1]. This lack of capacity creates adverse economic and environmental impacts which are preventable. The biggest challenge impeding capacity building and infrastructure development in the region remains lack of revenue and resources available for the development, upgradation, and  maintenance of tourism sites.

Learning from Global Experiences

Global experience demonstrates that the best way to promote tourism development is by embedding a self-sustaining system of revenue generation and expenditure within the region. International best practices further indicate that the most transparent and efficient way of achieving this is through local governments. Local governments have the capacity to ring-fence  revenuesi.e.  guarantee that funds allocated for a particular purpose will not be spent on anything else. Revenue collected via hospitality and tourism activities as well as through user fees, tolls and charges can be invested in tourism development in the region. Studies have shown that local tax collection earmarked for specific purposes and uses, in accordance with the preference of consumers, creates better incentives to pay that otherwise may be weak or absent in a centralized tax and expenditure system.

However, hypothecation (or ring fencing) of taxes comes with a caveat; complete reliance on locally generated revenues to fund tourism development can be counterproductive given the procyclicality of tax revenues. This can result in a shortage of funds and consequently impede provision of tourism products (goods and services) during economic downturns. Hence, a hybrid model or what is known as weak hypothecation is preferred world over. This is when a portion of revenue from the central pool also goes towards tourism development in addition to what is generated through earmarked taxation.  

An important benefit of taxing certain tourism related activities is that it helps mitigate the effect of negative externalities associated with tourism such as degradation of environment and natural resources. Moreover, money generated through such taxes can be used to build resilient systems of tourism which are better equipped to absorb shocks resulting from climate change and pandemics[2].

Potential for Ring Fencing Taxes for Tourism in KPK

In Pakistan, tourism is a provincial subject and hence budgetary decisions are made at the provincial level. All revenue collected in KPK goes into a provincial consolidated fund and the provincial government then makes expenditure decisions for various sectors specified in the annual budget. Furthermore, constitutional provisions do not allow for ring-fencing at the broader, provincial level. However, there is potential for ring-fencing through  various authorities operating within the province as these authorities[3] have the mandate to decide how to use revenue generated through several tools at their disposal.

This prospective avenue for ring-fencing is constrained by its own set of issues. There is significant overlap in administrative jurisdictions across these authorities and local bodies resulting in an administrative spaghetti bowl with multiple departments, overlapping jurisdictions, regulations, and numerous taxes/levies making tourism administration and management exceedingly complex.

Local Challenges for Investing in Sustainable Tourism

Lack of Tax Compliance: The most prevalent issue in KPK is the lack of tax compliance within the tourism industry. Due to seasonality of revenues business owners and service providers attempt to maximize revenues during peak season to tide them over during dry spells. Without a steady stream of tax revenue, the entire case for hypothecation falls flat as there are no funds to apportion. In recent years successful efforts have been made to increase compliance but more  needs to be done to reach a self-sustaining level of revenue.

Ecological and Environmental Threats: Unchecked flow of tourists poses serious threats to the environmental integrity of the region. Pigouvian taxes[4] can be used to regulate the flow of tourists and to mitigate negative externalities caused by commercial activities such as deforestation, pollution, solid waste disposal etc. The provision of a public good or a service can be connected directly to a fee or a charge to create willingness to pay.

Complicated Regulatory Landscape: As highlighted above the overlapping administrative jurisdictions make tourism management exceedingly difficult. To overcome this, it is imperative to improve interdepartmental and inter-authority communication and cooperation with a clear delineation of mandate and jurisdiction of each department/authority.

Lack of Private-Sector Engagement: The private sector has limited engagement with the authorities which dampers its ability to influence decisions which affect the region. This acts as a disincentive to pay taxes/levies or fees to these authorities even if the money is being spent locally on improving public services and infrastructure. Formalization of private sector engagement with the authorities is essential to garner their support and increase compliance.

Revenue Leakages and lack of skills: Much of the investment in tourism products in KPK comes from outside the province which means revenues generated leak out to wherever the holding companies are based. Additionally, low levels of economic activity and development and lack of a skilled workforce in the region constrain local involvement in the tourism and hospitality industry. Hence, there is an urgent need to focus on the capacity building and skills training of locals. 

Lack of Data on Tourism: The dearth of data on tourism in terms of tourism flows, grading of restaurants and hotels limits the capacity for evidence-based policy design for the tourism sector.

Key Policy Message

The premise of a self-sustaining tourism development system is contingent upon the province’s ability to extract a steady stream of tax revenue from its tourism industry and the exercise of taxing tourism related activities can only be successful if the money collected translates into tangible infrastructure and improvement in systems as this reinforces incentive to pay such taxes. Moreover, local support for the tax regime is essential for its success and can only be achieved when there is sufficient pay-off for locals of the region in terms of job creation and increased economic prosperity. Investment in enhancing the skills of locals is essential to increase the value of contribution of locals to the tourism sector which will in turn increase the portion of revenue generated and retained in the region.

Emun Hafeez is a Research Associate at the Consortium for Development Policy Research.

[1] Turab (2022)Financing Sustainable Tourism in Khyber Pakhtunkhwa: Mobilizing Local Resources

[2] Turab (2022)Financing Sustainable Tourism in Khyber Pakhtunkhwa: Mobilizing Local Resources

[3] Khyber Pakhtunkhwa Tourism Development Authority, Galiyat Development Authority, Kaghan Development Authority and the upcoming Upper Swat Development Authority.

[4] A Pigouvian tax is a tax on a market transaction that creates a negative externality, or an additional cost, borne by individuals not directly involved in the transaction. Examples include tobacco taxes, sugar taxes, and carbon taxes

Resilience and Inclusion in Education – Bridging the Learning Gap

Since March 2020, schools across the world have either been completely closed, or  operated under strict COVID-related restrictions. This has affected 1.6 billion learners globally, resulting in substantial learning losses and plummeting enrollment rates (World Bank, UNESCO, UNICEF 2021). The lockdowns left almost 50 million children in Pakistan and 12 million children in the province of Punjab out of school (Zakaria 2020). By the third school reopenings (September–October 2021), 21% of adolescent boys and 8% of adolescent girls in Punjab had dropped out of school. Those who remained within the schooling system incurred major learning losses. A study by the Punjab Examination Council indicates a decrease in the academic performance of Grade 5 children in Punjab in 2020. With an increase in dropouts and substantial learning losses, there is a need to chart future steps to recovery. This webinar aims to outline how dropouts can be reintegrated into the schooling system and how learning losses can be overcome with an underlying focus on technological and innovative solutions.

Why have so many children dropped out of school?

There are several reasons for the increase in dropouts.

  1.  First, income losses incurred during the pandemic left families financially vulnerable, due to which many children were forced out of school. Many students, particularly boys, also had to enter the labour force prematurely to make up for income losses, resulting in a higher dropout rate for boys (21%) as compared to girls (8%) in Punjab.
  2.  Second, lockdown measures kept families housebound, increasing the gendered burden of work; girls spent more time doing household chores instead of studying. This can encourage parents to keep their daughters at home even after school reopenings, particularly in a cultural milieu which puts a lower value on girls’ education.
  3. Third, many students were not able to continue learning through remote learning programs (TeleSchool and TaleemGhar) due to a lack of access to technology and the absence of conducive learning environments at home. This has made catching up difficult, resulting in many families opting not to send their children back to school (Geven et al., 2022).
  4. Fourth, many families have also opted to engage their children in religious education, which many consider an alternative to formal schooling in Pakistan.

Has remote learning worked to reduce learning losses?

In addition to the issue of dropouts, COVID-19 has also resulted in learning losses for those that remain within the schooling system. While the government launched a distance learning program early in the pandemic, its uptake has been limited. In Punjab, by the time schools reopened in September–October 2021, only 8%  of girls and 2%  of boys were engaged in distance learning (Geven et al., 2022). There are multiple reasons for the resistance to remote learning uptake. Some of them are listed below:

  1. Access to technology is severely limited in Pakistan, especially in remote regions, and within disadvantaged groups. According to the Pakistan Demographic and Health Survey (DHS) 2017, only about 15% of households of the poorest quintile owned a television. Comparatively, within the wealthiest quintile, around 96% owned televisions. Access to the internet and smartphones is even more unequal; only 12% of Pakistani households have access to the internet.
  2. Even where households have access to technology, devices may have to be shared between family members. Additionally, most houses lack spaces which are conducive to learning which make it difficult to keep students engaged with distractions around.
  3. Most curricular content is scripted in Urdu, which can make it inaccessible to families fluent only in regional languages.
  4. Due to COVID-related income shocks, many boys may be prematurely pushed into the labour force, which can limit the amount of time dedicated to learning.
  5. Girls are expected to do household chores. Since school reopenings in September 2021, girls spent about twice as much time as boys on family care (Geven et al., 2022).
  6. Societal attitudes towards watching television have also impacted uptake. A recent study noted that television in Pakistan is considered to be a medium to access entertainment, which adds to the hesitation in its use for education. Some fathers also prohibit their daughters from accessing television (Malik et al., 2022).
  7. Alternatives like private tutoring are costly, and can only be accessed by relatively advantaged groups.

As a result of these factors, students have undergone learning losses amounting to around 0.6 years of learning-adjusted schooling, according to early estimates (Geven and Hasan 2020).

Percentage of people who had watched the TeleSchool transmission
Source: Gallup Pakistan, 2020

How have other countries re-integrated students into the school system and mitigated learning losses?

Following are some models of recovery adopted in other developing countries.

Tackling Dropouts: To address the issue of increasing drop-outs, several countries have initiated back-to-school campaigns to re-integrate children into the schooling system. In Kenya, community-based household mobilizations led to 96 percent of learners eventually re-enrolling. Additionally, in Mexico and Brazil, governments have adopted conditional cash transfers, tying cash support to families to school enrollment.

Overcoming Learning Losses: Similarly, to overcome learning losses, many countries have adopted some form of remedial learning.  In 2020, the Philippines government established summer schooling for students who had received a grade lower than 75 percent in the previous school year. While evidence on the effectiveness of such programs is still limited, interventions that focus on targeted instruction, with extended instruction time and condensed curricula are potential options to be explored for learning recovery (World Bank, 2021).

Building Resilience: School closures are not unique to COVID-19 and are likely to occur in the future as a result of climate-related disasters, conflicts, and public health emergencies. Remote and hybrid education is expected to continue after the pandemic (World Bank 2021). In case of repeated closures, strengthening remote learning systems is key. Many developing countries have employed multimodal strategies to ensure widespread access. In Peru, for example, the authorities have deployed a multi-modal strategy based on an assessment of the availability of different modes of technology and have used multiple channels like radio, television and the internet to stream educational content. Additionally, educational content has been created in nine native languages, making it more widely accessible . Moreover, telecommunication operators agreed to zero-rate the program’s core digital site so that students can access all available educational resources without paying for the bandwidth. This was combined with regular communication of weekly schedules for learning sessions, frequent teacher-student follow-up, and a strong monitoring system to understand the program’s coverage and engagement.

How can these strategies be implemented in Pakistan?

While cross-country examples can shed light on innovative strategies, Pakistan’s recovery strategy needs to be anchored in evidence, with considerations for capacity, budget constraints and other relevant factors.

There are no neat solutions to the losses faced by the education sector in Pakistan during COVID-19 but there are a few areas which require greater focus from policymakers. Some questions to be explored for future interventions are:

  • What strategies can be employed to re-integrate drop-outs into the formal schooling system?
  • What can an effective strategy for remedial learning look like in Pakistan?
  • How can we improve the current system of remote learning to build resilient systems by establishing learning continuity between the home and school environments?
  • How can government initiatives address gender-related inequalities in re-integration and learning loss?
  • How can stakeholders in the wider ecosystem be leveraged to provide learning solutions to address learning loss?


  • “The State of the Global Education Crisis: A Path to Recovery”. World Bank, UNESCO, and UNICEF, 2021.
  • “Brief on Learning Continuity Amidst COVID-19”. UNICEF, 2020.
  • Geven and Hasan, “Learning Losses in Pakistan Due to COVID-19 Closures: A Technical Note on Simulation Results”. World Bank, 2020.
  • Geven et al. “SMS Girl Data Insights”. World Bank, 2022.
  • Malik et al. “Girls’ Lived Experiences of School Closures: Insights From Interviews With Girls and Mothers in Punjab, Pakistan” South Asia Gender Innovation Lab, World Bank, 2022.
  • Muñoz-Najar et al. “Remote Learning During COVID-19: Lessons from Today, Principles for Tomorrow”. World Bank, 2021.
  • Zacharia, Sharon, “Pakistan: TeleSchool and Taleem Ghar (Educational TV at home)”. World Bank, OECD, Global Education Innovation Fund, 2020.
  • “Remediating Learning Loss”, World Bank, 2021.
  • “Assessment of Students’ Learning Loss: COVID-19 in Punjab”, Punjab Examination Council, 2020.

Desolation of Smog: Air Quality Crisis in Punjab

The scenes in Lahore look eerily similar to those of a sci-fi dystopian movie. A grey haze has descended upon the city. Lahoris walk around wearing protective face masks – not because of Covid-19 – this time, it is the smog which poses a serious health risk to the people of the city.

A worrying trend is in play in Lahore for the past few years. As the winter months approach, the city is wrapped in dense, unbreathable smog. The city frequently features in the list of cities with the worst air quality in the world, often topping the list during the winter months. This constantly deteriorating air quality poses a severe health risk to Lahoris who are exposed to the polluted air containing particulate matter 2.5 (PM2.5), which are fine particles less than three percent the diameter of a strand of human hair, easily absorbable within the bloodstream and gravely risking health. A study conducted by Sanval Nasim (LUMS) and Faiza Sharif (GCU) highlighted that PM2.5 exposure increases the incidences of cancer and cardiovascular and respiratory diseases such as ischemia, myocardial infraction, asthma, and bronchitis.  A separate study conducted by Sanval Nasim and Mahnoor Kashif highlighted the impacts poor air quality has on the financial sector when impaired cognitive ability and mood changes due to exposure to polluted air affects investor behavior and can drive substantial variation in returns on the stock market.

So, while there is evidence of increased health and economic risks associated with poor air quality, why is it that Lahore and other cities of Pakistan continue to face this issue year in year out and why have government actions been ineffective in dealing with it?

Sources of Air Pollution

Presently, there is a lack of research on source appropriation for the existing poor air quality. However, one study carried out by the Food and Agriculture Organization (FAO) in 2018 highlighted broadly the main polluting sectors to be transport (43% of total share in emissions), industry (25%), agriculture (20%), and power (12%).

Poor fuel quality and older automobiles with inefficient engines are leading sources of vehicular emissions. Annual rice stubble burning season which begins around the October-November period in Punjab is another leading source of smog as farmers across the province begin to prepare the crop fields for planting of wheat.

While we may be able to pinpoint the sources which contribute to poor air quality in Lahore and Punjab in general, there also needs to be an acknowledgement on the behalf of the government that its regulatory policies against these emission sources have been negligible and toothless in producing any tangible change.

Lack of Policy Implementation

A closer look at the existing policy to tackle smog and poor air quality will reveal that this issue is not one of lack of legislation or laws, rather a failure of governance. Detailed policy measures exist at both federal and provincial levels, but due to poor implementation the problem still persists. The mandate to control the various causes of air pollution fall under different departments, and bringing the relevant departments together to devise and coordinate a cohesive anti-pollution strategy is a major challenge. This inter-departmental lag contributes to regulatory deficiencies.

In the face of such failures, the air pollution crisis has been declared an emergency and the Provincial Disaster Management Authority (PDMA) has been forced to step in as a coordination department.

A case in point of this inefficient implementation is the Punjab government’s initiative to equip older brick kilns with modern zig-zag technology to reduce emissions. Converting brick kilns with modern technology across the province was no easy feat, as there were many non-conforming kilns which had to be severely fined to force them to adopt the new technology.  Additionally, lack of technically adept and skilled labour has also been a deterrent in the adoption of zig-zag technology. There is also the issue of incorrect categorization since brick kilns continue to be categorized as part of the cottage industry, which means that they are exempt from the policies and regulations pertaining to large scale industries, making it difficult to regulate them and encourage them to conform to modern technologies.

Vehicular emissions which are a major contributor to poor air quality need tighter controls too. The government has requested oil marketing companies to import Euro 5 fuel which is significantly cleaner and reduces emissions compared to the more widely available Euro 2. However, there has not been a revision of the fuel standards set by the Environmental Protection Agency (EPA). The 2016 fuel standards set by the EPA which were developed around Euro 2 need to be revised to Euro 5, so the discrepancy between word, letter and spirit is diminished.

State Responsibility

The burden and responsibility essentially lie with the state in this regard. The sectors that are responsible for their share of air pollution will almost always try to mitigate their costs rather than to reduce emissions, while the citizenry and civil society can, at most, serve supporting roles to create pressure for improved regulations. It is the government itself that needs to spearhead the required initiatives. There are examples which demonstrate lack of prioritization by the government such as when the Pakistan Environment Protection Agency (PEPA) mandated that the Pakistan Environment Protection Council (PEPC) convene at least twice a year, yet failed to do so in the past many years.

On paper Pakistan has excellent environment related legislations, but failure in implementation and lack of resource capacity does not allow effectively achieving the goals set by them. In an attempt to devolve powers to the provincial governments, the bureaucratic lag has been exacerbated where multiple departments have overlapping or cross-cutting jurisdictions which leads to inefficient execution of laws and regulations. Consequently, there is little accountability of which department is to be held responsible when regulations are violated.

There is a dire need to break this cycle of bureaucratic futility by redefining the mandates and jurisdictions of each department and how they may interact and support each other in effective implementation of laws.

Way Forward for Future Policy Actions

The Punjab Government in October 2021 declared smog a calamity and instructed the PDMA to take action against crop burning in the province to reduce emissions. The government also shifted all schools and private offices to remote work on Mondays till January 15, 2022 in hopes that the number of vehicles on the road will reduce. But again, these measures are neither sufficient nor appropriate to curb emissions in the province. The government must realize now that addressing crisis situations should not warrant a knee-jerk reaction such as closing down schools, rather it should have effective laws and regulations in place with a robust implementation mechanism.

Revision of Devolution of Powers – Empowering Local Bodies over Departments

Admittingly, there is considerable devolution of powers from the federal to provincial levels in the air quality policy landscape. The provincial governments have departments which in turn work with the district level administrators to ensure that rules and regulations are abided by. However, due to overlapping jurisdictions, contributors to air pollution and violators of environmental laws are able to escape fines which is why there is an imperative need for a local government structure that can take on a more hands-on approach in curbing emissions and clamping down on violators.

Comprehensive Automobile Legislation

Much of the data points to automobiles as a major contributor of emissions and pollution. As previously pointed out there is existing regulation of shifting to cleaner Euro-5 fuels across the country but that is only part of the solution. The preponderance of old vehicles with inefficient engines is equally responsible for emissions which is why the automobile legislation should focus on effective motor vehicle testing regime and a plan to phase out old/polluting vehicles. This can be done through incentivizing car manufacturers and banks in aiding citizens to finance new vehicles in place of their older vehicles.

Additionally, there should be a focus on public transport legislation whereby incentives are provided to citizens and organizations to take up public over private transport. To this end, the focus of the government should be large private companies and major emitters to shift all their employees to public transport.

The electric vehicle policy introduced in 2019 shows the government’s strategy for overhauling transport in the country in the coming years. However, this will only be successful when recharging stations become ubiquitous across the country, which is why oil marketing companies will also need to start incorporating electric vehicle charging ports at their fuel stations all over Pakistan.

Urban Policy and Design

The air quality crisis also needs to be viewed in the larger context of urban planning and land-use. There is a need to influence policy/decision making to consider environmental factors as part of the planning process. Pakistan requires a very solid, integrated green and sustainable urbanisation plan for the country which can then be filtered down to the provinces. It continues to allow cities to grow and central business districts develop without proper zoning strategies and without keeping in mind the ecological footprint of such development. Zoning regulations should clearly separate industrial areas from residential areas; business centers should be moved into SEZs.

The automobile policy is closely tied in with urban policy and currently, planning is personal transport/car-centric with no regard for environmental consequences. Promotion of public transportation, facilitating non-motorized transport, and imposing land use related costs for use of personal transport have to be factored into urban planning.

It is evident that tackling the smog and air quality crisis requires a holistic approach which combines effective legislation and stringent implementation protocols. At the same time there needs to be a realization on part of the government that the make-shift policy measures to tackle emergency situations is a regressive way of governance and that it ought to invest in strengthening its response system via a strong local body set up.

Sheheryar Khan is a Communications Assistant at the Consortium for Development Policy Research

This article is based on the discussion from a workshop organized by CDPR on Lahore’s air quality and the IGC report “Charting Pakistan’s Air Quality Policy Landscape”.


The Rising Price of a Healthy Life

Inflation in Pakistan has exhibited volatile trends in recent years touching double-digit figures intermittently. Much of this increase and fluctuation can be attributed specifically to growth in food inflation. This has a significant impact on social welfare, particularly of the poor as such households remain more vulnerable to food inflation because they spend a higher share of their expenditure on food. An increase in food prices coupled with stagnant income levels can significantly lower their purchasing power. As the share of expenditure on food increases, resources are often diverted away from other essential expenses such as healthcare and education. This can be detrimental to the development of human capital, productivity and overall economic growth.

A recent World Bank policy note points out that food inflation and price volatility in Pakistan has exceeded that in other neighbouring countries. Between May 2020 and 2021, prices of food and non-alcoholic beverages increased by 14.83% with urban centres seeing a higher rise (15.3%) compared to rural areas (12.8%). Such a spike in food prices can adversely impact nutrition especially given that 68% of Pakistan’s population is unable to afford a healthy diet. Research shows that the cost of a nutrient-sufficient diet is increasing at a faster rate than the cost of a basic diet in Pakistan. Hence a healthy diet is becoming more and more inaccessible to consumers.

This blog explores the various supply and demand factors and the market structures that lead to food inflation in Pakistan. It explores how the government can play a more facilitative rather than a distortionary role in maintaining food price stability, particularly in response to shocks like Covid-19.

What causes food inflation?

Food price inflation is driven by various demand and supply factors. The interactions between contributory factors are complex and lead to uncompetitive market conditions and failures that raise food price volatility and urban-rural disparities in prices of essential food items. The  underlying causes of the price hikes range from inappropriate policies and regulations that distort markets, inhibit competition and discourage private investments, to limited investment in research, innovation and technology transfer.

1. Supply Side: Low agricultural and livestock productivity can keep the supply of domestically produced food below potential, and result in higher food prices. Low productivity is driven to a large extent by high costs of production and inefficient use of scarce resources such as land and irrigation water. Food prices are also impacted by inefficiencies in the supply chain such as lack of storage and processing facilities, particularly for perishable crops. Speculative behaviours like hoarding also leads to artificial shortages and can drive up food prices. Moreover, Pakistan remains vulnerable to the effects of climate change, with farmlands routinely affected by floods, locust swarms and droughts that further reduce farm output.

2. Demand Side: Pakistan has one of the highest population growth rates (2% in 2020) in the region. It also has a rising GDP growth rate which has resulted in an increasing per capita income. Higher capacity to pay not only changes the magnitude of demand but also consumption patterns. When supply is unable to match  rising demand it can lead to shortages and price hikes.

3. Domestic & International Market Shocks: Due to poor productivity, Pakistan remains a net importer of food and is therefore exposed to global price fluctuations, currency fluctuations and exchange rate volatility. Fluctuations in oil and energy prices have also had a significant impact on the cost of production.

4. Governmental Inefficiencies: The government has a responsibility to manage food inflation and protect the poor from price shocks and ensure food security through procurement, exports and import subsidies. However, government interference via distortionary (and often reactionary) policies that disregard the cost of policy uncertainty and their ripple effects on the food system can make the market more vulnerable to shocks and manipulation. This can result in a suboptimal production mix, inefficient use of scarce resources, low private sector participation, and low integration in global value chains, all of which reduce consumer and producer welfare and increase the fiscal burden.

Reign of the middle-men (Arthiyas)

An important power dynamic within the supply chain is represented by the role played by middlemen. Majority of farmers in Pakistan are small sized who face two main constraints: 1) lack of access to credit and 2) poor connectivity to markets. In the absence of  access to formal credit, middlemen fill this vacuum by providing informal credit and inputs to farmers. To maximize returns while minimizing risk, middlemen also assume the role of sales agents either by facilitating the sale of the harvested crop or by setting up arrangements which bind the farmers to sell their entire produce to them. In this way middlemen buy produce for minimal prices and then sell them at much higher prices retaining a hefty profit for themselves.

Ensuring farmers get reasonable margins for their produce is key to ensuring greater productivity and encouraging investment and innovation in agriculture. This can only effectively be done by providing multi-sectoral support in the form of technical advice, high quality inputs (seeds, fertilizers, insecticides) and (most importantly) market integration and shortening of the value chain. A key factor influencing the commission agent’s profit is the information asymmetry between market actors. While the Punjab Government has initiated efforts to disseminate information about agricultural produce prices, impact of these initiatives remains limited.

Plight of milk farmers

The government has historically set price caps for milk and meat which does little to control price at the retail level but significantly discourages investment in expanding production and improving quality. These price caps rarely incorporate changes in production costs and offer insufficient returns for farmers to improve the quality of their products. Once the price is set, it is rarely monitored at the point of sale, which results in consumers having to pay higher prices, unless they are willing to buy poor quality adulterated products at government prices. Such price-setting leads to profit-maximization by the intermediary while the producer ends up receiving the capped price. Low profit margins for the producer leave little for investment in storage, value-addition, or production improvements. This makes the supply chain vulnerable to shocks such as Covid-19.

Price control mechanism

When the prices at various wholesale markets are recorded and their average is taken, it can be observed that the government allows for a 10 to 15% markup and then sets the rate for the following day. This process is inefficient as it creates winners and losers. The Deputy Commissioner’s (DC) office weekly monitors and regulates the prices of fresh produce both at the auction and the retail level. The distortionary effect of this price settling is seen at most retail outlets where DC regulated produce is kept separately and is typically of subpar quality. This leads to loss in consumer welfare. Additionally, price setting encourages fraudulent behaviors and disincentivizes farmers up in the chain from innovating and  investing in packing processes which reduce post-harvest losses. Buyers and sellers are aware of losses incurred in transit and the prices set incorporate those potential losses which essentially mean that producers lose out the most by getting very low prices. Understanding these dynamics can help policymakers determine the locus of the intervention and ensure reforms which not only benefit consumers but producers as well.

Gaps in data

Quality data is also essential not only for long-term policy making but for producers when making decisions about their resource allocations, investors and consumers.One of the biggest causes for the food inflation in Pakistan is lack of documentation – this impacts the entire supply and demand chain. Farmers, middlemen and logistical partners are all undocumented because they want to avoid paying taxess. Resultantly the statistical data collected is flawed due to which governments (federal or provincial) are unable to develop strategies based on numbers. In a move to address this issue, the Punjab Government has started collecting data on all the middlemen in the province which has aided in decreasing intra-district price volatility.

Role of the government

The government heavily influences agriculture markets by fixing minimum support prices, providing input subsidies, restricting movements of agriculture commodities, and imposing tariff/subsidy on export and import. All these interventions affect consumer and producer welfare and increase the fiscal burden. Consumers end up paying higher than international prices with a general perception that even producers are not  receiving the announced minimum price for their products.

It is imperative that measures are taken to curtail losses incurred in transit. The more perishable the commodity, lower the share of consumer price given to the farmer. Limited profit margins greatly reduce resource availability and incentive for reinvestment in measures which minimize post-harvest losses. Other losses that occur during transportation and at the marketing stage, can be minimized by encouraging private sector participation (similar to what was seen in China, Kenya and South Korea) to provide refrigerated transportation, better organization, storage and grading at market. The PAMRA (Punjab Agricutural Marketing Regulatory Act) in Punjab, which establishes a new, more transparent legal regime to market agricultural produce to protect the free flow of produce and to encourage food supplies is a step in the right direction. Additionally,the Punjab government has removed barriers from entering the market, enabling several private actors to set up fruits and vegetable markets, thus increasing competition and lowering prices.

Way forward

Food price inflation should be a crucial agenda for the government specially to protect the poor from price shocks and to tackle undernutrition. To ensure government interventions do not distort the market leaving it even less efficient and responsive than before, it is important that the costs of these unintended consequences are weighed against the benefits when making policy decisions. Policymakers need to base decisions on an understanding of the food system such that their policies/interventions minimise distortions. The government should therefore ensure that markets perform efficiently while fulfilling its development outcomes.

Short-run solutions are not beneficial for Pakistan. The government needs to devise robust, forward-looking policies. Timely and effective interventions are necessary and should include measures that can handle unpredictable shocks and ensure long-term resilient food flows.

Emun Hafeez is a Research Associate at the Consortium for Development Policy Research.

Income Inequality under Covid-19

The Covid-19 pandemic has come as an unprecedented shock to global social and economic systems with  significant cross-sectoral impacts. But not everyone has been equally affected by this, leading to a pattern of recovery from the pandemic which is unequal and inconsistent. While the health consequences of the pandemic are obvious, developmental impacts are less evident and indicate a larger long-term threat to inequality. Not only has suffering, poverty and vulnerability risen, income inequality has also gone up. Recent data shows a substantial increase in the wealth of billionaires and hence the distributional impact of covid-19 is significant. The highest income groups have experienced disproportionately high-income growth rates while the poor continue to suffer. This blog highlights key aspects of such inequality in a post-covid world and what governments must consider to mitigate or reduce its impact especially on the poor, marginalised and vulnerable.

A worsening situation

Even before the onset of the pandemic, inequality was an important policy concern for policymakers, donors and academics. However, Covid-19 has necessitated swift and immediate action to address inequality worsened by the pandemic. Tackling inequality is not straightforward as it is becoming exceedingly difficult to define what all it entails. Inequality is inherently a multidimensional and complex concept.

In most recessions the poor tend to be at a disproportionately higher risk and the recession brought on by the pandemic has been no different. It has decimated certain segments while leaving other segments completely unscathed. However, the economic impact of the recession caused by Covid-19 is unique in many ways. Prior to the pandemic, the poor had actually been performing better than the middle class in terms of economic growth, but the top 1% has done incredibly well and that is what creates most of this disparity.

The Covid-19 case is unique as the disease and the cure (including containment measures) both   adversely affect inequality. The elderly and people in high density areas (mostly poor) are more likely to be impacted by the health shock caused by the disease. Even the initial mitigating measures in the form of social protection handouts, emergency cash transfers and deferred utility payments etc, rolled out mostly in a blanket form, had a varying impact on the different segments of the population based on their pre-existing capabilities to withstand shocks. The on-going vaccine rollout also remains unequal as richer countries have overall higher access than developing countries, while within countries those residing in cities and with access to government facilities are getting vaccinated earlier on. Across these multiple facets of inequality each reinforcing the other, a pressing concern remains that their impact may compound in an exponential manner resulting in a massive rise in inequality.

The multiple dimensions of inequality and covid-19

The pandemic has impacted inequality in various manners and across multiple phases. We can classify three categories of these phases: Inequality of opportunity, inequality in the labor market and inequality stemming from state action.

Inequality of opportunity: This phase begins from inception where the circumstances of one’s birth dictate the opportunities they can access particularly in terms of health and education which are in part also dictated by geography. Such inequalities have worsened significantly due to the pandemic, particularly evident in the case of education where access to online schooling is unequal, whereas education delivery has become a major challenge due to lockdowns. And while the quality of education has suffered across all types of schools (public and private), it has been much worse for children from poor households. Children from more affluent backgrounds living in more infrastructurally developed areas have been able to continue their education due to availability of internet connectivity and multiple technological devices that have allowed children to attend online classes. The same is not true for their poorer, more rural counterparts. Access to education also has a gender dimension. It is predicted that 11 million girls might not go back to school post Covid-19. Such disparities in early opportunities can manifest in adult lives, making individuals less productive members of the society. .

Inequality in the labour market: Educational background is a key determinant of the kind of employment one is eligible for and for an individual’s bargaining power in the labour market. The pandemic has exacerbated existing disparities in employment. The ability to work from home is highly correlated with education and “pre-pandemic” earnings, and while daily wage earners have lost jobs and incomes, the richer segment has been better able to adapt to the changing job landscape. Typically, inequality in the labour market is most evident  across the urban rural divide. However, Covid-19 has impacted the urban centres significantly more than rural areas due to the nature of the disease and how it spreads. But within urban areas, it is the informal/daily wage earners and fixed salary workers with low-education qualifications associated with industries impacted by lockdown that remain most vulnerable to its impact. Hence increasing income inequality within urban areas.

Inequality stemming from state actions: The government has a responsibility to create a more equitable society. One way to do that is to ensure redistribution of wealth and earnings within society. There are various tools to help achieve this such as tax, transfer and expenditure policies that also include social protection measures. However, policymakers face several challenges in reaching out to those most impacted by Covid-19. Cash transfer programs such as the one under ehsaas Pakistan usually has a minimum threshold and criteria for eligible recipients, yet the segment most impacted by the pandemic includes daily wagers and the service sector in urban areas not targeted by the programs. This segment of the population is generally not ultra poor and often do not meet the selection criteria of such social protection programs. Hence, when shocks such as  Covid-19 occur it becomes difficult to rapidly and effectively target the needy.

More than growth

Good economic growth has the ability to insulate an economy and absorb negative shocks. However, growth alone is not enough, instead needs to be inclusive. This can be achieved by building strong social security systems.

Subsidies are used as a mechanism for redistribution and until recently, was the only tangible means for the public to verify what the government was doing for them. Now there are other, more efficient, ways to achieve this. Direct cash transfers, especially when done digitally, have enormous potential and significantly reduce the risk of leakages and wastages associated with subsidies. Yet huge amounts of subsidies are built into Pakistan’s budget and  the political economy of making radical changes to/reforming subsidy programs remains extremely complex. Hence, adopting large scale transfer programs in lieu of subsidies remains easier said than done.

Data Challenges

It is exceedingly difficult to quantify the magnitude of the impact of Covid-19 on income inequality due to the complexity of inequality and government structures which through redistribution and support policies can alter the spread of wealth within society. The problem is compounded by the lack of data which has become difficult to collect due to the pandemic. Hence accurate estimates about the impact cannot be made. The government needs to come up with rapid effective data collection strategies reliant on spatial and real time data – such as night lights data, mobile and satellite data – to promote more dynamic means of gathering information to inform policy such as the data collection done for Togo’s cash transfer program.  The one key learning from the pandemic has revealed the immense potential of the digital space. To realise this potential, access to the internet is essential. Governments should work to provide good stable internet connection at affordable prices.

A changing lens: from inequality to vulnerability

Growth covers up many of the imperfections in economies but due to the pandemic there hasn’t been any growth, rather many economies have gone into a very steep recession and with this recession many gaps and fractures in service delivery have become more pronounced. Many people have become newly vulnerable. The best way to deal with shocks like Covid-19 is by insuring against them and addressing vulnerabilities.. The concept of resilience is of extreme importance. The ability to bounce back from shocks requires more attention which is why the focus should shift from inequality in terms of poverty statistics and income measures to mitigating vulnerability. If every individual is equipped to fend for themselves and their families in adverse times, it can  eventually lead to a reasonably more equal society.

What it all boils down to

A key takeaway from the current pandemic is that the underlying persistent inequality needs to be effectively addressed to make countries more resilient to external shocks. Growth may be key to achieving this as growth has the ability to mask many of the stresses and imperfections in the economy, but while growth is the basis, the true antidote to inequality lies in effectual and well thought out distribution strategies. Governments must take this opportunity to invest in development.

Emun Hafeez is a Research Associate at the Consortium for Development Policy Research.