Indebtedness and Poverty: The Case of Pakistan

Abstract

Since the advent of Neolibralism, debt has been construed as means of policy reforms to achieve stability, liberalisation and recovery from shocks. However, the other side of the picture has been either ignored or underappreciated. That is the human cost of indebtedness. Whether internal or external, indebtedness may have significant implications for the living conditions of the masses, as it leads to substantial deviation of resources towards debt management. This paper attempts to assess the impact of indebtedness on poverty for Pakistan. The impact of total, internal and external debt on poverty has been evaluated separately. Using the data from 1973 to 2013, Johansen Co-nintegration test reveals long run relationship between debt and poverty. The results remain consistent when domestic and external debt is taken separately. The long run impact of total, internal and external debt on poverty is positive. Which means that for Pakistan debt leads to increase in poverty. Further, it is evident that domestic debt has more severe poverty implications as compared to external debt. These results have two important policy implications; firstly, the overall levels of debt have to be reduced and secondly, the issue of domestic debt reduction takes priority. JEL Classification: I30, I38, F34, H36 Keywords: External Debt, Domestic Debt, Poverty, Johanson Cointegration