IBT Journal of Business Studies (Formerly Journal of Management & Social Sciences)

Vol. 11, No. 2, (Fall2015) 213-228

GOVERNANCE ISSUES IN PAKISTAN AND

THEIR IMPACT ON INCOME INEQUALITY
Athar Iqbal1
Assistant Professor, Iqra University

Dr. Ayub Mehar2

Professor, Iqra University
ABSTRACT
Purpose- The purpose of this paper is to investigate the relation
between governance of a country and its impact on income inequality.
The World Bank, Economic Freedom Network, Fraser Institute and
World Economic Forum have been defining and measuring the
governance indicators.

Methodology/Sample – This study takes six governance indicators

score from -WWGI for the year 2000 and 156 counties data to calculate
correlation between wealth Gini and governance indicators. The
statistical analysis is comprises of OLS estimation and Correlation
analysis.

Findings - We found significant negative relation between governance

indicators and wealth inequality, income inequality. Bad governance
has deep impacts on economy of Pakistan. Excessive debt, high fiscal
deficit, high inflation, low tax to GDP ratio, high trade deficit, lack
of adequate capital formation and severe energy crisis are some of
the economic challenges faces by Pakistan from decades.

Practical Implications – This study suggests that improvement in

governance is not a single day task, it cannot be achieved at once
and it is not related to any department or institution. It’s a process
that will establish equality, effective management of economic
resources.

Keywords : governance, income inequality, fiscal deficit

Jel Classification: D63,D60, G38

* The material presented by the author does not necessarily portray the viewpoint of the editors
and the management of the Institute of Business & Technology (IBT)
* Athar Iqbal : [email protected]
* Dr. Ayub Mehar : [email protected]

© IBTJBS is published by the Institute of Business and Technology (IBT).

Main Ibrahim Hydri Road, Korangi Creek, Karachi-75190, Pakistan.
 Athar Iqbal, Dr. Ayub Mehar

1. INTRODUCTION
1.1 Overview
Human Development in South Asia (1999) observed that South Asia is a region which
is divided among rich and very poor as richest one-fifth population earn approximately
40 percent of the income and poorest one-fifth earn less than 10 percent of the income,
so there is a wide gap between rich and poor in South Asia. Rich and poor are divided
apart; on the other hand some of this region emerged as most poorly governed regions
in the world. A region where 515 million people are struggling for their survival and
future of 395 million illiterate adults are at stake. These illiterate people have no source
of regular earning and no training to get jobs.

With the help of economic data of South Asia it can be said that by only growth of
GDP of any country, all economic and social problems will not be solved. In South
Asia we have problems of governance and this crisis of governance in South Asia can
halt economic and social progress of this region. South Asia has extreme income
inequality where richest 10 percent is six times richer than the poorest 10 percent; this
shows lack of governance in economic system where equitable distribution is almost
impossible (Human Development in South Asia, 1999).

Human Development in South Asia (1999) observed that South Asia has many
governance issues like in this region income tax is only paid by one percent of the
population and share of direct taxes is only 29 percent of the total revenue generated
by taxes. Human Development in South Asia (1999) presented and compared two
indexes, Human Poverty Index (HPI) which is prepared by UNDP, Poverty of Opportunity
Index (POPI) which is prepared by Dr. Mahbub ul Haq with $1 a day as defined by
World Bank for poverty incidence and showed that other than India all other countries
in South Asia is more poor when analyzed on the basis of HPI and POPI. Pakistan’s
HPI and POPI is four times higher than income poverty as defined by World Bank
which is clear indication of poor governance in Pakistan where whatever income
generated by country couldn’t be transferred to people on equitable basis.

Pakistan’s performance in sixty five years after independence is not very disappointing.
Pakistan’s poverty ratio has declined and economy shifted to more diversified production
structure from agrarian economy. Integration with the world economy has been fairly
good, and liberalization and deregulation of the economy have begun to take root. But
potential for growth and development is far more that what realized by Pakistan. Human
development indicators computed by United Nations Development Program (UNDP)
of Pakistan is far behind other countries of Asia and rest of the world. Overall literacy
rates, life expectancy, infant mortality are much below than neighboring countries as
well as from those countries who are around same per capita income level. Fiscal and
monetary policies have been lax, and the gains achieved by establishing sound institutions
in the earlier years are being gradually eroded. The physical infrastructure has not kept
pace with the speed and level of economic activity. Technological and scientific progress
has been limited despite possession of nuclear technology.

Vol. 11, No. 2, (Fall2015) 214

Governance Issues in Pakistan and their Impact on Income Inequality

1.2 Current Situation

Pakistan economy is facing various problems. These problems are of multiple natures.
Some of the issues are given below which may help to understand its dynamics. The
News (2012) reported that Pakistan as per Global Competitiveness Report 2012-2013
has been ranked among the bottom 20 out of 144 economies around the world. World
Bank’s doing business report kept Pakistan at 128th position out of 189 countries and
considered it a tough place to do business. According to Failed State Index (renamed
Fragile States Index) ranking, Pakistan stands at number 13. Pakistan falls under the
‘high alert’ category. Pakistan ranked 74 out of the 82 countries as per The Economist
Intelligence Unit (EIU) released the business environment ranking for 2014.As per
survey of Transparency International 2012, Pakistan ranked at 139 on the scale of 1-
175.As per Economic Freedom Report rating, Pakistan stands at 111 out of 144 countries
ranked. According to HDI ranking by UNDP in year 2012, Pakistan ranked at 146 out
of 187 countries. Pakistan falls under the ‘low human development’ group.KOF Index
of Globalization which measures economic, social and political dimensions of globalization
ranked Pakistan at 108 out of 166 countries in 2012.

2. LITERATURE REVIEW
The word governance is not new, as Human Development in South Asia (1999) observed
that much has been discussed and written about governance, and specifically about
good governance by academics and international policy makers. It is argued that
governance took its importance after collapse of communism when transitional economies
found it difficult to cope up with the emerging market economy. Transitional economies
faceed lack of proper institutions, unfulfilled contracts, poor protection of rights, poor
insurance mechanism and poor civil society. The objective of governance in any society
should be social development as well as economic growth and prosperity.

Governance is studied and advised by the World Bank as the way in which power is
applied in the administration of a country economic and social resources. The World
Bank pointed out three specific areas of governance, first is structure of political
government, second how authority is applied to manage country’s resources for social
and economic development and third is, government capacity to design, formulate,
and implement policies and discharge functions.

Kaufmann, Kraay, and Zoido-Lobatón (1999) developed six governance indicators

called Worldwide Governance Indicators (WGI) namely Voice and Accountability,Political
Instability and Violence, Government Effectiveness,Regulatory Burden,Rule of Law
and Graft.

Kaufmann, Kraay, and Zoido-Lobatón (1999) presented examples of Ukraine and Russia
where because of weak governance, in terms of lack of property rights, and ineffective
rule of law, living standards are at decline. Kaufmann et al. (1999); Rajkumar and
Swaroop (2008) pointed out that good governance has positive impact on growth and
development while weak governance slows economic growth and development.

215 IBT Journal of Business Studies (Formerly Journal of Management & Social Sciences)
 Athar Iqbal, Dr. Ayub Mehar
Hyden and Court (2002) argued that political developemnt is a prerequisite for growth
and development of any society. Keefer (2004) observed that intially governance was
considered to understand economic performance of developing countries with emphasis
on certain characteristics but later performance of bureaucracy, property rights, credibility
of government policies and decision making, and institutional characteristics are also
considered.

Corruption is always with us as argued by (Aidt 2003). There is growing literature on

corruption and governance in which Transparency International, World Bank, UNDP
are more popular. Kaufmann, Hellman, Jones, and Schankerman (2000) observed that
corruption is basically a governance problem.

Mauro (1995) explored channels through which corruption impacts on economic growth
and finds negative association between corruption and investment and growth. According
to estimate a one standard deviation improvement in the corruption index will increase
investment rate by 2.9% of GDP. Brunetti and Weder (1998); Shen and Williamson
(2005) further confirmed Mauro (1995) findings.

2.1 Income Inequality and Governance

It is argued that income inequality is harmful for growth as well as political instability
is also negatively associated with growth and investment (Barro, 1991; Alesina, Özler,
Roubini, & Swagel, 1996; Venieris & Gupta, 1986; Mauro, 1995; Alesina & Perotti,
1996; Ortiz & Cummins, 2011). Benabou (1996) argued that the more unequal country
in terms of wealth and income grew more slowly.

Akram, Wajid, Mahmood, and Sarwar (2011) argued that there is a relationship among
bad governance, income inequality and poverty level.De Kruijk, Van Leeuwen, and
Kemal (1985) examined inequality and poverty in Pakistan during 1970s. It is found
that poverty decreases by 50 percent and income inequality rises in same period. Another
work in similar area by (De Kruijk & Kemal,1987) observed that in Pakistan with the
information available it is clear that poverty declines while inequality rises.

Adams and Alderman (1992) explored sources of income inequality in rural Pakistan
during 1987 to 1989 and found income inequality increases during the survey period
from 0.384 to 0.417. Alesina and Rodrik (1994) observed that in any country when
distribution of resources are more unequal, economic growth and prosperity of that
country will be lower than the society where distribution of resources are not much
unequal.

Glaeser, Scheinkman, and Shleifer (2003) observed and presented model that
inequality is bad for growth but only in those countries where rule of law is poor
consequently political institutions are weak and institutional breakdown is common.
Kemal (2006) discussed that objective of economic growth and development is to
k
change the living standard of people living in society, only growth is not enough,
equitable distribution is also required.

Akhtar (2008); Khandker (1973) showed serious doubt on various reports and data
Vol. 11, No. 2, (Fall2015) 216
Governance Issues in Pakistan and their Impact on Income Inequality

presented in Pakistan about regional inequality. Akhtar (2008) took data from 1998-
99 to 2004-05 and found that poor percentage in Pakistan reduced from 31.1% in 1998-
99 to 23.9% in 2004-05. Similar trend of decline reported in urban and rural headcount.
On the other hand 2005-06 data showed that urban- rural gap is widening at country
level.

Idrees and Ahmad (2010) with the help of Household Integrated Economic Survey(HIES)
from 1990-91 to 2004-5 found inequality in Pakistan rural and urban areas based on
consumption. Asad and Ahmad (2011) showed upward trend from 1990 to 1997 in
inequality.

Cheema (2012) found relationship between income inequality, poverty and growth.
Cheema (2012) argued that growth of economy helps to enhance income of population
but not necessary to reduce poverty, it may increase inequality and further aggravates
the situation, poor become more poorer and rich become more rich.

Husain and Kennedy (1999), Rajkumar and Swaroop (2008) observed that good
governance required for effective allocation of resources, to bring comparative advantage,
to increase productivity, to make market more competitive and most importantly to
distribute the resources equitably in any society.

Kaufmann, Kraay, and Zoido-Lobatón (1999); Kaufmann and Kraay (2002); Kaufmann,
Kraay, and Mastruzzi (2006) found a large causal effect of good governance on strong
institutions, growth and development.

Pasha (2000) concentrated on the concept of good economic governance and proposed
that there are nine elements related to good economic governance. Haq, Zia, and Arif
(2006) worked based on Kaufman governance indicators and showed poor political
governance is very clear from the fact that Pakistan has lowest tax to GDP ratio. Pasha
(2000); Haq et al. (2006); Grindle (2004) observed that good economic policy is essential
for the growth in Pakistan. Osborne (2003) ranked Pakistan as 41 out of 58 countries
indicating bad governance impact.

Human Development in South Asia (1999) observed governance issue in Pakistan.

Ismail, Rizvi, and Mahmood (2000) observed that Pakistan faces issues in governance
specifically due to strong link among various elites who have to become more powerful
and get advantage up to maximum extent. Anwar (2009) observed that in Pakistan
continuing poverty is due to inequality in terms of income distribution among various
groups of people. Anwar (2009) further found that poor people and middle class lost
their consumption while rich people gained in consumption which makes it clear that
gap between poor and rich is widening in Pakistan.

Income inequality is calculated by Anwar (2009) based on consumption expenditure

with the support of Pakistan Integrated Household Survey (PIHS) and Pakistan Social
and Living Standard Measurement Survey (PSLSM) during the period of 2001 and
2005. Overall income inequality is 27.52 in 2001-02 which increases to 29.76. In 2001
ratio of highest to lowest was 5.5 which increases in 2004-05 to 6.24. Rural area Gini
217 IBT Journal of Business Studies (Formerly Journal of Management & Social Sciences)
 Athar Iqbal, Dr. Ayub Mehar
coefficient is 23.67 in 2001-02 which increases to 25.19 in 2004-05 and urban areas
Gini coefficient shifted from 32.27 to 33.88. Income inequality of Pakistan rises which
supports our view and previous literature (Gradstein, 2007) that in those countries
where governance is poor, income inequality is an issue.

Another work on consumption inequality covered by Asad and Ahmad (2011) shows
that there is overall rising trend in consumption inequality. Urban area consumption
inequality rises from 0.302 to 0.320, nonetheless rural areas does not show any major
change and remain at 0.252 levels in 2004-05 as compared to 0.254 in 1990-91. Asad
and Ahmad (2011) argued that income inequality in rural areas not shifted due to
foreign remittances from labor class.

Cheema and Sial (2010) computed Gini coefficient of income inequality in Pakistan
from 1992-93 to 2005-06 which shows that overall income inequality rises in Pakistan.
In 1992-93 inequality is 0.2685 which rises to 0.30 in 2005-06. Rural inequality is
0.2388 in 1992-93 which shifted to 0.2438 in 2005-06 and in urban areas increases
from 0.3170 to 0.3473.

Ortiz and Cummins (2011) worked with the help of WDI (2011), quintile information
extracted from UNU-WIDER(2008) and European Commission (2011) and Gini Index
used prepared by Solt (2009) and observed that in Pakistan overall average income
inequality decreases from 32.6 to 30.8 during the period of 1990 to 2005. On the other
hand, it showed that poorest 20 percent(Q1) of population’s inequality rose from 8.1
to 9.1 while richest 20 percent (Q5) decreases from 41.7 to 40.5.

2.2 International Governance Indicators and Pakistan Ranking

Worldwide Governance Indicators (WGI) developed by World Bank. From 1996 to
2011 there is not a single year when Pakistan’s any governance indicator moved from
negative to positive. There is a consistent negative value coming for all governance
indicators. Political Stability and Absence of Violence shows worst position as compared
to other indicators.

Another index which is prepared by Fraser Institute in favor of economic freedom and
measures policies and institutions followed by country is Economic Freedom of the
World. This index covers five broad areas.

First, we compare Pakistan’s ranking with other South Asian countries as given in
Economic Freedom Report of the World. Pakistan ranked 111 out of 144 countries
ranking. Pakistan is in the last quarter of ranking and fourth in South Asian countries
with similar score in ranking with India. Ranking positions highlight the fact that other
countries in South Asia are better in above stated five main components as compared
to Pakistan.

The first component shows Pakistan ranking at 4 which indicates that country heavily
relies on political decisions rather than market forces. Implementation of legal system,
protection of property rights are very important for effective and efficient operation of
markets and to develop confidence of investors that their contracts will be enforced
Vol. 11, No. 2, (Fall2015) 218
Governance Issues in Pakistan and their Impact on Income Inequality

and their property rights will be protected. Pakistan ranking at 117 shows poor
performance in this area and highlights the issues in judicial system and implementation
of legal system which is available in books of laws but not practically implemented by
government.

When we compare HDI ranking of neighboring countries and other South Asian
countries, Pakistan is ranked lower than Sri Lanka and India. When we compare South
Asian region with other regions of the world, only one region scored below South Asian
region and that is Sub-Saharan Africa. South Asian region scored just above Sub-
Saharan region and Pakistan is very close in ranking with low human development
Sub-Saharan African countries.

3. RESEARCH METHODOLOGY
3.1 Sample Size and Sampling methodology
To measure governance, we take six governance indicators score as proposed
by Kaufmann and Kraay (2008) from ¬WWGI for the year 2000. Various researchers
used World Bank Governance Indicators, World Economic Forum, Transparency
International and many other indexes to work on various segments of governance and
economic and social issues like (Anderson & Marcouiller, 2002; Breton, 2004; Brunetti
& Weder, 1995; De Groot, Linders, Rietveld & Subramanian, 2004; Easterly &
Levine, 2003; Rigobon & Rodrik, 2005; Treisman, 2000).
Hence following the above researchers, we used Worldwide Governance Indicators to
understand governance issue and its relationship with wealth concentration. We used
156 counties data to calculate correlation between wealth Gini and governance indicators
in Table3.1(a)

3.2 Statistical analysis and Technique

The statistical analysis is comprises of OLS estimation and Correlation analysis.
The conceptual based regression equations are predicted via OLS estimations. The
basic assumptions for OLS estimations have already been tested before the estimation.

3.3 Empirical Results of the Study

As noted in the introduction, this paper contribution is to investigate the relation
between governance of a country and its impact on income inequality. We empirically
tested by developing methodology that wealth concentration and poor governance leads
to inequality. We expect negative relation between these two variables.
To test this empirically, we take world wealth concentration Gini as available in (Davies,
Sandström, Shorrocks & Wolff, 2011) paper for 229 countries. We used 156 counties
data to calculate correlation between wealth Gini and governance indicators in Table3.1
(a)

Table 3.1(a) shows the result of correlation among governance indicators and wealth
inequality which is significant at 1% and 5% except voice which is significant at 10%.
All governance indicators have significant negative relation as per researcher expectation;
hence researcher concludes that when a state has bad governance, wealth inequality is

219 IBT Journal of Business Studies (Formerly Journal of Management & Social Sciences)
 Athar Iqbal, Dr. Ayub Mehar
on higher side. Further we estimate wealth concentration Gini on average of six
governance indicators.

Table 3.2(a) reports the basic model summary on how wealth concentration affects
governance. The dependent variable is governance and independent variable is wealth
concentration Gini. Independent variable has negative effect on governance as shown
in Table 3.2(a). This result suggests that wealth concentration has negative and significant
effect on governance of a state.

From the above result it is evident that wealth inequality has governance issue. When
we take Pakistan as a case, situation is worse because all governance indicators of
Pakistan are on negative side. Wealth inequality is much more in Pakistan as compared
to data presented by government authorities because wealth data in Pakistan in terms
of Household Balance Sheet does not show real picture. Those who accumulate wealth
discourage policies that revealed this wealth. They concealed this information from
government agencies, hence successfully reduce their wealth.

We collected Corruption perception index data for the year 2011 and World Bank’s
Governance Index of 2011. First of all we removed those countries which were available
in World Bank’s Governance Index but not covered by Transparency International
Index and finally reached to 182 observations. As per theoretical understanding, there
should be negative relation between corruption perception index and governance
indicators. This is based on this perception that poor governance leads to higher
corruption in society.

Our correlation result confirms this understanding and we find significant negative
relation between Corruption Perception Index of TI and World Bank’s Governance
Index as shown in Table 3.1(b)
We observed that when overall country governance is fragile then it is almost difficult
for any country to show progress in macroeconomic, trade and other rules and regulation
areas. To explore association among various governance indicators and economic
freedom index, we calculate correlation by taking 2011 World Governance Indicators
and World Economic Freedom Report Index ranking and find very strong positive
correlation as shown in Table 3.1(c).

Each variable of governance indicators is positively significant with World Economic

Freedom ranking that shows that better governance reflects better performance in
political, legal, macroeconomic, trade and regulations areas hence strengthen overall
business, social and political environment in any country. This further support our
understanding that governance of a country plays significant role in the solution of
various economic and social issues.

As it has been discussed by Perotti (1996) , Aghion, Caroli, and Garcia-Penalosa

(1999);

Davies, Shorrocks, Sandstrom,and Wolff (2007) and Davies and Shorrocks (2005) in
various papers that wealth inequality data for many countries are not available, so
Vol. 11, No. 2, (Fall2015) 220
Governance Issues in Pakistan and their Impact on Income Inequality
researchers generally use income inequality as proxy for wealth inequality. We gathered
data for income inequality from World Bank and wealth inequality Gini coefficient
data as provided by (Davies, Sandström, Shorrocks & Wolff, 2011). Finally data is
available for 130 countries. Data of income inequality Gini is not available for all
countries in 2011, so we selected closest year for which income Gini for a country is
available and relate it with wealth Gini. Figure 3.1 shows that wealth inequality is on
higher side at all level of income inequality as well as showing same trend as income
inequality presenting. We find correlation between income inequality and wealth
inequality as shown in Table 3.3 which confirms previous researchers’ findings that
there is strong positive correlation between income inequality and wealth inequality.
Similar result was found by (Ortiz, I., & Cummins, M. 2011).

There are various researchers who did not directly take Worldwide Governance Indicators
to measure governance but took various other variables to measure governance and
showed association in governance and various economic and social development
outcomes like (Rajkumar & Swaroop 2008; Bulte, Damania, & Deacon, 2005); Holmberg,
Rothstein, & Nasiritousi (2009). Following these researchers, we use income inequality
and WWGI to understand relationship between governance and income inequality.
We earlier suggested that bad governance negatively impact on income inequality in
a country. We take data of governance indicators from World Bank’s The Worldwide
Governance Indicators of 2011 which covers 215 countries and Gini coefficient of
income inequality for 213 countries. We are able to gather data for 156 countries for
which both governance indicators and income inequality Gini coefficient are available.
Table 3.1(d) exhibits correlations between income inequality (Gini coefficient) and
governance indicators. Table 3.1(d) shows negative correlation between governance
indicators and income inequality as per our understanding. The result shows that
governance mechanism has association with income inequality in a society. All correlation
coefficients have negative sign indicating that inequality rises when governance is poor.
Only Political Stability is not significant while Absence of Violence indicator is
significant at 10%. Nevertheless both variables supported theoretical understanding of
negative association with governance indicators. Thomas (2010) argued that variable
which are used to show relationship should be consistent with the theoretical prediction
about that relationship.

Governance has impact on income inequality and where governance of a state improves,
helps to reduce inequality as also observed by Gradstein (2007). Various evidences
in this regard obtained by (Persson & Tabellini, 1991; Alesina & Rodrik, 1994) from
cross countries research and concluded that inequality is harmful and causes of various
adverse economic and social outcomes and reduces growth.

Now we regress income inequality on governance indicators and expect negative

relation.

Table 3.2(b) reports basic model summary on how governance affects income inequality.
The dependent variable is income inequality and independent variable is governance.
Independent variable has negative effect on income inequality. This result helps us to
understand that bad governance has negative and significant effect on income inequality
221 IBT Journal of Business Studies (Formerly Journal of Management & Social Sciences)
 Athar Iqbal, Dr. Ayub Mehar
of a state.

4. CONCLUSION AND RECOMMENDATIONS

Governance is an organizing concept which applies to all social sciences. Governance
was popularized by international institutions led by World Bank has key role. Various
other institutions took part in governance measurement and improvement from different
points of view including Transparency International, Economic Freedom Report, World
Economic Forum, etc. A growing literature stresses and supports that governance is
important and play a vital role in economic development and prosperity of a country.
Pakistan faces weak political governance and considered a fragile state due to unstable
political government. Various coalitions have been formed to rule the country but all
groups are interested in their own benefits, consequently emerged as unstable coalitions.
Plenty of examples are present in Pakistan which indicate governance failure, like
energy crisis, low and stagnant tax to GDP ratio, high debt burden, high incidence of
tax evasion, regressive tax system, high losses of public sector enterprises, burden of
subsidies, high corruption and misappropriation in development fund and posting of
inefficient people in public sector enterprises. Corruption and patronage is present in
all government offices from lower to top level. Poor performance, delayed cases and
corruption in the lower courts have not been improved. Fiscal deficit is on the higher
side which puts pressure on the incumbent government to borrow more funds from
internal and external sources.

Poor governance is reflected through government inability to generate sufficient revenue

to cover expenditures resulting in high budget deficit. Government imposes indirect
taxes on public rather than putting emphasis on direct taxation which shifts burden
from rich class to poor people. Huge corruption in Pakistan Railway, massive financial
fraud in the National Assembly Employees Cooperative Housing Society and fake
degree issue of parliamentarians shows lack of accountability of politicians. Allotment
of urban land by KDA, CDA and LDA to influential people at highly subsidized rates,
conversion of agricultural land into industrial land and then sold at high margin of
profit are few examples of rent seeking activities of politicians.

Above discussion leads us to this conclusion that governance of the country is poor.
Political misgovernance has had a damaging impact on economy of Pakistan and
creating inequality. This paper examined the impact of governance of country on
income and wealth concentration.

Pakistan presents overall weak governance in every walk of life which is indicated by
all international governance measurement indicators developed by World Bank, Fraser
Institute, World Economic Forum, Fragile State Index Ranking, United Nations Human
Development, Transparency International etc.

It is suggested that improvement in governance is not a single day task, it cannot be

achieved at once and it is not related to any one department or one institution. It’s a
process that will establish equality, effective management of economic resources;

Vol. 11, No. 2, (Fall2015) 222

Governance Issues in Pakistan and their Impact on Income Inequality

To achieve good governance strong political will and commitment will be needed.
International financial institution, UNDP is working and giving guidelines to improve
governance but government should not only consider their recommendations, we should
also work and understand the local ground realities and environment as well as
institutional capacity. Civil society, impartial media, NGOs participation is necessary.
However it is important to understand that as times passes, situation will aggravate and
more things would need to be done. For example in the case of Pakistan, there is, at
present no work in the area of land reform. Wealth tax net should be broadened to bring
more wealthy people within tax ambit.

ACKNOWLEDGEMENT
First of all with a profound gratitude, we are thankful to Almighty Allah forgiving us
success, knowledge and understanding without which we would not been capable of
completing this research paper.
We are also profoundly grateful to all our family members whose endurance and
understanding have played a significant role in our success by sacrificing the important
family time and supporting us all over the research work.
We are finally thankful to the editor, reviewers and IBT specially who provided us with
the opportunity to publish our research paper in this esteemed journal.

REFERENCE
Adams, R. H., & Alderman, H. (1992). Sources of income inequality in rural Pakistan:
a decomposition analysis. Oxford Bulletin of Economics and Statistics, 54(4),
591-608.
Aghion, P., Caroli, E., & Garcia-Penalosa, C. (1999). Inequality and economic growth:
the perspective of the new growth theories. Journal of Economic literature,
37(4), 1615-1660.
Aidt, T. S. (2003). Economic analysis of corruption: a survey*. The Economic Journal,
113(491), F632-F652.
Akhtar, S. (2008). Trends in Regional Inequalities in Pakistan: Evidence Since 1998.
Lahore Journal of Economics, 13(Special Edition), 205-220.
Akram, Z., Wajid, S., Mahmood, T., &Sarwar, S. (2011). Impact of poor governance
and income inequality of poverty in Pakistan. Far East Journal of Psychology
and Business, 4(4), 43-55.
Alesina, A., &Perotti, R. (1996).Income distribution, political instability, and investment.
European Economic Review, 40(6), 1203-1228.
Alesina, A., &Rodrik, D. (1994).Distributive politics and economic growth. The
Quarterly Journal of Economics, 109(2), 465-490.
Alesina, A., Özler, S., Roubini, N., &Swagel, P. (1996).Political instability and economic
growth. Journal of Economic growth, 1(2), 189-211.
Anderson, J. E., &Marcouiller, D. (2002). Insecurity and the pattern of trade: an empirical
investigation. Review of Economics and statistics, 84(2), 342-352.
Anwar, T. (2009). Measuring Inequality of Consumption and Opportunities In Pakistan:
2001-02 and 2004-05. Pakistan Economic and Social Review, 157-181.
223 IBT Journal of Business Studies (Formerly Journal of Management & Social Sciences)
 Athar Iqbal, Dr. Ayub Mehar
Asad, M. A., & Ahmad, M. (2011). Growth and consumption inequality in Pakistan.
Pakistan Economic and Social Review, 69-89.
Barro, R. J. (1991). Economic growth in a cross section of countries. The quarterly
journal of economics, 106(2), 407-443.
Benabou, R. (1996). Inequality and growth. In NBER Macroeconomics Annual 1996,
Volume 11 (pp. 11-92). MIT Press
Breton, T. R. (2004). Can institutions or education explain world poverty? An augmented
Solow model provides some insights. The Journal of Socio-Economics, 33(1),
45-69.
Brunetti, A., &Weder, B. (1998). Investment and institutional uncertainty: a comparative
study of different uncertainty measures. WeltwirtschaftlichesArchiv, 134(3),
513-533.
Brunetti, Y., &Weder, B. (1995). Political sources of growth: a critical note on
measurement. Public Choice, 82(1-2), 125-134.
Bulte, E. H., Damania, R., & Deacon, R. T. (2005).Resource intensity, institutions, and
development. World Development, 33(7), 1029-1044.
Cheema, A. R. (2012). Poverty, Income Inequality, and Growth in Pakistan: A
Pooled Regression Analysis Ahmed RazaCheema and Maqbool H. Sial.Lahore
Journal of Economics, 17(2), 137-157.
Cheema, A. R., & Sial, M. H. (2010). Estimating the contributions of growth and
redistribution to changes in poverty in Pakistan. Pakistan Economic and Social
Review, 279-306.
Davies, J. B., &Shorrocks, A. (2005, January).Wealth holdings in developing and
transition countries.In Luxembourg Wealth Study Conference.January(Vol. 27).
Davies, J. B., Sandström, S., Shorrocks, A., & Wolff, E. N. (2007). Estimating the level
and distribution of global household wealth (No. 2007/77).Research Paper,
UNU-WIDER, United Nations University (UNU).
Davies, J. B., Sandström, S., Shorrocks, A., & Wolff, E. N. (2011).The Level and
Distribution of Global Household Wealth*. The Economic Journal, 121(551),
223-254.
De Groot, H. L., Linders, G. J., Rietveld, P., & Subramanian, U. (2004).The institutional
determinants of bilateral trade patterns. Kyklos, 57(1), 103-123.
De Kruijk, H., & Kemal, A. R. (1987).Sources of Income Inequality in Pakistan [with
Comments]. The Pakistan Development Review, 26(4), 659-672.
De Kruijk, H., Van Leeuwen, M., & Kemal, A. R. (1985).Changes in Poverty and
Income Inequality in Pakistan during the 1970s [with Comments]. The Pakistan
Development Review, 24(3/4), 407-422.
Easterly, W., & Levine, R. (2003). Tropics, germs, and crops: how endowments influence
economic development. Journal of monetary economics, 50(1), 3-39.
Glaeser, E., Scheinkman, J., &Shleifer, A. (2003).The injustice of inequality.Journal
of Monetary Economics, 50(1), 199-222.
Gradstein, M. (2007).Inequality, democracy and the protection of property rights*. The
Economic Journal, 117(516), 252-269.
Grindle, M. S. (2004). Good enough governance: poverty reduction and reform in
developing countries. Governance, 17(4), 525-548.
Haq, R., Zia, U., & Arif, G. M. (2006). Governance and Pro-poor Growth: Evidence
from Pakistan [with Comments]. The Pakistan Development Review, 761-776.
Vol. 11, No. 2, (Fall2015) 224
Governance Issues in Pakistan and their Impact on Income Inequality
Holmberg, S., Rothstein, B., &Nasiritousi, N. (2009). Quality of government: what you
get. Annual Review of Political Science, 12, 135-161.
Human Development in South Asia (1999).The MahbubulHaq Human Development
Centre. Oxford University Press, pp: 1-208.
Husain, I., & Kennedy, C. H. (1999). Institutions of Restraint: The Missing Element
in Pakistan's Governance [with Comments]. The Pakistan Development Review,
38(4), 511-536.
Hyden, G. Court, J.(2002). Governance and development. Idress, M., & Ahmad, E
(2010). Measurement and Decomposition of Consumption Inequality in
Pakistan. The Lahore Journal of Economics, 99-112.
Ismail, Z. H., Rizvi, S., &Mahmood, A. (2000). Governance, Decentralisation, and
Poverty: The Case of Pakistan [with Comments]. The Pakistan Development
Review, 1013-1030.
Kaufmann, D., &Kraay, A. (2002).Growth without governance. World Bank Policy
Research Working Paper, (2928).
Kaufmann, D., &Kraay, A. P. Zoido-Lobatón (1999)“Governance matters”.Policy
Research Working Paper, 2196.
Kaufmann, D., Hellman, J., Jones, G., &Schankerman, M. (2000). Measuring governance,
corruption, and state capture: How firms and bureaucrats shape the business
environment in transition economies. World Bank Policy Research Working
Paper, (2312).
Kaufmann, D., Kraay, A., &Mastruzzi, M. (2006).Measuring governance using cross-
country perceptions data. International handbook on the economics of corruption,
52.
Keefer, P. E. (2004). A review of the political economy of governance: from property
rights to voice (Vol. 3315). World Bank-free PDF.
Kemal, A. R. (2006). Income Inequalities in Pakistan and a Strategy to Reduce Income
Inequalities. Background Paper for PRSP-II, PRSP Secretariat, Government of
Pakistan.
Khandker, R. H. (1973). Distribution of income and wealth in Pakistan. Pakistan
Economic and Social Review, 1-39.
Mauro, P. (1995). Corruption and growth. The quarterly journal of economics,110(3),
681-712.
Ortiz, I., & Cummins, M. (2011). Global Inequality: Beyond the bottom billion–A rapid
review of income distribution in 141 countries.
Osborne, E. (2003). Measuring bad governance. Cato J., 23, 403. Pakistan faces low-
growth equilibrium. ( 2013, October 10). Dawn.com. Retrieved from
http://www.dawn.com/news/1048662/pakistan-faces-low-growth-equilibrium
Pakistan ranked 124th amid 144 economies. (2012, September 05). The News.
http://www.thenews.com.pk/article-66430-Pakistan-ranked-124th-amid-144-
economies
Pasha, H. A. (2000). Elements of Good Economic Governance.Social Policy and
Development Centre.
Perotti, R. (1996). Growth, income distribution, and democracy: what the data say.
Journal of Economic growth, 1(2), 149-187.
Persson, T., &Tabellini, G. (1991). Is inequality harmful for growth? Theory and
evidence (No. w3599).National Bureau of Economic Research.
225 IBT Journal of Business Studies (Formerly Journal of Management & Social Sciences)
 Athar Iqbal, Dr. Ayub Mehar

Rajkumar, A. S., &Swaroop, V. (2008). Public spending and outcomes: Does governance
matter?. Journal of development economics, 86(1), 96-111.
Rigobon, R., &Rodrik, D. (2005). Rule of law, democracy, openness, and income.
Economics of Transition, 13(3), 533-564.
Shen, C., & Williamson, J. B. (2005).Corruption, Democracy, Economic Freedom, and
State Strength A Cross-national Analysis. International Journal of Comparative
Sociology, 46(4), 327-345.
Thomas, M. A. (2010). What Do the Worldwide Governance Indicators
Measure&quest. European Journal of Development Research, 22(1), 31-54.
Treisman, D. (2000). The causes of corruption: a cross-national study. Journal of public
economics, 76(3), 399-457.
Venieris, Y. P., & Gupta, D. K. (1986). Income distribution and sociopolitical instability
as determinants of savings: a cross-sectional model. The Journal of Political
Economy, 873-883.
World Bank (2010). Doing business in Pakistan : comparing regulation in 13 cities and
with 183 economies. Doing business subnational, Washington D.C., The
Worldbank. http://documents.worldbank.org/curated/en/2010/01/17197387/doing-
business-pakistan-comparing-regulation-13-cities-183-economies.

Vol. 11, No. 2, (Fall2015) 226

Governance Issues in Pakistan and their Impact on Income Inequality

APPENDIX
Table 3.1 (a-d) Correlation results between Inequality Gini and Governance Indicators

*significant at 1%
**significant at 5%
*** Significant at 10%

Table No.3.2 (a-b) Regression Results of Wealth Concentration, Income

Inequality and Governance Indicators.

Table 3.3 Correlation between Wealth Inequality and Income Inequality

227 IBT Journal of Business Studies (Formerly Journal of Management & Social Sciences)
 Athar Iqbal, Dr. Ayub Mehar

Vol. 11, No. 2, (Fall2015) 228