VZCZCXRO7501
RR RUEHLH RUEHPW
DE RUEHLH #0178/01 2460235
ZNR UUUUU ZZH
R 030235Z SEP 09
FM AMCONSUL LAHORE
TO RUEHC/SECSTATE WASHDC 4163
INFO RUEHIL/AMEMBASSY ISLAMABAD 4866
RUEHKP/AMCONSUL KARACHI 2142
RUEHPW/AMCONSUL PESHAWAR 1822
RUEHBUL/AMEMBASSY KABUL 0485
RUEHLO/AMEMBASSY LONDON 0193
RUEHNE/AMEMBASSY NEW DELHI 0865
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHC/USAID WASHDC
RUEAIIA/CIA WASHDC
RHMFISS/JOINT STAFF WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEKJCS/SECDEF WASHDC
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL
RUEHLH/AMCONSUL LAHORE 5318

UNCLAS SECTION 01 OF 02 LAHORE 000178 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EAGR EAID ECIN EIND EINV ETRD PGOV PREL PK
SUBJECT: PROSPECTS FOR POVERTY REDUCTION THROUGH NON-FARM EMPLOYMENT 
IN SOUTHERN PUNJAB 
 
¶1.  (SBU) Summary: Non-farm employment is vital to help 
alleviate poverty in southern Punjab, according to local policy 
makers and academic experts.  Population growth has vastly 
outpaced increases in both agricultural productivity and 
non-farm jobs, which resulted in higher poverty rates in 
southern Punjab even when the economy as a whole had improved. 
Industrial employment available in Pakistan has largely 
concentrated on low wage, low value-added, and highly fragmented 
sectors, which leaves most manufacturing centers both poor and 
vulnerable.  Past government emphasis on protecting these 
industries and their jobs only served to institutionalize the 
deprivation.  Pakistan needs an economic growth strategy that 
creates formal sector non-farm jobs in order to stabilize 
southern Punjab, but the limited education and skills of the 
existing workforce severely constrains options for restructuring 
the economy.  End Summary. 
 
- - - 
THE LINK BETWEEN NON-FARM EMPLOYMENT AND RURAL POVERTY 
- - - 
 
¶2.  (U) Surplus labor in the agriculture sector was the root of 
rural poverty in the country, said Harvard economist Ricardo 
Hausmann in a speech to experts gathered at a June 29-30 
conference at the Lahore University of Management Sciences 
(LUMS).  Previous academic research arrived at a similar 
conclusion.  In spite of years of high economic growth and 
substantial international aid flows in the 1990s, rural poverty 
in Pakistan increased, particularly in the cotton-wheat belt of 
southern Punjab and northern Sindh.  A 2004 World Bank report 
concluded that "the most likely factor increasing poverty in the 
1990s has been the decline in real rural wages" resulting from 
the "failure of the non-farm sector to absorb surplus labor." 
Other research similarly found that high population growth 
combined with a dearth of non-farm employment opportunities had 
drowned the region in surplus workers, and as a result wages 
collapsed. 
 
¶3.  (U) Much of that excess manpower was applied to farming, 
which helped increase total agricultural output; however, 
farming practices only changed in labor intensity not methods. 
A 2005 ADB report observed, "the highest incidence of poverty is 
in zones that rely most on crop incomes... [and] where the 
possibility of diversifying incomes in order to manage risk is 
limited." 
 
- - - 
POLICY FAILURES YIELD "ECONOMIC GROWTH WITHOUT DEVELOPMENT" 
- - - 
 
¶4.  (U) Professor Naved Hamid of the Lahore School of Economics 
said that for decades "Pakistan had economic growth without 
development."  Total economic output may have increased, largely 
fueled by deficit spending, expansion of the garment and textile 
sector, and bringing more land under intense cultivation. 
However, government spending was often directed to the military, 
or price supports and subsidies, not infrastructure, health, or 
education.  The garment industry expanded, but still focused on 
low-tech, low value-added merchandise.  Total farm output 
increased, but cropping patterns, irrigation techniques, and 
post harvest handling did not materially improve. 
 
¶5.  (U) Echoing the sentiments of many other post contacts, two 
Punjab senior civil servants acknowledged at the conference that 
political interests secured protection for marginally 
competitive industries, thwarting attempts at substantive 
changes in industrial development policy.  In a recent study for 
the ADB, Hausmann concluded that Pakistan consolidated its 
export economy around the low-value added garment sector 
"space," protected that sector with subsidies and trade 
controls, and failed to make any substantial jumps into new, 
more sophisticated product spaces.  Pakistan has "the lowest 
level of export sophistication" of comparable countries, and 
"its relative position has worsened over the past 40 years," he 
wrote.  Long existing structural weaknesses in the country's 
economy precipitated the current economic crisis in Pakistan, 
and government policy contributed to the problem. 
 
LAHORE 00000178  002 OF 002 
 
 
 
- - - 
FOREIGN AID'S UNINTENDED CONSEQUENCES 
- - - 
 
¶6.  (U) Several speakers at the conference believed that foreign 
assistance to the government at previous moments of acute crisis 
enabled Pakistan to ignore the structural weaknesses of its own 
making.  As LUMS Professor Ijaz Nabi put it, "Aid has created a 
kind of Dutch Disease" in Pakistan, because it focused on 
financial support for the government rather than building 
infrastructure.  It fuelled unsustainable spending, but not 
necessarily on a foundation for future economic growth. 
 
- - - 
PK "NEEDS JOBS FOR THE PEOPLE IT HAS, NOT THE PEOPLE IT WISHES 
IT HAD" 
- - - 
 
¶7.  (U) The economists concluded that short-term policy options 
are limited because of the interaction between three workforce 
characteristics: a) the lack of basic education, b) the narrow 
transferability of skills from the existing industrial base in 
the garment and textile sector, and c) the atomized nature of 
employment in Pakistan's disorganized and largely informal 
economy.  Finance Minister Shaukat Tarin argued that 
hyper-fragmentation in industry constrained skill development, 
discouraged foreign direct investment, and hampered efforts to 
improve tax collection.  The preponderance of small family-owned 
businesses and informal labor created an industrial climate that 
was neither transparent nor competitive, he said.  Consequently, 
Pakistan has become "less skilled" overall according to 
Hausmann, a phenomenon that is "almost unique in recent 
history."  Hausmann expressed skepticism about official visions 
for growth of sophisticated economic sectors, and quipped that 
the country "needs jobs for the people it has, not the people it 
wishes it had." 
 
- - - 
COMMENT: BUT HOW DO YOU CREATE GOOD JOBS IN RURAL DISTRICTS? 
- - - 
 
¶8.  (SBU) Comment: Academics and policy makers have singled out 
the relative decline of non-farm employment in agricultural 
districts as a key reason rural Pakistan remains poor.  Growth 
of industrial employment in the formal sector will diversify the 
economy in the countryside and help stabilize the most 
vulnerable districts.  The challenge lays in how to attract the 
right kind of investment, given the realities of the rural 
workforce and infrastructure. 
CONROY