An Application of VECM to Investigate the Role of Socio-Economic Factors in Poverty: New Evidence from Pakistan

Abstract

Poverty is a crucial and worldwide phenomenon. The main purpose of the study is to investigate the relationship exists between socio-economic factors, social factors, and poverty, the relative influence of economic and social factors on poverty and to describe causality between time series in the VAR system. This study utilized the Vector Error Correction Model (VECM) by using quarterly time-series data, 1994Q1 to 2018Q4, that have been collected from the world development indicators (WDI) and Economic Survey of Pakistan. The study identified education, unemployment, inflation as economic factors while zakat and rainfall as social factors that can reduce poverty. The findings of this study indicate that inflation and unemployment have a positive and significant relationship with poverty in the long run in Pakistan while education, rainfall, social welfare programs, and zakat has a negative relationship in the long run with poverty. Besides, the study also found that in the short run, there is no relationship between economic and social factors with poverty. Moreover, the study found that in the long run that the relative contribution of education and rain increases, 28% and 20%, is greater than the contribution of inflation, social welfare programs, unemployment and zakat, 3.8%, 0.5%, 2.5%, and 0.08%. Similarly, its contribution to poverty reduces up to 44% in the long run. This study helps policymakers to take important decisions about economic and social factors while designing policies to reduce poverty. The results suggest that the state bank of Pakistan should adopt a contractionary monetary policy to control inflation and policymakers can develop policies like education for all. The government should develop a business environment to create more employment opportunities.

Can the integration between Islamic social finance and Islamic commercial finance tackle poverty in Indonesia?

“…With the ZIS distribution scheme to the productive sector, in the long term mustahiq's income will increase and ultimately reduce the number of poor people. This finding is in line with previous research such as Abdelbaki (2013); Bouanani & Belhadj (2020); Choiriyah et al (2020); Athoillah (2018);and Zafar et al (2021).…”

“…The same result was also obtained by Athoillah (2018) who used panel data from all provinces on Java Island from 2001 to 2012 where his findings stated that if zakat increased by 1%, the number of poor people in Java decreased by 0.031%. In another study, using time series data from the Q1 of 1994 to the Q4 of 2018, Zafar et al (2021) proved that zakat was able to reduce the poverty rates in Pakistan in the long term by 0.08%, but in the short term, it did not affect poverty. Iskandar et al (2021) that in the short and long term, Islamic social finance is able can poverty and equalizes income inequality.…”

“…For example, research by Abdelbaki (2013) analyzes the role of zakat as a representation of Islamic social finance in increasing consumption and reducing poverty in Bahrain. In other countries, such as Tunisia and Pakistan, research by Bouanani & Belhadj (2020) and Zafar et al (2021) explores how zakat contributes to alleviation in these two countries. Meanwhile, research on the effect of ZIS on poverty alleviation has also been carried out in Indonesia by Athoillah (2018) and Choiriyah et al (2020) who investigate the role of zakat in reducing poverty in Java and Indonesia.…”

“…People with higher incomes can help people with lower incomes through the distribution and utilization of ZISWAF funds so that poverty can be reduced. ZIS funds can also be used for the productive sector so that the poor can use them to build businesses so that their income can increase (Zafar et al, 2021).…”

Is government spending in the education and health sector necessary for human capital development?

“…Secondly, government spending on social protection and human capital formation is neglected in empirical research. Most of the empirical research highlighted the importance of social protection in poverty alleviation (Bakhshinyan et al, 2019;Zafar et al, 2021) and in economic growth (Piachaud, 2013) but the role of social protection programs in human capital formation is overlooked. However, a few empirical studies conceptualize a framework that suggests how social protection can play a key role in supporting human capital development in poor nations where people spend their income on their daily survival (Holzmann and Jørgensen, 2001).…”