Growth on rise; quality not so

Last week this column termed 10-year high growth of 5.28 percent as fair and square; implying that the growth is real and there are no visible signs of overstating the numbers or government support schemes were to move the GDP up.

One senior monetary economist commented on social media that " There is and should be more to economic well being of societies than just economic growth ... what exactly is this higher growth telling us? Did the economy create more productive jobs? Is it helping mitigate inequalities of incomes and opportunities? Does it indicate that our society is more safe [sic]?"

He was spot on. There is not much debate in the policy circles and media on the quality of growth, and what drives the growth momentum. Yes, the economy is growing whilst poverty is declining; as in 2001-02 there were 57 percent households living under $2 per day and today only 7 percent are below that threshold. But, what about growing stunting issue in infants and stagnating malnutrition? The access to clean water is getting thin; and is causing more damage to society than absolute poverty could. Today more people in Pakistan posses mobile phones, than having access to toilets.

Inequality is growing at alarming rates - GINI coefficient has moved up from 0.44 to 0.55 in last fifteen years; and today the country is ranked 147 on Human Development Index. Food is becoming dearer for low income groups as there is a policy shift from direct agriculture subsidies to support price mechanism. Yes, there is the BISP, utility stores, and similar schemes by the Punjab government; but that simply is not enough to cater all.

Housing prices have moved much higher than real economic growth. The affordability of owning house is diminishing in middle class and the number of people living under a roof is increasing. Both real estate and construction prices are increasing at higher rates than real wages; and in the near absence of mortgage, it is becoming increasingly difficult for an average young family to own a house. On the flip, those who own assets are creating wealth as price movements are in their favour.

There is an elite capture to put it mildly, and those who have access to capital, assets and other social and economic amenities are growing as the vulnerable are getting deprived of basic necessities. Government education and health care are in tatters, while private service providers are charging premium. Entry barriers for kids who cannot afford good private education to decent employment are getting high. Bank financing is not available to 'ideas' rather financing rely on collateral (mainly real estate). And the list goes on.

How can these worsening social indicators be linked to macro growth in big sectors? The best performers in the last 2-3 years have been cement, steel, automobiles, banks, trade, retail, and wholesale.

There are oligopolies in many manufacturing sectors impeding them not only from becoming competitive in global markets for exports but also, at times, unnecessary protections result in rent seeking that is eventually paid by the consumers.

There is no doubt that the cement industry is competitive in Pakistan, and it's not only growing but is also in an expansionary phase. These are healthy signs for a country in quest of building large infrastructure projects. However, there is an unnecessary 20 percent regulatory duty on imports of cement, consumer is paying premium for no good reason. The gross margins of nine cement companies averaged 36 percent for the past four years, while the EBITDA margins are above 35 percent as well. This partly explains why inequality is growing in Pakistan. Had the sector been more competitive, real growth in the sector would have been even more pronounced. More importantly, it would have generated consumer surplus to lower inequality.

Even worse is the story of auto assemblers. Three players in car making took three times the time of what was initially granted for localization; and opening up to competition. The EBITDA margins are even better than their cement counterparts. There are duties on imports with limits of age, while the demand is high. These companies used to have full cash from consumers with delivery time of months while they were providing credit to vendors at mark up. The dealers make rent by charging premium on instant delivery. How would inequality not rise?

The story goes on for many other formal and informal sectors - big famers have government protection in form of support price irrespective of international prices. Fertilizer big guns with EBITDA margins of 30-50 percent enjoyed cash subsidy from government to sell produce to farmers in vicinity of international prices. Within textile, spinners lobby against high job creating value added sector. And the list goes on to explain why income and social inequalities are worsening in Pakistan.

Traders, wholesalers, and retailers are the biggest chunk of economy. This group tends to operate informally and simply evades taxes. There are numerous high net worth individuals who make money from real estate or any other informal sector and simply do not pay tax. Yes, they do philanthropy on their whims; but the toll is too low relative to their tax potential.

In turn a fiscally strapped government, does not have resources to provide social security in form of health, education and access to justice. Quality and inclusiveness of growth obviously remain a pipedream.

The good news is that next year GDP may grow up to 6 percent. Yes, it will create employment but inequality is bound to grow with the rules of the game.