For a country bestowed with immense natural resources, sharp increases in poverty, income inequality, deteriorating environmental base and acute shortage of energy present an unusual case of economic mismanagement. What follows is a brief glimpse of how the economy has fared in past and then and what could be done in dealing effectively with many problems it currently faces.
The 1960s era saw Pakistan witness a high growth rate and the creation of an industrial class. But later, it was found that this growth only benefited a very specific small class and created huge income inequality and disparity, which eventually led to the secession of East Pakistan.
In 1980s, the country experienced high growth rate on the back of foreign aid inflows. But this time, it was not backed by same productivity growth and the cost of sovereignty paid, as later decades revealed, was much higher.
In the later part of the 1980s, Pakistan went to the International Monetary Fund (IMF) and World Bank (WB) for a Structural Adjustment Program (SAP). The IMF and the WB recommended privatisation, diminished the role of government in running businesses, deregulation, liberalisation, removal of quotas on international trade, lowering tariffs, expanding list of importable items, removing subsidies, increasing indirect taxes and letting the currency be floated freely.
These programmes brought a negative impact on growth, inflation, income distribution, the social sectors and poverty. Not only the absolute poverty incidence, but also the intensity and severity of poverty, increased significantly by all poverty lines and poverty measures over the period of adjustment. These programmes created new poor in urban areas amongst the low income groups, mainly clerical and sales workers, whose real wages were eroded over the period. Poverty also increased among self-employed (smallholders in the informal sector) and unemployed who got affected adversely by the overall economic contraction in the 90s.
Even now, capitalistic democracy in Pakistan is keeping the market in a status quo for the benefit of big monopolists who in collaboration with politicians further their interests and bring barriers to entry for new entrants. 'Functional inequality' episode strengthened the elitist class and people of higher financial standing and political influence of this class even now can get loans and default on them, are the only ones who can bypass redtapism and avoid taxes.
Only 2.75 million Pakistanis, or 1.6 percent of the country's estimated 170 million people, are registered tax-payers, yet the Structural Adjustment Programs only emphasise on removing subsidies, raising utility prices and increasing indirect taxes. The policy to lower and subsequently remove import tariffs has badly affected the domestic industrial base. Now, the government regularly has to trim PSDP (Public Sector Development Programme) to finance fiscal deficit. Elitist class has not yet allowed passing of tax on agriculture and real estate.
Crony capitalism led to selling strategic and important public sector corporations at throw-away prices as part of Structural Adjustment Programme, whereas, the sick units either could not be sold or the government could not detach itself from having to provide subsidies and sovereign guarantees to make them fund losses and deficits.
Politicians in this capitalistic democracy too contribute in maintaining the status quo by providing token benefits to their voters (even without providing in many cases) and by creating an environment where the poor have no choice but to join hands and support them to safeguard their private property rights in the absence of ruling class fulfilling its basic responsibility of safeguarding private property rights.
When investment is constrained by poor property rights, improving financial intermediation and liberalisation will not help and it did not in terms of how we have fared in terms of development. Security of property rights has been one of the most important determinants of why some countries developed quickly than others. Budget FY12 allocates Rs 495 billion for defence expenditures and Rs 295 billion for other security-related grants and transfers. In addition, Rs 1,034 billion is set aside for debt repayment.
Due to this, the development expenditure is once again increasingly dependent on borrowing, which will increase debt servicing next year and this negative feedback loop will move in cycle. For the expansion of tax base, there was no farm tax, no wealth tax and no measures to bring retail sector, real estate and services sector in tax net were taken.
Looking beyond and between economic indicators, let's try briefly to delineate the root cause of many of the problems of the increasingly becoming 'security state', that is Pakistan: The ever so disappointing role of establishment which is becoming increasingly explicit and which is resulting in desperation not peculiar of every developing state as the problems are not confined to what every typical developing country faces. They comprise them, but much else too. Increasing social stratification and increasing polarisation of society Persistent hold of elite class over the country's policies, administration and resources.
Poor civil and private property rights. Lack of political will in all ruling class; be they democratic and military dictatorships. Lack of resolve and autonomy in framing home-grown policies and continuous reliance on often-tried allies and remedies whose hold has made sovereignty of the country almost meaningless. Lack of attention to structural bottlenecks, tax rationalisation and poor governance.
Deteriorating social capital and social fibre and the increasing divide between elite class and the poor resulting in a continuously shrinking middle class. Income and wealth disparity expanding into biased access to education, health facilities, provision to justice, opportunity to participate in mainstream political circle and any meanings of legal and illegal access to service from the corrupt and poorly governed bureaucracy. Increasingly declining national cohesion and increased stratification with regards to religious sectarianism, ethnic origin, regional and political affiliations.
PC'S NEW GROWTH STRATEGY: SOME POLICY RECOMMENDATIONS
The new growth strategy set forth by Planning Commission places emphasis on development incentives, institutions, markets, communities and it emphasises the microeconomic foundations of the macroeconomic framework. The goals are novel, but their implementation and execution is what matters and below are some policy recommendations in this regard.
Prioritising Education
Access to education must not become a function of one's wealth and income. Subsidised quality education needs to be provided to the masses for which the allocation for education alone needs to be increased to 5 percent of GDP. Social sector development is of pivotal importance at least to the 90 percent population of Pakistan. Education especially technical, vocational and skills oriented needs to be encouraged. Primary and secondary education shall be given more share in the education budget. A postgraduate is in a better position to attain scholarships world-wide, but, the rural primary and secondary education can only be funded by the state.
It shall be made compulsory for all government employees to send their children in government schools. It can be made a part of the degree requirement that every graduate has to teach at a government school for a period of 6 months to obtain degree and employment. It will create public awareness, novel ideas, strong communal bond and an affinity in the young professional aspirants with their community members. It shall be made compulsory for all medical science graduates to work for 6 months in a public hospital to obtain degree and license to practice.
Financial Sector Reforms
Banking spreads are at an all time high. No further incentives shall be provided to banks as the current situation will urge them to lend to industry as the consumer financing slowed down. But, for that, government needs to reduce domestic borrowing. If banking spreads remain high, the government could increase the tax rate on banking companies rather than taxing the small savers (already very little in number amid high inflation) with Capital Gains Tax (CGT) and Withholding Tax (WHT).
Banks should be compelled to open branches in rural areas. This will provide formal sources of finance to the rural poor and it will enable them to get out of usurious loans they have to take from landlords and in case of non-payment, have to surrender themselves and their children to bonded labour. This proposed policy will deepen the democratic culture in Pakistan in the long term and will improve the civil rights of the poor masses.
Incentivising Value Addition
Services industry like IT outsourcing, gem stones polishing, medicare, tourism etc shall be given priority as they require less infrastructure and are labour intensive. Since they can be started even on the most barren lands with no diminishing marginal returns, they are ideally suited for Pakistan.
Value addition requires venturing into production/manufacturing. It requires a clear incentive in manufacturing over trading. In the absence of incentive in production/manufacturing, 'rent seeking' behaviour sets in and more producers opt for trading. This extends the supply chain with excess middlemen which also results in increase in prices. A distinct monetary incentive (ie cheap financing) and/or fiscal incentive (ie tax concession) to production is necessary to deal with rent seeking behaviour.
Dealing with energy crisis
Energy is the main asset for any country. More energy resources will reduce the cost of production leading to decrease in prices and cost of a healthy standard of living. It will induce production, exports and attract foreign investment while reducing unemployment and increasing purchasing power. Investment in energy sector shall be encouraged and prioritised.
Cross checking and random checking on rotational basis be made compulsory in utility companies to identify line losses in particular regions. The connivance of officials with people who are not paying utility charges can be broken this way. In an independent cross check, if line losses exceed a threshold limit, the person responsible for that region shall be expelled. Rather than paying penalty (which are not rational, outdated and extremely low for many crimes) and which encourage continuing theft operations as before, the door of corruption must be seized for the corrupt. This is going to be much more effective than running expensive TV ad campaigns.
Alternate sources of energy must be explored especially solar and wind energy. Price hike must take into account that high end consumers be burdened with price hike more than the low-end consumers. But, it must be noted that too high a price could once again increase line losses.
Enhancing capital formation & investment
Overseas Pakistanis should be persuaded to invest in industry rather than in stock market and real estate.
In developed economies, there is less check on investment coming in and strict check on investment going out of the country. It is the opposite in Pakistan. It is vital to facilitate investors especially overseas Pakistanis which can come even if they are provided with very few incentives. Investment facilitation from scratch to the complete set-up of industry can also be provided on a fee basis. Most foreign investors will opt for investment facilitation and it will increase not only the pace with which an investment project will be completed but also open a new window of revenue generation for the government.
Foreign investment in Pakistan has come into sectors like real estate and stock market which does not create real increase in output and does not provide employment to the masses. Government schemes should promote investment in local industries, local plants and equipment and manufacturing within Pakistan so that employment generation can take place inside Pakistan.
Salman Ahmed Shaikh is a researcher in Islamic Economics. He has written 20 papers and more than three dozen articles in Islamic Economics. He is the author of the book "Proposal for a New Economic Framework Based on Islamic Principles". He can be reached at [email protected]
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KEY ECONOMIC WORRIES
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ECONOMIC VARIABLE FY11
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Total Debt Rs 11.2 Million
Debt to GDP Ratio 61.30 %
Inaction 14% T a x
to-GDP ratio 9.10 %
Fiscal Deficit 5.30 %
Current Account Surplus $748 Million
Remittances $9.05 Billion
Losses of Key SOEs Rs 245 Billion
Taxpayers-to-Population Ratio 1.60 %
Key Policy Rate 14%
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Corporate Tax Rate 3rd Highest Globally
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KEY DEVELOPMENT WORRIES
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ECONOMIC VARIABLE VALUE
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Human Development Index Ranked 125th
HDI Value 0.49
Poverty Rate In excess of 33 %
Population below $2 a day 60.30 %
Unemployment Rate 15 % for 2010
Malnourished Population In excess of 33 %
Malnourishment in Children Approximately 38 %
Population with food in security Approximately 50 %
Inequality (as per Gini coefficient) 0.336
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