Budget and GDP growth: export-led and bottom-up

Prime Minister Imran Khan in his speech in the parliament on the last day of the fiscal year highlighted that economic growth model for the country being followed is an ‘export-led’ one. According to him, Budget 2021-22 focuses in that direction. The PM also said the government’s approach to building economy is based on ‘bottom-up’ approach, unlike the previous ‘trickle-down’ one.

Exports primarily come from agriculture and industrial sectors, and in terms of goods and also services. Like any sector, these two sectors need an institutional environment that sets rules and procedures that allow the underlying organisations and market to provide the economic agents involved a conducive environment to work in an optimal way for both production for domestic consumption, and also producing an even better quality and cost-effective products to compete in international trading markets. Moreover, given the world is faced with the existential threat of climate change crisis, an important element of this production process requires that it is compliant with needed environmental standards, especially with regard to the one that is based on renewable energy sources.

Institutions in the practical sense are the ministries, and equivalently departments in provinces with full autonomy after the 18th Constitutional Amendment (referred henceforth in article as fully autonomous departments). It is important that government understands the importance of making heavy financial and technical investments into ministries/fully-departments. Such investments need to undertake the task of building economy with a non-neoliberal, large mandate government approach, providing, in turn, through legislation in parliament and in-house procedures formulation of governance and incentive structures that define the institutional environment for underlying departments and state-owned enterprises (SOEs) in public sector, and private sector organisations and individual economic agents to both interact/conduct economic exchange directly, and through the intermediation of markets.

Here, the government and business need to act as equal partners in development; and markets are approached by governments in a co-shaping and co-creating way. The PM has been of the view that institutional reform comes in a slow, transitional way. This approach needs to change for two broad reasons.

Firstly, the International Monetary Fund (IMF) programme that the country has continued to remain as prolonged user – a country remaining in IMF programmes for at least seven years in a decade – in all the decades since the 1990s, and the neoliberal policy overall also followed otherwise as well, have been a ‘shock-therapy’ of Washington-consensus-based neoliberal policy packages.

Secondly, China avoided that shock-therapy by adopting an indigenous policy package of greater government and taking the lead on private sector collaboration with government and unlike the neoliberal shock therapy, did not go for unfettered markets, quick and large-scale privatisation, limited government and over-inclined liberalization. This allowed China to use markets for price rationalization and also helped it attract foreign direct investment (FDI) along with insulating its economy from highly fluid portfolio investment and the shocks it could produce.

Resultantly, unlike both Pakistan and India China was able to achieve sustained high levels of long-term growth rates.

Also, its bottom-up approach was a lot more than mainly providing stimulus to the bottom echelons of the income ladder, in the sense of providing it in the overall non-neoliberal institutional approach, and also in a mission-oriented, moonshot kind of ambitious way. Here, the government brought together different sectors of the economy and business; and stimulus was directed with purpose of resolving the overall economic problems such as rationalizing prices, reducing income inequality, and poverty. So, the reforms were both government-led and also ambitiously pursued; for instance, in terms of dealing effectively with climate change crisis, China is investing more than a trillion US dollars currently in this direction. Similar was its approach to reducing poverty and improving its own capabilities to build more meaningful relationship with private sector. Together with adequate presence in market, it was able to provide incentivization for greater exports and attract greater FDI.

The current budget and overall policy, especially the one being formulated under research groups, and involving public and private sector input, need an overall directional-role from the PM and his economic team. They need to focus this effort and fill in gaps with more involvement of national and international opinion, through first defining the major economic problems. Concrete directions are missing currently. There is a need for an ‘economic war council’ approach, over and above the usual decision-making platform of Economic Coordination Committee (ECC) of the Cabinet.

The government should formulate plans to put in place an institutional, organisational and market architecture that allow agriculture and industry to have ‘all’ conceivable issues resolved. Reforms in this direction, including that of public service, need to be planned in a non-neoliberal way, and all sectors need to be taken together to increase exports in directions that economy currently allows, and could allow as a parallel goal. The budget should reflect the financial needs of these targeted pathways of change, which overall need to be pursued in an ambitious way.

This is important to reach the goal of exports enhancements fueling growth, and avoiding the trap of balance of payments (BoP) crisis that growth produces in low export situations, and on the other hand, chartering growth in a way that stimulus pre-distributes the sources of growth in favour of those at the bottom of income ladder – and, in turn, reduces income inequality and poverty without waiting for trickle-down – along with overall growth that is also sustainable in the sense of being climate conscious and not jeopardizing sources of natural resources for future growth.

In that sense, the government needs an outcome-based budgeting in the strictest sense possible where this may be defined as ‘the practice of developing budgets based on the relationship between funding and expected results. It increases visibility into how government policies translate into spending and focuses on the outcomes of a funded activity, i.e., the quality or effectiveness of services provided.’ This is needed by government to lead, and channelize efforts towards resolving the economic challenges so that outcome-based budgets adequately support government’s reform effort – for instance providing governance and incentive structures in price rationalization and dismantling elite capture – in terms of targeted and meaningful financial support.

Moreover, “the view of GDP” itself also needs to be evolved by government, and quickly because of the fast-approaching climate change crisis in particular, where it should move in the direction, as pointed out by Alessio Terzi in his European Commission published discussion paper ‘Economic policy-making beyond GDP: an introduction’ in the following manner:

‘Gross Domestic Product (GDP) started to be used during World War II to measure the material production needs of the conflict. Throughout the decades, several issues have been identified with measuring economic success via this single indicator. Most prominently, GDP fails to inform decision makers on how the benefits of growth spread across the population, and to what extent these are concentrated in certain pockets of society. Moreover, it does not take into account the depletion of natural resources and environmental sustainability more broadly. As these have become increasingly pressing concerns for policymakers and the public at large, over the past decade, statistical institutes (including Eurostat) have been developing new complementary indicators, which have been embraced to various degrees by several governments and international organisations. At the current juncture, the challenge is to bring these indicators into more active policymaking in a sensible and manageable way.’

(The writer holds a PhD in Economics from the University of Barcelona; he previously worked at the International Monetary Fund)

He tweets@omerjaved7

Copyright Business Recorder, 2021