Revisiting economy’s direction

‘But putting growth at the center of economic policymaking is a mistake. While important, growth in the abstract is not a coherent goal or mission. Before committing to particular targets (be it GDP growth, overall output, and so forth), governments should focus on the economy’s direction.

After all, what good is a high growth rate if achieving it requires poor working conditions or an expanding fossil-fuel industry?’ – An excerpt from a recently Project Syndicate (PS) published article ‘Rethinking growth and revisiting the entrepreneurial state’ by Mariana Mazzucato.

Economy is composed of ‘exchanges’ – for instance, in the real economy, labour (manual labour, teachers, doctors, etc.) for any number of works in exchange for price of labour or wages/income earned, and in the financial economy, banking deposits made available in exchange for obtaining security of money, earning interest rate, making available loanable funds, earning banking service charges, and profits based on spreads – that should be provided in terms of ‘equality of opportunity’ for economic agents and the price and reward involved should be in line with the correct value of goods and service provided.

At the same time, such exchanges should not play a role in destroying the environment – negative externalities – or jeopardize the lives and livelihood of economic agents.

The role of the government then is to set the economy on a ‘direction’ where economic growth in itself is not the main objective, but putting in place a set of rules or rules of the game or, in other words, institutions, under which economic organizations and markets allow for an economy that promote economic exchange in an inclusive, and environmentally sustainable way.

Neoliberal policy over the last four decades or so, which limits the role of government and, in turn, regulation to only a fixer of market failures and facilitator of private sector, has not allowed for reaching growth in a way that has diminished both inclusivity, and environment sustainability.

In the process, the assault of Neoliberalism – both under International Monetary Fund (IMF) programmes and through neoliberal policy choices of the ‘Chicago boys’-styled policymakers (in and outside of the IMF programmes, including in the case of Pakistan) – has not only decreased the capacity of governments in general to deliver public goods, it has also reduced their capacity to successfully insulate the demos against the ‘profit-over-people’ mentality of vested interests.

This, in turn, has led to lack of economic resilience – especially in the case of existential threats like climate change and shocks like Covid pandemic – especially in the case of under-prepared public health sector on one hand, and lacklustre transition towards a meaningfully green economy on the other.

Moreover, Neoliberalism has also reduced the quality of democracy, especially at the back of decreasing influence of public voice over public policy, produced by inordinate distribution of income and wealth where under elite capture, policy has been heavily influenced to further vested interests of the politico-economic elites.

There is, therefore, a need to move the economic direction away from Neoliberalism to a social democratic styled policymaking with more meaningful role of public sector, and shifting the economy away from market fundamentalism to greater regulation that ‘directs’ the economy towards an appropriate level of productive and allocative efficiencies, and overall, a much more inclusive, resilient and green economy.

Hence, as indicated by renowned economist Mariana Mazzucato over the last ten years, there is a need to move towards an ‘entrepreneurial state’, which is mission-oriented, purpose-driven, has better public sector capacities, relies on lesser outsourcing and where an industrial policy is provided by the public sector, which in turn does not focus on individual sectors but contributes in a mission-oriented way towards, for instance, achieving an inclusive, resilient, green, economy.

In the same article, Mariana Mazzucato indicated in this regard: ‘The economy will not grow in a socially desirable direction on its own.

As I stressed ten years ago, the state has an important entrepreneurial role to play. …Governments need economic-policy roadmaps with clear goals, based on what matters most to people and the planet. Public support for businesses should be made conditional on new investments that will “build forward better” toward a greener, more inclusive real economy. …But to help steer growth in the right direction, governments also must make goal-oriented investments in their own capabilities, tools, and institutions.

The outsourcing of core capacities has undermined their ability to respond to changing needs and demands, ultimately reducing their potential to create purposeful growth and public value over time. …A mission-oriented industrial strategy requires the public and private sectors to work together symbiotically. Done right, such an approach can maximize long-term public benefits and stakeholder value: innovation-led growth becomes synonymous with inclusive growth.’

Let’s take one example in the shape of energy sector, both in terms of pricing and public sector governance. So, can the country achieve the objective of inclusive economy, if for instance a plethora of indirect taxes is put to fill the gap of direct/income tax and where the diminishing role of the public sector under the neoliberal assault has diminished its capacity to provide a meaningful level of governance and incentive structures?

The current bills of electricity are both loaded with indirect taxes – including the pricing of petroleum products that includes a hefty petroleum levy also indicative of a sub-optimal situation in terms of applying direct taxes, and where electricity pricing significantly depends on the price of petroleum products since a meaningful level of electricity is based on fuel –and lack of public sector capacity has led to hefty build-up of electricity theft and line losses.

Here, instead of fixing the tax, an administrative issue, the burden of this failure is passed on to the consumers, while the electricity producing chain – generation companies, distribution companies, and so – is bailed out of its circular debt crisis under the neoliberal philosophy of government as the ‘nanny state’ to the ‘too-big-to-fail’ interests.

This anomaly needs to be fixed by the government, whereby both oil, and electricity pricing is relieved off the indirect taxes/levies and the burden is rightfully shifted through both implementation of direct taxes through bringing in greater progressivity and tax broadening, and through much better public sector governance and incentive structures in the shape of reducing electricity theft and line losses.

Here, it is hard to imagine that the IMF will not support a much-needed correction/relocation of tax focus and better administrative steps, especially given the overall domestic resource mobilization target is not being disturbed, and in fact the quality of economic growth this policy correction will allow will improve its quality in terms of inclusivity, resilience, and environment sustainability.

In addition, an over-arching step in terms of correcting the direction of economy is to move away from the current policy framework of procyclical, monetary and fiscal austerity, and towards a non-austerity, counter-cyclical way.

Copyright Business Recorder, 2023