Poverty trap – ‘terrible thing’ or ...?

You don’t have to be a finance professor at Princeton to understand that Pakistan is indeed “stuck in a poverty trap”. Yet noted economist and lost national treasure Atif Mian also said, in a series of tweets ‘On poverty traps, and Pakistan’, that the only way out of such traps is “through a big policy change – a change that is coordinated and credible over a sustained period of time”; concluding that he would “talk about what this means in the future”.

So I wait for the revelation, sincerely hoping that he meant the very near future. Because any longer would see the lower-middle class – where I look left and right and see so many like me hanging by the skin of their teeth – dissolve below the poverty line as well. And then the poverty trap would become even more firmly entrenched.

I do hope, though, that it will not just be an extension of the “silver lining” that he said “terrible thing” poverty comes with – the desperation that drives the poor to “work for less”, a “natural advantage” that governments can “harness”, and “growth and prosperity follows, as countries like Vietnam and Korea have shown”.

Asia’s Tiger Club Economies have fascinated students of financial markets since the early 90s, no doubt, when they wrote the book on attracting feverish hot money to rising emerging markets, the inevitable compression of yield differentials and unwinding of the so-called carry trade that follows, cycles of rapid growth and also contagion, even deflation, cascading through time zones, especially their ability to recover growth rates and reserves after every crash.

It will, therefore, be instructive to see how they used the poor “working for less” to their advantage, and how this constitutes a “natural advantage” that can be leveraged to rescue the Pakistani economy. Because, already, the lower as well as middle income classes have been working for far less than they used to for a number of years. That, quite naturally, has led to a quantum jump in household debt, small business defaults, and the poverty rate, with half the country either just around or below the poverty line

You don’t need to dig further than the data (charts) Atif Mian provided in his tweets to see that the last two years have been the worst since the 80s in terms of low growth and high inflation. Low growth means a shrinking job market, and high inflation is the worst tax on the poor, making sure that millions of households in middle- and low-income groups will be condemned to “working for less” for the foreseeable future.

Especially since the government has chosen a nakedly predatory tax regime to comply with IMF’s “upfront conditions” for the new bailout program.

So, does this mean that the “natural advantage” that the government can exploit to trigger growth out of the downturn is growing? Surely the good professor will be mindful that his recommended “policy change” must not run afoul of IMF’s harsh conditions, particularly when it comes to tax and subsidy relief.

No such commonsense prescription can be “coordinated and credible over a sustained period of time” without compromising the EFF (Extended Fund Facility). Because if you fall out of the program, like last time, billions of dollars due in debt and interest repayment over the next couple of fiscals will not get rolled over, and default will most definitely follow.

Right now, the only question is whether the country can ride out the EFF before its discriminatory and cruel tax policy forces people unable to pay their bills and put food on the table into outright revolt. The only policy option it does have is about spreading the tax burden evenly across the economy.

But it continues to protect the four big sectors that have never paid their fair share simply because of their connections and nuisance value. And even as the economy negotiates the darkest nights of its history, policy makers would rather risk widespread social breakdown, even anarchy, than implement an equitable tax regime that would create the fiscal buffer needed to see the EFF through to the end.

Perhaps when that is done, and some semblance of stability is finally achieved, the government can think about ingenious ways of milking the “natural advantage” that the poverty trap somehow creates. But, speaking of the EFF, it turns out that Pakistan’s case has not been included in the Fund’s executive board’s schedule for this month, raising fresh concerns about the timeline of disbursement.

The finance minister, who said a week ago that board would give the green light at this meeting, glossed over this setback by snapping out his usual all-is-well line with his usual straight face. How about that?

Does anybody remember that after the last round of talks he had to be forced by reporters into accepting that the IMF had mandated “timely confirmation of necessary financing assurances from development and bilateral partners”? Later, after he shuttled through China and the Middle East, negotiating with those partners, he claimed with the same straight face that he had secured those commitments.

But there’s been an eerie silence about the matter since then. So, has it or hasn’t it been secured? And does it have anything to do with IMF not taking up Pakistan this month? Does this mean that the EFF, which the finance minister first said would begin with the new fiscal, will be delayed further?

No doubt Atif Mian’s answer to the riddle will also factor in the uncertainty created by this delay. Regardless, it’s becoming increasingly clear that, at least in the immediate term, the only policy flexibility the government has relates to how it will extract the tax revenue that the Fund will demand for successive tranches of the EFF. Will it do what it has never done and tax the biggest, fattest, best politically connected sectors of the economy? Or will it continue to cement the poverty trap by squeezing more out of vulnerable segments whose own economies have been shattered by historic inflation, unemployment and tax burden of the last few years?

Also, even if it’s slightly out of context, perhaps Atif Mian will do us all a big favour and deliver his verdict about this lopsided tax policy as he dwells on the dividends of poverty traps.

Copyright Business Recorder, 2024