Is trickle-down theory effective?

Nawaz Sharif and his highly trusted economic lieutenant Ishaq Dar are firm proponents of capitalism, arguing in favour of a major private sector role in growth and citing the trickle-down theory as the way forward that would ensure that wealth would trickle down to the poor as the state takes care of the rich and the influential through budgetary expenditure and revenue decisions.
But is the trickle-down theory effective? Or in other words is a theory that was fashionable two to three decades ago still relevant? A statement by the highly popular Democratic Senator Elizabeth Warren of Massachusetts is telling: "What trickle-down economics was all about was saying to the rich and powerful, the government will help you get richer and more powerful, ...So starting in 1980 when it was all about 'fire the cops,' it was called deregulation, cut taxes for those at the top, which means there was less to invest on education, on infrastructure, on basic research". Warren adds: "Here we are the richest country on Earth. We have so much going for us, and yet we have a federal government that works great for millionaires. It works great for billionaires. It works great for giant corporations, for anybody who can hire an army of lobbyists, an army of lawyers, give lots of campaign money ... For the rest of America, it's just not working and it's time to take that government back and make it work for us."
Warren, a woman who has made a name for herself in her ceaseless scrutiny of Wall Street to protect the "little guy", adds "One hundred percent of income growth in this country since the 1980s has gone to the top ten percent and that's not only wrong, that is going to destroy our country unless we take our country back!" Her contribution to dealing with this concern was the establishment of a Consumer Financial Protection Bureau (CFPC) in 2011 that she claims was vigorously opposed by the Obama administration. The CFPC has the following terms of reference: (i) not to allow a bank to push a borrower to procure a high interest loan if he/she qualifies for a lower interest loan, the reason cited for the financial crisis, (ii) to disable financial institutions from irresponsible lending or to those with no ability to repay; (iii) in the event that a home owner cannot make a due payment then the lender (bank) has to try harder to avoid foreclosure and face civil penalties if it fails to provide customer service; (iv) by 2013 CFPC made it a requirement for financial institutions to provide applicants with a list of free low cost housing counselors who would inform the borrower if he/she was being ripped off; (v) borrowers with high cost mortgages would be required to have an outside appraiser to determine the worth of the house for the borrower; (vi) to oversee debt collectors, pay-day lenders and under-regulated financial institutions; (vii) all those scammed by credit card companies would get refunds. The CFPC has ordered three American Express subsidiaries to pay 250,000 customers 85 million dollars for illegal practices like misleading credit card offerings, age discrimination, and excessive late fees. This past September, the CFPC ordered J P Morgan Chase to refund $309 million to more than 2.1 million Americans for charging them for identity theft and fraud monitoring services; (viii) student lenders would face scrutiny; and (ix) in the event that any American considers anything is unfair then a division of CFPC dedicated to this function would oversee consumer complaints. To conclude, the CFPC is a practical measure that has saved the little guy in the US billions of dollars though no doubt it is a drop in the ocean.
So what has the Sharif administration done to achieve its overarching policy objective to promote private sector activity that would allow wealth to trickle down to the little guys? What is inexplicable is the fact that private sector activity has been derailed by massive rise in government borrowing from the commercial sector (an outcome of the government's commitment to the IMF not to borrow from the State Bank of Pakistan), failure to tackle the energy crisis, and long delays in refunds that have compromised the liquidity necessary for the private sector to engage in economic activity. Exports and foreign direct investment are on the decline as is our rating in the World Bank sponsored ease of doing business indicators.
There is no data on which income group has benefited from higher national income over the past decades but the rich are clearly neither suffering nor enamoured of Sharif administration's economic policies given the massive rise in investment in Dubai's real estate by Pakistanis during the past two years as well as relocation of several industrial units to Bangladesh given the flawed tax policies of Ishaq Dar. The incumbent finance minister maintains that it is unclear whether higher asset acquisition in foreign countries - real estate or bank accounts - reflects investment by resident or non-resident Pakistanis. However, considering that there has been an escalation in procuring real estate in Dubai by Pakistanis during the past two and a half years one is compelled to conclude that flight of capital maybe with Dar's tacit support - a charge supported by the Ayyan Ali case as, in spite of her being caught red handed with half a million dollars, has yet to be indicted over a year later by Customs court - Customs department which comes under the administrative control of the Finance Ministry.
Exporters and industrialists are not the little guys, Dar may well maintain. He cites the continuation of the PPP-led coalition government's Benazir Income Support Programme (BISP) as his major poverty reduction initiative. But what he ignores is the fact that at a time when the world commodity prices have declined dramatically the Sharif administration has ensured the price of commodities at higher than their international value due to cartelization in some cases (sugar for example) - a cartel consisting of who's who in our politics. The farm package, partly again in abeyance till after the local bodies elections, seeks to either give a hand out to those with 12.5 acres or less, unlikely to increase yield, or is focused on the rich or those with resources to establish agro based industries.
Overcharging to meet the liquidity needs of the energy sector from the middle to lower middle income groups remains the norm. While a lower international price of oil has allowed the government to reduce rates of domestic petrol and products but by raising taxes on some products to over 40 percent this policy is making our industry and exporters uncompetitive in a regional context thereby compromising our exports. In other words, the trickle-down theory which necessitates supporting higher not lower private sector activity - be it in the industrial non-export or export sector - that would have generated greater employment opportunities is not being implemented by its biggest proponent Ishaq Dar reflected by his fiscal policies, the expenditure priorities as well as reliance on heavy borrowing.
In contrast to the PPP-led coalition government Dar has reduced subsidies and made them more targeted. This can essentially be supported but what is disturbing is the poor governance record of the incumbent government that appears to be vying with that of the Zardari-led government that the nation believed was not possible in 2013. LNG scam can rival the rental power projects while the Nandipur scam today is worse than during the PPP government because of the element of incompetence thrown in with corruption.
Dar may point out that the policy of low interest rates to the vulnerable has been the hallmark of the past Sharif administrations as well as the present. However this time around the conditions for the youth loan scheme required collateral and/or a guarantor which made this scheme more a middle income or rich income earners scheme rather than the poor. In addition, he has claimed in the Letter of Intent submitted to the International Monetary Fund board that "in June 2015 State Bank of Pakistan issued guidelines to banks to facilitate the opening of bank accounts for the unbanked population to meet the National Financial Inclusion Strategy (NFIS) target of 50 percent adult population with bank accounts by 2020. We are devising plans to strengthen the financial literacy of these new client groups. As a critical component of the NFIS to improve credit information system and help banks extend credit to broader sections of society the Credit Bureau Bill has been enacted in August 2015." A good plan but again given our past poor implementation one would have to wait and see whether it is successful or not.
What is unfortunate is that no one, not even the PTI claiming to be the only viable opposition in the country, is supporting an agency of the likes of CFPC for the vulnerable; while in this country the vulnerable do not have easy access to the banking sector yet special interest-free or reduced interest loans and/or hijacking of vulnerable specific programmes (including the farm package) need to be independently monitored and the vulnerable protected as and when they complain to an agency like the CFPC.