High levels of Poverty and Growing Inequalities: A ticking time bomb is the high level of poverty and growing inequality, that have heightened social tensions which could undermine all economic gains and continue to be the breeding ground for growing alienation, terrorism and crime.
There are around 40-45 million poor and perhaps the same number close to the poverty line. Anywhere from 80-90 million are poor and/or vulnerable with limited access to decent education, health, economic opportunities and assets. While the share of people below the poverty line has gone down (a statistic which, along with growth and inflation numbers, suffers from severe credibility with people), life for these 80-90 million has largely remained unchanged.
And on top of that, high inflation in recent years is hurting them more than the better off. There is more national interest in stock markets and real estate developments, and much less in making sure that the poor are actually getting greater access to better quality of life.
There is absence of a credible and comprehensive Poverty Reduction Strategy. The poverty strategy and programmes are more on paper and less on ground, and by and large tinkering on the margin in respect of impact. Therefore, the present development strategy is widely perceived as one for the elite, of the elite and by the elite.
A much more aggressive, effective and comprehensive poverty reduction strategy is needed to ensure that these 80-90 million people have a stake in the market based economic system, to avoid the repetition of history, and to address the gross inequalities.
Expenditures on basic education, preventive health, social safety nets and programmes to help the landless and rural poor, should be increased dramatically, while putting in place adequate financial safeguards and accountability mechanisms (eg involvement of communities, local governments and NGOs in design and implementation) to minimise waste and abuse.
In addition programmes are needed to enhance skills and poors' access to opportunities and assets. There are huge benefits of converting the energy of the large pool of underprivileged citizens, especially of underdeveloped areas, in terms of productive work force as well as better utilisation of land, which is a fixed resource.
Dramatic increase in pro-poor expenditures on the ground (not that resulting from salary increases of teachers and counting police expenditures as pro-poor) are affordable and doable, by switching expenditures from questionable PSDP projects, unjustified subsidies and wasteful current expenditures. Easily at least 1-1.5% of GDP could be made additionally available for pro-poor expenditures next year, by expenditure switching as noted above.
No other large federation, India, USA, Brazil, Russia, etc faces this "manufacturing defect", where one federating unit has disproportionate and overbearing influence (perceived and real). And compounding this issue is that whatever glue bonded these unit together, 60 years back, is now coming apart at a very dangerous pace, both on account of political issues and poor federal economic policies.
The present government has increased resource flows to the provinces, which is a very good step. However, there are a few key policies that need a paradigm shift to strengthen the "federating glue" and overcome the historical sense of deprivation.
There is urgent need to have a market based natural resource pricing, for water and gas. The present pricing and sharing of profits/royalties is unfair to Balochistan and NWFP, and has largely benefited the energy consuming population in Punjab and Karachi.
Imagine the resource transfer to Balochistan and NWFP, over the last 40 years, if the prices were market prices - prices that Pakistan was paying for imported energy. Imagine if Balochistan received the same price of gas as Pakistan is now willing to give to Iran, a few hundred miles away. Increasing federal grants and programmes, as was belatedly done by Ayub in the 60s for East Pakistan, will not and cannot fully overcome the perceived wrong of unfair resource pricing and sharing.
A market based pricing, along with a system that distributes the additional 'windfall gains' to the province and directly to its citizens needs to be put in place. A possible bold step for distributing resources could be that similar to one in Alaska, where each Alaskan resident gets a check in the mail for the annual dividend from the Alaskan oil/pipeline. Let each resident of Balochistan and NWFP get a "check in the mail", with adequate safeguards to minimise abuse.
The second worrisome issue is the growing disparities in economic and social progress between Punjab and the rest of the provinces. Punjab is galloping away, while the smaller provinces and rural Sindh are being left behind, both in a reality and perception.
Imagine what will happen in 10 years. It will become as untenable, as between West and East Pakistan by the 60s. Just as most East Pakistanis perceived that the streets of Karachi, Lahore and Islamabad were paved with earning of the golden fibre from East Pakistan, similar perceptions are being generated and increasingly gaining widespread appeal within the smaller provinces.
Overcoming this would require a paradigm shift in distribution of NFC resources, dramatically increasing the share of the provinces, in addition to special programmes to address the perceived regional inequalities.
The present situation is unsustainable, where retail prices are lower than costs, where subsidy is non-targeted and where consumers are not being prepared to accept the reality that cost of commercial energy will have to be same as that in international markets.
There is no way that the economy or the budget can sustain a situation where Pakistan will be importing LNG at $6-7 per MMCF (and perhaps Iranian gas at around $5-6 per MMCF) while retail tariffs are half of that cost.
Poor are being short changed in that they have to pay higher energy costs, for non-commercial energy, while the better-off are being subsidised. The competitiveness of Pakistan's manufactured exports is also being hurt by the present distorted tariffs.
Moreover, under the present pricing structure, it will be difficult to attract private investors - unless they are given guarantees which makes the investment risk free. Why would any private investor invest in a sector where the underlying financial situation is loss making.
Government needs to take the bull by its horn. Reducing losses, improving sector management, introducing competition and customer service is overdue. In addition pricing reforms are critical to ensure that subsidies are targeted, that industrial tariffs are not used to subsidise households, and that consumers face the real costs so that right choices are made and energy is conserved.
In respect of water, the government's strategy has many good elements. But a fundamental missing element is absence of a water pricing and trading regime (allowing trading of water between users and between provinces) which reflects the scarcity value of water.
The next generation of farmers will have to be educated, and accept, that water quantity is fixed while requirements are increasing, and consequently water has to, and will be, priced. Farmers have to be informed, and appropriate incentives introduced, so that farmers switch out of growing water intensive crops (like sugarcane and coarse rice) as well as flood based watering.
Pakistani farmers have to achieve water productivity similar to that in Turkey, Israel, California, etc for Pakistan to avoid a catastrophe and nation threatening internal water wars, in not too distant a future.
Needless to say, there are many other economic and non-economic factors that will also influence the course of economic growth Critical non-economic factors that are a necessary condition for sustained growth include: establishing of a stable and accountable democratic system; moving away from the present personalised form of governance, at all levels, to institutionalised governance; enforcement of rule of law and accountability without fear or favour; improving security environment and access to impartial justice; improving stability, transparency and predictability of policies; enhancing quality and capacity of public institutions; and very importantly having a statistical system that is credible.
In conclusion, President Musharraf and his economic managers have brought Pakistan back on the long road to progress. However, it is vital that the recent success does not blindside policy makers to the serious challenges around the corner and the weak growth foundations on which the present success is built upon.
There are emerging signs that the future is being compromised for the present. Continued skirting of difficult, but necessary, choices is no longer an option. Bold steps, and a change in growth and development strategy, are needed to ensure that the growth is sustainable and the strategy credibly seen as one that is for the people, of the people, and by the people.
(The writer is a former Operations Advisor at the World Bank)
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