Is our growth inclusive?

The projection of economic growth as something evil that benefits only the rich is mistaken. But equally fallacious is taking the GDP number for a sacrosanct symbol of sure-fire prosperity for all. All praise is due to the government’s economic team for various improvements in the macro-economy: 5% growth in first quarter, about 10% appreciation in the Rupee within 3 months, and excellent performance of the stock market – all reflect recovery. Yet how these gains are shared with the neediest of the needy remains to be seen – and only this should be taken as an encompassing yardstick of success.

Historically, Pakistan’s economic policy has never been pro-poor. In the words of Stephan Klasen, ‘Pro-poor growth will require growth that is focused on sectors where poor people are active (or could become active) and regions where poor people live…’ Leaving Zulfiqar Ali Bhutto’s 70s aside (who launched into an over-charged, rather self-defeating assault on poverty) poverty reduction was no government’s priority. Admittedly, PPP-governments were relatively more focused in this respect, but their lacklustre economic performance and unimpressive governance hit the poor from another window, namely, overall stagnation of incomes.

Yet our amoral approach to economics has hardly changed. The present government is living up to the impression it is known for – being industrialists’ government. According to a State Bank’s report, industry and services grew by 0.7 and 1.2 percentage points more than their respective targets in Q1 FY2014. But the agriculture sector missed its target by 1.3 percentage points and its growth was 0.2 percentage points less than even the corresponding quarter last year.

Was this apparent industrial bias simply an irregularity? Not really. This season – after the first quarter – farmers got the squeeze from sugar mills, where the official price for sugarcane was perceived as being unfairly low – same as last year. In addition, the sugar mills also made deductions of around 1000kg per trolley on pretext of poor quality cane – which farmers find indeed a novel way to pay less for their cane. Hardly was any farmer exception to this general rule of katoti or deduction, since the cane was abundant and the buyer monosponic. The sugar industry – as always – was allowed to act as the single buyer. The wheat support price, which was the farmers’ last hope for compensation this year was also not revised. While the previous government had been revising the prices upwards every year, this government came with a sharp change of policy.

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This echoes a recurring shortcoming in the South Asian approach to economic development where agriculture and industrialisation were treated as if they were mutually exclusive. Growth in India, to state another example, did not ameliorate the state of farmers the way Chinese growth did, where growth and poverty reduction both were rapid.

East Asian countries, like Japan, South Korea, and Taiwan engaged in aggressive export-oriented industrialisation, but with an equally high-spirited redistribution of resources. Agricultural policy complemented the industrial policy. Agrarian reforms included fair and stable prices, subsidised credit and technical assistance from the government, and redistributive and tenurial land reforms. These measures ensured better deal for the farmers and steady growth of agriculture.

For the industry, in turn, the agrarian reforms secured a smooth supply of economical raw materials, but also a bigger domestic market for industrial products. As new buyers, who had graduated out of poverty, kept becoming part of the markets for comforts and luxuries, domestic demand for the manufactures increased. The resulting win/win situation, had other spillover effects as in better health and education.

There is no reason why this pattern of inter-sectoral complementarities cannot be emulated in Pakistan. Agriculture employs 45 per cent of the total labour force here. The rampant poverty which is especially concentrated in the rural areas makes the case for such pro-poor growth even stronger.

The recent multidimensional poverty report by Naveed and Ali (2012) reveals about a 3rd of Pakistan’s population remains poor, 21 per cent being under severe stress. But, ‘severe poverty in rural population is 4 times higher than in urban population’. In addition, while only 18 per cent of urban households are poor, 46 per cent rural ones live in poverty.

The policymakers need to strike a balance between the interests of the bottom 20% and the top 20. To think that supporting the rich industrialist class would bring growth on its own is an illusion that has failed us miserably in the past 66 years. Growth cannot be sustained with crime and violence. Crime and violence will be there as long as there is poverty. Agriculture is the golden goose that can eat away the poverty bug and keep laying the gold eggs of industrial growth. Nurture the golden goose, don’t kill her, my dear industrialist!

(The Express Tribune Blogs (version I) and PakistanKaKhudaHafiz.com Opinions (version II))

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IMF’s happy, but the government needs to plan ahead

That the Fund facility is on track is not that merry a news. Economists tell us that the government is taking the right steps. Yet, it cannot be lulled by the recent note of satisfaction issued by its benefactor. Why so?

IMF lures the bad boys of the world economy into one of its programmes and encourages them to behave. Both live through mutual dependence, just like banks and the greedy. One needs to lend money the other one is coveting for. Yet, if the contract goes ‘off-track’, the deal stands suspended. And remember who we are talking about? IMF and the bad boys.

Out of the paper, into the real world, things are not that simple. IMF needs to appreciate its role in making a programme successful. In only 7 out of 20 IMF-programmes in Pakistan could the pre-agreed amount be drawn. Most of these were suspended before completion. Needless to say, the absence of political will of the ruling parties resulted in poor success rate.

Yet from an institutional perspective, the IMF’s irresponsible lending in the first place, followed by its inability to make the governments accountable at earlier stages of the programme is a compelling explanation. In 1994-97 period alone, Pakistan government entered 6 IMF-programmes: 2 Programmes every year. All failed. But the IMF was generous enough to keep lending for one after another.

This brings us to an inherent problem IMF-designed adjustment programmes. For the Fund, the incentive to term a programme ‘off-track’ is least in the beginning, as early derailment would reflect irresponsible lending. The result is poor programme compliance goes unpunished initially, only to strike back later when the programme is altogether suspended.

How impeccable is the design of the on-going IMF-programme and how much pressure the IMF is putting on the government to pursue the ‘right’ policies remains beyond the eyeshot of common man. But the signs are mixed. For one, it seems too cheery for the Fund to issue note of satisfaction with foreign reserves crippling, rupee depreciating, & foreign portfolio investment falling. One may surmise that the medium-term outlook of the Pakistani economy must be encouraging, and that must be the basis for IMF’s optimism. But it is not. On the contrary, the IMF has revised its forecasts for GDP growth and the current account downwards, for Pakistan as well as globally.

Lastly, it cannot be overemphasised that the government is being a little too optimistic in expecting mere fiscal consolidation to get the wheel of the economy rolling. Appease Taliban or launch a full-fledged assault, it does not matter to investors. What does is a clear vision and an articulated strategy to create a supportive, safe, and thriving business environment over the years, where property rights and contracts would be enforced. If the government keeps delaying critical decisions in the political arena, all we get at the end of an even ‘successful’ IMF programme will be another mountain of debt.

(An earlier version of this post appeared in the daily Dawn)

Mr Dar should take responsibility for his policy

It will be difficult to say whether the economic team of the PML-N is itself confused or is inadvertently up to a zero-sum game. What is clearer is that the finance bill 2013 was a disappointment to the public, the IMF and economists alike. Yet the finance minister is intent upon hoodwinking IMF in the name of public and public in the name of the IMF.

The public was given the message that preparations for an IMF programme made the budget difficult. IMF team, now visiting Pakistan, was told that their conditions – of imposing ‘harsh’ policies, including ‘more’ taxes – were not acceptable to the government in wider interest of the public. So the excuse-narrative travels from the IMF to the public and all the way back, missing the budget-architects altogether.

First, it needs to be appreciated that the budget was not IMF-oriented at all. While the IMF had been pressing for widening the tax base for more than a decade now, the steps taken in the budget were modest. The group that has come to be known as the ‘tax captives’, was crushed further under additional levies. While the IMF was, and remains, against imposing more and more taxes on those who are already paying it and favours instead to bring the non-tax paying classes in the tax net, the public is conveyed a draconic image of the IMF.

Predictably, some other measures like salary raises, rise in federal development expenditure, and later a lowering of interest rate were not to go well with the IMF. Thus, the budget might have had a tinge of austerity, but not every austere budget is an IMF-budget.

Second, contrary to the compassionate image the government tried to create, the budget was not public-friendly either. The increase in the rate of sales tax and decrease in corporate tax rate were not social measures by any measure. Moreover, squandering money over populist policies such as laptop distribution (research culture absent), roads rebuilding and other ‘bridge-to-nowhere’-kind projects will divert tax-payers’ money from socially optimal to politically advantageous projects.

The budget could have been an austere one focusing on correcting chronic fiscal imbalances through restraint in spending and an efficient and equitable tax regime. Or it could have had a greater Keynesian flavour to it, focusing on funnelling money into people’s pockets through greater government expenditure and expecting economic activity to pay its fiscal dividends. Unfortunately, it was none of the above.

The government seems to be torn between its desires. It does not want to be profligate but at the same time believes spending is a good way to revive the economy. Hence we have austerity on one side, and hike in development expenditure (and Aashiana-like schemes) on the other. Perhaps, the economic wizards in office are in a hurry to fix the economy and have compromised sequencing the policies. Wearing an optimist’s hat, one can only wait and see if this double-barrelled policy for eliminating the economic ills proves any useful.

But until then it would be great if Mr Ishaq Dar can blow sense into his economic plan through proper articulation of what he intends to achieve with his policy mix rather than blaming IMF and the public for what are essentially his plans to fix the economy.