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)

Provinces, the Centre and the NFC

(A slightly modified version of the article was published in The News on July 18, 2013)

In his article ‘Safeguarding the IMF programme‘ (July 15), Dr Ashfaque H Khan stressed the need for making the Federal Board of Revenue’s revenue target less wishful for striking a realistic deal with the provinces. That is, not to expect surpluses from the provinces unless the centre achieves the promised revenues. If there is a stalemate, and the provinces fail to agree with the centre on the requisite provincial surplus targets, the expected IMF programme may be in jeopardy.

It is difficult, however, to see the IMF agreeing on a lower revenue target for the federal government. From the IMF’s point of view, a revised revenue target might have the opposite effect: the will of the federal government for overhauling resource mobilisation may be seen to have dampened. By that line of argument, a reduced revenue target will result in even lesser revenues, with no actual effect on provinces hitting their fiscal targets.

Perhaps a parliamentary review of the anomalies in the current NFC Award is the only option the government has, the importance of which is strongly echoed in Dr Ashfaque’s article. As for the short term, it is hoped that the provinces and the centre both act responsibly and don’t get too shaky even before the programme starts. After all, a few slippages are allowed even in ‘successful’ IMF programmes.

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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.

Economic Priorities

(Published in The Express Tribune on May 21, 2013)

This is with reference to Shahid Javed Burki’s article “Economic priorities” (May 20), in which he suggests that the government should take its time and prepare its own plan before going to the IMF. Given the bitterness of the prescriptions expected from the IMF, devising our own plan would be a natural choice.

Ironically, there is no difference of opinion between the IMF and Pakistani economists about governance issues in the power sector, untargeted subsidies, swelling public debt, performance of public sector enterprises, and other major issues faced by the economy. Therefore, it would help if he can advise on what the government’s own plan should essentially consist of, and what alternative channels may be used to tackle external payments in the meanwhile.

Economy of Pakistan: 2008-2012/13

Admittedly, the last government was faced with difficult challenges which undermined its economic performance. The world was experiencing the worst recession since the Great Depression, the US’s war in Afghanistan was worsening the security situation in Pakistan, and the energy crisis was bleeding the economy of potential income every day. But just as accusing Pakistan Peoples Party (PPP) for every wrong thing that happened during its tenure is flawed, so is vindicating it for what was a below-average economic performance. Let us see if the key economic indicators have a story to tell.

When the PPP assumed office, the economic fundamentals spoke explicitly of the tough times ahead. The global recession had directly hit Pakistan’s exports’ demand while the food and oil price hikes internationally had made imports pricier. Thus, in fiscal year 2008 (FY2008), trade deficit was growing, reserves were falling, the fiscal deficit was looming at 7.6% of GDP, inflation was hovering around 12% and economic growth had fallen by 3.1 percentage points to 3.7%.

The circumstances made borrowing from IMF inevitable and a 23-month Stand-by Arrangement was entered in 2008. As is a norm with any country under IMF-programme, the growth rate for the immediately following year fell further down to 1.7%, making output growth for that year one of the lowest in country’s history. But even without the programme, growth hovered around 3-3.5%.

The average growth rate in 2008-12 period was 3%. Sub-Saharan Africa grew at 4.6% and South Asia grew at 6.4% during the same period.

What about welfare, which remains among PPP’s key areas? For this the government initiated its flagship poverty relief programme, the Benazir Income Support Programme (BISP). According to former World Bank President, Robert B. Zoellick, the Secretary General of United Nations, Ban Ki-moon, and the Asian Development Bank, the performance of BISP has been first-rate.

On the other hand, various poverty estimates show poverty to have worsened in the past few years. The two seemingly contradictory claims may be reconciled by hypothesising that the beneficiaries of BISP may have actually become better off, yet more and more people could have been falling below the poverty line due to lack of opportunities and economic stagnation.

Other policies  may have made farmers better off in some way but sadly did not translate into significant agricultural growth. Agricultural output grew by a modest 2% a year in 2008-11 period, compared to 4.4% in Bangladesh and 3.1% in India.

Similarly, industrial output registered a negligible growth of 2% a year, compared to 7% in Bangladesh and 6.6% in India, in 2008-11 period.

Agriculture and especially industry, both were affected by the energy crisis, which was not an overnight happening, but an outcome of previous governments’ criminal negligence. It may be said that PPP just ended up at the wrong place at the wrong time. Yet the onus for not being able to improve the situation lies on PPP’s shoulders. Ironically, less than a week before dissolution of the assembly, Mr Zardari inaugurated the Iran-Pakistan gas pipeline – which has meagre chances of becoming operational anyway, given the security situation in Balochistan.

Finally, consolation could have been found had the government not ransacked the fundamentals. But it did not happen.

Inflation skyrocketed in 2008 to 20.3% but was brought down to 11.9 by 2011. The year-on-year inflation fell to 5.8% in April 2013. Though, some are of the view that it is merely the changes in methodology and artificially low prices of utilities – which are being heavily subsidised and will soon become expensive – that are mirroring in the low CPI inflation figures. Also, the effect of government borrowing will fully come to effect in 1.5 to 2 years, and may affect inflation adversely.

The fiscal deficit for FY2013 is estimated to be around 7.5% of GDP by the IMF. If this is considered correct, average deficit for fiscal years 2009-13 turns out to be 6.7%. Troubling is the fact that more recent guesses put the deficit for FY2013 at 8.5% to 10%. Reflecting this, public debt to GDP ratio reached 62.5% in FY2012, significantly higher than Asian Development Bank’s recommended 30-40%.

Lack of exports growth and rise in import prices did not let the external account improve either. Trade deficit rose from 4.1% during FY2000-07 to 8.9% in FY2009-11 in percentage GDP terms. Adding figures for FY2012-13 to the average would paint a grimmer picture.

Capital and Financial accounts worsened year-on-year primarily on account of net outflows of direct investment. The level of reserves remained much lower than international norms throughout the PPP tenure. What is worse, they have now fallen to a level where not even two months imports may be covered. It has been predicted that if inflows from the coalition support fund or IMF do not come soon, the State Bank’s reserves would fall to a zero.

But investors do not wait for a country to go default on its obligations. They can panic on any given day at any time, pulling their money out of the economy. This may cause exchange rate of rupee to plunge, dollar debts to substantially rise, cost of further debt to skyrocket, imports to become very expensive, and conditionality over loans to become draconic.

So this is where the PPP left us. Arguably, chalking the state of economy with a few economic indicators risks oversimplification. But if all indicators narrate the same story, faith should serve us better than scepticism. It is now up to the Nawaz Sharif government to take the challenge of bringing the economy back on the right track.

Economic Growth: best poverty alleviation strategy

(First published in Dawn, on 4th May, 2013)

THIS is in response to the letter “Jump in Pakistan’s poverty level” by Dr Ali Akbar Dhakan (April 29 or the post on May 7, 2013 on this blog). The writer has brought alarming statistics about poverty to light, suggesting foreign-financed growth as the solution. I would like to add a few things to his recommendations.

First, if investment is to be attracted from outside, encouraging industrial conglomeration would pay more than discouraging it in a rural bias.

Second, the returns from having a relatively balanced budget are greater than incurring a high deficit year on year. Therefore, it would be best to use the already available share more responsibly rather than increasing allocation to the development sector per se.

Third, priority must be given to tackling security and energy crisis in place of redistributive policies that yielded little in the past, as he has well shown. In essence, facing trade-off, economic growth should take precedence over quick fixes.

Making sense out of IMF’s harsh prescriptions

The International Monetary Fund (IMF) is not an icon of economic management even among economists. There are all kinds of opinions out there: dissolve IMF; reform it; revolutionise! However, it may be argued that IMF – at times – faces a larger share of criticism than it deserves, especially from the political and intellectual circles.

Those who criticise the IMF claim that IMF forces governments to cut subsidies thus raising prices for the poor; it taxes people already in the midst of a crisis; it is a part of the Western conspiracy to privatise our strategic assets – and the list goes on.

There may be a grain of truth in all such claims. Yet a compelling explanation lies in a completely different view. IMF does not force a country to borrow. Pressure mounts on the economy when (i) our spending internationally exceeds our foreign receipts and transfers; (ii) when investments by us abroad are greater than investments by foreigners in our country. The logic is simple: to keep spending, we have to have ‘money’ in our pocket. If a country is short on foreign exchange reserves (other name for ‘emergency’ money useable in the international market) it has to borrow from the IMF, subject to some conditions that IMF sets. These policy reform targets are a modern economists’ guideline to the gap between how things are and how they should be. That is to say, they are not devoid of economic logic, quite the contrary.

Let us put things into perspective by reflecting on the last five years of people’s elected government in Pakistan. The Pakistan People’s Party (PPP) came into power in February, 2008. The state of the economy was dismal, owing in part to policy inaction during political transition, but equally due to the global financial meltdown, consequent recession and the food and oil price shocks. Thus, in fiscal year 2008 (FY2008), export growth had stagnated; the cost of imports was upwards; in an effort to stabilise rupee, the level of reserves was falling; the fiscal deficit was looming at 7.6% of GDP; inflation was hovering around 12%, and economic growth had fallen by 3.1 percentage points to 3.7%. Consequently, Pakistan had to enter into the 23-month IMF Stand-by arrangement (SBA) in 2008.

The government failed to implement the IMF-prescribed reforms, possibly due to their unpopularity. No one wanted subsidies to be cut and taxes to be raised. Unprofitable industries did not want protection from foreign competitors – in the form of tariffs – to be removed. At the same time, the government had to prove its benevolence in a timeframe of 5 years. It wanted to spend today rather than investing in a tomorrow they had little odds of seeing in office. The programme got suspended in 2011 with little success if any at all.

Meanwhile, the structural weaknesses kept deepening. Based on IMF’s projection of a fiscal deficit of 7.5% of GDP for FY2013, the average fiscal deficit during the five PPP fiscal years (FY2009-13) was 6.7%. Transition year (FY2008) excluded, this represents a 3.1% rise in fiscal deficit in PPP-years, compared to a deficit of 3.6% in the last five Musharraf years (FY2003-07).

The rising fiscal deficit was a result of popular policies. These included profligate redistributive policies; power subsidies as opposed to proper distribution, billing and recovery; compensation to crippling railways and falling planes; but also unprecedented levels of corruption, poor governance and tax evasion which cost the likes of Rs.8.5 trillion – as reported by Transparency International Pakistan.

The position of external account was not very encouraging either, primarily due to poor exports growth and relatively rapid (value-terms) imports growth. Trade deficit –which is the major component of external account- rose from 5.8% during FY2003-07 to 8.9% in FY09-11 in percentage GDP terms. If the figures for FY2012 and FY2013 are included, this average would be higher. This rise in trade deficit was a reflection of a power-starved industry on the domestic side and a struggling world economy in the international perspective.

The economy now is in a bad shape. The level of reserves is continuously falling and barely enough to cover 2 month imports at present. This along with weak financial inflows, a weak rupee, and heavy debt repayments to be made in the coming two years will force Pakistan to go the IMF again. The Fund will advise Pakistan officials to slash expenditures, phase out subsidies, liberalise trade, possibly privatise and/or restructure unprofitable public sector enterprises, and reform tax policy. Thus, a hullaballoo against the harsh policy prescriptions of the Fund will ensue!

Censuring IMF then for suggesting bitter medicine – or even a surgery – for remediating the economy would be injudicious to state the least. It is absurd to expect the tax payers in the rich countries to pay – and keep paying – for the economic mismanagement, tax evasion and corruption of our elite – not to mention our nonsensical choices of representatives in parliament. When IMF lends, an institution in which the rich countries have the major stakes, it has a right to remind us there is no free lunch!

Let us pin our hopes in the following government to take the tough steps for once, spend within means and favour only the performing sectors, setting the economy and the wellbeing of our generations on the right track.

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