Towards a human economy

September 08,2018

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We can redefine underdevelopment as a condition that constrains the full potential of society from being actualised. This occurs when there is a systematic denial of opportunities to the majority of the people to fully develop their human capabilities. In Pakistan, this process has led to the emergence of an economic structure characterised by four features: (i) the failure to sustain high economic growth; (ii) recurrent balance of payments crises; (iii) aid dependence; and (iv) persistent mass poverty and inequality.

Douglass North has shown that a key distinguishing characteristic between developed and underdeveloped countries is that, while the former are able to sustain per capita income growth over long periods of time, the latter are unable to do so. In this sense, Pakistan’s stop-go pattern of economic growth over six decades is typical of an underdeveloped country. Periods of relatively high growth are followed by close to zero or even negative per capita income growth, so that the gains made during the high growth periods are largely lost during periods of stagnation. Consequently, over the long run, the increase in per capita income is rather modest.

The proximate factors that explain Pakistan’s stop-go pattern of economic growth are: first, low domestic savings that are inadequate to finance the investment required for high growth. The resultant investment-savings gap is an enduring feature of Pakistan’s economy and has created a structural dependence on foreign grants and loans. And, second, low-export growth that is insufficient to finance the import requirements of high GDP growth.

These two factors have apparently resulted in growth instability where, near the end of every high-growth period balance of payments pressures have built up. The usual kneejerk reaction is to seek an IMF bailout package. The standard prescription of the IMF, which is based on questionable empirical and theoretical foundations, is to manage the balance of payments crisis by contracting import demand through a slowdown in GDP growth.

The balance of payments crisis in Pakistan on each occasion has been quelled in the short run through an IMF programme. However, achieving this objective through a reduction in the GDP growth rate has also reduced the growth of government revenues. Consequently, the very budget deficit that IMF policy aims to reduce soon reappears due to low revenues. Pakistan thus gets the worst of both worlds after the adoption of IMF programmes. The budget deficit returns, and at the same time the growth slowdown increases poverty and inequality. Equally important, IMF programmes, by focusing on the short run and failing to address the structural factors underlying the balance of payments crisis, have served to reproduce the crisis itself.

At a fundamental level, the stop-go pattern of GDP growth is rooted in the institutional structure of Pakistan’s economy. This structure systematically generates rents (unearned income) for the elite coalition that has been in power since the mid-1950s. The rents are generated through the rules and norms that restrict competition, discourage hiring based on merit, dis-incentivise hard work, induce lack of efficiency, constrain innovation and hence prevent growth sustainability.

Overcoming underdevelopment and transforming Pakistan will involve changing the institutional structure as well as configuring key organisations of the state to move towards what Dr Khalid Malik and I have called a ‘Human Economy’. I would suggest that this is an economy that works to actualise the untapped human potential of the hitherto deprived sections of society: the middle classes and the poor.

Development for Pakistan’s transformation requires four key policy initiatives (these are discussed in detail in my contribution to the UNDP Report 2018, titled ‘Inclusive and Sustainable Development’):

First, provide to every citizen of Pakistan basic services of quality healthcare, quality education including skill training and social protection including old-age pensions and unemployment benefits. The universal provision of these services is a key feature of a development process that will move the economy towards equity. This is essential to social justice and central to the idea of an Islamic society as well as a democratic state.

At the same time, a healthy and productive labour force with quality education will have the capacity for original thinking and innovation. Empirical research by Professor Aghion et al has shown that innovation is a determinant of long-term productivity growth and thereby sustained long term GDP growth.

The universal provision of these services will also facilitate social cohesion which research by Easterly et al has shown is a key factor in long-term economic growth.

Second, accelerate the growth of small and medium-sized enterprises (SMEs) that have an export potential. Increasing the share of this sector in GDP can lead to higher GDP growth for given levels of investment, faster export growth, higher growth in employment and a more equitable distribution of national income.

To achieve this objective, institutional measures will have to be undertaken to provide access for SMEs to a package of services including the following: (i) Institutional link-up with large scale manufacturing industries for outsourcing; (ii) Provision of credit; (iii) Raw material banks to enable the small units to buy in small lots; (iv) Skill training and management systems for quality control to meet export standards; and (v) Access over facilities for forging and heat treatment for dimensional control of product manufacture.

Third, shift from an elite farmer-based agriculture growth of the last six decades to a new agriculture growth strategy based on small and medium farmers (less than 25 acres). In this size class, which constitutes over 60 percent of the total farm area and 94 percent of the total number of farmers, there is considerable potential for increasing yields per acre as well as off-farm production of milk and meat. Such a growth strategy will both reduce inequality in the agriculture sector and accelerate overall agriculture growth.

And, fourth, reduce regional economic disparities between provinces and within provinces. This requires the development of infrastructure in selected growth nodes in the backward districts and provinces. These growth nodes for small and medium-scale manufacturing facilities, as well as the production of dairy products, can be linked up with national and international markets. CPEC has created the possibility of developing backward areas and linking them up with both global and national markets. However, actualising this possibility requires maximising the multiplier effects of investment in CPEC-related projects. Careful planning is required to develop the credit, technological and skilled labour requirements of the new growth nodes in backward areas. Ancillary roads going deep into backward areas to link them up with the main CPEC network will also be required to enable processed fruit and automobile parts to be produced and sold by small-scale entrepreneurs in backward areas.

The time has come to change development thinking within a new perspective of transformative development. In this context, policies for unleashing the human potential of the middle classes and poor have been outlined in this essay.

The writer is dean, School of Humanities and Social Sciences at the Information Technology University Lahore.



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