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Saturday November 02, 2024

Equitable growth over trickle-down economics

By Mansoor Ahmad
October 12, 2024
A labourer bends over as he carries packs of textile fabric on his back to deliver to a nearby shop in a market in Karachi on June 24, 2022. — Reuters
A labourer bends over as he carries packs of textile fabric on his back to deliver to a nearby shop in a market in Karachi on June 24, 2022. — Reuters

LAHORE: The current economic scenario in Pakistan presents a paradox: while macroeconomic indicators such as reduced inflation, lower petroleum prices, a manageable current account deficit, stable remittances, and higher foreign exchange reserves are improving, the average citizen is not experiencing significant relief.

This disconnect stems from several deep-rooted structural challenges. A major reason is that almost 90 per cent of the wealth is concentrated in the hands of the top 20 per cent, leaving 80 per cent of the population with limited benefits from economic upswings. When wealth is concentrated within a small segment, the immediate benefits of economic improvements remain with this group, while the trickle-down effect takes much longer to reach the masses.

High unemployment rates and slow growth of small and medium enterprises (SMEs) are critical issues. SMEs are the backbone of most developing economies, contributing to job creation and income distribution. However, in Pakistan, they face challenges such as high capital costs, market access issues, and regulatory hurdles.

With the government’s debt servicing costs consuming a large portion of the budget, there is limited fiscal space for social and developmental expenditures that could directly benefit the poor. Without significant public investments in social safety nets, education, health, and infrastructure, broad-based poverty reduction remains elusive.

Pakistan needs to strengthen progressive taxation mechanisms to ensure that wealthier segments contribute more to public revenue. This could involve implementing wealth taxes, capital gains taxes, or more effective collection of income taxes from high-income earners. Immediate relief can come from targeted policies that promote SMEs. By improving access to finance (such as low-interest loans), reducing bureaucratic red tape, and providing digital and technological support, SMEs can become more resilient and grow, leading to job creation. More jobs will put money in the hands of the common people, enhancing their purchasing power. With proper support, SMEs could show signs of recovery within 1-2 years, leading to tangible improvements in the job market over the medium term. The economic improvements witnessed recently would benefit the poor after another year or two. With a significant portion of the population dependent on agriculture, enhancing agricultural productivity through better technology, infrastructure, and access to markets can boost rural incomes. Policies should focus on value addition in agriculture, improving access to quality seeds, and market reforms that eliminate middlemen who reduce farmer incomes.

Expanding and improving social protection programs, such as the Benazir Income Support Programme (BISP) or health insurance schemes, can provide direct relief to the poorest segments. While these programmes will require additional funding, this can be sourced from increased taxation on wealthier individuals and sectors that are currently under-taxed. Without public resources directed at social and human capital development, inequality will remain entrenched.

Pakistan needs to prioritize industrial diversification beyond large-scale manufacturing, which is growing slowly at 3.0 per cent. Investment in technology-driven sectors, renewable energy, and export-oriented industries can foster long-term economic growth and job creation. However, this requires consistent policy support, better infrastructure, and stable governance.

Long-term structural reforms are essential to reduce wealth inequality, such as land reforms, better access to education and skills for low-income groups, and increased public services in underserved areas. Although this will not provide instant relief, it is vital for sustained improvement in poverty and inequality over the next 5-10 years.

Given the structural issues of wealth inequality, unemployment and government debt constraints, the average citizen is unlikely to feel a significant improvement in the immediate term. The impact of current economic improvements will take time to filter down, and realistically, visible relief may begin to appear in 2-3 years.

For sustained relief, economic growth must be inclusive, meaning policies should intentionally target income redistribution and job creation for lower-income segments of society. If reforms aimed at tax justice, SME growth and social spending are implemented, Pakistan can achieve more equitable growth, although a timeline of 5-10 years is more realistic for broader improvements in living standards.