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Thursday March 28, 2024

Political economy of doom

By Imtiaz Alam
June 09, 2016

When casual fiscal tinkering becomes a substitute for the fundamentals of real economy and resource constraints are ignored to accommodate unsustainably misplaced priorities and over-extended security agendas, you are destined to live in a vicious circle that doesn’t allow you to think out of the box. As pure econometric solutions in the fiscal sphere are not working, are we ready to look into the political economy of doom and its reversal?

While ignoring the negative indicators of real economy in his fourth budget, the finance minister has dared to set mid-term macro-economic targets that he should have ideally set when he presented his first budget. No doubt, thanks to dwindling international prices and the IMF’s Extended Fund Facility, inflation, fiscal and current account deficits are down.

Economic growth and exports have failed to pick momentum, despite a better law and order situation and low borrowing rates. The Sharif government was lucky that soon after it came to power international prices of petroleum products and other commodities almost crashed. But we are unlucky that the government missed this golden opportunity and failed to kick-start the economy, despite heavy borrowing and providing cheaper liquidity – now at the interest rate of 5.75 percent.

 It is unlikely that even if the government completes its term and continues with its current policies, it can achieve its targets of seven percent GDP growth, increasing investment-to-GDP ratio to 21 percent and tax-to-GDP ratio to 14 percent while restricting fiscal deficit at 3.5 percent by 2018-19. It is also unlikely that, despite Chinese funding under the CPEC, the country will get rid of loadshedding by 2018. Nor will we be able to raise our foreign exchange reserves to even a meagre target of $30 billion.

Faced with a rising cost of a debt trap – as the rescheduling period granted by the Paris Club has come to an end – we will be servicing our debts at the cost of $13.5 billion by 2018. After meeting our two current expenditures on debt servicing (Rs1.36 trillion) and overall defence expenditure (approximately Rs1.5 trillion), we will be left with nothing out of the federal net revenues of Rs2.77 trillion to cover other expenditures – except the option of relying on debt.

Against a marginal increase in our meagre revenue generation of 10.5 percent of GDP, the increasing current expenditure demands of security, administration and debt-servicing will not let us keep fiscal discipline, despite sacrificing necessary development and human security. There is no vision or holistic strategy to address the seven weaknesses of low-saving, low-investment, low productivity, low value-addition, low quantity and quality of exports and low revenues as opposed to the ever rising demands of no-productive expenditures, all round rent-seeking and diminishing rate of returns on exclusionary processes of accumulation and development of underdevelopment.

Most glaring is the debt trap, which is expected to further rise and tighten the noose around our isolationist and confrontationist security and foreign policies. Currently, foreign debt is one-third ($55.1 billion) of the total debt of Rs19.1 trillion at the rate of 1.9 percent as compared to two-thirds domestic debt (Rs13.4 trillion) at the costlier rate of 10.7 percent. Out of the current cost of Rs1.3 trillion, 92 percent is on domestic debt and eight percent is on foreign debt.

Here arise the real questions of political economy that are pushing us towards economic doom. To the extent of budget-making, it is about whom you are raising revenues from – and who you are spending them on. Except for a small corporate sector and salaried people, neither big land-owners (less than one percent) nor traders (negligible) pay their due taxes. Forty-four percent of the companies registered with the SECP declared zero profit in 2014. Less than one million out of a potential three million file their tax returns.

Of all the taxes, 63 percent are indirect whereas the share of withholding tax in income tax has gone up to 61 percent. This simply means that the affluent classes don’t pay their due taxes and the burden of taxes is shifted on to the masses while the rich demand all exemptions and privileges – even subsidies. On the other hand, the profile of expenditure shows that it is not only primarily non-productive, but also serves the interests of elitist growth for the rich, and perks and privileges of the elite and powerful institutions – mainly military and civilian establishments.

Primarily the processes of capital accumulation are exclusionary and serve the interests of rent-seeking urban and rural elites and a parasitic civil and military bureaucracy. The very basis of neo-liberal economics is exclusive and has very little trickledown effect. The strategy to shift towards export-oriented growth from import substitution has not worked due to a narrow export structure and export of low-value or primary goods.

The current Ittefaq-Dubai ‘highway model’ completely ignores human development and lacks focus on the restructuring of real productive sectors such as agriculture and small-scale manufacturing. Public health expenditure is 0.92 percent of GDP with Pakistan ranked 191st among 192 countries. The expenditure on education is 2.1 percent of GDP placing Pakistan at the 164th position among 173 countries. Sacrificing human security and national socio-economic development at the unsustainable costs of extended militaristic agendas and a maximalist and isolationist foreign policy is going to be disastrous.

This has to do with the political and institutional power structure of a national security state which is reflected in the marginalisation of civilian authority in contrast with hegemony of the garrison in national affairs. Lack of sufficient democratisation, the fragility of civilian structures and predominance of bad governance further reinforce forces of authoritarianism and extremism.

Pakistan indeed requires a credible security system that ensures internal and external security in a most troubled region. Our full-spectrum nuclear deterrence has provided us a necessary shield from aggression in a hostile neighbourhood. Asymmetry in conventional weapons vis-a-vis India is going to grow and we don’t have any option but to keep a cost effective and affordable defensive system while not taking a suicidal course of perpetuating conflicts with all our neighbours.

The CPEC provides us with yet another opportunity that can also help us bring Iran, Afghanistan, Central and South Asia in a cooperative and interdependent relationship, rather than opting for an extended adversarial neighbourhood. Pakistan has lived far too long on the international community’s support and we cannot afford to make it hostile towards us for the sake of certain proxies falsely taken as ‘security assets’.

Instead of taking a confrontationist and militaristic course, Pakistan should look towards building a dynamic economy and dynamic, educated and skilled human capital to compete for progress. But the signs are not very encouraging, as visible tension in civil-military relations is becoming quite disturbing. The question that will decide our destiny is whether we are ready to take the course of peaceful and harmonious development both in the country and in our neighbourhood or whether we wish to go down a militaristic course of authoritarianism within the country and adventurism in the neighbourhood.

Unless we reverse the political economy of doom in favour of participatory and sustainable growth, there is no hope for a safe and prosperous future of our people.

The writer is a senior journalist.

Email: imtiaz.safma@gmail.com

Twitter: @ImtiazAlamSAFMA