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May 27, 2019

Pro-people policies


May 27, 2019

One of the clichés in Pakistan is the idea of separating the spheres of economy, society and politics from each other. This might be possible in the sphere of (neoliberal) discourse but not in reality.

This is because, first and foremost, (macro) economy is an ‘abstraction’ and its concrete manifestation is the day-to-day interaction of households/firms in the processes of production, distribution, consumption and exchange of goods and services. In other terms, the economy is being ‘reified’, ie the distinction between the abstract and the concrete is blurred. Furthermore, human behaviour, class, gender, political and cultural dynamics collectively mediate and regulate macro-economic outcomes. In other words, political economy is embedded in the macroeconomic policy choices.

Economic policy ought to be a ‘means’ to an ‘end’ and the latter has to be the overall wellbeing of society, especially of the marginalized and downtrodden. But unfortunately in Pakistan, economic policy becomes an ‘end’ in itself. For example, the obsession of keeping the fiscal deficit below an arbitrary threshold becomes a goal in itself, without analyzing the welfare-effects of pursuing this policy on ordinary people.

Economics as a discipline is full of debates, disagreements and ideological contestations. Economic policies come in different shades ranging from right, centre and left. This is not necessarily a bad thing. But the problem arises when some economists portray their preferred set of policy choices as the only ‘scientific/objective’ option out there. Joan Robinson was one of the leading economic thinkers of the 20th century; while being an economist herself, she was very sceptical of the orthodoxy of her discipline. She noted that “the purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists”.

It would not be hyperbole to assert that the PTI government is being misled by economists (fiscal-conservatives) on two accounts, if not more. One, the government is being told that by opting for austerity measures, the economy will bounce sooner or later. In fact, the discourse in the mainstream media and political circles has been so successfully monopolized by fiscally conservative economists that policymakers in Pakistan would be surprised to find out that there is a large group of macro-economists (progressives) who advocate that the government should not reduce its spending despite running into fiscal deficit because austerity policies lead to more economic troubles than benefits.

Second, fiscally-conservative economists don’t get tired of telling the PTI leadership that the income and spending behaviour of the government should replicate the household. As a result, the PTI leadership aspired to and advocated for balanced-budget and zero debt-spending. This is not just impractical but, unlike households, a government which is an issuer of a sovereign currency can technically never run out of money because it has the power to create new money. Thus, the government – technically – does not face any money constraint. The challenge, rather, lies in controlling inflation which can be done given that the productive capacity of the economy continuously grows.

Moreover, capitalism is inherently an unstable system due to regular recurrence of business cycles. Therefore, it is necessary for the government to do counter-cyclical spending to ensure that the economy remains afloat. In the aftermath of the 2008 global recession, many governments in the world, including the US, opted for Keynesian fiscal stimulus (ie increase in government spending) to jump start their economies.

The economic rationale for fiscal stimulus is simple to understand. When an economy is stuck in a downturn (like Pakistan’s contemporary economic situation) the private sector halts its investment due to uncertainty and loss of confidence. Moreover, households also reduce their consumption to save for unforeseen hardship due to rising uncertainty in the economy. This results in reduction in sales for businesses. In return, businesses lay off people, which further reduces consumption in the economy. This vicious downward spiral continues with more unemployment and low economic growth. This is exactly what is happening to Pakistan’s economy. As compared to the previous fiscal year, the economic growth in Pakistan has declined by more than 50 percent and unemployment has increased by 32 percent in the current fiscal year.

In this situation, the government must intervene by increasing its spending to restore confidence in the economy, even if it entails running a large fiscal deficit. The fiscal stimulus needs to be designed in a way that it improves the overall productive capabilities of the economy, and increases exports and employment opportunities. The government can invest in renewable energy sources, IT sector, housing and physical infrastructure. For example, by reconstructing or building new housing/infrastructure, the government can inject much-needed money into the economy that will create new demand for raw materials, machinery and so forth. Those who will be hired in these projects are going to spend their wages to buy groceries and other necessities in the local market which will create more income for local businesses; they will then place more orders to the wholesaler/factories and this process goes on.

In other words, an extra one rupee spent by the government through a fiscal stimulus programme will generate economic activity of worth greater than one rupee; this is called Keynesian ‘multiplier effect’. In short, the marginal benefit of a fiscal stimulus package overweighs the marginal cost of running a fiscal deficit.

There is an ongoing discussion in Pakistan about providing fiscal incentives to job-creators. That is, providing tax cuts to rich households and big businesses. The economic rationale is that they would use the money saved from tax breaks to invest more in the economy, which would create more employment and economic activity. But there is no guarantee that they would not simply park that money in a tax haven or speculate in land markets.

A pro-people economic policy would rather focus on development programmes which would create direct employment and economic activity for the working and middle classes. The economic rationale for these policies stem from the fact that low-income households have a higher marginal propensity to consume, ie they consume a higher proportion of their income vis-à-vis rich households. Therefore, an extra rupee put in the hands of working and middle class Pakistanis would lead to higher economic growth as compared to giving tax-breaks and incentives to rich households and businesses.

I argue that the working and middle classes of Pakistan should also be treated as job creators because they spend the majority, if not all, of their income in local economies via consumer spending. This creates demand in the economy, which translates into employment opportunities and economic growth. This fact can be verified by decomposing the national income account, ie consumer spending is the largest component of the gross domestic product (GDP) in Pakistan. In other words, the backbone of Pakistan’s economy are the working and middle classes; squeezing them will lead to a deepening of the economic crisis rather than an economic recovery.

The writer is a visiting fellow at the Mahbub-ul-Haq Research Center, LUMS and a PhD-candidate in economics at the University of Massachusetts-Amherst.

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