Thursday October 21, 2021

Social unrest and economics

September 23, 2021
Social unrest and economics

LAHORE: Employment, rather than growth, is a key determinant of ever-increasing social unrest in the country that has enhanced income inequality and perception of injustice.

In the past two decades, we have witnessed a decline in the share of income accruing to labour, as real incomes of wage earners and self-employed workers have, on average, grown less than would have been justified by productivity gains.

Increasing unemployment is also because of the failure of the private sector particularly the small and medium enterprises to upgrade technology. The SMEs are regularly losing their domestic market share to the imported finished goods that invariably are better in quality.

The SMEs fail to upgrade because they do not have access to credit. The SMEs are the major providers of jobs and have nominal share in bank credit.

It is unfortunate that the state itself is the major borrower from the commercial banks that crowd out credit for not only the SMEs but the larger concerns as well.

Bank loans to the government carry no risk and they charge around two percent premium on the central bank’s policy rate. The loans provided to big corporate sectors carry some risk but these entities have huge assets that they provide as collateral to the banks against the loan.

Corporate sector has been doing well even in bust and boom cycles in Pakistan. Corporate profits in Pakistan have shown robust growth, but instead of translating them into higher real investment, those profits were used increasingly to pay dividends.

The profits created no employment opportunities. The pro-employment approach that centres on cost-effective measures will be instrumental in avoiding a further deterioration in employment. Carefully designed pro-employment programmes support demand, while promoting a faster return to pre-crisis labour market conditions.

Government simply has to make conditions conducive for labour intensive sectors like construction and apparel that it has done lately. Pro-employment programmes are not expensive to the public purse though the amnesty granted to the builders did cheat the exchequer of huge revenues.

The SMEs, particularly smaller ones have no assets except their outdated equipment. The commercial banks are reluctant to sanction loans without collateral.

Another issue with SME lending is that the loan amount is small which in many cases may be 50-100 times less than the loans approved for each of the big corporations. The commercial banks promoting automation can manage big accounts with a small workforce. The SMEs lack automation, and monitoring their accounts needs larger manpower.

The central bank has recently made efforts to remove these drawbacks faced by the commercial banks. SBP has come up with a generous scheme to lure banks towards SME financing.

According to SBP, a circular on SME Asaan Finance (SAAF) scheme, the central bank has asked FIs to submit expressions of interest. Those banks that show interest in SAAF will be offered both refinance and credit guarantee for three years.

A generous offer, as globally either one of the two is offered. Both incentives are available for working capital as well as term financing.

This is the first scheme in Pakistan (outside exports) where refinancing has been offered for working capital. Let us hope that this scheme works.

The banks though would still be reluctant because of the larger human resource required for this purpose. It was better had these schemes been restricted to various SME banks operating in the country.

They have the experience of working with SMEs and they charge higher markup on SME loans to provide for larger human resource needs. The SMEs almost exclusively raise finances from informal lenders at extremely high markup.

Employment opportunities are also linked to investment in new infrastructure and upgrade of existing ones. On both counts, the performance of this government is dismal.

Given the resource constraints, infrastructure projects could have been launched in partnership with the private sector.

There is scope for broadening tax bases, notably on property and certain financial transactions. Such measures would enhance economic efficiency and help share the burden of adjustment more equitably, thereby also contributing to appease social tensions.

It must be noted that much of the increase in profits in recent years occurred for a few major players in the financial sector. These profits were disbursed to shareholders and no employment was created in this sector.

The real challenge for both planners and entrepreneurs is to rely less on exports to advanced economies and more on domestic and South-South sources of growth. This transition would require new investments.

Ever increasing social unrest in the country is due to income inequality, higher food prices and the heavy-handedness of the state that favours the exploiters instead of the oppressed.