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Thursday July 07, 2022

Putting people first

May 21, 2022

Chinese leader Deng Xiaoping in an interview with a US journalist had once referred to the cultural revolution of the 1970s as a “treasure” for the nation. Why? Because of the shared perception that the Cultural Revolution had been an unmitigated disaster for China. And, that shared realization made it possible to undertake serious reforms.

Perhaps a similar inflexion point is taking place in Pakistan. Current and past development policies as practised for some time now have produced a non-sustainable growth economy and an unequal, unjust society. But we are not there yet, given our polarized politics. Gradually and hopefully, there is growing realization, at least among the civil society and independent economists, that something must change.

Progress is neither automatic nor inevitable. It is the product of enhanced capabilities of individuals coming together in a functioning society. With the right policies and societal support, much can be achieved. All policies are a means to an end. Their justification lies in their influence on the lives of people.

The role of the state, especially in developing countries, has to be a transformative one: to enhance people’s capabilities and to make markets work for everyone.

Can the new government start taking steps, even if they are baby steps, to put people first, in policy and in governance? What will it take?

First and foremost, as Joseph Stiglitz once mentioned, we have to ‘unlearn’ what we have been taught in standard economics textbooks. The real world is more complicated and many of the simplistic prescriptions regularly doled out are plain wrong.

The Covid-19 pandemic exposed the fragility of the conceptual underpinnings of macroeconomic policy. In the same breath we seem to have gone from the ‘absolute necessity’ of budgetary discipline to the ‘absolute necessity’ of deficits. Most developed countries committed up to 10 percent of their annual GDP to expansionary measures to deal with the crisis. Yet, this flexibility is being denied to developing countries.

The next steps: the government has to undertake a step-change in its thinking and accept that it has far more fiscal space, even in an IMF-constrained environment. The key is to focus state expenditures on growing the capacity of people and the economy.

But, Pakistani debt is approaching 90 percent of its GDP. Policymakers are worried: is it too high? It depends. Countries like China have demonstrated that you can live with high levels of debt as long you keep growing. Conversely, low levels of debt can fast become unsustainable if growth stagnates. Like the proverbial mouse and the wheel, stopping the motion can be hazardous.

In 2010, the 90 per cent debt threshold idea was presented in an influential paper by eminent neo-classical economists-Reinhart and Rogoff. Yet after much close review of the data sets, the final conclusion was that the threshold idea is basically ‘phooey’ to quote John Cassidy in the ‘New Yorker’ (April 2013). The debate about stabilization vs growth is therefore a necessary one. We should not think that there is no budgetary flexibility, especially as we recover from Covid-19.

Fiscal stabilization as traditionally presented is about slowing the economy, with devaluations and higher interest rates as part of the toolkit. Yet, evidence is mixed as to whether these measures actually succeed. No one seems to worry about the pain caused to people in the meantime with the loss of jobs and increased poverty.

Many in Pakistan feel that the current government should focus on stabilizing the economy. But this would be unwise without a full reflection of the policies pursued by governments over past decades in Pakistan, not just the past four years. As is well documented, each growth burst in Pakistan led to a balance of payments crisis and an ultimate beeline to the IMF.

We have to think long term. And start now with baby steps towards the broader objectives. Macroeconomics has to function within a longer-term developmental framework.

First off, we have to break the Gordian knot between growth and imports. Put high tariffs on all imports – except perhaps capital goods and commodities essential to the poor and the middle class like wheat, sugar and edible oils. An outright ban or prohibitive tariffs on luxury goods imports is a good idea.

And start on an industrial policy that boosts competitiveness by consolidating export subsidies into industry wide five-year performance agreements that reduce and finally eliminate them. Similar thinking can apply to public enterprises that soak up large amounts of budget support.

In the 1980s and 1990s, China introduced a version of such contracts, even for S&T think tanks. Interestingly enough, many of the industries and institutes prospered once they accepted that they needed to do better (what economists label as boosting X efficiency).

What about inflation?: Most observers are of the view that inflation this time around is more about supply than demand conditions. Raising interest rates to reduce prices may not achieve much.

A similar condition occurred in China around the 2008 Great Recession. China chose not to raise interest rates, as the country was worried that such actions would reduce investment. Instead, governors and industry managers were instructed to work on improving the supply response – increase production and get the supply chains working better. Pakistan can learn from that experience.

Taxes, more taxes?: the focus of much debate about taxation has been on levels, on the current low 9 per cent tax-to-GDP ratio in Pakistan. India is at a similar level and so is Bangladesh, but with different development outcomes. It is time to shift the focus, and aim to make the tax system pro-poor. Right now, the tax system, as many studies have shown, is regrettably pro-rich and pro-for those politically connected.

Start by eliminating most if not all exemptions and concessions and gradually shift the reliance on indirect taxes. Getting rid of most of the SROs will start leveling the playing field. Imagine, 70 per cent of Pakistani lawmakers still don’t pay any income tax. And tax agricultural income by restoring the full provisions of the Finance Act of 1977.

Ehsaas and more: The BISP and Ehsaas income support programmes, however creditable, remain just that: a safety net. But they need to become much more. We have to move them towards conditional cash transfers which enhance the capabilities of the people by making some transfers conditional on the recipients investing in health and education. The Brazilian experience with the Bolsa Familia programme is especially instructive.

Small farmers and rural labour: small farmers are the missing link. In China, small farmers are among the most productive globally. And they are the primary reason why China managed to achieve food security despite a large population based on a relatively small arable footprint. Small farmers have to be better supported. At this point, much of the agricultural support services and subsidies are siphoned off by large farmers. This must change.

On jobs, particularly in the rural areas, the state has to take on a bold position and publicly commit itself to the proposition that having a job is a basic human right. India’s employment guarantee initiatives did much to change the agrarian situation in the country. Similar models could be looked at for Pakistan.

Health and education: Importantly, invest in people in the June budget. No country has adequately developed without a functioning public education system. Bar none! When public education does not work, it’s usually because education has been under-funded by the State. Instead of a declining education/GDP ratio in the last years in Pakistan, we need to move it in the other direction, with a commitment to reach three per cent of GDP in three years (Unesco after all recommends four per cent). A similar challenge lies with health: as a first step, we can sharply scale up the health card initiative so that all those below a certain income are covered.

Pakistan is at a threshold. The next steps have to be transformative in intent. These next steps hold the key to the direction we collectively wish to go in. and whether we can learn from the failed policies of the past.

The writer is the former director of the UNDP Human Development Report Office.

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