Business Recorder
EDITORIAL (March 12 2008): Although countries not utilising IMF resources are not bound by its advice, it continues to analyse the economies of its members periodically with a view to offering policy prescriptions on various issues as a part of its mandate.
According to the latest report, the IMF wants the new government of Pakistan to bring agriculture and services sectors into the tax net and reduce exemptions in order to tide over financial difficulties of the country. Talking about the overall budgetary situation, it asserts that "fiscal effort should rely primarily on strengthening revenue mobilisation substantially to reduce deficit, while allowing for increased spending on infrastructure, human capital and poverty alleviation."
Going forward, fiscal adjustment, accompanied by higher levels of investment and vigorous implementation of structural reforms to increase the economy's productivity, constitute the main avenues to improve external competitiveness. In addition to strengthening tax revenues, priority should also be given to other structural reforms of critical importance to increase savings and investment. Besides, the reform of energy sector's regulatory and tariff framework should be pressed ahead vigorously for strengthening public sector financing profile and enhancing the prospects of privatisation of power sector companies.
In the foreign sector, a high degree of flexibility in economic policy making is required to respond quickly to external shocks. In particular, given the need to continue strengthening the foreign exchange reserves position, the authorities should adhere to their plan to rely primarily on active demand management policies in response to external financing shortfalls. However, even with the envisaged reduction in current account deficit over the medium-term, Pakistan would continue to depend heavily on large capital inflows.
We feel that the policy advice given by the IMF is very appropriate to the current situation and can only be dismissed at a great peril to the economy. As the latest trends indicate, weakness in the fiscal outcome has now emerged as the greatest challenge to the health of the economy.
Thanks to a wide-ranging reform process and substantial inflow of external resources, the overall fiscal deficit that averaged nearly 7.0 percent of GDP in the 1990s, was brought down to 3.4 percent in 2005-06 and 3.7 percent during the previous year. This excluded, however, earthquake spending which was an exceptional burden on the budget during these two years. The developments during the current year appear to have washed away these gains which were earned by great efforts and a firm resolve.
The fiscal deficit for 2007-08 was targeted at 4.0 percent of GDP, but it is not likely to be achieved as it has already touched the figure of 3.6 percent during the first half of the year due to lower-than-expected revenue growth (1.76 percent) and higher expenditures (25.28 percent). While revenues stagnated, higher debt servicing cost, increased outlay on subsidies for energy and food and rise in development spending led to a jump in expenditures. The country is obviously heading again towards a fiscal deficit of nearly 7.0 percent of GDP if the sharply deteriorating trend is not arrested in the remaining part of the year which does not seem to be likely at the moment.
Such an expansionary fiscal outcome would have grave consequences for the economy as a whole. While overall spending cannot be substantially reduced for a variety of reasons, the only alternative for the country is to mobilise a much higher level of revenues. It is against this background that the IMF has proposed to the new government to bring agriculture and services sectors into the tax net and reduce tax exemptions.
Everybody knows that agriculture tax is a provincial subject and the vested interests would oppose it tooth and nail but adequate collection of taxes from this source is necessary to improve the fiscal position of the country and for the sake of equity. Further delay in taxing the exempted sectors and punishing the tax evaders will only make matters worse. It also needs to be pointed out that proper fiscal management constitutes an important element of demand management about which the IMF has talked in its report.
Sticking to the target of overall deficit of 4.0 percent of GDP during 2007-08 and further progress in the desired direction in the subsequent years could reduce pressures on the worsening current account and soften inflationary impulses in the economy.
The State Bank has already taken several measures to curb demand by tightening the monetary stance but if fiscal policy of the country is at variance with the monetary policy, the intended objectives of price stability, avoidance of internal and external debt, sustainability in the external sector, higher growth trajectory etc cannot be achieved. We know that the new economic managers of the country would not like to be dictated by the IMF but there is no harm in listening to its advice, especially when it is given in good faith and without a quid-pro-quo.
Copyright Business Recorder, 2008
Sunday, March 16, 2008
Monday, March 3, 2008
The State of Pakistan's Economy
Unstable growth & poverty
By Dr Akmal Hussain: Dawn, Feb 28, 2008
IN spite of the claims by the Musharraf regime that they had launched Pakistan’s economy on to a new trajectory of high growth, it has now begun to slow down. There are mounting pressures on the balance of payments, high inflation and severe shortages of energy and water. This clearly indicates that the brief spurt in GDP growth during the Musharraf period was unsustainable.
As the newly elected democratic government prepares to face the challenge of achieving sustained growth with rapid poverty reduction, it may be helpful to examine the roots of unstable GDP growth and endemic poverty in Pakistan.
The latest work of Nobel Prize winning economist, Douglass North, and his colleagues who have pioneered the New Institutional Economics may be relevant in addressing the challenge before the new government. North, et al have shown that in order for markets to function for sustained growth an underlying institutional structure in the polity and economy is necessary. These institutions provide equal access to all citizens on the basis of merit to compete in the economy and polity. The institutional structure embodies incentives for competition, hard work, efficiency and innovation through which GDP growth becomes sustainable.
In Pakistan unstable GDP growth and endemic poverty are located in an elite based structure of power which excludes the majority of the people from high quality education, health facilities, access to land and the high wage end of the labour market. Consequently most citizens of Pakistan are denied the opportunity of actualising their productive potential and thereby contributing to a growth process that is both sustainable and equitable. It is now widely recognised that inequality adversely affects both the sustainability of growth as well as its capacity for poverty reduction. Pakistan’s power structure and the inequality it engenders prevents most of the population from playing its full role in the economy. Those excluded are the poor, women, the illiterate, the inadequately educated, the semi-skilled and the unskilled. Therefore there is a constriction of the human potential through which entrepreneurship, investment, innovation and productivity growth can occur to sustain growth.
At the same time the poverty reduction capacity of growth is constrained by the institutional environment of the state and the economy: The poor face a structure of state power, markets and institutions, which discriminate against their access to resources, public services and government decision-making.
It can be argued that the failure to achieve sustained high growth in the past, as well as inequality, is located in the governance model itself. As I have suggested in my recent research work, within Pakistan’s governance model (originating in the Raj), power has been historically constituted by accessing state resources for arbitrary transfer as patronage to selected individuals. During the pre-independence period resource gratification within this governance model was conducted to win loyalty for the Raj.
After independence, whether in democratic or military regimes, state resources were granted within a structure of patronage to build individual domains of political power. Within this model an individual could become rich simply by entering into a patron-client relationship with the government for rent seeking. Therefore there was little incentive for enterprise, innovation, or savings, which drive growth in a modern economy. At the same time, since patronage could only be acquired by the few within this governance model, the majority were deprived of access to resources. Thus endemic poverty and the inability to sustain economic growth have become the hallmarks of Pakistan’s economy.
Let us now examine some of the structural constraints to equitable and sustainable growth emanating from Pakistan’s governance model indicated above. First, in many rural areas markets are asymmetric with respect to the rich and poor farmers respectively. My work for the UNDP, Pakistan National Human Development Report (NHDR) shows that the poor farmers pay a higher price on their inputs and get a lower price on their outputs compared to the large farmers. Consequently the poor peasants are losing as much as one third of their income due to such asymmetric markets.
The second structural factor is that the distribution of land ownership is highly unequal and there is widespread tenancy. The poor tenant suffers insecurity of tenure, loss of a large proportion of his income to the landlord and lacks access over credit. Consequently, the poor tenant has neither the incentive nor the ability to increase productivity. Thus the constriction of the productivity potential of the small farm sector constrains agriculture growth and generates inequality.
The third structural factor in endemic poverty is that in some landlord dominated areas where landlords control the local state apparatus as well as the credit market, the poor tenants are locked into a nexus of power and debt bondage to the landlord. The NHDR data shows that 51 per cent of the tenants get locked into debt dependence on the landlord, and out of these 57 per cent are obliged to work as wage labourers on the landlord’s farm without any wages while 14 per cent work for a wage below the market rate.
Thus, the structure of power and dependence systematically deprives the poor peasants of their actual and potential income. Consequently, poverty becomes endemic, inequality increases and agriculture growth is constrained. Fourth, a large proportion of the population lacks access to health, sanitation and safe drinking water. The NHDR survey data showed that due to inadequate diet and lack of access to safe drinking water and sanitation facilities, 65 per cent of the poor in the sample survey were suffering from ill health. Disease emerged as a major factor that pushes people into poverty, due to high medical costs combined with income loss due to absence from work. This constitutes a major structural factor that accentuates poverty, inequality and constrains GDP growth by constraining the productivity of the poor.
The fifth structural factor in endemic poverty is that the poor live in localities, which are inadequately policed. In case of theft or violence against their person, lack of access over the judicial system, accentuates the insecurity and economic deprivation of the poor.
Our analysis suggests that achieving a sustained high GDP growth and overcoming poverty will require the new democratic government to address the structural and institutional factors that perpetuate poverty and constrain growth. The challenge before the new government is to lay the institutional foundations of a democratic polity and economy that provides all citizens, not just a few, the opportunity to actualise their creative and productive potential. It is only then that our civilisation, economy and state can blossom and grow.
The writer is Distinguished Professor, Beaconhouse National University, and Senior Fellow, Pakistan Institute of Development Economics.
By Dr Akmal Hussain: Dawn, Feb 28, 2008
IN spite of the claims by the Musharraf regime that they had launched Pakistan’s economy on to a new trajectory of high growth, it has now begun to slow down. There are mounting pressures on the balance of payments, high inflation and severe shortages of energy and water. This clearly indicates that the brief spurt in GDP growth during the Musharraf period was unsustainable.
As the newly elected democratic government prepares to face the challenge of achieving sustained growth with rapid poverty reduction, it may be helpful to examine the roots of unstable GDP growth and endemic poverty in Pakistan.
The latest work of Nobel Prize winning economist, Douglass North, and his colleagues who have pioneered the New Institutional Economics may be relevant in addressing the challenge before the new government. North, et al have shown that in order for markets to function for sustained growth an underlying institutional structure in the polity and economy is necessary. These institutions provide equal access to all citizens on the basis of merit to compete in the economy and polity. The institutional structure embodies incentives for competition, hard work, efficiency and innovation through which GDP growth becomes sustainable.
In Pakistan unstable GDP growth and endemic poverty are located in an elite based structure of power which excludes the majority of the people from high quality education, health facilities, access to land and the high wage end of the labour market. Consequently most citizens of Pakistan are denied the opportunity of actualising their productive potential and thereby contributing to a growth process that is both sustainable and equitable. It is now widely recognised that inequality adversely affects both the sustainability of growth as well as its capacity for poverty reduction. Pakistan’s power structure and the inequality it engenders prevents most of the population from playing its full role in the economy. Those excluded are the poor, women, the illiterate, the inadequately educated, the semi-skilled and the unskilled. Therefore there is a constriction of the human potential through which entrepreneurship, investment, innovation and productivity growth can occur to sustain growth.
At the same time the poverty reduction capacity of growth is constrained by the institutional environment of the state and the economy: The poor face a structure of state power, markets and institutions, which discriminate against their access to resources, public services and government decision-making.
It can be argued that the failure to achieve sustained high growth in the past, as well as inequality, is located in the governance model itself. As I have suggested in my recent research work, within Pakistan’s governance model (originating in the Raj), power has been historically constituted by accessing state resources for arbitrary transfer as patronage to selected individuals. During the pre-independence period resource gratification within this governance model was conducted to win loyalty for the Raj.
After independence, whether in democratic or military regimes, state resources were granted within a structure of patronage to build individual domains of political power. Within this model an individual could become rich simply by entering into a patron-client relationship with the government for rent seeking. Therefore there was little incentive for enterprise, innovation, or savings, which drive growth in a modern economy. At the same time, since patronage could only be acquired by the few within this governance model, the majority were deprived of access to resources. Thus endemic poverty and the inability to sustain economic growth have become the hallmarks of Pakistan’s economy.
Let us now examine some of the structural constraints to equitable and sustainable growth emanating from Pakistan’s governance model indicated above. First, in many rural areas markets are asymmetric with respect to the rich and poor farmers respectively. My work for the UNDP, Pakistan National Human Development Report (NHDR) shows that the poor farmers pay a higher price on their inputs and get a lower price on their outputs compared to the large farmers. Consequently the poor peasants are losing as much as one third of their income due to such asymmetric markets.
The second structural factor is that the distribution of land ownership is highly unequal and there is widespread tenancy. The poor tenant suffers insecurity of tenure, loss of a large proportion of his income to the landlord and lacks access over credit. Consequently, the poor tenant has neither the incentive nor the ability to increase productivity. Thus the constriction of the productivity potential of the small farm sector constrains agriculture growth and generates inequality.
The third structural factor in endemic poverty is that in some landlord dominated areas where landlords control the local state apparatus as well as the credit market, the poor tenants are locked into a nexus of power and debt bondage to the landlord. The NHDR data shows that 51 per cent of the tenants get locked into debt dependence on the landlord, and out of these 57 per cent are obliged to work as wage labourers on the landlord’s farm without any wages while 14 per cent work for a wage below the market rate.
Thus, the structure of power and dependence systematically deprives the poor peasants of their actual and potential income. Consequently, poverty becomes endemic, inequality increases and agriculture growth is constrained. Fourth, a large proportion of the population lacks access to health, sanitation and safe drinking water. The NHDR survey data showed that due to inadequate diet and lack of access to safe drinking water and sanitation facilities, 65 per cent of the poor in the sample survey were suffering from ill health. Disease emerged as a major factor that pushes people into poverty, due to high medical costs combined with income loss due to absence from work. This constitutes a major structural factor that accentuates poverty, inequality and constrains GDP growth by constraining the productivity of the poor.
The fifth structural factor in endemic poverty is that the poor live in localities, which are inadequately policed. In case of theft or violence against their person, lack of access over the judicial system, accentuates the insecurity and economic deprivation of the poor.
Our analysis suggests that achieving a sustained high GDP growth and overcoming poverty will require the new democratic government to address the structural and institutional factors that perpetuate poverty and constrain growth. The challenge before the new government is to lay the institutional foundations of a democratic polity and economy that provides all citizens, not just a few, the opportunity to actualise their creative and productive potential. It is only then that our civilisation, economy and state can blossom and grow.
The writer is Distinguished Professor, Beaconhouse National University, and Senior Fellow, Pakistan Institute of Development Economics.
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