Economic focus

Three big, basic, and foundational issues should be taking up a lot of thinking and head-scratching time for economic policymakers in Pakistan right now. These issues have overlaps and are connected to each other too, but they are distinctly identifiable. How is the Pakistan economy going to get back to a sustainable high growth trajectory? How are we going to stabilise the economy and keep macroeconomic situation stable and sustainable? And how are we, as a society and polity, going to tackle issues of increasing inequality and fragmentation?

Economic growth, though not an end in itself, is extremely important for us. Our population is increasing and almost half of it is living in poverty where they are not able to meet some of the basic necessities of living a life of dignity and where they are not able to have resources necessary to develop their potential fully and use it for their benefit and that of the society at large. Redistribution of resources are always needed in a society, and we need to tackle some of the worst aspects of the inequalities and inequities in our society, but given the fact that we are, in income as well as in terms of production function frontier, performing way below our potential, there is plenty of room to grow. Furthermore, though necessary, re-distribution has limits. So, growth should be a very important goal for us.

But the news on the growth front, for the last few years, has not been good at all. Even allowing for the ‘shocks’ of global slowdown, higher international oil prices and effects of the 2010 floods on the crops, the problems in the area seem to be deeper. We do not seem to have a clear growth strategy in the country, and this is being said while keeping the new growth framework, proposed by the Planning Commission recently, in mind.

The issue of macroeconomic stability has been with us for decades now. Every few years or so, we are on the edge, anticipating default on international loans and commitments, and/or looking for bailouts and loans. And this, despite two or two and a half decades of implementation of ‘structural reforms’. Today we stand at the same place again. There are quite a few commentators who are anticipating imminent difficulties on the macroeconomic front: our deficit is significant, the world does not seem to be in the mood to lend money to us or give us a break, international institutions, especially the IMF, also looks unwilling to extend another package, and so it is jitters time yet again.

A developing economy is likely to face stresses and strains on the macro side: it is part of the effort to develop and since the pace of change can be uneven with leading and lagging sectors, some strains are inevitable. But to be in grave trouble every few years, and to be unable to implement basic reforms, over decades, is quite something else. And this seems to be Pakistan’s real problem.

At one level the issue could not be simpler. As a nation we save 12-13 percent of our income, while to have a decent growth rate of 6-8 percent of GDP we need investments of 25-30 percent of income per annum. So the savings gap is large. How is that to be filled? We can borrow for investments, but there are limits to how much debt we can carry, and more importantly, if we mismanage investments, which we have and continue to do so, the loans will not be easy to payback and will accumulate, as they have done.

Tied to this is the other gap: we want government to provide some important and necessary services: law and order, education, health, social services, and defence, among others. These services cost money to provide. Government has to tax to raise money. But, whatever the reasons, we have not been able to develop proper taxation systems in Pakistan. Hence where we want government to spend some 16-18 percent of GDP on service provision, and maybe even more if services have to be of higher quality, while we are able to raise only about 9 percent of GDP as tax. How is the gap to be filled? By government borrowing obviously. But eventually the society has to pay for the borrowing. This dynamic keeps us on the brink.

For the last couple of decades, as we have attempted structural reforms and privatised, decentralised and liberalised, we have also seen definite increases in economic and social inequalities. There is sufficient evidence, from literature in economics and other social sciences, showing that significant levels of entrenched inequality are not good either for growth and stability prospects of an economy, or the stable and peaceful development of democratic governance systems. But here too, it seems, that the reforms needed, in Pakistan, are deep, and we have not been able to do any of them. For example, while those in the tax net pay significant rates, majority of Pakistanis, even from affluent sections, do not pay any taxes. There are entire sectors, like agriculture, almost completely exempt from taxation. While the inability of the state to document incomes has let off many in the trading class.

All three of the problems mentioned above are very important to tackle. But, more importantly, it seems that these problems not only have connections with each other, it is the same basic issues, across these problems that are not allowing the state and society of Pakistan to be able to tackle any of these problems. The state is unable to carry out ‘deep’ foundational and structural reforms in the country and this is not allowing us to get to the root of these issues. The political system is unable to take on some of the very entrenched interest groups and elites of the country. The state is weak and this weakness is holding back basic reform. But without these reforms we are unable to address, on a sustainable basis, the three issues mentioned above, and hence we keep coming back to the brink of crisis again and again.

Elite and entrenched interest groups do not allow reforms to go deep enough and Pakistan, as a whole, suffers. People are happy to have a large portion of a shrinking pie than take the risk of losing it but work for a bigger pie. How can change then happen? Will the elite and the interest groups mentioned see the writing on the wall and in ‘enlightened self-interest’ or long term interest be willing to go for change? Or will the impetus for change have to come from a larger and more grass root demand for change? Pakistanis will have to face this question soon enough as the status quo will be hard to continue for long.

The writer is an Associate Professor of Economics at LUMS (currently on leave) and a Senior Advisor at Open Society Foundation (OSF). He can be reached at [email protected]