Lesson in fundamental economics

Inequality trap

Outgoing UNDP chief, Marc Andre, hit the nail on the head the other day during a seminar in Islamabad when he pointed out that “Public policy (in Pakistan) is the source of growing inequality as it is focused on providing services to the rich”. The gathering was told, among other things, that the government’s politically driven public spending concentrates official largesse on a few districts, leaving much of the country far, far behind, which in turn increases income inequality sharply. Public investment in Lahore, for example, is at least six times higher than the Seraiki belt. Also, except Quetta, the performance’s best districts are worse than Punjab’s worst performing districts, according to a Planning Commission member.

Normally governments are expected to intervene when the normal market mechanism begins concentrating wealth in limited hands. But in our case official policy is one of the major factors behind such trends. ‘Politically driven fund allocations, absence of land reforms, pro-rich tax system and privatisation’ were mentioned as the key reasons for growing inequality in the country. And since a major chunk of the development pool is distributed among members of assemblies, for political reasons of course, there is little chance of a little dose of text book economics making its way to policymakers.

A good way to begin changing the landscape, somewhat, would be empowering local bodies. However, the way political parties resisted the local government elections, and had to be arm twisted into holding them by the Supreme Court, there is little chance of policy makers giving much thought to routing big funds to the grass root anytime soon. Yet, one way or the other, they would have to decouple development money from the assemblies and take it as close to where it is most urgently needed as possible. And, given present constraints, there is no better mechanism than local bodies. The way things are working, though, the government is violating one of the most fundamental rules of economics by facilitating the inequality trap.