Issues in World Bank’s Global Economic Prospects report and Pakistan’s growth outlook

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  • The figures aren’t looking good 

 

The World Bank came out with its June 2019 Global Economic Prospects (GEP): Heightened Tensions, Subdued Investment report, where the main message is that in 2019 while forecasted global growth overall weakens to 2.6 per cent, that of emerging/developing economies expected to be at four per cent; while both likely to increase to 2.7 per cent and 4.6 per cent respectively in 2020.

Having said that, unfortunately the WB’s main thrust for lowering poverty remained on growth. This reflects the underlying basis of trickle-down economics entrenched in WB’s mindset, where since the 1960s it was assumed that by increasing national output would naturally lead to denting poverty, which has not happened in the last 30 years, and in the words of Nobel laureate Joseph Stiglitz would have been a good phenomena if it were to happen, as a lot of public funds investment took place in safeguarding and nourishing the income pie of the rich. Yet, as now soundly highlighted by research, this income pie did not trickle down, but rather increased income and wealth inequality for the rich.

Nevertheless, the bottom line is that this never happened, and rather the rich increased their wealth, while the income inequality gap increased; overall average wages continued to stagnate, and coupled with austerity adventurism, has meant that poverty has increased over time. Yet WB continues to not highlight the importance of distributional consequences of growth towards denting poverty. The report also does not draw attention to the role of extractive institutional design, and the lack of regulation in an era of fast and deep financialisation of economies. To his surprise, the author could not find the word ‘inequality’ even once in the entire report.

It is all the more bizarre of WB to not include the endogeneity of inequality in determining economic growth, along with the positive role of distribution in denting poverty, since recent research by leading economists like Thomas Piketty and Joseph Stiglitz- among numerous others– and even the IMF’s own senior economists–all documented the importance of equity with growth in denting poverty and inequality, while at the same time inequality in itself was found to be a significant determinant of economic growth.

The government should make best use of all these windfall gains to shift tax composition from indirect to direct, among initiating other needed reforms for meeting growth and equity concerns

Even the word ‘equity’ that appeared 21 times in the report, had nothing do with equity concerns of growth in terms of distributional consequences; instead it appeared with reference to equity prices and indexes, in turn, concerning overall with the world of finance and investment. Moreover, the word, ‘welfare’ appears once and that too in the reference section! Does the report that reflects and forecasts the global economic prospects, and that tries to talk meaningfully– but fails– about poverty, has no place for deliberating the status and role of welfare and inequality in determining economic growth, and in translating this growth into denting poverty and checking equity concerns– more importantly in relation to its impact over the last few decades in perpetuating a large chunk of global wealth into fewer and fewer hands? Indeed, serious points for the WB staff to ponder if they wish to really penetrate the meat that bears significantly in determining economic growth and poverty.

According to the GEP report, while the real GDP growth of South Asia is forecasted for 2019 at 6.9 per cent, and which is expected to increase to 7.0 and 7.1 per cent in the next two fiscals, Pakistan’s performance in this regard is quite poor– at 3.4 per cent in 2019 (a major upward projection over IMF’s earlier forecast of 2.9 per cent), which is expected to dip in 2020 to 2.7 per cent, after recovering to a paltry 4.0 per cent in 2021.

At the same time, India and Bangladesh will remain close to the mid-seven per cents, which also means that unlike in Pakistan greater absorption of unemployed people in the labour force in both is expected. For the PTI government, this also means being caught in a difficult position in terms of coming true on its manifesto promises of providing jobs, meeting enhanced social and education expenditure targets, and other announced endeavours like subsidised housing and ehsaas (or welfare) programme.

Two areas the government could have explored to better manage these promises, was to tap effectively into international financial markets to service external debt, which would have not only built up forex reserves but also possibly allowed avoiding a neoliberal IMF programme, and secondly as a consequence allowing government to reach a much needed home grown economic policy to deal with stagflationary concerns while avoiding unnecessary cuts in development spending and withdrawing from greater role of government and regulation, in turn by tapping into unconventional monetary policy measures.

The last measure is also important to save the economy from any further curtailment of aggregate demand, since already one of the reasons of low growth in the country was at the back of contractionary monetary policies; clearly also indicated in the GEP report as, ‘The (South Asian) region continued to enjoy solid economic activity in 2018, posting 7 per cent GDP growth due to robust domestic demand. Pakistan was a notable exception, with a broad-based weakening of domestic demand against the backdrop of tightening policies aimed at addressing the country’s macroeconomic imbalances.’ And also, ‘Private consumption and investment remained robust in much of the region, offsetting a slowdown in Pakistan.’

The GEP report also underlines the lack of budgetary support to agriculture here, by indicating, ‘India has announced a package of direct benefits to farmers and some tax breaks for the middle class while others (Pakistan, Sri Lanka) are on paths of fiscal consolidation to tackle sizable deficits.’ It is important for Pakistan to correct fiscal imbalance with active policy, even an unconventional one, at the earliest possible and provide much-needed budgetary and overall institutional support to agriculture, since unlike India and Bangladesh, the percentage share of agriculture in GDP is a lot higher in Pakistan at 22.9 per cent; while in India and Bangladesh at 15.5 per cent and 13.4 per cent respectively. Such support is also important, since rural poverty is a lot higher than urban poverty in Pakistan.

That said, all is not lost still and the government should adopt a more heterodox approach to economic policy- mainly by a) taking a political economic view of issues, b) borrowing from active redistribution policies, c) bringing back the state in taking the lead on running economic institutions, d) rationalising prices, e) right-sizing the scale of production/activity and labour-intensive techniques of public sector enterprises to reduce losses, in turn meeting the supply gaps generated from reduced scale of goods and services from alternative sources in the transition time. For this, the government should also extensively expand the role of the Planning Ministry, make an overall economic ministry for reaching efficiency gains, and transform the approach of budget making to being a wellbeing one.

One breath of fresh air for the government’s current account worries should be a recent change in the direction of oil prices, which have suddenly turned, slipping to below $60 a barrel in London. This has been the lowest since January 2019, mainly at back of a) global trade wars concerns and its negative impact on portfolio investment and productive activity, b) significant supply disruptions from Russia, Venezuela, and Iran, and c) large-scale market absorption of US shale oil that has been entering market in huge quantities. The government should make best use of all these windfall gains– albeit expected to last briefly– and take this cushion to shift tax composition from indirect to direct, among initiating other needed reforms for meeting growth and equity concerns.