Can the Current Economic growth be sustained, Poverty reduced?

[Officer Barbrady]

An expansionary budget

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* GDP growth rate 2004-5 8.4%, two percentage points higher than last year.
*Pakistan is now the third fastest growing economy in Asia after China and Singapore.
*After a decade and a half, Pakistan’s GDP growth rate has overtaken that of India’s.
*At an estimated $736, income per head of the population Pakistan is approaching the threshold that separates poor countries from middle income nations.
*The sharp increase in gross domestic product was made possible by a 12.5 per cent rise in manufacturing output, 7.5 per cent growth in agricultural production and 7.9 per cent increase in the estimated output of the service sector.
*These achievements notwithstanding, the government acknowledged that the economy was now faced with some serious problems. Inflation has returned with the rise in price for the year estimated at 9.3 per cent, the highest level in eight years.
*It is the highest rate of increase in national income in more than two decades. To sustain this rate, the economy will need to receive investments of some 25 to 30 per cent of the gross domestic product. This is well below the achievement of 2004-2005. Investment continued to perform relatively poorly, increasing at 16.9 per cent in the current financial year.

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OMAR Ayub Khan, minister of state of finance, presented an expansionary budget to the National Assembly on June 6. The budget aims at sustaining the high rate of growth of recent years, reducing the incidence of poverty, and tying the economy closer with the global system. Such an approach has long been overdue.

I have argued in earlier articles that Pakistan should have pursued an economic strategy that simultaneously addressed the problems of economic stagnation and poverty alleviation. That should have been done in 2000 when the administration headed by President Musharraf was settling down. However, the decision was taken to follow the line laid down by the International Monetary Fund to first focus on stabilizing the economy before addressing the issue of structural change and reviving growth. I am referring to the past not to revive an old debate but to examine whether the government now has a strategy to finally address the long-term problems faced by the economy.

There is a great deal to cheer about the performance of the economy in the last three years, a subject I covered at some length in this space last week. The question now is whether the budget for the year 2005-06 has set the stage for bringing about structural changes in the economy that would sustain the rates of growth of recent years and last year’s admittedly significant impact on the incidence of poverty. My conclusion is that the budget falls short of reaching this objective.

Before examining the budget from the perspective of economic development including poverty alleviation, I should say a word about government statistics. A former finance minister and a bitter opponent of the current administration questioned the veracity of some of the government’s claims about growth rates, budget deficit and tax collection. He suggested in a speech at the Senate that there were serious discrepancies between the official projections and various statistics in the government’s own documents. While I don’t agree with some of the discrepancies he purportedly discovered, and which to my reading don’t exist, there is undoubtedly a problem with Pakistan’s official statistics. This is a long-standing problem which needs to be rectified particularly when we are trying hard to get foreign investors interested in the economy.

It would be helpful if the government could clearly present some of the basic statistics about the economy, in particular its size in terms of both rupees and dollars. There is some confusion about this after a significant and warranted change introduced last year in the structure of national income accounts and the year — the ‘base’ year — on which they are based. Given the various proportions mentioned in the budget speech, it is hard to discern what was used as an estimate of gross national income.

Just to give one example. The expenditure on defence at Rs 223.5 billion is said to be 3.1 per cent of the GDP. This suggests the size of the economy in 2005-06 at Rs 7,210 billion. However, the budget deficit is estimated at Rs 263 billion which is said to be equivalent to 3.8 per cent of GDP. This suggests the size of the economy for the next fiscal year at Rs 6,921 billion. There is a difference of Rs 289 billion in these two estimates. Which of the two is correct?

There is also some misunderstanding about the rate of increase in the per capita income. The budget document and the Economic Survey for 2004-05 mention a “double-digit increase in per head income”. This can be the case only in nominal terms since with 8.35 per cent increase in GDP in real terms and 1.9 per cent increase in population, real income cannot increase by more than 6.4 per cent. Repeated references to double-digit per capita income increases create the impression that the government is playing a game with numbers.

The most eye-catching feature of the budget is the sharp increase in the size of the Public Sector Development Programme. The budget allows for a 37.8 per cent growth in spending for federal and 25.9 per cent for provincial development programmes. The federal and provincial PSDPs are budgeted to increase to Rs 272 billion or 3.8 per cent of the implied gross domestic product for the year. In nominal terms, this is Rs 70 billion greater than the expenditure for the current year. Much of this increase is directed at social programmes. Properly executed, these programmes should help to alleviate poverty over the long run.

Is the budget aimed at helping the poor over the short and medium term? Much of the newspaper analyses have reached the conclusion that the fiscal policy for the coming year will help the rich while keeping the poor within the poverty bracket. This is a clichi common in newspaper writings on government policy. One writer in this newspaper lamented the fact that the budget, by giving incentives to the textile sector, has set the stage for further deterioration in income distribution and will make “the rich richer and the poor poorer”.

I can’t think of an industry that would help the urban poor and unemployed more than textiles. This industry is by far more labour intensive than most others; its backward and forward linkages provide more employment opportunities than many other industries; some of the associated activities such as garment-making and fashion houses help women more than any organized industry. It is careless to label incentives to the textile manufacturers as helping the rich at the expense of the poor.

That notwithstanding, I believe the budget could have done more for sustaining growth and alleviating poverty. Why do I say this? How can a budget aid the poor? There are many ways fiscal policy can be used to reduce the incidence of poverty. One way is to tax the rich and pass on the revenues to the poor through subsidies. This approach hardly ever works, particularly in countries with weak administrative systems. In fact, there is enough empirical evidence available to show that subsidies usually end up in the pockets of the politically powerful and the not-so-poor. The Indian state of Bihar, for instance, is one of the poorest in that country with one of the highest incidences of poverty and yet spends more on subsidies in terms of the proportion of state product than most other states. These subsidies are ostensibly targeted at the poor but essentially reach the rich and politically poor.

Instead of directly aiding the poor, fiscal policy can be used to direct resources into the programmes that help the poor. Some of this will get done by putting additional funds into education and health sectors. However, I would have liked to see the incorporation into the PSDP of the types of programmes that are known to work in situations similar to those that currently prevail in Pakistan.

A concerted effort is needed to educate the children of poor families, in particular girls and women from this socio-economic segment of the society. Giving financial compensation to the families willing to send their girls to school, providing lunches to children attending schools in poor areas, providing free or subsidized medicines through non-government organizations working in poor areas, improving ambulatory care in these areas are few examples of the types of interventions that are known to work. Some of these approaches are being tried in Punjab but these initiatives are not of the scale that would make a great deal of difference.

The poor would also be helped by the use of public resources to develop the sectors and industries that have the capacity to create jobs for low-income groups. This is one reason why incentives given to the textile industry helps. This is also the reason why the government should launch a large public works programme to improve irrigation by repairing and developing the large network built many decades ago. Large government investment in irrigation would have an enormous impact on rural poverty and would also bring life back to agriculture that continues to perform well below its considerable potential.

Another way of assisting the rural economy is to use the unemployed poor to improve transport infrastructure. A labour-intensive works programme of the type that was launched by the government of President Ayub Khan in the ‘sixties could be used again to build farm-to-market roads, connect villages with towns on the more developed provincial and national networks, improve the access of poor areas to the services available in towns and cities.

Some of these initiatives will require strengthening of local governments. There is considerable questioning of the system that was put in place by the administration of Pervez Musharraf a few years ago. While it made a great deal of sense to give authority to the directly elected nazims and the councils they head — as was done under the system introduced by this administration — it is not right to continue with the practice of providing development funds to the members of national and provincial assemblies. MNAs and MPAs have no business getting directly involved in development work. This is the job of local councils. It is also important that the new set of elections to local bodies are held on a party basis in order to give political organizations the opportunity to develop their roots at the village and town level. ‘Party-less’ elections may serve short-term interests of the government in power but they retard political development. The Musharraf government should resist the temptation to resort to this kind of political manoeuvring.

The budget is not the only government policy statement that can provide appropriate sets of incentives to the private sector to invest in the areas that should be given high priority to bring about the needed structural change. It needs to be supported by other initiatives. The country’s regulatory system needs to be looked at carefully in order to remove obstacles in the way of new investors while affording protection to different classes of citizens. Investors in Pakistan currently confront a regulatory system that is antiquated and creates opportunities for corruption. Of particular concern are the policies relating to land use that have prevented investment in urban areas.

While last year’s budget provided incentives for investment in construction and while these incentives contributed to the boom in real estate in most large cities, there are still problems in the use of land in the central areas of most large cities. It would help to set up a high-powered commission of respected citizens to suggest changes to the government and the parliament in various regulatory systems in force at this time.

In sum, I believe that the budget has missed the opportunity to put forward a carefully thought-out strategy for sustaining growth, alleviating poverty, modernizing the economy and improving its efficiency. With growth having resumed this was a good opportunity to soberly reflect about the future and set the stage for the country’s long-term development.