Nasty jolts to the economy

By Shahid Javed Burki

PAKISTAN�S economy received several nasty jolts in the last several months. Some were delivered by the developments over which the country�s policymakers did not have any control. These included the inexorable increase in the price of oil which has affected all oil-importing countries including Pakistan.

There has also been an increase in the price of agricultural commodities Pakistan must import to meet domestic demand. These include wheat and oil seeds.

There were other jolts to the economy for which policymakers must take full responsibility. These include the shortage in the generation of electric power which has resulted in load-shedding that is taking a heavy toll in terms of both lost output and great discomfort to the citizens. Most affected by this shortage are the less well-to-do segments of society who cannot afford to buy alternate sources of electric supply such as portable generators.

These shortages should have been estimated by the previous administration and appropriate investments should have been made. Instead, for eight years, Pakistan did not make investments in electric power generation while the demand for electricity continued to increase at nearly seven per cent a year. This has left the country with a demand-supply gap estimated by the government at 4,000 megawatts.

Compounding these problems were the decisions taken by Islamabad to spend carelessly in order to help the party in power in the elections of Feb 2008. Public expenditure was allowed to increase way beyond the resources available to the government by way of tax and other revenues. The result was a ballooning of fiscal deficit estimated at 9.5 per cent of GDP by Ishaq Dar who was the minister of finance in the first coalition government to take office after the elections.

A significant part of this deficit was financed by borrowing from the central bank which added to the inflationary pressures already present in the economy. This produced price increases without precedence in Pakistan�s history. Once again it is the poor and the not-so-well-off segments of society that are suffering. Unless help arrives soon, Pakistan may begin to see political and social pressures building up. Considering the weak state of institutional development in the country, it would be hard to contain these strains.

The new set of political leaders, who have come to power, is being advised to adopt adjustment measures to deal with the pressures under which the economy is labouring these days. The prescriptions being offered are the usual ones: contain government expenditures by cutting spending on both current and development parts of the government budget, raise resources by expanding the tax base, provide relief to the poor by giving them cash transfers and by creating jobs for them by starting rural and urban works programmes, take advantage of the fall in the value of the rupee by encouraging exports, and make non-essential imports more costly.

In a report released by the new Lahore-based Institute of Public Policy that I chair, the government was also advised to transfer greater authority to the provinces and to the institutions of local government. This will help with the process of adjustment since it would bring economic governance closer to the people. We also advised the government to make sure that the design of adjustment policies ensured that future growth was not compromised. This was done in the 1999-2002 period when, following the advice of the International Monetary Fund, the then administration applied hard breaks to the economy.

This, as indicated above, is the standard advice given to most governments dealing with difficult economic situations. Pakistan, however, needs to do much more than follow the standard prescription. It needs to adopt an approach and develop a strategy that lessens the grip on the economy of several powerful vested interests. Over time, the Pakistani economic elite has increased its influence on the making of public policy.

The extent to which this has happened is clearly shown by some simple calculations. The latest World Development Indicators published by the World Bank provide estimates for all countries of the share in national income of various segments of the population. In Pakistan, the top 10 per cent of the population claims 26.3 per cent of the total national income while that of the bottom 10 per cent is only four per cent. This is one of the sharpest differences in the developing world: the rich receive 6.8 times the amount of national income that accrues to the poor.

However, a comparison of the shares in national income does not fully reflect the amount of real inequality between different classes of people. The rich have much better access to public services than the poor; the state generally looks after their interests much more than it does for the poor.

What makes these income differences even more problematic is that they are widening as a consequence of the growth model followed by the Musharraf government which favoured the rich. The sectors that flourished under President Musharraf did little for the poor while they provided large amounts of incomes and asset appreciation for the rich. The recent price increases in food commodities have added further insult to the injury inflicted by the pursuit of the growth model.The poor�s real income will decline significantly if food and fuel prices are allowed to eat into their disposable incomes. Not only is the price increase hurting the poor, the latter are also being affected by the various shortages that have appeared in the economy against which the rich can protect themselves but the poor are left to fend for themselves.

In fact, the rich have succeeded in creating large cocoons around themselves, thus isolating themselves from the less fortunate citizenry. They have built gated communities, protected by private security companies; they send their children to expensive private schools that provide education of reasonable standards; they go out over the weekends to shop in the malls of Dubai and go for summer vacations to various watering spots in Europe.While one should not grudge this lifestyle, it cannot be sustained in the midst of great and growing poverty. And it must not be sustained at the expense of the poor. Public policy must address this problem to ensure not only sustained economic growth but also social and political stability.

DAWN - Editorial; June 10, 2008

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