Equitable economy – 16 Nov 2022

Over the years, our economic and financial experts have made us dependent on imported raw materials, goods and energy that we are unable to pay for. We are trapped in a vicious cause-and-effect cycle of rupee devaluation and rising inflation, which contributes to food and energy insecurity, increasing poverty and vulnerability.

The situation has now been exacerbated by the recent floods, estimated to have caused losses of up to $40 billion. The World Bank’s Country Climate and Development Report (Nov 2022) estimates that climate events alone will cost us at least 18-28 per cent of the GDP by 2050. We need to re-think our politics to get the economics right.

We have been reduced to a vulnerable, least-developed and low-income country. Pakistan is the fifth most-populous country in the world. Its nominal GDP (2021) should be somewhere in the range of $1,186 billion (the GDP of Indonesia, which is the fourth most-populous country with the 16th-largest economy) and $440.8 billion (the GDP of Nigeria, which is the sixth most populous country with the 31st-largest economy). Instead, Pakistan’s economy is $346 billion. Among the three countries, Pakistan has the lowest per capita (GDP) of $1,537 (Indonesia $4,291 and Nigeria $2,085).

For ordinary people, the intricacies of the market, currency fluctuations, inflation or monetary policy are irrelevant. All this complicated thinking and policy is reduced to its net effect, how ordinary everyday lives are affected.

Whether it is our household or national economy, we must increase income to improve our overall prosperity; this is what economists call economic growth. As a driving motive for our economic policy, it is fine. But it must be equitably shared.

We may not know the intricacies of the persistent gaping hole in our national accounts, but it is clear we spend more than we earn. In 2021, our purchases were valued at $69.04 billion and exports or earnings were a mere $35.57 billion, a financial gap of $33.47 billion. Even though remittances which were valued at $31 billion in 2021 (8.7 per cent of the GDP) have momentarily eased financial pressures, the underlying problem still remains.

We realize that extravagant or unproductive spending has put us on the road to ruin. Money borrowed must be repaid. This is simply deferred taxation which, given the narrow tax base, the poor pay ultimately. In other words, those making critical economic decisions largely escape the consequences.

Inefficiencies in the system, use of borrowing in unproductive projects, and fund embezzlement diminish the financial pie. Corruption robs us of our scarce resources and hard-earned gains. There is illegal corruption that NAB and the provincial anti-corruption establishments have failed to control, which according to Transparency International have cost over $94 billion from 2008 to 2013, with an average of $18.8 billion annually.

But we have also smartly designed our laws so that what we ordinarily understand as corruption is no longer corruption according to the law, which alone was estimated to be $22 billion or Rs2.6 trillion in 2018. Corruption, legal or illegal, is causing a massive loss of $40.8 billion that must be curbed.

The exorbitant inflation has become a survival issue for ordinary citizens as essentials such as food and energy are fast getting beyond their financial reach. Like inflation, economic mismanagement and poor governance are also a form of taxes on the poor who are made to disproportionately finance the fiscal burden and suffer the austerity consequences, further eroding their meagre incomes.

According to lay reasoning, this is essentially a supply-demand gap mismanaged badly. With population growth, demand is increasing but there has been no meaningful effort to enhance our national productive capacities to ensure the supply-demand and import-export balances. Without addressing the underlying structural and productivity issues, monetary policy tinkering with money supply, interest rates and currency to maintain stability is a temporary fix. This is Dar economics. In the long-term, it only makes a bad situation worse.

Instead, we should be asking: why are the poor having to subsidize the rich and the utterly inefficient public and corporate sectors, which have left our manufacturing base infantile, low quality and uncompetitive? With the fourth largest irrigated land area globally, why is Pakistan importing wheat, lentils, cooking oils, etc? Why are promising productive sectors such as agriculture and SMEs neglected? Why is the banking sector allowed to thrive on low-end banking services with ordinary people’s deposits used for ‘safe’ government lending and ‘big’ businesses who are accustomed to write-offs? Why should austerity and a disproportionate tax burden be the norm for the majority poor only?

More than economic necessity, it is bad political and policy choices made by our civilian- and military-led governments that have managed to convert our resources and opportunities into liabilities.

As a low-income country with significant levels of poverty and vulnerability, it begs the question: how can we justify the exorbitantly high state-related costs that do not satisfy value for money criteria? With monetization, why do we have such a high number of government cars and the parasitic post-retirement benefits that top up pensions? How do we justify procuring and maintaining fleets of high-end cars?

These choices are rooted in a fatal deadlock of myopic and selfish short-termism. Our politicians’ mental and policy horizon rarely goes beyond an electoral term. Hence, they are reluctant to invest in anything that does not profit them during their term in office.

Our professional ‘permanent’ civil service could have balanced this short-termism by providing the necessary technical input and an essential level of policy stability and continuity, but it is no longer permanent, capable or professional. Their professional horizon rarely exceeds their next posting, which means indulging their political bosses’ whims to secure a plush posting rather than adding value to their service. The Supreme Court’s Anita Turab judgement sought to correct things by protecting civil servants’ tenure in office, but it is unable to ensure its implementation – another dysfunction.

The virtue of lay reasoning is that it cuts through to fundamentals and impact – the staggering under achievement. By GDP, Pakistan ($1,658) stands between Haiti ($1,673) and Cameroon ($1,584), evidencing our diminishing global relevance. Regionally, we are far behind Sri Lanka ($3,293) Bangladesh ($2,734) and India ($2,466). Domestically, corruption, privileges, tax evasion and inefficiencies are, by conservative estimates, costing over $40.8 billion annually, about 12 per cent of the GDP. This amount is sufficient to plug the hole in our national accounts.

Savings and austerity must begin by ending these subsidies that enable, what the former finance minister Miftah Ismail calls, ‘the one-percent’ to ride over their economic mess at our expense. Bad political choices – instead of economic necessity – have given rise to chronic structural issues that no one is still willing to address seriously.

We must commit to a shared set of national priorities that will drive our state policies for the next 10 years or so, prioritizing sectors that are vital to be self-sufficient in producing our essential goods locally. We must enhance the necessary capacities and competitiveness, broaden the tax base, sustain our growing population, manage disasters and shocks effectively and export our surpluses to be a country that can care for its people equitably and effectively.

The writer is a former secretary, Law & Justice Commission of Pakistan.

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