June 24, 2002	Monday	Rabi-us-Sani 12, 1423

THE FEDERAL budget 2002-03 was perhaps the last budget presented by Mr Shaukat Aziz. Perhaps not! He might still be requested to head the finance ministry after the planned October 02 elections.

For, in a debt-ridden economy, a key skill is the ability to interact successfully with the external financiers and to simultaneously balance their requirements with those of the domestic economic interests. This budget reflects a balancing act, the finance ministry tried to perfect under Mr Shaukat Aziz. Balancing act notwithstanding, whether investment and economy will rev up to include all, are key questions that continue to agitate!

For, while the finance managers could show results on the external front this year with the help of external political factors, it is the domestic front that is expected to adjust to external politic economic factors in an environment supposed to have been freed for an interplay of market forces. The budget is, thus, set against the strategic backdrop also outlined in this budget speech. The budgetary measures, therefore, need to be read in context.

The context comes under the rubric of “economic reform.” The broad contours of economic reform include private sector encouragement; privatization; financial sector and capital markets’ reform; prudent fiscal management; a brush with agricultural development; good governance: development of small and medium enterprises (SMEs), information technology, oil and gas; and poverty alleviation measures.

While the privatization programme is pursued relentlessly in conformity with foreign advice, the state of privatized enterprises is least studied and hardly factored into privatization decisions. The extent of dent this policy will make in the foreign debt burden is either not known or is not encouraging. However, since it is a part of a policy to instil confidence in external financiers, it is to be pursued intensely. It is then clearly a part of the donor driven agenda, freedom from which cannot simply be claimed by words.

As for private sector encouragement required essentially to boost the economy, the top rate of tariff reduction to 25 per cent remains moot. While an industry-specific impact needs to be known still, tariff reduction reduces not just the cost of inputs but also the prices of imported competing products. Rapid tariff reduction has caused severe problems for those industries, whose products compete not with smuggled goods but with goods imported legally. Rapid tariff reduction en bloc and private sector encouragement, therefore, become conflictual goals which our finance managers have refused to see since end-1990s as, once again, our economic agenda is donor-dominated.

While reduction in import duty of vehicles is a rap on the knuckles of the local automobile industry for jacking up the prices and restricting output, it will certainly make an already underutilized production capacity even more difficult to utilize fully. So, while top tariff rate reduction also applies to competing imports, special measures to reduce duty on raw materials would certainly help some such as TVs’ and electric fans’ last year and surgical instruments/cutlery eta this year. An attempt has, therefore, been made to balance the act of duty reduction by rationalizing tariff on raw materials. The beneficiaries are, however, mostly in the SME category. Are we to phase out medium- and large-scale industry as desired once by the World Bank? If yes, we have a donor-driven agenda. If not, we have a home-grown one.

Even if it is home-grown, most of it certainly needs a fresh look. If determined by the donors, then too it should be thought through. For, they do not have a monopoly on wisdom either.

The case made by the free-marketeers usually is that domestic industry must compete with imports so as to become efficient and competitive. While this argument cannot be disputed in theory: in practice, the domestic industry must be developed enough to be able to compete with imports. For this purpose, an enabling incubatory environment is required without which the private sector in an LDC (less developed country) will find it hard to fend for itself from day one. If we are implementing the free marketeers’ logic prematurely without understanding the ground rules applicable in a developed countries’ turf, our agenda is certainly not home-grown.

If that be the case, we have to closely examine whether the above externally mandated prescriptions will encourage private sector, efficiency, competitiveness, investment, and employment generation. The donors might come back on this claiming that this was the road followed in the Far Eastern countries. A closer view would, however, reveal that their path was one of ‘guided capitalism’ and not of a premature withdrawal of the support system for industry in general and private industry in particular.

Under such circumstances, it is next to impossible to instil the much desired confidence in the private sector even if corporate tax rates are decreased by a couple of percentage points for a few years. For, it is the top-line that ethical long-term businesses worry about first and foremost especially the ones who happen to be challenging the entrenched competitors. To be overly concerned about the bottom-line in the short-run is another facet of our economic life that the government has grappled with rather appreciably.

The capital markets’ reform in general and the role of the SECP in particular are steps in the desired direction. The SECP’s code of corporate governance, disclosure and audit requirements should help address the other part of the concern that many had about private sector encouragement. Principles of good corporate governance need intense communication without which a competitive business edge is not possible to develop. This thrust needs to be maintained irrespective of its source—indigenous or external. Even if it is external, it is most welcome.

However, despite the continued emphasis on private sector encouragement, investment did not increase significantly which further contributed to our inability to attain the tax revenue target in the outgoing year. The targets could not be attained either in the area of direct taxes or custom duties or even sales tax. Targeted custom receipts could not be realized either due to reduction in tariff rates or lower imports which again point towards depressed economic activity. If the strategic direction fails to yield the desired results, it should be rethought. Digging deeper in the same direction clearly betrays some compulsions that cannot be explained away verbally.

While investment climate is certainly a function of the overall law, order, and security situation; economic policy remains a relevant explanatory variable. In fact, it is the responsibility of economic managers to attempt to offset the adverse impact of noneconomic variables. If economic policy too offers a hostile front, then it will only accentuate the threats posed by political factors. A favourable economic policy can mitigate the effect of political threats as was the case with TVs’ and electric fans’ last year and as is always the case with oil & gas whose interests can be economically induced to venture into the roughest terrain anywhere.

So, while tariff rationalization can work miracles for some beneficiary industries, mere tariff reduction may not for some others)if they are to be phased out as a matter of policy or to be reprimanded or to be ignored. Before pronouncing tariff policy as a wonder prescription for restoring investor confidence, it needs to be studied as to why it has not worked despite half a decade of steady tariff reduction with no perceptible results. Whether tariff reduction, in compliance with external diktat, helped or hindered investment decisions is a crucial concern to address. Only then can we build its linkages with efficiency, competitiveness, and employment generation.

To bank on investment as a primary means of generating employment is a view even more misplaced than some of the above linkages. Public sector investment generates jobs but temporarily. It’s the private sector linkages that generate jobs through labour-saving technology. So, even if all the envisaged investment in the country does take place, it is not an employment strategy. It will not generate enough employment for all the labour force which grows at a rate faster than the rate at which all of the imaginable laboursaving investment will ever generate employment in the country. Clearly, employment requires something radically different from the above conceptualization which is fraught with pitfalls.

Yet another prong of the employment strategy is the poverty alleviation programme and the SMEs. As said time and again, microfinancing deals with the symptoms of a malfunctioning economy and does not get to the root cause. The route to the root cause is either not identified or not shown deliberately for the sake of domestic and external political expediency. However, there does exist a broad strategy, mentioned earlier, to deal with the symptoms. Consequently, there is a trickle more allocated to health, education, and public infrastructure. Agriculture received attention to the extent of water, credit availability, and pricing. Progress is intended in the areas of taxation structure, tax administration, and financial sector reform.

Most areas affected by the root cause of our economic malaise were given attention in this year’s budget. However, the balancing act remained confined to the symptoms with no mention of the core cause afflicting them all. Until such time that there is a budget focusing not merely on an economic reform of the symptoms, the symptoms will compound. Year after year, energies will be consumed addressing the symptoms that are only likely to pose bigger challenges with the passage of time. Should we then view these self-created challenges as strokes of luck designed to make us fly higher? It is a bird of a special kind that gains altitude with turbulent winds. Are we birds of the same feather? If not, our dominant challenge is to first acquire those feathers and stock that convert challenges into opportunities for a better future. For this purpose, a strategy is only partially on the cards. It is important to fill the over-half empty glass!