July 21, 2002	Sunday	Jamadi-ul-Awwal 10,1423

KARACHI, July 20: The problem is there. The purchasing power of the middle class has been falling. Much has been said and written about its impact on the economy. But a million dollar question is how to get over this problem?

President of state-run National Bank S. Ali Raza has an idea. “Let us convert our equity in housing and other such assets into cash,” he says.

“The conversion into cash of the equity placed in houses and lands will have a real big impact on kick-starting the economy.” Ali Raza claims that a higher level of liquidity thus achieved will enable people to consume more and improve their lifestyle.

This in turn will attract industrialists to set up more units to cater to the increased demand of goods—and that will generate employment. The combined effect of a larger domestic demand and full employment will be that the industries would achieve the economies of scale and become more competitive in the export markets as well. That will lead to economic prosperity and the purchasing power of the general public will rise.

“This is an idea that is going to put on some flesh on it,” Raza says but he recognises the difficulties that lie ahead.

“A very efficient legal system needs to be developed for this purpose over two to three years so that the banks can start lending against houses and lands. Federal, provincial and local governments need to settle the ownership title issues and remove other bottlenecks.”

“And finally we...the banks need to develop such products that increase people’s income and increase their ability to spend.”

Ali Raza says increasing the domestic base of the industries is as critical as enhancing exports—if not more—to let the economy grow. He believes that the idea

Employment and liquidity put forward by him is practical though he admits that its implementation needs some cultural changes.

“I believe that the number of middle income group whatever it is now...can triple or quadruple in 5-10 years if we achieve the desired conversion of assets into cash,” he says. “People say the saving rate in Pakistan is low. But let me say it is the saving mobilized through formal instruments whose rate of growth is low. Otherwise saving into equity in houses and lands (that remains partly undocumented) is very high. Our problem is that we are a cash-poor but asset rich people. It is the other way round in many parts of the world including the United States.”

Makes sense? Can the remedy being prescribed by Raza do some good for the common man in particular and for the economy in general?

Let us listen to what a noted economist Dr. Arshad Zaman says.

“The conversion of the fixed assets into cash merely increases liquidity without giving rise to a net increase in purchasing power,” says the former chief economist of the Planning Commission. Dr. Zaman also does not share the view that making people cash rich and asset poor would speed up industrialization. Because lack of financing facilities is not the main problem of the business community today. “There are other problems like (i) maintenance of law and order (ii) absence of a system of courts to enforce contracts (iii) need for a sovereign government more supportive of domestic industry and (iv) need for a system of incentives that make domestic investment activity profitable.”

He cites rapid cuts in customs duty more in line with the government agreements with the IMF than demanded by the WTO as one basic hurdle in the way of industrialization. He is critical of the IMF-sponsored poverty reduction and growth facility and says that in the whole IMF programme there are no targets or performance criteria for employment.

“The problem (of low employment and resultant erosion in the purchasing power) is political,” Dr. Zaman remarks.

“Governments in Pakistan find it easier to rely on external borrowing rather than providing public services financed by domestic taxes. Naturally the governments have to be sensitive to the demands placed upon them by their financiers. Generally, these demands are designed to serve the interest of the financiers much more than those of national investors and consumers.”

Dr. Zaman believes the situation may not improve unless the governments change this basic mindset. He firmly believes that once this mindset is changed the focus of economic planning can be shifted on creating full employment without which no country on earth can make real sustainable progress.

Dr. Zaman proposes a four-pronged strategy for Pakistan to come out of economic crisis:

(i) achievement of full employment (ii) access to social infrastructure (iii) access to physical infrastructure and (iv) reintroduction of dismantled social safety nets.

Basheer Chowdry, who is chairman of Modaraba Association of Pakistan and an executive member of Leasing Association of Pakistan also believes that creation of full employment is the only answer for all the economic woes of Pakistan.

“Per capita income will rise (and with that will rise the purchasing power of the middle income group) only when every eligible member of a family is employed,” he remarks.

— Mohiuddin Aazim