PAKISTAN’S fiscal crisis has captured the attention of economic policy makers and clearly, its high debt, low growth, and high real interest rate payments of eight per cent are a volatile mix that could lead to explosive debt increases in the near future, says the World Bank.

The bank’s latest report, “Poverty in Pakistan: Vulnerabilities, Social Gaps and Rural Dynamic” is classified for official use and termed “Confidential” but obtained by Dawn. It says that in the 1980s and early 1990s, the emerging debt and growth crisis was disguised by substantial external flows. These flows, from international lenders and remittances, dropped off long ago: official remittances from migrant workers declined from over 10 per cent of the GDP at their peak in 1983 to 2.3 per cent by 1996, creating the crisis atmosphere now surrounding the national debt. However, the newly emergent crisis atmosphere surrounding debt is matched by the chronic, but more silent crisis of the growing social gap.

The argument in this behalf is not that fiscal objectives should be compromised in order to address Pakistan’s social gap. Rather, it is that by attacking the governance problems that are at the root of this gap, Pakistan would work also to spur economic growth that will mitigate the fiscal crisis. In the past, governance problems have precipitated a vicious circle in Pakistan: a focus on fiscal policies that de-emphasized social spending; were implemented with excessive leakage and insufficient attention to efficiency and equity; and eventually gave rise to serious fiscal and social gaps. A different strategy, focused on governance reforms, can create a virtuous circle, in which growth is accelerated and resources are freed for spending, helping to effectively close both the social and fiscal gaps.

Governance problems were the main reason that deficit-funded public investments of the 1980s failed to yield long term growth dividends. If these dividends had been realized, the debt incurred would now constitute a small fraction of GDP and debt service payments would today be much less onerous. For example, if the $58 billion in development assistance provided to Pakistan between 1960 and 1999 had been invested during this time to yield a moderate real return of 6 per cent, it would have grown into assets equal to $239 billion in 1998, many times Pakistan’s current external debt. Instead, this debt now stands at 92 per cent of GDP, and is in and of itself a constraint on growth. The governance reforms that are specifically directed at improving the implementation of social spending should close the social gap, by increasing the amount of real resources allocated to meeting the needs “on the ground.” In addition, by closing the social gap, the country should indirectly incur growth payoffs that would increase resource available for debt reduction. One set of estimates looking at the effect of education on growth, controlling for other factors, finds that a ten percentage point increase in secondary school enrolment is associated with a 0.5 percentage point increase in yearly per capita growth.

Social spending is embedded in the fabric of government and society in Pakistan, however, so successful governance reforms will have to be comprehensive and broad in their scope. Reforms that reduce waste and leakage in all areas of fiscal policy, especially in development, and that deepen the rule of law, also have direct effects on the efficiency of spending - relaxing the fiscal constraint that exacerbates the social gap - but also increase growth, expanding the size of the pic available for debt reduction.

The engine of growth is universally regarded as investment, which is obstructed when the governance environment is weak. Both individuals and firms, poor micro-enterprise entrepreneurs and multinationals, have borne the brunt of weak governance when they attempt to deal with the police or judicial institutions, or in times of civil unrest that have precipitated serious deterioration in the rule of law, as in Karachi in the 1990s. Just as the poor are forced to compete for targeted infrastructure investments, firms are forced to compete for exemption from onerous regulation or, more commonly, from the arbitrary imposition of unjustified regulatory requirements. Firms see their own labour costs rise and competitiveness decline when their workers lack the educational basics. Firms, like the poor, are exposed to the tremendous insecurities of crime or to abusive behaviour by public officials. Like the poor, entrepreneurs understand that success (or, in the case of the poor, to avoid catastrophe) requires strong personal relationships with government officials who can protect their interests. This is the antithesis of the rule of law, and lies at the root of poor service delivery, the vulnerability of the poor, and the reluctance of investors to enter the country, even in more tranquil times in which the pressures of international conflict are absent.

In view of its uncertain governance environment, it is less surprising that Pakistan has failed to reap substantial private investment from its significant liberalization efforts.

The governance uncertainties have a strong negative impact on growth. The International Country Rick Guide, published by Political Risk Services (Syracuse, New York), rates countries according to bureaucratic quality, rule of law and corruption; three key ratings, on a scale of 1 to 18, is associated with a one percentage point increase in the yearly rate of per capita income growth in the countries surveyed.

It shows that if Pakistan had exhibited similar performance with respect to the rule of law, bureaucratic quality and corruption as Singapore during the 1990s, per capita income in the year 2000 would have been $ 300 higher. Even achieving the Indian governance indicators during the 1990s would have raised per capita incomes in Pakistan by $ 100 by the year 2000.

The remaining chapters of this report discuss the many specific ways in which government spending and policy decisions contribute to the social gap. They range from allocation concerns in health and education, to a range of barriers to market access that confront the rural poor. However, in designing policies to remove these barriers, continued attention must be paid to the governance environment, and to the incentives of all of the actors whose support is necessary to make reform successful.

These policies must also be focused on economic growth, but growth that is more sustainable than that experienced in the 1980’s.The social sector reforms that ignore the difficulties that the poor face in holding the government accountable, and the important role that local elites play in this regard, are likely to be successful. The Social Action Programme, for example, grew out of recognition by both donors and the Pakistani government, that targeted action on social service delivery was needed to address poverty. However, the design of the programme did not reflect the obstacles to improved service delivery that existed “on the ground” nor the gap between the reforms that were envisioned and those that either the poor or their political representatives sought to secure. This incomplete understanding of the relevant social and political context meant that the SAP placed excessive emphasis on the creation of parent associations that could not exercise influence, and dedicated insufficient human and financial resources to circumventing and overcoming institutional and social obstacles.

The World Bank report believes that the lack of accountability can be improved by increased democratisation, decentralisation, and transparency. However, these labels hide a wide array of potential reforms, only some of which may be useful. In the case of Pakistan, the simultaneous improvement of the investment climate and the prospects for poverty reduction will emerge when narrow groups that have been able to target benefits to their and their constituents’ interests are forced to take in to account broader needs, including the needs of women and other disadvantaged groups and classes. Not all democratic governments - and certainly not all non-democratic governments - achieve this. However, growth, development and poverty alleviation demand it. While emphasising the importance of good macroeconomic policies and the need for continuing attention to the fiscal gap - in regards to which particularly attention should be focused on promoting growth through governance reforms - the report focuses on the complementary factors that are critical to ensure that growth in Pakistan benefits the poor. In doing so, successive chapters analyses the most salient social and poverty related characteristics of Pakistan, drawing primarily on household data from various surveys, to identify areas where public policy can make a difference.

The report provides an anatomy of poverty in Pakistan, exploring its evolution across the 1990s, outlining problems related to its measurement, and discussing dynamic factors that influence how people identified as poor either fall into or escape their circumstances. It also explores the broader dimensions and possible social determinants of poverty; exploring the social characteristics associated with lack of consumption, and pointing to the influence of human capital on poverty. It also more deeply examines the dynamics of the most important social sectors - education and health, and of the most neglected target areas - the rural sector. It says that there is a strong impact of educational attainment and health on earnings. Using education as a case example, the report outlines how governance problems and political economy considerations impede service delivery, with particularly adverse consequences for the poor. It further identifies the major policy challenges of the rural sector, including the need for a coordinated strategy that address some critical constraints such as access to assets, particularly land, access to credit, non-farm opportunities and in infrastructure. Chapter five concludes the report by collating priorities for poverty alleviation, and identifying relevant challenges and lessons for stakeholders, including governments and NGOs.

The report does recognize the fact that successfully addressing the specific issues noted in it may be conditional on wider reforms being undertaken in Pakistan, as outlined in the recent Development Policy Review. It proceeds on the understanding that is nevertheless important to broach these issues. Moreover, in this regard, the report closely references the Pakistan government’s own I-PRSP, recognizing the considerable commitment already shown by the government towards addressing the underlying problems broached in the report.