December 10, 2003	Wednesday	Shawwal 15, 1424

After four years of much-lauded economic reforms, steered by a strong economic team, fully backed by a powerful military ruler and supported by foreign donors, the State Bank Annual Report 2002-03 has come out with a dismal message for the country’s poor.

The report says it would, “simply be a pipedream “ to expect “accelerated” poverty reduction “in the short-term.” It shows that the government is tardy in a breathlessly fast changing world.

Implicitly, the report removes the shine from the fine label on the IMF programme entitled “Poverty Reduction and Growth Facility (PRGF) that the economic managers are executing with religious zeal. Though winning laurels from the donors, the PRGF effort is adding to the growing frustration among the poor and the unemployed. In the last four years, the trend towards poverty growth has not been checked nor has the direction changed. Reducing poverty is a tall order in the present policy framework.

The rewards of these reforms are as follows: Investments, both domestic as well foreign, at low levels, are inadequate. Government development spending on human and physical infrastructure is not enough to” crowd in” private investment, ensure sustained economic growth or cut poverty levels. Institutional capacity is a snag in good governance and timely execution of development programmes. These are enough grounds to question the policy options pursued by the country’s economic managers.

Normally, political governments, elected for five years, are dismissed for good or bad deeds in three years or less, much before their mandated term.The quasi-military rule has no mechanism for accountability to the Parliament or the electorate.The government is answerable to multilateral agencies, fully or partially, depending whether it is politically on the wrong or right side of the major-shareholders of the IFIs. The IMF conditionalities are linked with the difficult or easy waivers as the political situation demands.

The SBP officials say the poverty trend cannot be meaningfully reversed “until economic growth is sustained at the rate of six per cent over the next five years and pro-poor policy interventions are faithfully implemented.” The assumption may or may not be realized. The future is uncertain. The goals are blurred.

The poor are getting a raw deal because they have no lobby in national politics. Democracy is about common man’s rule through representatives, to make and unmake governments through periodical elections and to exercise his sovereign right to shape his destiny. The poor are denied their stake in the national affairs and the fruits of economic development. And on human concerns, the technocrats are left to slog with a “dismal science” known as economics.

In the present stage of development of the market economy in Pakistan and elsewhere, growth rate does not necessarily lead to either creation of jobs or reduction of poverty. After a 5.1 per growth rate last year, the State Bank rightly pointed out:” The biggest challenge in the short-term is to create as many jobs as possible.” There is a significant gap between policy pronouncements and delivery and a key factor is a lack of institutional capacity and” faithful implementation” to which the State Bank is looking for, cannot be assured. Governance leaves much to be desired.

What the policy-makers have not fully recognized is the growing evidence that trickle-down theory does not work unless the economic growth is investment-led and in the current situation particularly focused on development spending by the state. Productivity gains from modernization and balancing or automation does not lead to job creation. In fact, it means job losses.

Social indicators are more important,than economic growth rate, for assessing the country’s development and also for addressing its problems. The social spending is at low levels and the government is now accused of including irrigation and other projects in the programme that are not directly related to poverty reduction.

Since it is the sources of growth that determine the poverty levels, the Governor of State Bank, Dr Ishrat Husain, is pleading for a pro-poor growth and labour-intensive industrialization that creates far more jobs than big capital-intensive enterprises. But the growth of small labour-intensive enterprises is largely linked to big industries as is so evident from textile and automobile sectors.

The talk about small and medium sized industries(SMES) for past few years has been mere rhetorics. The State Bank report does not have any figures of loans advanced to either SMEs or micro-financing of the poor. The SBP governor says the figures are being collected and would be published in the next quarterly report.

Missing from the SBP report 2002-2003, for the first time, are also economic trends for the following year, that used to update businesses in an emerging market to take more informed decisions. Now, they have to wait for such indicators in the next quarterly report when nearly half of the fiscal year will be over.It is no indication for happy tidings.

Credit may be given to the country’s economic mangers for the tremendous efforts to achieve macro-economic stability. In this, they were helped by” fortunes” showered by 9/11. But their focus on external sector at the cost of the domestic market has not yielded desired outcomes.

Foreign investment is at low level despite improving credit ratings by Moody’s Investment Services/Standard and Poor, IMF and multilateral donors on board, withdrawal of multi-layer economic sanctions by the West, high foreign exchange reserves, a floating currency and stable exchange rate and economic and financial liberalization. Is it a case of missed opportunities or these factors are not enough in a complex and fast changing world to attract foreign investment?

Now, the State Bank falls back on the past experience to conclude that” the hoped-for improvement in foreign investment is unlikely to emerge unless encouraged by a robust domestic private investment.” Foreign investment has shown very little appetite for even investing in shares, though Karachi Stock Exchange is being described as the best performing one in the world.

As the SBP report says “ private investment growth is still a matter of concern.” For oil drilling and exploration, the duty on import of equipments has been reduced to zero. For the financial sector, fiscal incentives have been given for mergers. Such concessions are not available to other sectors of the economy to stimulate investments. The balance-sheet of the government is the first and the last priority. And hence fixed investment as a ratio of GDP has fallen from 14.4 per cent in fiscal 2000 to 13.1 per cent in fiscal 2003.

Whereas the State Bank sees as a “welcome change” in public sector investment, it is disappointed by non-utilization of the budgeted expenditure despite the absence of fiscal constraints.It is not a positive development. The overall development spending amounted to provisional Rs 129.2 billion in FY03 against Rs126.2 billion in FY2002. Yet its share in the GDP declined from 3.5 too 3.2 per cent.

In any economy, public sector development spending has a multiplier effect. And the State Bank reminds the government that public sector spending in human and infrastructure development has an important role in “crowding-in “ private sector.Instead the governments have continuously reduced public sector expenditure for past more than a decade.

To add to what the State Bank says the economic development and growth in the short- to-medium term has to be PSDP-led. Otherwise, surplus liquidity in the financial market will not flow adequately into the real economy and would remain stuck in speculative investments.

A failure of macro-economic policies have stifled investment growth and forced banks to go for non-interest incomes in a big way. This has invited State Bank’s penalty and action.

The removal of poverty may need a long and sustained effort but the step- by- step improvements must begin now.