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Budgeting for growth In what looks like a tentative break from the policy thrust of his last four budgets, Federal Finance Minister Shaukat Aziz has loosened the leash on public finances in the budget for 2004-05. He now seems poised to put to use the fiscal room he has been able to create by following over the past four years the IMF's tight-fisted prescription in a Pakistan-friendly, post-9/11 international economic environment. After having almost halved the budgetary deficit by 2003-04 from about seven per cent of the GDP in 1999-2000, the finance minister has proposed to increase, albeit only by about half a per cent, the deficit target for the next year compared to the one achieved in the outgoing year. He proposes to use the resulting additional resources at his disposal to create an enabling environment for the private sector, both domestic and foreign, to enlarge its activity commensurate with the generous incentives and concessions that he has offered to industry, agriculture and business in the next year's budget. At the same time, he has also used part of these extra resources to expand the public sector development programme by almost 26 per cent compared to last year's, while he has kept the size of the overall budget at almost the same level as that of 2003-04 - the increase by four per cent is offset by a proportional inflation rate. The finance minister has been enabled greatly in raising public sector development expenditure by significant reduction in the burden of debt amortization, thanks largely to the generous debt rescheduling that Pakistan received from official debtors in December 2001 and the subsequent increase in concessional flows from almost the entire developed world more by way of compensation for our active role in the war against terrorism than because of any altruistic reasons or as a reward for the so-called good governance. The IMF board will certainly not be happy with this kind of 'extravaganza'. But the member (the US) on its board with a veto (unlike the UN Security Council where each of the five permanent members has a veto) is today on our side and, like many other slippages which were ignored in the recent past by the Fund, this too would be regarded as a non-happening. Moreover, Pakistan's need for IMF assistance is expected to cease for the time being at least after October this year when the five-year, three billion dollars of almost grant-like assistance from the US is expected to start flowing in. Market economies never present a picture of perfection; they are always in a state of flux. In fact, it is only when things follow their course in such economies that high margins are made. Perhaps that is why market economies are said to operate on the dictum of 'no risk, no gain'. Pakistani private sector has yet to learn to swim in this sea of flood and shallows. It has only learnt to make and accumulate rent. And whenever the private sector's profit margins have been threatened it has gone running to the government for concessions and incentives. It never believes in sharing its profits with the public and that is why most of our private sector enterprises, even the public limited companies, are wholly owned by single families. They keep on accumulating their wealth even by pilfering utilities and evading taxes. Over the years, their dependence on the government has become so overwhelming that it has now become almost impossible for a new comer to cut across the barriers of red-tape and protectionist walls that the private sector has been instrumental in raising around itself through corrupt practices. By presenting an investment-oriented budget, Mr Aziz has thrown a challenge to this rent-seeking private sector to come out of its wait-and-see mode and test its entrepreneurial skills in a relatively freer market environment. The Washington Consensus which most IMF-World Bank client states regard as the very gospel of development, requires the governments in developing countries to give up their industrial and business involvements and even their social obligations like guaranteeing easy and unhindered access to education, health and utilities in favour of wide segments of the nation, irrespective of the income level of the various classes. The Consensus wants these governments to confine themselves to playing only the role of the regulator. The official economic managers of Pakistan too have been trying to do this rather more earnestly for over four years. However, their hope that the private sector would take up the slack being created as a result of the government's shrinking commercial activities and social obligations has so far remained only a forlorn hope. Perhaps, out of desperation or knowing very well the limitation of the Pakistani private sector, the federal finance minister, while creating a near-ideal enabling environment for it to enlarge investment has, at the same time, decided to restore the public sector development activity to a level it had achieved before the Consensus-backed free marketers stepped in to press their own prescription. The focus of the PSDP for the next year is on creating jobs, adding to the infrastructure, especially to improve water availability and enhance communication as well as telecommunications and building human resource capacities to take up the future challenges of an economy now planned to grow at the rate of seven to eight per cent in the medium term. That the new budget has been prepared on the assumption that the trickle-down effect of an accelerated growth would take care of poverty is beyond doubt. That is why except for some desperate measures to save the lower middle classes from falling below the poverty line, no significant effort seems to have been made to give a human face to the growth rate proposed. The trickle-down theory has been known to have worked only when the growth is in the range of 12-15 per cent of the GDP. With a growth rate of six to eight per cent the effect stops well above the poverty line. If developing economies grow at such rates for about a decade, it has been seen to have only widened the gap between the rich and the poor. What is urgently needed, therefore, is a crash programme to remove first the vital barrier between the rulers and the ruled. Simultaneously, a genuine agrarian reform should be carried out to enable the rural poor to come out of their perpetual bond of poverty. This would enable the ruled to be on the same footing with the rulers for the available opportunities to improve their lot. The language barrier was attempted to be removed during the Zia regime by introducing Urdu as a medium of instruction from the primary onwards. It was also declared that Urdu would now become the official language of the government. This did not happen and the policy only produced illiterate graduates lacking in skills that world entitle them to well-paid jobs. Since the ruling elite had refrained from sending their children to Urdu-medium schools, the gap between the ruler and the ruled has only widened. You cannot empower people at the grassroots without giving them access to economic opportunities through education and skill development. Without these they would always remain servile to the ruling elite. Finally, the failure to come up with an agreed sixth NFC award is likely to further undermine the concept of devolution because without financial devolution, there could never be any effective empowerment at the grassroots level. The defence budget has been increased by about 21 per cent compared to the original allocation in the outgoing year's budget. Arguments in favour of resorting to such increases would certainly be many and some of them would surely be valid. But in view of the proposal to reduce the numerical strength of the armed forces by 50,000, such an increase looks rather on the high side. Also, let us not enter into an arms race with India. We simply cannot win such a race and, secondly, the concept of minimum deterrence should not be stretched beyond its logical parameters. Please Visit our Sponsor (Ads open in separate window)
