Inequality & development

IF budgets are meant to deliver marginal changes in the established fiscal order, they don’t deserve the hoopla that accompanies their announcement. With the private sector now playing the role which is unprecedented in Pakistan’s history, much that happens to the economy is not the result of what Islamabad does but what thousands of entrepreneurs think and do.

When the history of the economy under President Musharraf gets to be written it is the role that he and his associates have assigned to private entrepreneurship that will be singled out as the most important economic initiative of the period.

However, if the people in power choose to use the budget to bring about a major change in the structure of the economy then the changes in the fiscal policy they announce should deserve the attention that the budget normally receives.

From my way of looking at the Pakistani economy, there are two areas that deserve the policymakers’ attention. The first is making the current high rate of GDP growth sustainable. The second is to address the problem of growing inequality in the distribution of both income and wealth.

I will deal with the second issue in this article, having covered the first in several articles contributed earlier to this space. Both the government and independent observers of economic trends in the country have focused a great deal on the incidence of poverty and the rate at which it is declining.

At issue is not the exact estimate of the number of poor who live in absolute poverty (with incomes of less than one dollar a day) or in poverty (with incomes of less than two dollars a day) but the rates at which their proportion in the total population is falling.

The government contends that the incidence of poverty is declining at a significant rate. If this is indeed the case and if the high GDP growth rate of recent years (seven per cent increase per year over the last five years) is resulting in a fairly significant reduction in the proportion of poor in the population then public policy is set on the right course.

Contrary to Pakistan’s own experience in the 1960s and that of a number of other high-growth developing countries, the trickle-down effect may finally be working to help the poor.

However, the government’s critics maintain that the rate of decline in the level of poverty is exaggerated by Islamabad; that, for the rewards of recent high rates of GDP growth to travel down to the poor, public policy needs to be fashioned in a different way.

If the critics are correct then the trickle-down approach would need a helping hand. One way of coming to a conclusion about this argument is to analyse what is happening to economic equality as a result of the rapid growth in GDP in recent years. This is an area of analysis that has even less reliable data and information available than is the case with the incidence of poverty and its decline over time.

Concern with growth’s impact with equality is not confined to Pakistan. This is being debated in the academia as well as in a number of developed countries. Academics have come to it by following a circuitous route. It was in the 1990s that mainstream economists turned to growth as a concept that needed analysis and understanding.Then Robert Lucas of the University of Chicago and Paul Romer of Stanford University published path-breaking papers that laid the basis for what economists call the endogenous model of economic growth.“Endogenous”, as dictionaries inform us, means a process involved in “producing or growing from within.” Until then, economists had tended to describe growth as dependent on the quantities of factors of production – labour and capital – that were used in the process of production.

But there was a limit to the amount of labour that could be applied for economic production, even in a country such as Pakistan that had a rapidly growing population. Adding machines (i.e. capital) to the workplace resulted in what the economists called “diminishing returns”.

This theory had produced a puzzle for economists. With the countries such as those in Europe that had reached the stage of zero population increase, this theory implied a slowdown in the rate of economic growth to the point where developing countries with growing populations would begin to catch up. That was not happening. Economic theory predicted the closing of the gap between the rich and poor nations. Instead, the gap continued to widen.

This is when Lucas and Romer entered the picture by including in the production function inputs such as the quality of human capital and technological developments. This model implied that economies could continue to grow even if the size of the work did not increase. They could do this by investing in improving the quality of the workforce through education and training. Technological improvements would also contribute to growth.

With Lucas and Romer helping us, we begin to understand what is keeping Pakistan well below the growth trajectories being followed by a number of Asian countries, the government’s protestations notwithstanding.

Conventional economic theory informs us that capital accumulation drives economic growth up to a point. Our own experience tells us that capital accumulation, unless it is financed from resources obtained from within the economy, will remain dependent on external capital flows. These may come from sources other than the largesse of friendly rich nations.

In an article contributed to this newspaper a few weeks ago, Ishrat Husain provided some compelling statistics to show why a sudden cut off in American aid will not have the devastating effect it did in 1966 and 1990. Pakistan could survive a spell of bad relations with the United States because it has found new sources of external finance not dependent on Washington’s goodwill.

That said, the remittances sent by the Pakistani resident community in the Middle East, Britain and North America and the large amounts of investment capital that is pouring into the country from the Middle East are not good substitutes for domestic savings. No country has ever been able to secure for itself a good economic future by depending almost exclusively on foreign savings. It would be wrong for Pakistan to rely on this resource.

But there are other weaknesses. Pakistan has a large and young population which is poorly educated and poorly trained. It cannot contribute to sustainable economic growth. Moreover, the economy’s technological base is poor. Neither the state nor the private sector has invested much in technology; the country continues to rely on the technologies imported from abroad.

Even the development of nuclear weapons was made possible by technologies obtained from abroad, mostly be stealth. India, on the other hand, used indigenous technologies to build nuclear weapons.

I should mention two other advances in economic thinking before returning to the subject of the budget and what could it have done to set the economy on the high growth trajectory. The first reference is to the work done by the economist Douglas North on the importance of institutions for economic growth. Following North, institutional economists define institutions not as structures and organisations but as the laws, rules and regulations that govern human relations.

If these are weak, economies cannot grow rapidly. Institutional weakness is defined as the absence of established observable rules that don’t distinguish between the circumstances of the people.

The same set of rules applies to the poor as to the rich, to those who have little influence over the government and to those that are part of the government, to those who have influence over other human beings to those who have to exist within the orbit of other people’s influence.

Economists also borrowed some insights from sociologists and anthropologists to focus on what they began to call social capital. This is defined by the way, or ways, in which people interact with one another.

Economic growth is faster and economic modernisation is more rapid in societies that are well-endowed with social capital. With the rise in ethnic tensions and sectarianism, the quality of social capital is declining in Pakistan. Only political development can reverse this process.

The third major advance in policy thinking is the focus on inequality. For decades, economists have found it difficult to factor inequality in the subject of growth. For some years, thinkers such as Simon Kuznets who looked at the empirical evidence on growth and distribution, decided that in the early stages of development, inequality is an inevitable consequence of growth. But that has changed.

In recent times, economists such as Paul Romer who had pioneered the thinking about new growth models, have begun to focus their attention on income inequality as an obstacle to sustained economic advance.

Writes one commentator: “During the 1990s, Paul Romer, a Stanford economist, emerged as one of the leading theorists on economic growth. Recently though, Romer has changed his focus, and he told me that the country, too, is entering a new phase. For most of the 20th century, he explained, economists focused on stability — that is understanding and controlling inflation and depressions. Then, towards the end of the century, growth became the central obsession. Now, Romer said, we are embarking on the next great challenge in American economics: mitigating inequality.”

What is true for America is even truer for Pakistan where economic and social inequalities are considerably more pronounced. It is often political scientists who help economists understand why certain distortions created by the strategies they advocate can create social turbulence. Concentrating on growth without caring for its distributional impact is one area where policymakers can go wrong. This is the case in Pakistan.

It should be clear from the above discussion that the conditions just don’t exist in Pakistan which can support a high rate of economic growth, alleviate poverty and improve the distribution of income. We don’t save enough from our national income to accumulate capital. We have not trained our large and growing workforce to help modernise the economy and take advantage of the window of opportunity that exists as a result of falling rates of fertility in the developed world.

We have not invested in the development of technologies that would help improve worker productivity. We have not only under-invested in institutional development, we have destroyed even those institutions that were left behind by the British.

What we need, therefore, is a comprehensive strategy of growth that would help deal with these shortcomings. The budget could have started the process but was confined to introducing only marginal fiscal changes. What could have been done? I will pick up this question next week.

Rise of the super-rich By Madeleine Bunting

PUBLIC opinion can sometimes shift suddenly, and a new consensus emerge with striking force as familiar details are re-ordered, rather as a kaleidoscope makes a new pattern.

That's what is happening now in Britain: inequality has been the lonely preserve of hoary class warriors worried about child poverty for much of the past decade. No longer.

Inequality has shifted to the centre ground of politics; it has been propelled there not, however, by a sudden outbreak of social conscience worried by poverty in the UK, but by the increasingly powerful sense of grievance of middle England.

If you want to understand this gathering storm, check out the Daily Mail, The Telegraph, The Spectator —even Tatler. You could see it in the coverage last week of the private equity bosses hauled up before the Commons select committee to defend their paltry tax returns, or the news reports that "non-doms", those resident but not domiciled in the UK, don't pay stamp duty.

"It's not fair" is the indignant cry, and out tumbles a self-pitying litany of dispossession and deprivation. The middle classes, normally a bastion of effortless entitlement, are feeling very hard done by. It's the struggle to scrape together the half a million required for a modest south-east house with some cash spare to pay the childcare; the scramble for a half-decent school; the prospect of pathetic pensions; and the impossibility of easing their own children's university debts, let alone their entry into the London housing market. These last, assistance to the next generation, were key to how the middle class reproduced itself so successfully — but no longer.

Never have the middle classes looked so rich on paper —house values topping a million —and felt so poor. As Lloyd Evans put it in a Spectator column last month after buying his first house: "In theory, we're halfway to being millionaires. Yet we don't have a car, we can barely afford a holiday, and when we go for a drink, we sit on the green outside the pub, quaffing Tesco £2.99 Frascati to save money."

What's slowly dawning on middle England is that they've been duped: they were sold a line —a "fair deal for hard-working families"; meanwhile, another very different scenario was unfolding. Britain became the world's billionaire playground, attracting the super-rich with such a generous tax regime that in April the IMF went so far as to define the City of London as effectively a tax haven.

The wealth of Britain's top 1,000 has quadrupled since 1997 and the rate of growth is now spiralling out of control —a massive 20 per cent jump in the past year. Tony Blair and Gordon Brown have happily presided over an unprecedented golden age of wealth accumulation in this country - on a par with the US in Gatsby's Roaring Twenties.

Yet the protests have been oddly muted — until now. Except for complaints about soaring executive pay from dogged critics, there has been a peculiar tolerance of Britain's super-rich elite's mushrooming wealth. Why hasn't Brown had the roasting he deserves for being so pusillanimous about closing the tax loopholes that enable these billionaires to pay less tax than their cleaners? Why was it left to a fully paid-up member of the super-rich, Sir Ronald Cohen, to warn that the widening gulf of inequality could lead to riots in the streets?

This bizarre tolerance is revealing: huge wealth is now regarded as a fabulous spectator sport and massively enviable. It is also, most importantly, regarded as legitimate - the global economy is akin to a vast lottery, some just get lucky. The "winner takes all" has become a respectable formula of economic life, not evidence of a systemic injustice. Any other view is dismissed, in that derogatory phrase, as the "politics of envy". Peter Mandelson summed it up in 1998 with a magnificent use of adjectives: "We are intensely relaxed about people getting filthy rich."

The wealth may be obscene but the means of achieving it are presumed, naively, not. This wealth is perceived as victimless - not achieved at the expense of someone else's exploitation, but as a product of the near mystical vagaries of global stock markets. To still any incipient protest, the Treasury championed the claim that this wealth benefited Britain — it resorted to that widely discredited fiction of the Thatcherite years, that wealth trickles down. No Treasury review has ever attempted to prove this economic benefit to the country; this is an issue on which myths abound.

But the worm has turned. What "trickle down" means is massive inflation in the London housing market —which, in turn, drives the entire nation's housing market. Prices are being sharply skewed by an elite who are prepared to pay ludicrous money, and, insult to injury, manage to evade stamp duty —that bete noire of the property-obsessed — by transferring ownership of the property to an offshore company (another tax dodge).

That infuriates the middle classes is not just the injustice, but that they are now priced out of the neighbourhoods they grew up in, and forced into near-unmanageable mortgages to cling on —hence the cheapo Frascati, taking your own lunch into work, the love of Ikea, Primark and Lidl.

Some of the old class warriors will be saying poor diddums to the middle-class whingers who are still doing substantially better than the hefty, and increasing, chunk of the population living in absolute poverty —now running at 7.4 million. But don't scorn such useful allies; if the "hard-working families" of middle England can be recruited to campaign for a hike in tax rates for the rich (say, those with annual incomes over £100,000) and closure of tax loopholes, Brown might actually do something.

The charge sheet is being assembled. A super-elite rachets up social comparisons, leaving everyone lower down the pecking order disgruntled - the US economist Robert Frank argues that the relationship between inequality and lower rates of happiness is now well established. His new book, Falling Behind, examines the phenomenon in the US, where the middle classes are now working harder than ever to pay exorbitant mortgages on incomes that have stagnated while the wealth of the super-rich has ballooned.

“Richistan" is another country, argues a Wall Street reporter assigned to cover the subject full-time in 2003: private banking, private planes, private health and education. And it's a country stuffed full of absurd opulence - watches worth hundreds of thousands, but hey, why stop at one, what about a "watch wardrobe"?

We are as ghoulishly gripped by Richistan as if we were watching a car crash - and that's exactly what it is. A slow-motion catastrophe: an elite, however small, with this kind of immense wealth has a hugely disproportionate impact, skewing the whole frame of reference in a society of value, worth and status — which are all human needs basic to dignity and wellbeing. —The Guardian, London

Pemra amendments still a threat

OUR uniformed president has agreed to withdraw the sweeping media curbs contained in the recent amendments to the Pakistan Electronic Media Regulatory Authority (Pemra) Ordinance 2002. Apparently, he has linked the withdrawal of the draconian amendments to a code of conduct.

Press reports suggest that the code of conduct to regulate media business would be incorporated in the Pemra Ordinance. Reports also indicate that the Pakistan Broadcasters Association (PBA) has been told that the code of conduct must keep “national interests” in view.

So until the code of conduct is made public and amendments are withdrawn officially, the sword of Damocles will continue to hang over the media. It is difficult to believe that the government will agree to a code of conduct that does not suit it or that gives full freedom to the media. The government would be happier to see controlled freedom for TV channels and the press.

The government slapped the curbs on the media by making amendments to the Pemra Ordinance just two days before the National Assembly was to commence its budget session. This indicates that its intentions were mala fide. Through these curbs, the government made its dissatisfaction known to media organisations, especially to TV channels for their live coverage of recent events including those featuring Chief Justice Iftikhar Chaudhry and the bloodbath of May 12 in Karachi.

Although the present dispensation claims to be democratic and is never tired of taking credit for making the media free, ground realities point to something totally different if recent events are to be taken as yardsticks for the verification of the government’s claim. The message for journalists is loud and clear: the government will not let the media get too big for its boots for it would then impinge on its authority.

The implementation was suspended because of nationwide protest not only by journalists but also by political parties. The decision was taken following a meeting of the prime minister with officials of the PBA and the All Pakistan Newspapers Society (APNS). A six-member committee, consisting of three members, one each from PBA, APNS and the Council of Pakistan Newspapers Editors (CPNE) and three senior government officials from the ministries of information and law will review the ordinance.

These fresh amendments empowered Pemra to confiscate the equipment of broadcasters and seal their premises without consulting a council of complaints, which was envisaged in amendments passed in February this year. It increased the fine for violators to Rs10 million from one million rupees. President Musharraf had issued the original Pemra Ordinance on March 1, 2002, to establish a body to regulate the electronic media and the National Assembly passed the law on May 17, 2005, with some amendments in the form of a bill (Pemra Amendment Bill).

It will be pertinent to mention here that Mohammad Ali Jinnah resigned from the Legislative Council in March 1919 to protest against the Rowlatt Act while describing it as a black law, for it empowered the British regime to imprison anyone without assigning any reason or charge. Jinnah had serious reservations over such a provision as he believed that such an enactment was against the principle of justice.

Similarly, a plain reading of these amendments would suggest that these (until officially withdrawn) could/would be used as tools to condemn the media which is justified in describing it as a draconian law because it authorises Pemra to move on its own — given the fact that Pemra was transferred to the information ministry from the cabinet division. This is against the government’s own policy of keeping such authorities independent so that they can function on their own and without any pressure.

The government has not been happy with TV channels for their live coverage of the present judicial crisis. It attempted to teach a lesson to Geo through the police when a heavy contingent trespassed its office in Islamabad in March when the Chief Justice was to appear before the Supreme Judicial Council. Then came May 12 when people in Karachi saw residents bathed in blood on their TV screens. The Chief Justice was forced to return to Islamabad after staying in the airport for well over nine hours although he was scheduled to address a function of the Supreme Court there. These events unnerved the government and it blocked the transmission of channels.

Article 19 of the Constitution ensures freedom of speech as it says, “Every citizen shall have the right to the freedom of speech and freedom of expression and there shall be freedom of the press”. The level of freedom enjoyed by media organisations currently is primarily due to their own relentless struggle otherwise successive governments, especially military dispensations, have always tried to put curbs on the freedom of expression.

The worst form of repression was witnessed during Ziaul Haq’s regime which even flogged journalists. Similarly, the Press and Publications Ordinance 1963 promulgated by military dictator Ayub Khan was the focus of protest by journalists’ bodies and organisations of publications’ owners. It was finally revoked in 1988.

On countless occasions President General Pervez Musharraf was heard telling the nation that it was his government that issued licences to TV channels as well as liberty but recent events are contrary to his claims. This year is going to be an election year and the president is promising free, fair and transparent elections. But polls will hardly be regarded as free and fair if the media continues to receive a bashing at the hands of the government and there is no end of efforts to muzzle the press.

What was witnessed in the National Assembly’s press gallery on June 6 was unprecedented too as it involved journalist protesting against Pemra amendments and they scuffled with non-journalists who were sent in the gallery by the Press Information Department (PID). The next day’s ban on the entry of journalists in the National Assembly was imposed for the first time in parliamentary history.

If the government fails to pay serious attention to the issue, it will find it difficult to control the situation that is bound to be aggravated by any verdict on the presidential reference that does not go in favour of the Chief Justice.

The writer is a PPP-P member of the Sindh Assembly.

UK’s new government

Britain has a new government. It came into being on Sunday afternoon in Manchester when Gordon Brown became Labour's leader and Harriet Harman his unexpected deputy. Of the two events, it was Mr Brown's arrival, and the personal liberation this seemed to give him, that was immeasurably the more important.

Mr Brown spoke to his party as he should have done long before, about his purpose in government, attempting to define the battles of a political generation. "We are called upon to be the party of change," he said, in a speech that tried almost too ostentatiously to prove that he will be different.

He sought to whistle up the winds of political progress after the strangest of interludes between one prime minister and the next, which had left everyone, Mr Blair and Mr Brown included, apparently becalmed, their sails flapping.

Much about the new government remains unknown, not least the roles its leading figures will play. But Sunday's Labour special conference marked the end of a period in which the mood and rhythms of politics after Mr Blair's departure were something that could only be guessed at. Now they are becoming known.

It would be easy to downplay the extent of change that is taking place, to claim that many of the faces in the new government will be the same as in the old ones - not least Mr Brown and Ms Harman, who left the cabinet almost a decade ago only to climb her way back this week. Easy, too, to claim that Mr Brown's speech yesterday contained many familiar themes, about duty and reform, about injustice and international aid.

These are subjects that the government has grappled with since 1997. Mr Blair's departure does not make them any more straightforward, or Mr Brown's approach to them any more novel. For all that, this week marks a return of clarity and ambition to a Labour government that had begun to lose the attention of the people who had elected it.

The next election may be two years away - although Mr Brown teased yesterday that it could come sooner than that - but the shape of the contest is now clear. Labour will assert its ability to summon up what its new leader called "the better angels of our nature", a moral collectivism that stands in contrast to the Conservative belief in individual improvement, a scepticism about the state as an agent of social progress.

The debate between these two views of government will be engaging. Nor, despite Labour's good cheer yesterday, is it clear which will come out on top. Mr Brown has become leader in idyllic and private circumstances, untested within his party, or by the country and with both opposition parties sucked into bouts of confusion and self-doubt. He spoke to a Labour audience that is pleased to see him arrive at last and which respects what he has to say. There is no doubting the scope of his vision. But the much harder task for him will be to persuade a questioning public that he can bring a new moral purpose to government.

––The Guardian, London