THERE are too many large untargeted subsidies in Pakistan that are wasting a lot of resources due to their untargeted nature. The wheat subsidy goes to all the people who eat wheat and not just to the poor. Similarly, the electricity subsidy is enjoyed by all who have access to electricity.
The power subsidy alone was Rs464 billion in 2011-12, of which only some Rs4bn went to lifeline consumers. Should Pakistan, with a ballooning fiscal deficit and a dire need for resources to cover important areas like social protection, health and education, have such large untargeted subsidies? It does not make economic sense. But are there compelling reasons of political economy which explain their persistence?
The alternative to untargeted subsidies are targeted ones. But targeted programmes are expensive. We need to find those who truly need the subsidy and find them in a transparent way and verify their needs. And the identification mechanism has to be dynamic as we need to keep tabs on who falls into the poverty category and who doesn’t.
All of this is expensive to do. And whichever methodology is used for targeting, and there are a number of these, there will always be errors of inclusion and exclusion. But, depending on how the exercise is carried out, these errors can be minimised and eliminated over time.
Pakistan has, over the last five years, invested a significant amount of resources and effort in developing the mechanism for targeting subsidies to the poor through the Benazir Income Support Programme (BISP). Through poverty scorecards BISP has identified the population of the very poor across Pakistan. They have the ability, now, to make targeted subsidies to the poor. Why is Pakistan still using untargeted subsidies and ‘wasting’ resources when a targeting mechanism is available?
Untargeted subsidies are as large as 2.5 per cent of GDP, translating into a significant figure that, if targeted, could go a long way in addressing poverty issues across Pakistan. In fact, even when we are spending only Rs70bn or so through BISP we have evidence that these transfers have an impact on poverty. If we could directly spend 2.5 per cent of GDP on the poor, the impact could be dramatic.
I am not arguing that by doing away with untargeted subsidies we can get the ‘fiscal space’ for targeted subsidies. This argument, though often made, is not the focus. Our fiscal deficit is above eight per cent of GDP. Even if we cut down all untargeted subsidies the fiscal deficit is still at six per cent, still above the minimum that we are supposed to maintain.
So, even with no untargeted subsidies we will have no fiscal space. But that is not the issue. We are just pointing out that if the same money that is being spent as subsidy in the name of the poor was actually spent on the latter, and targeted well, we would be able to address the issue of poverty to a much larger extent. It is an issue of efficiency and effectiveness, not of more resources.
The story of untargeted subsidies is a complicated one. Is there a government, political or not, that can say it is going to do away with untargeted subsidies on wheat or electricity, replacing them with targeted ones, and risk facing the wrath of various interest groups that benefit from the way the current untargeted subsidies work? Or, is there a government that can halt the bleeding due to the transfers that are made to state-owned enterprises? Pakistan Steel, Pakistan Railways and PIA together had losses in excess of Rs80bn in 2011.
The government has also been unable and unwilling to implement tax reforms. Our tax-to-GDP ratio is one of the lowest in comparator countries. Even then cutting untargeted subsidies has been hard. Possibly the same reasons of political economy are involved in ensuring that the government is unable to carry out tax reform, revamp state-owned enterprises and cut untargeted subsidies.
Most insiders seem to suggest that all of these areas are so entrenched that they are taken for granted when future policies are discussed. According to one insider, a minister, starting the discussion on the reform of untargeted subsidies, said that the subsidies were a ‘given. Now let us go ahead and talk of how we are going to do things given these subsidies’.
Political economy issues aside, there is also tremendous mistrust among provincial governments and political parties (other than the PPP) of BISP and its method of targeting. Though few politicians from the opposition parties know the details, they are convinced that the methodology is flawed and people have been identified on a political basis.
Even a number of provincial bureaucrats have this impression. Clearly BISP and the PPP-led government have failed to share the details of the identification method with important stakeholders. But moving forward, if we are going to have any hope of continuing to develop the area of social protection, given the fiscal issues, we need a better dialogue between provinces and the federation and the various political parties in the country.
We do not have any fiscal space for providing resources for essential services. And it seems that governments are also unwilling and unable to implement reforms needed on the fiscal and governance side that can create fiscal space.
In such a situation the case for moving to targeted subsidies becomes even stronger as that seems to be the only way we can use our resources more efficiently. But though we have the basic tools for doing this now, ala BISP, lack of dialogue and consensus between political parties and the government is making this move hard too.
The gains from such a move could be substantial in terms of the dent we could make in poverty levels in the country. But given the intensifying divisions amongst political parties in the run-up to elections it seems unlikely that any attempt towards consensus development will be sought by anyone.
The writer is senior adviser, Pakistan, at Open Society Foundations, associate professor of economics, LUMS, and a visiting fellow at IDEAS, Lahore.